issues and challenges in strategic repositioning: the case of cable and wireless

Issues and challenges in strategicrepositioning: the case of Cable and WirelessColin Turner*Hull University Business School, University of Hull, UK

� Between 1999 and 2002, Cable and Wireless (C&W) undertook a radical strategic repositioning as it sought to become more focused on key growth markets. Due to a combination of a declining external environment and an inadequate external environ-ment, this process of strategic change failed to establish the company as an Internet powerhouse.

� This article examines the strategic repositioning undertaken by Cable and Wirelessthroughout the period 1999 to 2002. It scrutinizes how the company has sought to trans-form itself from an integrated communications provider, covering many segments inmany different locations, into a more focused operator targeting a specific commercialsegment.

� The major problems that the company encountered in this process of change are exam-ined, notably in terms of the limit to strategies based on the perceived benefits of strate-gic focus. It concludes with an examination of what lessons can be learnt from itsexperience of strategic change.

Copyright © 2003 John Wiley & Sons, Ltd.

Introduction

At its heart, strategic repositioning is a con-scious act undertaken by enterprises as theyadapt to a changing commercial environment.Such strategic change often represents a fun-damental shift in the underlying value propo-sition of the enterprise as it seeks to changeits targeted market segment(s) and/or its basisof differential advantage (Porter, 1996). Repo-sitioning is essentially driven by a growing gap between the needs of the market and thecapabilities of the enterprise (Corstejens and

Copyright © 2003 John Wiley & Sons, Ltd. Strategic Change, August 2003

Doyle, 1989). Accordingly, strategic position-ing decisions are based upon a firm reconcil-ing internal and external environments byfinding a match between market requirementswith the firm’s ability to serve them (Hooleyet al., 1998; Zook and Allen, 2001; Baghai et al., 1999; Mintzberg, 1997). Thus in reposi-tioning, it is important not just to know howthe change in direction affects the capabilityof assets but how distinctive resources andcapabilities (via their inimitability, immobilityand non-substitutability) sustain the new position (Grant, 1991; Slater, 1996; Collis andMontgomery, 1995).

In the telecommunications sector, the com-mercial environment has changed radically

Strat. Change 12: 251–257 (2003)Published online in Wiley InterScience(www.interscience.wiley.com). DOI: 10.1002/jsc.640 Strategic Change

*Correspondence to: Colin Turner, University of HullBusiness School, Hull HU6 7RX.E-mail: [email protected]

252 Colin Turner

over recent decades as technological changeand liberalization have generated both a verti-cal and horizontal disaggregation (Fransman,2001; Li and Whalley, 2002; Strous, 1997). Theconsequence has been the emergence of aplethora of niche operators focused on a par-ticular segment or ‘layer’ of the telecomm-unications sector. These trends have placedpressure upon the conventional integratedcommunications provider operating withinnumerous vertical layers and across many cus-tomer segments. Not only are these businessesunder attack from a number of different oper-ators in a number of different markets, but also from changing customer sentiment thatdemands more specialist provision. This hasbeen compounded by pressures from financialmarkets that prefer the easier valuations andtransparency characterized by focused operators as well as the clearer framework foridentifying a direction for the product andmarket decisions that result.

The changing strategic focus ofCable and Wireless

Founded in the 1860s, C&W brought togetherthe disparate communications resources ofthe British Empire. By the mid-1990s, C&Wwas a sprawling conglomerate communica-tions enterprise operating in over 70 nationstates and across many different market seg-ments. The enterprise was perceived as nomore than a de facto holding company for adiverse number of geographical assets.Despite repeated attempts to reconcile thesedisparate strategic business units, there was anemerging consensus amongst the financialcommunity that C&W was addressing toomany segments in too many locations with too many services.

This apparent lack of strategic coherencewithin the group was compounded bychanges in the external environment gener-ated by the shift to mobile technology andintense competition and the Internet-fuelledgrowth in data traffic placing increasinglysevere commercial pressures upon the tradi-tional cash cow of the company, namely fixed

line telephony. The result was that C&W’s conventional market places were looking in-creasingly mature with limited potential forgrowth. With financial markets seeking greaterclarity and certainty over strategy, pressurewas growing upon the company to undertakeradical action to transform the enterprise intoa more focused operator within higher growthmarkets.

With the appointment of a new Chief Exec-utive — Graham Wallace — in 1999, C&Wsought to respond to these challenges throughredefining its core business to focus on thehigh growth market for Internet Protocol (IP)data services to corporate customers. A keycatalyst for change was the acquisition ofMCI’s global Internet backbone in 1998 thatgave the enterprise a substantial presence inthe key US market for the first time. Conse-quently C&W reined in its global ambitions,concentrating upon supplying technologicallyadroit enterprises operating within the coremarkets for global data traffic (the US, Europeand Japan). This core business would beenclosed within a new division — C&WGlobal — whilst remaining non-core busi-nesses would be separated out into anothernew division — C&W Regional — where reg-ulatory and licensing commitments compelleda continued presence (notably in a number ofeastern Caribbean Island states).

