BT Group Global Corporate Strategies - Assignment Example

Global Corporate Strategies: Case Study- BT Group and Executive Summary BT is one of the mostprofitable companies in the telecommunications industry. Its rise to prominence has been sparked by its ability to cope with the changing circumstances and right decision making in the face of competition. BT has embraced innovation and is constantly on the outlook to source new technologies to further position itself as a market leader. To become a truly integrated telecommunications company, BT embraced strategic alliances and mergers and acquisitions. These corporate strategies also enabled it to capture new markets and globalize its operations. This study identifies the strategies that BT used to survive competition when faced with unfavourable regulations, market convergence and consequent increase in intensity of competition. The report may be insightful to multinational companies that are faced with cut-throat competition and need to embrace new approaches in their operations. Table of Contents Executive Summary…………………………………………………………………2 Introduction…………………………………………………………………………4 External Innovation and Competitiveness…………………………………………..4 Vertical Integration and Competitiveness…………………………………………..9 Strategic Alliances, Mergers and Acquisitions…………..………………….9 Concert Communications……………………………………………………13 Organizational Structure and Strategy………………………………………………15 References…………………………………………………………………………..20 Appendix……………………………………………………………………………22 Introduction BT is one of the world’s most successful telecommunications company. At the height of competition in early 2000s, BT had to make a number of key decisions to ensure survival in the face of competition (De Witt and Meyer, 2010). BT made changes to its organizational structure to accommodate external innovations units situated in the UK, US, China, Korea and Japan. The innovation approach also changed from inward-looking to outward-looking and from being technologically driven to being commercially driven (De Witt and Meyer, 2010). This paper explains how regulations, convergence and intensity of competition influenced BT’s operations and approaches to innovation. The paper then details how BT has used strategic alliances, mergers and acquisitions to become the worlds’ truly integrated telecommunications service firm with a special consideration on its joint venture with AT & T. The paper finally discusses the management’s ability to sustain innovation through its organizational structure and disruptive innovation approach. Q1. External Innovation and Competitiveness Salter, Criscuolo and Ter (2014) define innovation as the act of introducing new products, processes, ideas and technologies into the market. Salter, Criscuolo and Ter (2014) further clarified that an innovation should create value than can be commercialized for it to be considered a success. According to Chesbrough (2012), however, these ideas, processes and technologies should not only be new but also capable of being replicated at an economic cost and should also be specific in their application, that is, they must be geared towards satisfying a particular, specific need (Chesbrough, 2012). Innovation has been BT’s mantra for the past decade. Innovation, however, is undertaken within the boundaries of the industry’s regulations, convergence and intensity of competition. These factors determine how a firm approaches innovation (Chesbrough, 2012). As detailed in the case study, BT Group had to review its approaches to innovation after the intensity of competition increased and the market increasingly converged. Regulation in the telecommunications industry simply means the presence of rules that govern the interaction between the industry’s players and operations standards (Naiwaya and Vyas, 2014). The regulations in the industry determine an industry’s performance. The performance, however, hugely depends on whether the regulations are deemed as progressive or retrogressive. The regulations, in this instance, were imposed on BT Group by Ofcom (Sull and Monteiro, 2007). Ofcom is UK’s telecommunications industry regulator which was set up by an act of parliament in 2003. It regulates radios, televisions, and fixed and wireless communications services. Ofcom is tasked with identifying the market players that have Significant Market Power (SMP) and then regulates these powers so as to promote competition in the market (De Witt and Meyer, 2010). BT had controlled the fixed line operations commanding a 42% while its closest competitor commanded 18% of the market (De Witt and Meyer, 2010). As such, there was very little competition and innovation in this sector of the telecommunications industry. According to Brueller, Carmelli and Drori (2014), deregulation of the industry is crucial for growth of the players and enhancement of competition in the industry. However, the necessary enabling environment must be cultivated so that the deregulation does not lead to monopolization of the industry by a few players. Ofcom sought to deregulate this market so as to increase competition and promote innovation. By increasing competition and innovation, Ofcom also sought to promote investment certainty. As a result, Ofcom and BT agreed to promote equality of access for competitors (De Witt and Meyer, 2010). This deregulation enabled the competitors to access the products and services that BT enjoyed. The regulatory body also regulated the prices BT could charge for its products and services. As Porter’s Five Forces Model dictates, regulations