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The Rise and Demise of Lucent Technologies

JSME Vol 7: Issue 4, 2011

Author(s): William Lazonick (The Academic-Industry Research Network and University of Massachusetts, USA) and Edward March (The Academic-Industry Research Network and Dartmouth College, USA)

Abstract:
In 1999, as the Internet boom was approaching its apex, Lucent Technologies was the worldís largest telecommunications equipment company. With revenues of $38.3 billion, net income of $4.8 billion, and 153,000 employees for the fiscal year ending September 30, 1999, Lucent was larger and more profitable than Nortel, Alcatel, and Ericsson, its three major global competitors. In fiscal 2006, however, Lucentís revenues were only $8.8 billion and its employment level stood at 29,800. Both figures were lower than those of its three major rivals, even though all of the companies had gone through wrenching declines as the Internet boom turned to bust in the early 2000s.
Like Lucent, both Nortel and Alcatel struggled to return to profitability after the depths of the downturn in 2002-2003. But on December 1, 2006 Alcatel was almost twice the size of Lucent in terms of revenues and employees when the merger that created Alcatel-Lucent took place. Lucent became a wholly-owned subsidiary of Alcatel. Although Lucent CEO Patricia Russo was named the first CEO of Alcatel-Lucent, she occupied her new position at Alcatel headquarters in Paris.
In this paper, we analyze the rise and demise of Lucent Technologies from the time that it was spun off from AT&T in April 1996 to its merger with Alcatel in December 2006. Our analysis of the case of Lucent shows the ways in which strategy, organization, and finance interacted to enable both Lucentís rapid growth in the late 1990s and its loss of competitive capabilities in the first half of the 2000s. The analysis considers three questions concerning Lucentís performance over the decade of its existence.
1. How was Lucent, with over $20 billion in sales in 1995 as a division of AT&T, able to almost double its size by achieving a compound growth rate of over 17 percent per year from 1995 to 1999? We show that, in a booming market for telecommunications equipment, Lucent relied heavily on its ďincumbent advantageĒ, selling predominantly to the regional Bell operating companies that had emerged from 1984 out of the breakup of the old Bell System and benefiting from the rapid but short-lived expansion of demand for extra telephone lines for dial-up Internet.
2. What was the relationship between Lucentís growth strategy during the Internet boom and the companyís financial difficulties in the Internet crash of 2001-2003 when Lucent was on the brink of bankruptcy? We argue that at the peak of the boom, Lucentís top management made a number of decisions concerning acquisitions, divestitures, loans to customers, and accounting for revenues that were designed to impress financial markets but that in the subsequent deep decline of the industry wreaked havoc with Lucentís financial position and depleted the companyís productive capabilities.
3. After extensive restructuring during the telecommunications industry downturn of 2001-2003, why was Lucent unable to re-emerge as an innovative competitor in the communications equipment industry when the industry recovered? We explain how the damage that was done to Lucentís financial position and productive capabilities in the Internet decline of 2001-2003 left the company without financial and productive resources necessary to compete on global markets, especially in the burgeoning wireless segment of the telecommunications industry.
This paper is part of a project on innovation and competition in the global communication technology industry that includes studies of the evolution of the competitive capabilities of other major equipment companies such as Alcatel (and Alcatel-Lucent), Cisco Systems, Huawei Technologies, Motorola, Nokia, and Nortel Networks. The project seeks to identify the social conditions, rooted in national economic institutions, that support and undermine innovative enterprise (see www.theAIRnet.org).

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