Opportunities for Action in Technology and Communications. Attack and Defense: Managing the Competitive Cycle in Telecom

Transcription

1 Opportunities for Action in Technology and Communications Attack and Defense: Managing the Competitive Cycle in Telecom

2 Attack and Defense: Managing the Competitive Cycle in Telecom The unprecedented bull market in technology, media, and telecommunications stocks has given way in recent months to a dramatic weakening in valuations. The speed of this decline took most industry executives by surprise. Early in 2000, capital was cheap and plentiful for new entrants who could claim boundless opportunity. Since then, however, private equity has largely dried up. At the same time, established players have been forced to launch restructuring plans in response to weakened credit ratings, which in some cases were triggered by the soaring costs associated with next-generation mobile licenses. Although much has changed in recent months, some things remain the same. In particular, two core trends in customer demand continue unabated: the spread of Internet protocol-based services (IP) and the expansion of mobile communications. Together they are transforming the telecommunications industry. As consumer demand for IP and mobile services explodes, virtually every business process from product development to sales and marketing to provisioning will require reworking. In addition, much of the existing network capacity will become redundant as more efficient technologies are adopted. As the technology, media, and telecom industries evolve, which companies will emerge as winners? Until recently, there were two opposing sets of market participants, each with its own philosophy. New entrants were the attackers, dedicated to reshaping the industry through revolution. Players such as Level 3 Communications, Covad, and Nextel focused on growth, on the most profitable products

3 and customer segments, and on using new technologies to their best advantage. They had lean and agile organizations, and they developed business processes from scratch. Fueled by cheap capital, they used equity and stock options to motivate key employees. On the other side were the incumbent operators the defenders. They sought to protect their existing market positions, customer relationships, and cash flow while they introduced new services and technologies over time. Early in 2000, many industry experts assumed that the attackers had the upper hand, but since then the battle lines have become less clear. Many of yesterday s attackers are now struggling. In fact, new companies that gained market share and achieved success are now finding that they, too, are subject to attack. As they attempt to expand, some still must prove that their business models can be profitable. They must defend their ground simply to survive, and they must become more selective about where to advance. Meanwhile, yesterday s defenders, having long paid lip service to the need to attack, have begun to mobilize. Those with strong cash positions and balance sheets can now acquire businesses and assets at attractive prices. The restructurings of Deutsche Telekom, France Télécom, AT&T, BT, and others are, in effect, preparations for attack. Players from both camps are discovering that to succeed over the long term, they will need to excel at both attacking and defending. This new competitive environment may seem unmanageably chaotic, but it does not have to be. Research conducted by The Boston Consulting Group shows that there is a discernible attack-and-defense cycle with defined stages, which any business is likely to go through. (See the exhibit Attack and Defense: A Continuous Cycle. ) Indeed, we believe that execu-

4 tives should view this cycle as a manageable process and should anticipate that there will be points along the way in each of their businesses when strategies will need to switch back and forth between attacking and defending. Mastering this cycle will be a key to generating profits and growth for all players. The Attack Sequence The attack sequence is made up of four phases. Knowing how and when to pursue them is critical to achieving high growth. Identify an opening and drive in a wedge. The starting point for any attack is recognizing a weakness in a Attack and Defense: A Continuous Cycle The Attack Sequence The Defense Sequence Keep driving Identify an opening and drive in a wedge Buy time Fortify positions with customers Display no sentimentality Claim boundless opportunity Focus obsessively on growth Energize the organization SOURCE: BCG analysis.

5 competitor s business and finding a way to exploit it. This weakness might be a product offering that is too broad, a distribution channel that overlooks an important customer segment, a value-added step that the competitor doesn t offer, or a business model that is too costly or insufficiently focused on the needs of customers. Orange, which provides wireless phone services in the United Kingdom, is a good example. Now a part of France Télécom, Orange targeted British consumers who had both fixed-line and mobile phones but really needed only mobile service. Orange set out to convince those consumers that their Orange phone should become their only phone. This was a position that the incumbent, BT, which offered both fixed and mobile services, could not take. Keep driving. Attackers follow up their initial offerings with a continuous flow of product and service improvements. A classic example is how America Online has continually redefined its customer value proposition in order to enhance the functionality and simplicity of its service. Omnitel Pronto Italia, a wireless provider, has taken a similar approach. It has made a habit of rolling out new services and features rapidly to keep its competitors off balance. Claim boundless opportunity. Attackers entering new markets need to make bold claims about what they aim to achieve. They must communicate their goals partly for internal reasons to capture the attention of people in the organization. There are also compelling external reasons for articulating those ambitions. To be successful, attackers need to attract the right kind of talent and gain strong support from investors. In this phase, many businesses fail to set their sights high enough or to communicate their visions effectively.