that open up the market have the effect of increasing the threat of new entrants into the market. As such, this regulation opened up UK’s telecommunications market and allowed other competitors to enter the market which reduced BT’s market share by 12% over the next 5 years as the intensity of competition increased (BT Group, 2012). This necessitated the firm to look at other business opportunities that will increase its profitability and be more aggressive in its innovation ventures. Convergence in the telecommunications industry can be defined as the combination of different products, applications, devices and networks that were initially distinctly offered. Convergence increasingly became popular in the telecommunications industry after the turn of the millennium as firms tried to diversify their products and risks and remain relevant in their respective markets (btplc.com, 2014). For telecommunications firms, it comprised of analogue to digital migration in order to combine voice, text, data and audio service provision. Convergence, to many, represents a positive, forward movement. But that is hardly the case especially for firms that their niche will be adversely affected in terms of profitability. For instance, a television manufacturing firm does not enjoy the convergence where a smart phone can be used to stream live television content because it lowers their sales. Convergence, according to the Porter’s 5 Forces model, has an impact of increasing the threat of substitutes and also intensify competition (Krug, Wright and Kroll, 2014). The telecommunications industry value chain is made up of several distinct components. Some firms focus on providing contents and rights products and services such as video, music and games. Others provide application services such as video streaming and voice over internet protocol (VoIP), internet service provision services and a variety of networking platforms. Between 2000 and 2005, there was increased convergence in the telecommunications industry. For instance, BskyB, a television enterprise also started providing telecommunications services directly to people’s homes. Firms like Vodafone had already shifted their voice calls from analogue platforms to digital through VoIP. The ordinary television services were also being offered across the internet platform, a concept that was known as IPTV (De Witt and Meyer, 2010). Convergence also took place across the devices used at the time. The telephones that were previously being used only for fixed line services started utilizing mobile technology too. These advancements necessitated a change in BT’s innovation approaches. Before the convergence threat, BT’s approach to innovation involved utilizing the Research and Development department to innovate technologies that would be used by the firm (BT Group, 2008). However, the increased need for innovation meant that Internal Research and Development was being rendered irrelevant. Lichtenthaler (2011) importantly observed that the rate of useful technologies that were being innovated through internal innovation structures was not enough. During 1980s and 1990s when firms were competing on the innovation front, internal innovation represented the firm’s strength. A firm was rated based on the number of technologies its research and development departments could innovate. The problem was that most of the researchers participated in research studies and innovation projects for financial gains and not for the greater benefit of the firms. As a result, most of the innovations that the research and development personnel came up with were technologically driven but were not commercially viable. The innovations were an improvement to an existing technology but did not solve any need in particular. Consequently, BT embraced open innovation where it worked with other external innovative companies. It established an innovation unit in Palo Alto, Silicon Valley, to identify business start ups and other businesses with technologies that would be helpful to BT. Secondly, the management directed that the innovations should not only be technology-driven but also commercial (De Witt and Meyer, 2010). Before the increased convergence and subsequent competition, BT innovations were only technologically-driven. They were modeled after the latest technologies in the industry, even if they were not commercially viable. The new approach was to source for innovations that could be commercialized and the best way to do this was to concentrate on the customers’ needs and not the company’s needs (Lichtenhtaler, 2011). Another change in approach was in terms of planning. Traditionally, BT’s innovations were long term in nature. However, due to increased convergence it was necessary to review these innovations for relevance every once in a while. The dynamic planning was, therefore, shortened from 3 to 5 years to 18 to 36 months (De Witt and Meyer, 2010). Furthermore, the research and development department increasingly focused on the “New Wave” services such as mobility and broadband as opposed to the traditional voice services that were the focus of innovation in the past. Lastly, the blue sky approach also changed to purpose-driven approach (De Witt and Meyer, 2010). The innovations had more backing from the management and received more funds to promote their success rate. The intensity of competition also influenced the BT’s innovation approach. The intensity of competition is directly proportional to the rate of invention of disruptive technologies. It influence the choice