Surviving the Sprint Nextel Stragedy — part 1

This story is part of the Strategic History of Sprint series.

Moving beyond the Sprint Nextel merger, I want to focus on four strategies that were critical to the company’s ability to survive the Sprint Nextel merger stragedy:

• Long Distance (Wireline)
• Local (Wireline)
• 4G (Wireless)
• Prepaid (Wireless)

We will cover the first two today and the next two tomorrow.

BCG Growth Share Matrix

Before looking at these strategies, I want to introduce a tool often used by corporate strategy groups in managing portfolios of businesses or markets.

In 1970, Bruce Henderson of Boston Consulting Group (BCG) developed the Growth-Share Matrix as a way of evaluating the relative attractiveness of different businesses, products, or markets within a corporation.

The tool plots the different businesses against two distinct measures — relative market share (your market share divided by your biggest competitor’s market share) and market growth rate (see chart below). The relative size of each business (typically measured in gross sales) is represented by the size of the bubble for that business on the chart. The two axes typically cross at or near the median values of each other, creating four quadrants. The four quadrants have been given names to reflect the attractiveness of businesses in each.

A business that has low market share and is in a market that is not growing as fast as others in which the corporation participates (Business A in the diagram) is called a “Dog.”

One that has low share, but in a growing market (Business B) is called a “Question Mark.”

A business with high share in a high growth market (Business C) is called a “Star.”

One with high share, but in a low growth market (Business D) is called a “Cash Cow.”

Corporations will often maintain a portfolio of businesses that are spread across the four quadrants, but the amount and nature of investments can be shaped by understanding the implications of each. Both Cash Cows and Stars have high market share and therefore can be very profitable. Most corporations will choose to invest in both Stars and Cash Cows, but with different approaches.

Investments in Cash Cows are likely aimed at retaining revenues and share while maximizing margins, while investments in Stars are likely aimed at maximizing growth with attractive margins. A Question Mark is so named because it has the potential to either become a Star or a Dog. Leaders must evaluate the potential to grow share with focused investment, sometimes through mergers and acquisitions. Dogs are the most challenging and often are considered for divestiture or shut down.

BCG analysis can inform the corporate strategy development process, but it shouldn’t dictate the outcome. While the Growth-Share Matrix implies internal strengths and external opportunities from which flow financial performance expectations, many other factors come into play. Synergies often exist across business units, making some dogs attractive within the overall portfolio. Sometimes the strengths that have enabled a Star to achieve high share are not the same strengths required to maintain leadership as the market grows and matures.

Long Distance

The first of these strategies actually preceded the merger with Nextel.

If we look at the BCG Matrix for Sprint’s three traditional businesses at the time, we see that Wireless was a Question Mark (about half the size of Verizon, with approximately 4% industry growth), Long Distance was a Dog (about one-third the size of AT&T, but with -5% industry growth), and Local was a Cash Cow (a near monopoly in each of its markets, but with -1% industry growth).

The merger with Nextel was intended to position the Wireless business to move from Question Mark into the Star quadrant.

The big challenge was the Long Distance wireline business. Being in the Dog quadrant is bad enough, but worse, while the business had produced over a billion dollars in cash per year in previous years, that performance was declining rapidly and was expected to go cash flow negative within a few years. People simply were disconnecting their physical telephone lines and going mobile, and that was not a trend likely ever to reverse itself.

Strategic options were considered at the corporate level ranging from exiting the wireline business, to “doubling up” by acquiring AT&T (later acquired by SBC) or MCI (later acquired by Verizon). Exiting the business was rejected because of the reliance of the wireless businesses on the wireline network. Doubling up was rejected because the overall market was in decline and adding assets wouldn’t significantly improve the synergies with the core wireless businesses. Therefore, the “problem” was passed down to the business unit managing the wireline business.

At the time I was still the director of strategic planning for Sprint Business Solutions (SBS), the business unit managing the wireline business. We engaged the SBS management team in an intensive process to identify and evaluate strategic options that would accomplish the role required by the corporate strategy while delivering acceptable financial performance. We considered a range of options, but since the market was shrinking, not growing, most options required significant cost cutting. Building enough detail into the plans for realistic analysis and comparison required working down into the organization and across partner organizations (e.g., IT and Network). Given that the options being considered would likely involve painful decisions around reducing headcount, exiting markets, and eliminating products, all of this had to be done with tight confidentially, both internally and externally.

