Softbank Corp Internet and Web Related Acquisition : Business Technical

• Reorganization at AR Telecom (1998)
• PRODUCT APPLICATIONS
• INVESTMENT IN RURAL LICENSE
• CURRENT REGIONAL SALES AND MARKETING STRUCTURE
• DILEMMA
• CASE QUESTION

How should ABT top managers reorganize to resolve the tensions among the regional organization selling to national telephone customers, new applications for industrial and urban data, and investments in rural telephony?

In reviewing the evolution of their structure, top managers recognized that they had moved from a domestic functional structure to a geographic regional sales and marketing structure. They realized that each existing sales subsidiary was organized to develop and maintain a close relationship with the national telephone company of countries within its region, focusing mostly on its rural telephony needs.

Sales persons were not rewarded to develop new markets (such as industrial business or urban data transmission) because they were paid on the basis of meeting quarterly sales quotas. According to one top manager, “They could not focus oil such a diverse market as industrial because it is going to take two or three years of working closely with an industrial customer or a new telephone competitor to land a deal, and this just doesn't fit within our reward system of sales persons.”

In 1998, traditional Asian markets and telephone companies were beginning to suffer, and top managers anticipated that revenues from these markets would be flat or, worse, fall by the end of the year. There were opportunities to expand their presence in non-Asian markets with their traditional customers or to push for entry into other applications such as industrial and urban data.

Therefore, the top managers were focused on developing a structure to manage the tension within its wireless technology division (traditionally housed in the R&D area in Canada), its current regional structure (responsive to customers needs, cultural differences mostly in its current rural applications), and emerging new customer groups (such as the industrial and urban wireless data products).

From 1981 until 1988, ABT's Canadian headquarters controlled all of the details of the business. Then, as one top manager explained, “We felt that we had to get closer to the customer, and we went first to Asia because that was where the action was.” So, in the late 1980s, ABT placed several sales people in the field in three regions: Asia/Pacific, Latin America, and Europe/Africa/Middle East. In 1997, Asia/ Pacific markets were 50 percent of all revenues, Latin America 36 percent, and Europe/Africa/Middle East 19 percent of sales. The United States “as not a market for ABT's equipment given the significant rural infrastructure already in place in the United States.

Asia/Pacific. The first subsidiary was in Hong Kong as “an easy way into China,” according to a top ABT manager. There were no customers, and it was expensive to maintain an office there. “Because we weren't even paying the light bills, we decided to move the Asia/Pacific headquarters to Manila to save on taxes and expenses, and in order to have access to a skilled labor force.' Soon after this move, a sales subsidiary was set up in China, followed by another office in Bangkok after a large project was won there.

By the early 1990s, ABT had more than 60 people on the ground in these three operations. These offices were staffed with technical sales people with an engineering background. They were rewarded on meeting a quota, and they operated autonomously from the headquarters. Their sales efforts centered on selling ABT's equipment and solutions to national telephone companies. These technical sales people placed orders with headquarters and provided service to the firm once the system was installed and in place. Many times, they relied on project engineering for technical details related to a bid or final customer proposal.

In the early 1990s, the Asian headquarters was moved again to Bangkok. As one manager stated, “With these regional offices, we cultivated relationships.” If a project or bid was around $1 million, headquarters would rarely get involved If the order was more strategic (from $5 million to $10 million in size), headquarters would interact closely with sales, working together on pricing, delivery, and technical specifications.

Latin America. The Latin America office was located in south Florida. At first, this region was staffed with sales engineers. Then, managers for different areas within LatinAmerica were brought in to strengthen the region's marketing abilities. In 1998, there were three area managers: one each for South America (included Brazil, Argentina, Colombia, and Peru), Caribbean U.S., and Central America. The total number of engineers and managers in this office was 12 in 1998. Sales support and project engineers were still located in Montreal to support Latin America project bids technical assistance, or operations. Most of the activity x•vithin this area was repeat customers, the national telephone companies. This Latin American sales and marketing area had nothing to do with the 1997 investment in rural telecommunications by ABT. In fact, most of the managers knew very few details about this investment transaction.