of approach a firm adopts to get and utilize technological innovations (Chesbrough, 2012). A firm that is rigid in innovation approach will not be able to survive as competition intensifies. After BT agreed to open access to its first mile, the intensity of competition increased especially from BT’s traditional rivals such as Vodafone and Telefonica. With players such as BskyB also competing for the market share, BT had to diversify its operations. Since the traditional market was shrinking, BT adopted the “New Wave” products and services to offset the declining revenues in the retail services in 2005 (BT Group, 2013). These products are ICT, broadband and mobility. These technologies enabled BT to reduce competition intensity as it horizontally diversified its services and increased its chances of future survival. Within one year of these innovations the company had managed to offset the declining revenues in the telecom fixed line services by generating more than 30% of the company’s revenues (De Witt and Meyer, 2010). Before BT shifted its focus from traditional to “New Wave” its share price averaged at 200p. After the shift in innovation approach the share prices increased to 230p at the end of 2005 and had hit 300p by midyear of 2006 (BT Group, 2013). The company has continued with this approach to innovation and right now it has more than six business lines. Currently, its shares are valued at 400p and the firm offers a wide range of services such as firewall services, intrusion prevention, internet service provision, web conferencing, mobile networks and many other services (btplc.com, 2014). Q2. Vertical Integration and Competitiveness 2a) Strategic alliances, mergers and acquisitions During the 1990s BT had the ambition to become the world’s first truly integrated global telecommunications service firm (Sull and Monteiro, 2007). It aimed to achieve this goal through a number of corporate strategies the major ones being formation of strategic alliances and mergers and acquisitions. These strategies helped it integrate external innovation with its core functions and further internationalise its operations. Strategic alliances are corporate strategies where two or more firms agree to share their resources to pursue a common business opportunity (Brueller, Carmelli and Drori, 2014). Essentially, the corporations involved retain their autonomy in operations but contribute resources and participates in the activities the common new venture undertakes. There is, thus, a formation of a new entity. A good example of a strategic alliance is the formation of Concert Communications, a product of collaboration efforts between BT and AT & T. These alliances are formed because they are mutually beneficial to all the parties privy to the arrangement. Strategic alliances have different goals depending on the scale on which they are pursued at. Local strategic alliances are usually formed between firms in the same local market and their primary purpose is to further penetrate that market (Naiwaya and Vyas, 2014). Global alliances, on the other hand, involve partnering of firms from different regions of the world primarily to develop and improve their presence in the global market. Global alliances also boost a firm’ efforts to internationalise its operations as the resources and activities of their partners complements their efforts in achieving global presence (ba.resources.co.uk, 2010). However, strategic alliances have their negatives too. For instance, they reduce the size of the market especially if the two firms in the alliance are from different countries such as was the case of BT. Most international strategic alliances have an arrangement where a non-compete is signed so that there is no interference in each other’s operations and markets. In a bid to become the world’s first truly integrated telecommunications service firm BT entered into a number of strategic alliances through its years of operation. The first alliance was with AT & T in July 1998. This venture was equally owned by both parties. The primary operational mechanism was to combine to combine their transborder assets and operations (De Witt and Meyer, 2010). BT is a UK firm while AT & T is a US-based telecommunications firms. They had both internationalized heir operations. However, none had captured the global market the way they would have wanted. The collaboration efforts enabled them to enjoy economies of scale outside the UK and US markets and aptly capture the international telecommunications market (De Witt and Meyer, 2010). Since 1998, BT has entered into a number of other strategic alliances to become a fully integrated telecommunications firm. For instance, in 2005 BT entered into an alliance with Schlumberger to provide communications services in the oil and exploration industry (btplc.com, 2014). Schlumberger is an oil field firm. Through this alliance, BT was able to capture the oil fields operators and address their communications needs. In 2008, BT entered into a strategic alliance with Siemens to enable it capture the markets that needed logistics data management solutions. It further entered into an alliance with Orange to provide fixed line operations to Orange customers on behalf of Orange. This helped BT globalize its operations because Orange had an expansive network. BT is still forming strategic alliances to date. They have been efficient in identifying new markets and taking advantages of these business opportunities (btplc.com, 2014). Mergers are corporate strategies where two corporations come