Integral to the repositioning was C&W dis-posing of non-core assets and acquiring enterprises specializing in the delivery of IP services to businesses within its targetedgeographical markets.The company’s asset dis-posals included its operations in Hong Kong,Singapore and Australia. Whilst these busi-nesses were still profitable (in 1999, HongKong Telecom generated 75% of the enter-prise’s profit and 50% of its revenue) theirincreasing maturity, coupled with the impactof increased competition and lack of strategicfit with the move into IP data services, meantthat they were no longer seen as pivotal toC&W’s operations. These actions werecoupled by a move by the company to rid itself of other businesses in segments thatwere no longer core, notably its residential


and mobile units. In an attempt to cement therepositioning strategy, C&W made a numberof small-scale acquisitions in its targeted geo-graphical markets (most notably IP-based busi-nesses in the US and continental Europe).These purchases were of a significantly smallermagnitude than the disposals, leaving C&Wwith a cash surplus of over £7 billion, part ofwhich was used to develop both global IP ser-vices (£350 million) and a global IP infra-structure (£2.5 billion).

Challenges to the new strategic position

A hostile commercial environment marked theearly period of the company’s strategic repo-sitioning. The period since the mid-1990s wascharacterized by a sharp increase in competi-tive rivalry as both existing and new operatorsundertook aggressive network development.This pushed the sector towards commoditystatus and depressed the cost of IP trafficsharply.These pressures were compounded bychanges in buyer power. First, the Internetwas taking longer to diffuse than previouslyperceived, with the result that there was insuf-ficient traffic for both new and existing net-works. Second, large customers cutting backtheir IT spend became increasingly cost con-scious in their purchases without any realdiminution of the desire for customized ser-vices. Moreover C&W, like many other opera-tors, rushed to sign up unprofitable customersahead of its rivals, reasoning that they wouldbecome profitable as the demand for the oper-ator’s capacity rose. When this scenario didnot materialize, C&W was left with a largenumber of unprofitable contracts, notablywith small and medium-sized enterprises.

This capacity glut is likely to be a sustainedfeature of the telecommunications marketplace as only a small percentage of the infra-structure laid has actually been brought intoservice (in the USA some 90% of the fibre laidis ‘unlit’). This overabundance of capacity hasbeen compounded by the fact that technolog-ical change is doubling the carrying volume of this infrastructure every 12 months

(Fransman, 2001).Whilst these trends have ledto a number of corporate casualties such asWorldCom and Energis, the resulting consoli-dation will not lead to a diminution of rivalryas the acquirers of these assets will seek todeploy them with a pricing strategy that is free from the substantial sunk costs incurredby their original developers. These pressuresmean that the commodity status of the sectoris likely to remain. Indeed the cost of IP traffichas continued to fall by over 50% in the yearto the end of 2002.

C&W sought to cushion itself from theseexternal pressures by seeking to utilize its relatively strong balance sheet as a source ofcompetitive advantage in an environmentwhere many of its rivals are heavily in debt, anissue discussed later. However the ability ofC&W to utilize these cash reserves to differ-entiate the business has been undermined by the unexpected high cash burn at C&WGlobal. C&W has seen its cash reserve fallfrom £7 billion to £2.2 billion (end of 2002)on the back of the weakness of its Global unit with emerging tax and property liabili-ties reducing this cash reserve even further.Moreover the ‘value’ of this resource is under-mined by the political and financial supportoffered to many of its incumbent rivals (e.g.France Telecom) and through attempts byother similarly troubled private operators toraise cash from existing investors (e.g. ColtTelecom).

The company also faces a problem in that itsimply does not possess the resources tocompete effectively in the key geographicmarkets of the US and South-East Asia. The only market where C&W can match scale with international experience is Europe, mostnotably the UK (where in 2001, more than60% of C&W’s revenue was generated; C&W,2002). This problem is compounded by theflexibility and non-proprietary nature of thecore technology supporting the strategicchange — IP — that is likely to be as much a weakness as a strength of the business. Asmuch as C&W can use the IP to secure com-petitive advantage so its rivals can utilize thetechnology to undermine the company’s

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position, therefore rendering its ‘customized’services substitutable (Grant, 1991).

C&W’s experience indicates that its reposi-tioning into international data markets failedto close the gap between the market’s needsand the ability of the enterprise to meet them.As the environment changed so the market’sneeds altered in a manner that C&W appearsnot to have been able to respond to profitably.Furthermore, the ability of the company’sresources and capabilities to differentiate itselfwithin the market place was limited.The resultof these factors combined contributed to thefact that C&W over the period 2001–2002turned a profit of £3.6 billion into a loss of £4.7billion and saw a £4 billion write down on thevalue of its tangible assets.