With the privatization of many Latin American telephone companies, managers from AB Telecom's Latin American office had developed a close 'working relationship with Telephonic (Spain's national telephone company) and STET (Italy's national telephone company) because these two companies have purchased significant stakes in many national tele phone companies in Latin America. This area had been growing consistently for AU Telecom in the 1990s.

One manager explained how deals are developed in this region: “We follow regulatory changes in countries that are considering privatization. We know that a piece will be rural, and money will be made available for rural according to the bids for this privatization. Our local representatives keep us advised.” Another manager explained, “We have not pushed much into the industrial business in Latin America except for one excellent industrial client - an oil company in Venezuela - and this relationship was gained through a technical representative on the ground with this oil company.” When asked about how they interact with R&D in Canada, one manager stated, “We don't worry about technology. . .. we worry about satisfying a need... we have the best product technically, reflected in our high quality and high price. . . . this combined with being close to the customer lands us deals. . . many of our deals in Latin America are renewals.”

One area manager in the Latin American division stated, “The greatest impediment to our international growth is resources - human resources. We are looking for people with language, engineering, project skills, and good interpersonal skills.”

Europe/Middle East/Africa. In 1998, the Europe/Middle East/Africa region was the most difficult, according to several managers. This was attributed to too many different regulations and frequencies across this region. Sales subsidiaries have been developed where a strong relationship with a national telephone company existed. Sales subsidiaries had been set up in Nairobi, Saudi Arabia, South Africa, Sweden, and the U.K. The head of this regional structure had recently resigned.

In 1996, ABT deviated from its sales and delivery of operation systems to invest in the telecommunications infrastructure of a Latin American country. This investment in rural infrastructure in Latin America was a major departure from ABT's short-term, project-oriented, turnkey operations. For several years, top executives had discussed the possibility of pursuing investment as opposed to sales-only deals. This investment was initiated, managed, and controlled by top managers in Montreal, but local managers were htred to help with the installation and operations of this investment.

Top executives outlined several reasons for ABT to pursue an investment in rural telecommunications operations. According to one manager close to this deal, “Many people confuse rural with poverty, but they miss out on a very good investment and tremendous pent-up demand.” Most of the large hardware equipment manufacturers have moved from selling equipment and services to investing and buying up licenses in international markets. As one top manager stated, “It was a difficult decision to invest in rural telecom, but our board of directors was convinced it was a good idea.. . we realized that we could supply our equipment at no markup and then sell a 51 percent stake in our investment, perhaps using this to fund future investments in rural telecommunications.”

Concerning the challenges inherent in starting this new venture, one manager explained, “We are not experts at running a telephone company; we don't know how to bill or do maintenance.” In 1998, ABT hired a local manager away from the national telephone company to run the firm. Consultants with experience with Bell Canada were also helping with the venture. By 1998, ABT had set up 1,000 telephone lines and had 100 employees; the push was to install pay phones, a legal requirement of the license. ABT managers estimated that it would take about 8,000 to 10,000 installed lines to break even, probably in 1999. Once this ritual venture establishes a proven track record, ABT managers plan to sell off a portion to a local partner. If this venture is successful, AI3T managers are considering future investments in rural telecommunications. One top manager stated, “We are being approached by people in many markets around the world about potential investments.”

Rural teIephoiy. AB Telecom researchers, designs, and manufactures fixed wireless systems mostly for installation in rural and remote areas, to aid in rural telecommunications. ABT manufactures all components required for rural installation It subcontracts with local contractors to install the systems.

The main application of the AB Telecom product is to connect remote villages and towns to the national telephone system grid. Fixed wireless is a cost- effective solution for many national telephone companies to connect to rural locations; the cost of installing a fixed wireless system is far less than that of laying miles of fiber or copper cable to the same locale. ABT's traditional customers have been national telephone companies.

