Strategic Renewal of Europe’s Largest Telecom Operators (1992–2001):

Abstract

Forces of deregulation, internationalisation and technological innovation have dramatically changed the European telecommunications industry. To cope with these forces, incumbent telecommunication operators had to strategically renew their companies. What can be learned from these incumbents and which managerial challenges are ahead? To address these questions, we investigated trajectories of strategic renewal of Europe’s five largest incumbent operators and the impact on financial performance for the period 1992–2001. Remarkably, we did not find significant differences between the renewal trajectories of these incumbents. These findings suggest herd behaviour, indicating a preference for adopting similar organizational templates due to institutional forces resulting in a common ‘follow the industry’ renewal trajectory. In the years to come, however, we expect such herd behaviour will not be viable anymore. On the contrary, top management should make firm-specific strategic choices. The analysis and findings discussed in this paper provide insights for top management of incumbent firms in other deregulating European industries as well, such as the financial services and energy industries.

Introduction

In the last decade, incumbent operators¹ in the European telecommunications industry have been confronted by increasing turbulence. Forces like liberalisation, privatisation, internationalisation and technological innovation have transformed the European telecommunications industry. In responding to these forces, incumbent operators have had to engage in strategic renewal. The telecommunications industry is not a unique case. Deregulation, internationalisation and innovation have transformed other regulated industries in Europe as well. Examples of such industries are financial services, airlines, and electricity and gas utilities.

In this exploratory study, we investigate how Europe’s five largest incumbent telecommunications operators² have responded to the increase of turbulence in their industry during the decade preceding the telecom crash that started in 2001 (cf. The Economist, 2002). From a practitioners’ perspective, the research is relevant as it examines how top management of large incumbents tries to cope with the turbulence in their industry. The data set used will be unique in its comprehensive nature and also allows us to probe what future actions telecommunications operators might take. However, the relevance of this study is not limited to managers of the large telecommunications companies. The forces that have changed the European telecommunications industry have also influenced other regulated industries in Europe. Therefore, the analysis and insights presented here can also be used outside the telecommunications industry. Managers in other industries may use this framework as well to formulate strategic renewal trajectories of their companies.

The focus of this paper is on incumbent telecommunications operators and not on new entrants. As incumbent operators were used to stable competition for a long time, they are probably most challenged to strategically renew themselves; i.e. to perform strategic renewal actions to align organizational competencies with the environment to increase competitive advantage. Building upon previous research in which a conceptual framework of strategic renewal journeys was developed (Volberda et al., 2001a) and has been applied to the European financial services sector (Volberda et al., 2001b), we focus here on the main attributes of strategic renewal journeys. These attributes indicate to what extent strategic renewal actions are externally versus internally oriented; international versus domestic; exploration- versus exploitation-oriented, and aim at expansion versus retreat. We assess for each of the European top five operators how external, international, explorative, and expansive its strategic renewal actions have been. We are in particular interested to learn how different the patterns of strategic renewal actions, i.e. the resulting strategic renewal journeys, of the top five have been. In addressing this issue, we focus on the question: To what extent the renewal journeys of incumbents do result from similar selection forces at industry level or do these journeys result from strategic choice? Strong forces at industry level might suggest similarities and herd behaviour (‘following the industry’), whereas distinct strategic choices at firm level would promote differences in strategic renewal journeys. Finally, we analyse the financial performance (return on equity) of the operators to highlight the relationship between strategic renewal and performance.

This paper is organised into four sections. In the first, we analyse the main forces transforming the European telecommunications industry during the past decade. In the second section, we discuss two opposing perspectives on strategic renewal, i.e. an institutional and a strategic choice perspective. Next, we describe briefly our methodology and present our empirical findings. In the final section, we draw conclusions and discuss the implications for management.