Securing the new strategic position

The turbulent external situation, when com-bined with the apparent inadequacies of itsinternal environment, effectively altered thenature of C&W’s strategic thrust with theemphasis shifting away from repositioningtowards turnaround and ultimately, corporatesurvival. However, having sold off the major-ity of its local access networks, the companycould not respond like other operators byretrenching to its incumbent positions andhad little choice but to persist with its reposi-tioning strategy.The options for the firm in thissituation of excess capacity are to either waitfor an increase in demand, encourage othersto adjust capacity, or undertake internalrestructuring (Baden-Fuller, 1990; Baden-Fuller and Stopford, 1993). The experience of the telecommunications sector tends tosupport the evidence offered by Harrigan(1990) who suggested that many industriestake time to adjust or even accept that recov-ery is not imminent and that consequently,excess capacity is sustained. In these circum-stances, Harrigan claims that corporate strat-egy is geared more towards waiting for othersto leave the sector rather than the firm makingthe necessary adjustment itself. A conclusionsupported by evidence from the telecommu-nications sector. Thus the emphasis is upon

securing financial security for a sustained glutrather than seeking to actively reduce capac-ity. The problem for business is that reducingcapacity is costly, including irrecoverable sunkcosts, the limited re-sell value of assets and theshort-term costs incurred as the firm reducescapital and operational expenditure.

C&W has sought to ride out the downturnin the hope that the eventual upturn indemand would return it to profitability. Itsstrategic approach has sought to place theburden of adjustment upon other operators byensuring that it had sufficient financialresources to sustain the core global businessuntil market sentiment changed. C&W isrelying upon a tangible ‘flight to quality’ bybuyers generating the revenue needed tosecure the long-term success of its reposition-ing strategy.This relies upon users recognizingthat there is only so far prices can fall beforethey undermine the sustainability and there-fore survival of the provider and of the serviceprovided. The hope is that the user, in desir-ing reliability and stability, will not headtowards the lowest cost provider. This reflectsthe conclusion of Lurie and Kohli (2002) thatusers will pay a premium to a supplier of acommodity if they understand and reducetheir risks. Thus C&W sought to utilize itsfinancial resources to signal continuity, secu-rity and predictability of service, thereby lowering the degree of risk derived from any potential disruption to an enterprise’smanaged communication networks. Throughthis strategy C&W not only wanted to lock-inthe existing customer base but also sought togenerate customer defection from its lessfinancially secure competitors.

In meeting the needs of this strategy, C&Whas cut operational and capital expenditure ona number of occasions to sustain its relativelystrong financial position. Central to thisprocess were attempts to reduce the cashburn of the global unit. Thus C&W rid itself via disposals and alliances of unprofitable seg-ments, further narrowing its target markets.C&W has withdrawn from the domestic busi-ness markets in the USA and ContinentalEurope to concentrate upon MNCs in these


areas. This narrowing of focus was driven bythe belief that the alternative strategy ofclosing C&W Global would simply have costtoo much both in terms of finance and diminished strategic credibility. Consequently,C&W had to use its core strategic resource, itscash pile, to cushion the costs of scaling backC&W Global. These financial pressures onlyincreased as its cash cow, the Caribbean busi-nesses of C&W Regional, saw marginssqueezed due to increased competition, therebalancing of tariffs and the ongoing fixed to mobile switch.

Lessons for repositioning

Prior to the repositioning process, C&W wasperceived by the financial community as acompany lacking a strategy and a readily identifiable core business. The repositioningessentially sought to change this by giving the company a focused core business basedaround what are perceived to be its most profitable customers, its most differentiatedand strategic capabilities, its most criticalproduct offerings and most important chan-nels (Zook and Allen, 2001). However, as C&W has discovered, there is a differencebetween choosing the core business and thosecore activities operating as a sustained plat-form for growth. Not only were there prob-lems in the basis of the strategic change(particularly in the ability of C&W’s resourcesto establish the company as an IP power-house) but also there were emergent problemswith the strategic method, notably its mis-judgement of the pace of adjustment andchange within the sector. Whilst only some ofits errors could have been predicted they aresymptomatic of an inherent flaw made byC&W in the means and basis of strategicchange, the nature of its repositioning and its choice of core business.