together to form a new entity (Krug, Wright and Kroll, 2014). Acquisition, on the other hand, is where one firm purchases the interest in another firm to eventually own it (Krug, Wright and Kroll, 2014). Acquisition may involve a purchase in cash or issuance of acquirer’s shares to the acquired firm so that it becomes fully owned by the acquiring firm. Naiwaya and Vyas (2014) point out that unlike strategic alliances that result in a formation of an extra business entity, mergers and acquisitions result in reduction in the number of the business entities. In its bid to become the world’s truly integrated telecommunications service firm, BT has undertaken a number of mergers and acquisitions. For instance, in 1994 it acquired 20% in a US firm, MCI (De Witt and Meyer, 2010). At the time, MCI was the best long distance communication provider in the whole of North America. After this acquisition the two firms formed a Joint Venture they labeled Concert Communications Services. The integration was the fact that apart from the traditional short distance communications, BT could now provide long distance telecommunications which it could not at first. This venture offered expansive services especially to MNCs in over 80 countries and soon became the most profitable venture in the telecommunications industry at the time with revenues amounting to US $ 1.5 billion a year (De Witt and Meyer, 2010). Due to this profitability, BT even contemplated to merge with MCI but this ambition never came to fruition as Worldcom managed to beat BT to it. Mergers and acquisitions has been BT major corporate strategy to integrate other services into its operations to achieve vertical and horizontal diversification. Unlike the popular notion that mergers and acquisitions are only used for vertical integration, they are also widely used for horizontal integration to venture into new markets. When used for vertical integration, mergers and acquisitions are meant to buy out the competition, source more distributing agents or increase the market share. However, used for horizontal integration, mergers and acquisitions are primarily used to venture into markets that are beyond the firm’s scope to expand the prospective market size. In 2002 it acquired scoot.com to venture into online directory business (btplc.com, 2014). To venture into the Italian telecommunications market it acquired Albacom in 2004 and Atlanet in 2006. To capture the global corporate market it acquired Infonet in 2005 (btplc.com, 2014). To further venture into financial services communication provision, BT moved to acquire Radianz from Reuters in 2005. In the UK, BT acquired Lynx technologies to capture the middle income earners and small businesses in need of IT solutions (btplc.com, 2014). There are many instances where BT has resolved to acquire or merge with another firm to integrate these services into their own, capture new markets and globalize their operations. 2b) Concert Communications Concert is a global venture that was established by BT and AT & T in July 1998 (BT Group, 2014). The joint venture was launched in January 2000. It was BT’s first strategic alliance that enabled it to capture the international market and globalize its operations. Concert used low-cost leadership and product differentiation to maximize its corporate profitability. The venture combined the transborder assets of the two companies. They also combined their workforce and operations in areas outside the UK and the US where each company was to maintain its autonomy (BT Group, 2008). The two firms signed a non-competitive agreement. Thus, BT could not compete with AT & T in the US market while AT & T could not compete with BT in the UK market. The joint efforts were meant to capture the rest of the international market. According to Porter’s Three Generic Competitive Strategies, a firm is supposed to optimally position itself in an industry in such a way that it leverages its strengths to maximize its corporate profitability (Salter, Criscuolo and Ter, 2014). These strategies include focus strategies, cost leadership strategies and products and services differentiation strategies. Concert employed cost leadership strategies and a bit of differentiation strategies to achieve profitability goals. Cost leadership as a strategy is where a firm offers its products and services at a lower price than the industry’s average to increase its market share (Swot-pest-porter.com, 2014). A firm employing these strategies enjoys process efficiencies and has access to low cost inputs that allows it to charge lower costs. Concert enjoyed these process efficiencies since the managing team was assembled from the two firms and was comprised of the best employees from BT and AT & T. The process efficiencies enabled it to lower the costs of production and offer telecommunications services to multinational corporations at prices way below the global telecommunications averages (BT Group, 2008). The venture utilized the international networks and call traffics of both companies. This gave it access to large resources of factors of production which the competitors could not rival on the international market front. Furthermore, Concert used the combined network of global distributors to increase its market reach. Through this vertical integration and outsourcing of services, Concert was able to minimize its operational cost and maximize corporate profitability (De Witt and Meyer, 2010). Thus, it was able to offer its telecommunications services to more than 270 MNCs directly and more than 