In the end, we selected and refined a strategy we called, “Extreme Discipline.” This strategy included a product strategy to exit traditional “circuit” products (private line, frame relay, ATM) that were being replaced by “packet” (Internet protocol and Ethernet based) products. It also required market strategies for small, medium, and large business markets to focus on where we could win (specific cities for small and medium businesses where we had competitive network assets, specific industry vertical markets for large businesses where we had competitive solutions). This involved selling deselected product capabilities/customers to other companies, shutting down sales offices, reducing sales headcount significantly in deselected markets, and more modestly reducing costs and headcount in all other organizations.

In addition to achieving the targeted financial goals, some of the cost savings were reinvested in growing the wireless business. While the decisions were hard and the strategy wasn’t “exciting,” the decisions made and executed positioned the company well for the merger of Sprint and Nextel. The cost reductions and investments in wireless growth contributed to overall corporate performance improvements that helped Sprint’s stock price to increase from $17 in mid-2004 to $24 in early-2005. Meanwhile, the increased focus on wireless sales in the small and medium business markets aligned perfectly with Nextel’s strength in those markets.

Clearly defining the strategy helped communicate hard decisions internally and externally and helped focus execution on critical elements.

Although “Extreme Discipline” set our long distance wireline strategy going forward, this topic became a perennial one — every year we would ask the question “why are we still in this business?” Every year the same answer came back — as long as it can support itself, we need the wireline network to provide owner’s economics for wireless backhaul; we need long distance voice and data products to provide a complete portfolio and integrated solutions to business customers; and we need the complementary network capabilities for working with strategic partners including cable providers and Clearwire (see tomorrow’s article on 4G).

Local

The second strategy immediately flowed from the merger of Sprint and Nextel. I don’t fully understand all the reasons for doing so, but as part of the merger announcement between Sprint and Nextel, it was also announced that the combined company planned to spin Sprint’s local business out as a separate entity.

It is possible that doing so would make it easier to gain regulatory approval. Often large mergers require divestitures to reduce concerns that the combined business will have too much influence on the market, therefore hurting consumers. However, it is unlikely that the assets spun-off would have significant impact on Sprint Nextel’s performance in the wireless markets.

It’s more likely that the spin was intended to address concerns that investors couldn’t clearly value such a diverse collection of assets. Either the high growth wireless business would be undervalued, or the high margin local business would be undervalued, or both. Separating the two would increase the likelihood that both businesses would be fairly valued.

But perhaps one of the biggest drivers for the spin was the opportunity to transfer much of Sprint’s long term debt to the new local business, leaving the combined Sprint Nextel with (what at least seemed to be) a reasonable debt load. At the end of 2006, the new local business reported $6.4 billion in long term debt. (Thanks Gregg Brown for reminding me.)

As mentioned in my previous article in this series, there were significant cultural mismatches between Sprint and Nextel. Nextel acted as a very aggressive East Coast tech startup, while Sprint was more conservative. Within Sprint, the local division was even more conservative than the wireless and long distance divisions, especially on regulatory issues, so spinning off the local division would, to some small degree, reduce these cultural challenges.

Similarly, I mentioned that there were differences in investor expectations. Sprint paid dividends while Nextel invested generated cash back into growing the business. The local spin-off announcement indicated that the new local business would continue to pay dividends and implied that the combined Sprint Nextel would not. So, perhaps the spin was intended to satisfy both sets of investors.

The new local business also provided a soft landing spot (for a time) for a number of Sprint executives who were not selected for the combined Sprint Nextel. It’s possible that retaining jobs and talent in the Kansas City telecom industry was a contributing factor to the decision.

Whatever the reasons were, the Sprint Nextel merger was completed in August 2005 and the local business was spun off as an independent business named Embarq in May 2006. This was not a small company. Embarq was the largest independent telephone company in the country, serving customers in 18 states, generating approximately $6 billion a year in revenue, and employing approximately 18,000 workers.

However, as the traditional telco industry continued to be pressured by revenue declines and new competitors (most notably cable companies), consolidation continued. On October 27, 2008, Embarq announced that it had agreed to be acquired by CenturyTel. That company, now called CenturyLink, has continued to consolidate the industry and is by far the largest independent telco in the country.

Like a good cliff hanger, I’ll leave our hero in a precarious position. Tune in tomorrow when we pick up the story with the 4G and Prepaid strategies.