6 Focus obsessively on growth. In addition to formulating a good concept, attackers must be able to scale up their business models. They need to demonstrate that a concept that works well in a niche can also succeed on a wider scale. This is where attackers capture the lion s share of the opportunity or fail. This phase typically involves winning over customers who are more conservative than the early adopters. It will usually require taking a more segmented marketing approach. What s more, the roles, metrics, and organizational strategy needed to succeed in this stage will differ from those that worked earlier. The Defense Sequence Once a competitor has built a significant customer base and established an attractive price point, it becomes vulnerable to attack. It must think about shifting at least part of its effort from attack to defense. Defending market share and cash flow will require the following four sets of activities: Buy time. In the early stages of defense, the big danger for businesses is overreacting to attackers and giving up too much, too soon. Rather than cutting prices across the board, defenders must be highly selective about the prices they lower. In addition, they should explore ways of using their regulatory expertise and financial strength to prolong the life of their advantage. Fortify positions with customers. Instead of protecting specific products and technologies, players need to pinpoint the customer segments that are most worth defending. This requires a deep understanding of the current and potential value of individual customer segments and markets. To retain their most valuable customers, defenders should use every means

7 at their disposal: their brands, distribution channels, pricing, loyalty programs, and product and service bundles. Meanwhile, they must continually work to reduce costs both to preserve their margins and to expand their pricing options. Although Cisco Systems is often viewed as an attacker, it also excels as a defender. To cement its customer relationships, Cisco acquires businesses to fill gaps in its product line. Display no sentimentality. Defenders need to make hard choices about which segments or geographic markets are worth protecting. To hold on to valuable customers, defenders must also be prepared to sacrifice profitable products and services. If necessary, they must preempt would-be attackers by attacking themselves. U S West, now part of Qwest, understood this in the late 1990s when it elected to cannibalize its highly profitable T-1 business in order to retain its grip on customers seeking high-speed data services. Although the company s move into digital subscriber line (DSL) services caused its broadband revenues to decline sharply, U S West managed to become a leader in DSL and establish itself as an Internet service provider. The current credit squeeze is forcing many players to reevaluate their geographic priorities. For example, BT is becoming less enamored of holding minority stakes in far-flung operators, recognizing that its scarce capital has to be available for investments in high-priority markets. Energize the organization. Maintaining a defensive posture can take its toll on an organization, in part because many of the best people are lured away by the excitement and potentially greater financial rewards of attackers. Ultimately, defenders need to prepare their organizations to move into attack mode. They need to reexamine their organizational struc-

8 tures and be willing to rethink the fundamentals of their core businesses and management systems. Defenders need to weigh the advantages of a loose organization against those of a tightly integrated one. A loose organization, for instance, may stimulate entrepreneurship in individuals and business units, but a tight organization may be better at such tasks as providing an integrated product at the lowest possible cost. Defenders may need to grant certain parts of the organization more operating freedom in order to expedite decision making, and they will have to design clear and meaningful incentives for their employees. Recent announcements from AT&T, MCI Worldcom, and BT illustrate the extent to which large players see corporate restructuring as a way to address these issues. Energizing the organization often has less to do with specific strategies and structures than with effective leadership, which includes the ability to communicate an overall sense of urgency and a vision for going on the attack. Defenders that fail to do this well will falter as they make the critical transition to the attack cycle. Managing a Portfolio of Attackers and Defenders In today s telecommunications market, virtually all players with the exception of the very smallest are, in effect, managing portfolios of businesses, serving different customer segments and geographies, and employing different business models. New technologies, deregulation, and the deconstruction of the industry value chain continue to create enormous growth opportunities. But to tap those opportunities to the fullest, executives must actively manage their portfolios of businesses through the attack-and-

9 defense cycle. To do this, they need to confront a series of questions: Where should they attack and where should they defend? Because both activities use scarce resources, management must decide where to invest and where to harvest. Do they have the skills of both attack and defense? These skills will be equally important over time, but they are quite distinct and require different philosophies and approaches. Winning companies will create a culture that values defense just as much as it rewards successful attacks. Are they organized for flexibility? Companies managing a portfolio of attackers and defenders have to be flexible enough to pursue many different strategies simultaneously and coherently. They must also be nimble enough to shift from one mode to the other at short notice. Executives must look at everything the technologies they develop, the products and services they offer, the areas they serve, and the customers they target through the lens of attack and defense. And they must be prepared to take bold steps. The most dynamic competitors are learning to be both attackers and defenders. David Dean Henry Elkington Pattabi Seshadri David Dean is a vice president in the Munich office of The Boston Consulting Group and leader of the firm s global Technology and Communications practice. Henry Elkington

10 is a vice president in BCG s London office. Pattabi Seshadri is a manager in the firm s Dallas office. This article is adapted from Attack and Defense: The New Paradigm for Competing in Telecommunications, BCG Discussion Paper (September 2000). You may contact the authors by at: dean.david@bcg.com elkington.henry@bcg.com seshadri.pattabi@bcg.com We invite you to post comments and questions to the authors online at Or just visit the site to see what other readers have to say about this topic. We hope to generate a lively discussion and welcome your participation. The Boston Consulting Group, Inc All rights reserved.

11 Amsterdam Atlanta Auckland Bangkok Berlin Boston Brussels Budapest Buenos Aires Chicago Cologne Copenhagen Dallas Düsseldorf Frankfurt Hamburg Helsinki Hong Kong Jakarta Kuala Lumpur Lisbon London Los Angeles Madrid Melbourne Mexico City Milan Monterrey Moscow Mumbai Munich New York Oslo Paris San Francisco São Paulo Seoul Shanghai Singapore Stockholm Stuttgart Sydney Tokyo Toronto Vienna Warsaw Washington Zürich 02/01