29,000 individual firms through its global network of distributors (De Witt and Meyer, 2010). Concert also utilized differentiation strategies to increase its profitability. Differentiation strategies are applied by a firm that seeks to capture a particular market through provision of products and services that are, or are considered as, unique by the target audience (Naiwaya and Vyas, 2014). The main advantage of differentiation strategy is that it enables premium pricing since the product is considered as unique (ba.resources.co.uk, 2010). The customer base is willing to pay an extra cost to get the unique product which it considers as superior. Through BT and AT & T superior research and development units, Concert was able to provide tailored telecommunications products to the MNCs depending on their country of operation. The MNCs were willing to pay an extra fee for the customized products they were offered. The premium pricing enabled BT to cover the extra cost it incurred in customizing the products and enjoy the rest as incremental profit. Q3) Organizational Structure and Strategy An organization structure of a firm shows the relationships between the employees of a firm in their order of seniority, their relationships and tasks. According to Krugg, Wright and Kroll (2014), however, more than indicating the order of seniority and tasks for the different positions, the organization structure of a firm also determines the organization culture of that firm. This in turn influences the operations of the firm, the communication flow and how employees relate with each other (Chesbrough, 2012). BT’s external innovation organizational structure is headed by the chief technology officer for the Group. Under that there is the senior vice president in charge of technology and innovation. The vice president oversees the technology and innovation units in UK, Silicon Valley, Korea, Japan, and China. The BT external innovation organizational chart has been attached as Appendix A. BT’s organizational structure has undergone a series of changes in a bid to bring external technologies to BT. When BT was privatized it only had research and development unit known as Innovation Central and Applied Technology Centre in the UK (BT Group, 2014). The firm was relying on internal innovation to create new technologies for the firm’s use. This essentially was pursuing sustaining innovation. Sustaining innovations are those innovations that do not necessarily seek to create new markets but just to improve the technologies that are already in the market. Increase in competition forced the company to shift the focus from sustaining innovation to disruptive innovation (BT Group, 2013). Disruptive innovations are innovations that introduce something new into the market thereby increasing the value network. BT has been pursuing this since the turn of the millennium and has since ventured into a wide range of fields from oil and exploration, to banking, television broadcasting, medicine, logistics, online retailing, internet service provision and much more (btplc.com, 2014). All these have been enabled by external innovation coupled with corporate strategies such as strategic alliances, mergers and acquisitions. Due to increased competition and convergence in the telecommunications industry at the start of the new millennium, it became necessary for the senior management to restructure its organizational structure. BT established an external innovation unit in Palo Alto, Silicon Valley to lead in outsourcing of technologies that are beneficial to BT (De Witt and Meyer, 2010). Generally, the current organizational structure has improved BT’s senior management ability to bring external innovation in the area that it identified as crucial for its sustainability such as broadband, mobility, network technologies and information technology (De Witt and Meyer, 2010). According to Sull and Monteiro (2007), of late, organizations increasingly prefer flatter organizational structures because of the notion that it increases collaboration efforts and flow of information through both official and unofficial channels. The open and flatter organization has enabled more collaboration and consultation between the different departments which has led to increased adoption of innovation technologies. BT has three managers at Palo Alto unit. This unit has been the most vibrant of the external innovation units and has in the past contributed heavily towards bringing in external technologies. In its first four years, the Palo Alto unit managed to bring a total of eight innovations that were eventually utilized by BT. Since then, the unit has improved its aggressiveness and the managers are bringing in an average of 5 technologies every year (BT Group, 2014). The Vice president in charge of technology and innovation increased the units to China and Korea and Japan to complement the UK and Silicon Valley units. The China unit was headed by one manager while the Korea and Japan unit was also headed by a single manager. The choice to expand to these areas was informed by the fact that these Asian giants were always three or four years ahead in technology as compared to the rest of the world. There was, thus, a higher chance of getting a start up with useful technology that BT could commercialize. This has further increased the number of technologies outsourced in a year to an average of15 from 5 a decade ago (btplc.com, 2014). To further increase its ability to net the relevant technologies, the BT senior management is considering expanding