1. Japan Conference on Financial Institutions for Innovation and Development Ritsumeikan University July 30-31, 2015 William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES The Innovative Enterprise; a Case Study in the Transformation of AT&T from an Old Economy into a New Economy Business Model* Driving Factors for Change Evolving Strategy and Organization Transformation Results Edward March Thayer School of Engineering, Dartmouth College Master of Engineering Management Program *Based on Paper: “The Rise and Demise of Lucent Technologies”, William Lazonick and Edward March, Journal of Strategic Management Education 7(4), 2011 1

2. Basic Differences between Telecommunications and Computer Industries before Technology Convergence William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES Convergence: Digital Technology Replaces Analog Signaling; Voice, Data, Video can be Transmitted across the same Network, Limited Pre-Conditioning Telecommunication and Computer Industries have a Common Technology Base 2

3. Telecommunications Industry Regulatory Changes Driven by Technical Advances William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES Deregulated Telecommunications Industry Forces Change in Lucent Technologies Culture (1) Greater competition, faster new product development (2) More risk taking in market introductions (3) Investment made according to a technology roadmap(4) Advanced manufacturing capability developed in parallel with new designs Onset of Convergence 3

4. Lucent Technologies Organization Structure November 1997 11 “Hot Businesses” Rich McGinn, CEO William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES Business Units Business Unit Structure Decentralized, Entrepreneurial Separated by Technology Each a Profit/Loss Center Overlapping Products, Confusing to the Customer 4

5. Emerging Communications Technologies Influence Lucent Strategy, Exhaust R&D Resources William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES Global Competitors were Pushing Communications Technology in New Directions Incumbent Technology Voice Networks, Circuit Switching Centralized Network Control Electronic Transport Wireline Services Internet “Twisted Pair” Alternative Technology Data Networks, Packet Switching Distributed Network Control Optical Transport Wireless Services Internet “Coaxial Cable” Lucent Strategy Adapt Innovate Successful Strategy Failed Strategy 5

6. Lucent Technologies Transformation Results William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES GrowthDeclineStagnation Internet: 2 nd Phone Line Digital Switch Demand Electrical to Optical Conversion Wireless Network Installation Network Overcapacity Employee Downsizing Lost Opportunities, Lack of Resources Enterprise Systems Data Networks Global Wireless Growth Decline Stagnation Business Units Spun-Off Enterprise Networks 9/2000 Microelectronics 4/2001 6

7. Consequences of Insufficient Investment in Technology Development Consequences of Insufficient Investment in Technology William Lazonick The AIRnet University of Massachusetts Edward March Thayer School of Engineering Dartmouth College THE RISE AND FALL OF LUCENT TECHNOLOGIES When compete on technology, if R&D investment is not sustained, or if technology cannot be acquired, product portfolio becomes obsolete and company eventually fails Options for Lucent Technologies during “Stagnation Period” Supplier of legacy telecommunication equipment Niche supplier of specialty equipment Merge with another company, pooling resources and products together to retain full-line supplier status Alternative Chosen for Reestablishing Growth* Effective November 2006 *Less than two years after the merger, Bell Labs was no longer engaged in basic research. 7