Reorganizing AT&T: From Vertically Integrated to Customer-Centric Organization (B)

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"Changes in customer needs, technology and public policy are radically transforming our industry. We now see this restructuring as the next logical turn in AT&T's journey since divestiture (1984). It will make AT&T's businesses more valuable to our share owners, even more responsive to their customers, and better able to focus on the growth opportunities in their individual markets." ¹

- Robert Allen, former Chairman and CEO, AT&T, justifying the 1995 break-up.

"In breaking it up, AT&T wanted to increase its share value, which may work in the short run, but the company has set itself up for more trouble in the long run by separating the operations. AT&T never really worked out a way to be a vertically integrated company." ²

- G.Anandalingam, Professor of Telecommunications Management, Wharton School, commenting the 1995 break-up.

Introduction

In September 1995, Robert Allen (Allen) announced the biggest voluntary break-up in corporate history. The erstwhile AT&T was split into three stand-alone companies - the New AT&T, Lucent Technologies and NCR. Explaining the reasons for this move, Allen said, "It has become clear that for AT&T's business to take advantage of the incredible growth opportunities...it has to separate into smaller and more focused businesses.

We have reached the point where the advantages of our size and scope will be offset by the time and cost of coordinating and integrating sometimes conflicting business strategies."³ The management said that this restructuring was aimed at making AT&T's businesses more responsive to customers and the competition. Analysts commented that apparently the management of AT&T had realized that the strategies and the organizational structure of the company that made sense in the 1980s were not effective at all in the mid-1990s. Moreover, analysts felt, there were no real synergies between the company's equipment manufacturing and long distance telecom businesses. On the contrary, they were acting as impediments to each other's growth.

Analysts felt that Allen was resorting to another breakup due to AT&T's poor stock performance and its inability to face intense competition. The break-up of the Bell System had led to AT&T's market share in the telecom business plummeting from more than 90% in 1984 to around 50% by early 1996. Wall Street reacted favorably to Allen's announcement, with AT&T stock rising from $38 to $50 by late 1995 (Refer Exhibit I). AT&T appeared to shift from its traditional long distance telephony business to the fast emerging communication and information services business including wireless communication, online services, consulting and e-commerce.

Appreciating Allen's move, BusinessWeek reported, "With his bold, unpredictable move, CEO Allen has set AT&T on a clear path toward future. Allen has created a company whose future will depend on its ability to spin out ever-greater numbers of communications products. AT&T customers won't just want long-distance telephony over wires " they will want cellular service, Internet access, electronic commerce and more. Between now and 1997, Allen painstakingly has to divide the company he had run for seven years. When Allen announced the company will split into three parts, AT&T's 302,000 employees have all known that their jobs might be online. This time AT&T needs to move quickly. AT&T's $49 bn communications services business will find itself in a far more competitive industry very quickly..."

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1] As quoted in the article titled "AT&T Announces Major Restructuring For 21st Century," posted on www.lucent.com, September 20, 1995.

2] As quoted in the article titled "Breaking Up May Not be AT&T's Lifeline," posted on www.news.com.com, November 13, 2000.

3] As quoted in the article titled "The Demise of AT&T," by Michael Kastre, posted on www.adti.net, December 2000.