According to the conclusions of Foster andKaplan (2001) sustained growth in what is,essentially, a ‘discontinuous environment’depends upon companies refreshing theirportfolio by building new growth businessesand disposing of the ‘dull-but-profitable’ ele-

ments. Though the experience of C&W doesnot necessarily disprove the conclusions ofKaplan and Foster, it does highlight some ofthe problems that firms may face in actingupon them. C&W made a number of keyerrors in seeking to refresh its portfolio ofbusinesses to focus on the IP data segment,notably in entering markets that it did notreally understand and buying failing busi-nesses that it could not turn around. Moreover,in disposing of its dull-but-profitable busi-nesses, C&W rid itself of those units that utilized the key capabilities derived from a corporate history based on serving interna-tional markets. These capabilities are bothinimitable and durable and an undoubted keysource of competitive advantage (Slater,1996). These dull-but-profitable businesseswere essentially the core business of the oldcompany. Since its beginnings in the 1860s,C&W has developed a key capability in devel-oping and managing a diverse range of geographical telecommunications assets. Itnurtured skills in managing the developmentof small incumbent positions, defending thesepositions and conducting regulatory relationsto secure these businesses. The repositioningdefined a core business that was largely discontinuous with these key capabilities,thereby undermining the value of what madeC&W different in the market place. Further-more, in focusing on a new core business,C&W has allowed those remaining busines-ses of the old C&W (that it is compelled toserve) to suffer from underinvestment withthe result that their dominant positions,especially with mobile markets, were rapidlyundermined.

Authors such as Collins and Porras (1994)and Zook and Allen (2001) advocate a morestrategically conservative approach. Thisapproach advocates the generation of growththrough the continuities provided by theenterprise’s traditional core businesses. Thusrepositioning would have been a more evolu-tionary process with a transition based uponthe dull-but-profitable businesses providingthe necessary platform. C&W’s repositioningwas based upon market sentiment that



256 Colin Turner

stressed the benefits of being a focused operator. However this need not always be the case. The evidence offered here suggeststhat C&W, in seeking strategic focus, createdan excessively myopic vision of both thecompany and its core business (Levitt, 1960).As implied in Zook and Allen (2001), strategicfocus does not necessarily mean focusing onone segment or merely too narrow a definitionof the core business. A core business can bemulti-segmental to the extent that operationsacross all targeted segments utilize the samekey capabilities. Furthermore there should beno natural assumption that focus is always andeverywhere the best solution (Harper andViguerie, 2002). The desire for focus couldlimit growth potential if it impedes move-ments into profitable segments that are adja-cent, that is utilize the same capabilities, etc.,to the enterprise’s core business (Zook andAllen 2001). In addition, focus can be prob-lematic if it leads to the enterprise foregoingmanagement experience in the necessaryskills of starting and building new businesses(Burgelman and Grove, 2001). As opportuni-ties rise and fall in the telecommunicationssector, it is important that the enterprise is suf-ficiently flexible to take advantage throughpossessing the ability to adapt and ensure ithas the capabilities to extend its reach intoadjacent or new businesses. This underlinesthat whilst focus is desired, firms have to bestrategically flexible and that consequently,there is no best structure for telecom-munications operators (Deloitte Research,2001).This has been borne out by the fact thatboth conglomerate and focused operatorshave suffered in the turbulent telecommuni-cations market place.

Conclusion

Whilst there was a case for C&W to reduce its‘competitive scope’ (Porter, 1980), the strategyto reposition itself to focus on the IP datamarket has proved extremely problematic.These problems were ultimately sourced fromthe incompatibility between C&W’s internalenvironment and the needs of the external

one. However explaining the failure of therepositioning merely in these terms negatesthe number of strategic errors made by thecompany in the process of strategic changethat compounded this problem. Perhaps thekey error was derived from C&W taking toomyopic a view of its core business and therebyundertaking a process of strategic reposition-ing that was far too radical. The process ofchange needed to be more pragmatic with acore business built on the continuities pro-vided by its key assets and capabilities. Dis-posing of these assets was a mistake. Not only did C&W lack experience in the targetedsegments but also these older businessescould have shielded it from the worst of theturbulent external environment and providedstrategic flexibility.

At the time of writing (March 2003), whereC&W goes from its current parlous position isuncertain. The inevitable change in manage-ment finally occurred in early 2003 with afurther withdrawal from the global IP marketlooking likely. The company could becomesubject to a takeover or merge with anotherplayer, or may simply be broken up. Whatperhaps seems most likely is that C&W willrefine its business and move into a core busi-ness of being a pure bandwidth supplier oroffering basic connectivity. This is likely to becoupled with a further narrowing of its geo-graphic reach. Whilst the process of strategicchange attempted to establish a more focusedC&W, the form is which it is likely to emergein the aftermath of the process is likely to bevastly different from what was envisaged.

Biographical note

Dr Colin Turner is lecturer in business strat-egy at the Hull University Business School.Colin has written extensively upon develop-ments within the UK and European telecom-munications industry. A previous paper in thisjournal [‘Strategic breakout in UK telecommu-nications: the case of Kingston Communica-tions’ 11(1)] was one of the most popularpapers as measured by the number of hits onthe journal website.


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issues and challenges in strategic repositioning: the case of cable and wireless

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