its scouting networks to emerging markets that are also technology-driven. Instead of BT coming up with technologies, external innovation helps it to spot useful technologies and then commercialize them. It has since seriously considered setting up units in India, Israel, Brazil and Russia (De Witt and Meyer, 2010). To further increase managerial competencies, the senior management chooses the managers from its own employees (De Witt and Meyer, 2010). There is a general trend among multinational companies where they let the native head the foreign branch. Most of multinational companies believe that the native understands that specific foreign market better than a foreigner would. But BT does the exact opposite. All the heads in the external innovation units were employees of BT that had worked in the UK. In fact, of its four managers in charge of a invention units in the UK, US, China and Korea and Japan, only the China manager was not an employee of BT. Choosing from its own employees has the advantage of promoting the organizational culture of the company as opposed to outsourcing a manager (Brueller, Carmelli and Drori, 2014). Most of these managers have worked in the company for more than ten years and know the goals and objectives of the company and how the company seeks to achieve them. This improves the ability of the company to get the relevant innovations and technologies because of increased understanding of the firm’s needs by the scouting agents. The organizational structure was not the only thing that the senior management changed to increase its ability to bring in external technologies; it also changed its approach to innovation and employee culture. The employee culture of a firm determines how the employees relate and how they communicate or disseminate information. At the start, the employees of the innovation unit, for example the one located in Silicon Valley, could only do their assessment and then refer the prospective partners to BT’s headquarters for further clarification and adoption (De Witt and Meyer, 2010). The scouting unit had no powers except identifying and writing a report. This was more or less the same as that of the research and development department in the UK which wrote 30-page reports analyzing a technology. As competition increased these scouting and innovation units were given more powers and mandate. On their own they could spot relevant technologies and even outsource them on behalf of BT Group. They were also allowed to enter into small business arrangements with other firms on behalf of BT Group even without asking for consent from the headquarters (De Witt and Meyer, 2010). The focus of the innovation teams also changed from just identification of business start ups with relevant technologies that can be beneficial to BT to learning from others without necessarily contracting them. Thus, the number of startups that were contracted by BT reduced but the number of technologies kept on increasing (BT Group, 2008). The independence these units were given by the senior management meant that they could also outsource or make demonstrations and prototypes of their own and pitch at the headquarters for approval. However, the most critical thing that the senior management did to ensure that their ability to source external innovation is ever increasing is when it monetized the innovation units’ contributions (De Witt and Meyer, 2010). The innovation units’ contributions are now not measured in terms of how many useful technologies they brought in were adopted but by how much those technologies brought in in terms of corporate profitability. This will push the innovation units’ managers to be more aggressive in outsourcing innovations that are not only technologically-driven but can also be commercialized (Chesbrough, 2012). Therefore, the management has instituted the necessary measures that improve its ability to bring in useful technologies. Conclusion It is evident from the discussion that BT employs a host of corporate strategies and innovation approaches to increase its market share and profitability. These were necessitated by the market regulation, convergence and intensity of competition. The market regulations increased the ease of entry of other firms into the market and this increased the intensity of competition (BT Group, 2008). Convergence, on the other hand, increased the intensity of competition by allowing other firms to offer telecommunications services and use of communication gadgets and technologies in a way BT had not envisaged. This necessitated a change in organizational structure and approaches to innovation (De Witt and Meyer, 2010). BT has especially relied on forming strategic alliances and mergers and acquisitions to increase its market size. These corporate strategies have enabled it to become truly integrated as it has been able to integrate a wide and varied range of applications to its telecommunications services provision (BT Group, 2014). To that end it has become fully and truly integrated. 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California Management Review, 56(2), pp. 77-94. Sull, D., and Monteiro, F., 2007. BT Group: Bringing external innovation inside. London: London Business School. De Witt, B., and Meyer, R., 2010. Strategy: Process, Context, Context- An international perspective. London: Cengage Learning. Swot-pest-porter.com, 2014. BT Group PLC. Swot , pest and porters analyses, [Online]. Available at [Accessed 7th June 2014]. Appendix A: BT External Innovation Organizational Chart Read More