For this business, ABT considers Alcatel, NEC Japan, and Lucent to be its direct competitors, but the fixed wireless systems are a very small portion of these large multinational firms' sales, whereas ABT specializes in the fixed wireless systems and technology.

Industrial applications. New applications of ABT's wireless systems have been recently recognized. Corn- panics in industries such as oil, gas, and electricity generation require remote sensing of dispersed operations. In early 1998, this type of business had grown to comprise 25 percent of ABT's revenues. Much of this business was developed “by chance,” as explained by one top manager:

We realized that the industrial portion of sales could be more significant. The industrial market was not properly marketed to, nor were their needs involved in, our R&D efforts We realized that this area could become significant if we added more products that customers wanted because we are one of the largest companies selling to this fragmented and diverse market.

This manager went on to explain how industrial customers were developed in one Asian country:

Our industrial customers developed just by chance Fin this country]. Now, we have 100 industrial customers. We had no idea what the customer wanted. Because selling to this national telephone company was slow and government controlled, we stumbled upon the electric companies Who were interested. It started off with a change of attention of one salesperson already located in this market, but it developed in a mostly word of mouth way ... this counts for a lot in [this country]. We gained a reputation for being a reliable supplier, but growing this business was not part of a plan . - - it just happened.

The estimated potential revenue from this market is around $100 million per year, but it is spread among hundreds of industrial customers- One ABT manager explained, “Tremendous sales and marketing efforts are required to obtain a $5 million order, but once a customer orders and is satisfied, they are

• more likely to repeat the purchase. . . . We need more information to develop the business It is

difficult to find out where the big industrial users are worldwide mostly trial and error,” stated one top ABT manager.

Urban wireless. ABT also had developed and was testing fixed wireless systems in urban settings. the potential customers for this product were telephone companies, both the incumbent telephone company as well as start-up carriers, especially in Europe. A start-up company would offer data services in competition with the original telephone company. The ABT system would be used to transmit data reliably within dense urban settings. This application has required some modification to the original ABT product lines. “With data applications, we are really starting from zero, but we should be able to double or triple them in the future.” In 1998, this system was being tested in the U.K. Only a few technical and marketing people were involved and only in a haphazard way.

In early 1998, the top managers at AB Telecom were debating how to change its worldwide organization. AB Telecom is a Canadian telecommunications hardware firm that manufactures fixed wireless systems. This $200 million company earned more than 95 percent of its revenues from outside Canada, with 40 percent coming from Asia in 1997. In 1998, AB Telecom conducted all of its manufacturing and R&D within Canada; much of its market development and project engineering is maintained in its Canadian headquarters.

AB Telecom was founded in 1981 and is publicly traded on several Canadian stock exchanges. It had been profitable since 1990, with an average 7 percent net profitability between 1990 and 1997. Given its strong presence outside Canada, ABT has been awarded the prestigious Canadian Export Award several times by the Canadian government.

AB Telecom's traditional customer is a national telephone company that wants to improve telecommunications to its rural locations. Sixty percent of ABI's sales in 1997 were turnkey projects for national telephone companies. Its structure had been a regional sales and marketing structure with three regions; Asia/Pacific, Latin America, and Europe/ Middle East/Africa. Each region had a headquarters and several sales subsidiaries in different countries. These regional offices had autonomy in booking small deals, but headquarter became involved with deals worth over $2 million. The regional offices are also reliant on sonic project engineering support provided by the headquarters.

Several significant changes had created a need for top management to review its current structure;

• early signs of economic difficulty in Malaysia and other southeast Asian countries could

tentially stall or stop agreed-to projects in this region

• opportunities to use their existing fixed wireless systems for industrial application were

growing

• Europe, Middle East, and Africa provided many opportunities for sales to traditional national

telephone companies for rural applications

• potential is unknown for its new wireless prod -uc for urban data transmissions to telephone

companies and new competitors

In March 1998, the CEO, his top management team, and some board members met to discuss how to restructure the company.