Why Did Nortel Fail?

Why did Nortel (NT) fail? There are probably several valid perspectives on this, one being the bad luck to have a once-in-a-lifetime global financial crisis come along in the middle of a turnaround effort. A different political party or coalition in power may have also stepped in with a loan to tide the former Canadian tech icon over.

But let’s focus for now on the management variable. In the past, hiring an accomplished executive from the top ranks of Corporate America usually worked when there was a crisis to overcome. In the 1970s, it was John Lobb — the Mr. Fix-it from ITT Corp. In the early 1990s, it was Paul Stern from Unisys Corp. Both were highly capable and demanding executives who were in line to become CEOs of their firms but were bypassed. A psychologist might argue they were out to prove their doubters wrong by accepting the CEO job at Nortel (besides make a mint on stock options).

Mike Zafirovski fit the same mold, a capable senior executive overlooked for the CEO position at Motorola. The stage looked set for a repeat of the magic formula. So what went wrong?

Both Lobb and Stern had a sense of urgency that drove them to make big changes fast — even though radical change can scare people and risk rebellion. Indeed, in his departure speech, Stern said the reason for his image as a “tyrant” was due to his refusal to slow the pace of change. He defended his bold moves with the frog-in the-boiling-pot metaphor (as quoted from Nortel Networks: How Innovation and Vision Created a Network Giant)

“If you turn up the heat slowly, the frog will get comfortable in the warm water and he will die when it starts to boil. But if the water is boiling and you toss in the frog, he’ll jump right back out. I believe in dramatic change. It keeps you alert, alive. Incremental change doesn’t succeed; the bureaucracy kills slow change. You’ve got to make the bold move.”

It could be argued that the collapse of the world banking system and consequent severe recession was what tripped Mr. Zafirovski up. But if he had been imbued with a sense of urgency similar to his predecessors, maybe Nortel’s turnaround would have been completed before 2008 and Nortel could have avoided bankruptcy protection and the likely dismemberment to come.

Then again, to be fair, Mr. Z. was operating without the safety net of BCE Inc. Over the 1970s to 1990s, BCE was a source of capital, revenues, and manpower for Nortel. But by 2000, the year BCE disposed of its stake in Nortel, it had become too big to be backstopped. Indeed, BCE more or less lost that ability when it lost its status as a regulated monopoly in local telephone service, depriving it of a guaranteed source of cash flow. We could probably go on with more perspectives, but let’s leave it at that for now.

Comments

[Granville]

A technological revolution contributed to Nortel's downfall.
After the reverse splits are taken into account, Nortel is worth less than 1/1000 of its market cap in 1999. Around that time, IP-based telephone systems began to emerge. IP-telephony spelled the end of legacy TDM PBX types.
Now, legacy PBXs can last a long time. Many companies have gone through Windows 98, Windows 2000, WinXP and now have Vista, replacing desktops and servers regularly, and all during that time they haven't replaced their PBX, and may not have even maintained software upgrades.
During that time period, IP-telephony grew.
Open-source IP telephony, specifically the Asterisk-based telephone systems, heighten the problem for all providers of telephone equipment. Now that it has achieved the required QoS, reliability and scalability, and due to the current re-examination of IT budgets, Asterisk-based telephony will also overtake the IP-PBX offerings that are still using the legacy-TDM licensing model (think overpriced Cisco and Avaya).

2009 Jan 15 08:10 AM

[Roger Hornsby]

You should ask their customers. They always know. Their telecom products have always been self serving and inferior to their competitors. In a boom market like we have had in the past, you can survive or even prosper without doing a great job. But when the environment gets difficult....

2009 Jan 15 10:45 AM

[Granville]

Northern Telecom/Nortel PBX market share was the same as the AT&T/Lucent/Avaya product over the years, at about 21% each. Both were fine PBX products. Now, the entire telephony paradigm has shifted.
Each of the baby Bells used the DMS-100 as central office switches, and the Meridian 1 and the CS-1000 are bulletproof.
In what way was the Nortel product inferior?
Product quality is not an issue in the PBX market. Abundance is the problem; there are too many fine products for the market to support, just as there are too many car makers.
Fujitsu simply walked away from the business about 9 years ago. Siemens would like to do the same thing. The competition in that business is ferocious.


On Jan 15 10:45 AM Roger Hornsby wrote:

> You should ask their customers. They always know. Their telecom
> products have always been self serving and inferior to their competitors.
> In a boom market like we have had in the past, you can survive or
> even prosper without doing a great job. But when the environment
> gets difficult....

2009 Jan 15 05:31 PM

[SamDallas]

How about ineffective management. Tech changes all the time but for this one being driven into the ground the full credit goes to Mike Z and his GE cronies. Well done..you took an institution down with your six sigma crap.

2009 Jan 17 01:48 AM

[Avdude15]

As a former Nortel marketing employee I can tell you that at least on the data side of the business, their marketing organization was completely isolated from the sales organization.

What does that mean? Ask any marketing exec at Nortel, "how many sales leads have you generated? How many sales leads have you shared with channel partners?" - and the answer will be a blank look. They simply did not track those metrics. Critical channel partners have been leaving them for years for the simple reasons that they weren't getting sales leads and they weren't getting co-opt dollars. No channel partners means no-one to sell their products.

What about their own sales organization you ask? 1. They too weren't getting any sales leads from marketing. 2. One big sales force for thousands of products - the sales guys didn't/couldn't specialize or even get to know most of their own products.

This isn't the big picture - but disfunctional marketing combined with the wrong sales organization was a big part of the loss of market share in Ethernet switches, load balancing, security solutions, etc.

Nortel simply has the worst functioning marketing organization I have ever seen.

2009 Feb 19 07:04 PM