In 1999, Nortel’s sales reached $22.22 billion. Skipping forward to 2009, the corporation was declared bankrupt, with Nortel stock worth only $0.185 each.
So, what happened to Nortel? Why Nortel failed?
Formerly known as Northern Telecom Limited, Nortel was a Canadian multinational telecommunications and data networking equipment manufacturer. The company was founded in 1895 with headquarters in Ontario, Canada.
Once a leading provider of telecommunications equipment and services in the 20th century, Nortel’s early success was based on a model of deep technical expertise.
This expertise enabled the company to lead the shift from analog to digital while also opening up completely new markets.
Between 1997 and 2000, Nortel experienced rapid revenue growth. However, the rapid expansion of physical and human resources resulted in an upsurge in expenses and duplication.
Mismanaged Acquisitions
The business went on an acquisition rush as a response to the development of Internet technologies by the dot-com bubble. This strategy was unsuccessful because poorly chosen and poorly integrated acquisitions caused the organization to lose its focus and become excessively complex.
Nortel eventually had some of the worst financial ratios in the sector due to its high-cost structure and lack of financial discipline.
While Nortel repeatedly suffered financial losses during this time, other players in the business made profits.
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Poor Product Decisions
In addition to adopting an acquisition-focused development strategy, Nortel also made several poor decisions regarding products.
For instance, Nortel, which focused primarily on the North American market, depended heavily on a small number of clients who were compelled to cut back on their orders as a consequence of the global recession.
Additionally, Nortel had a competitive advantage in sectors that were both saturated (optical) and declining (wireline).
Executives at Nortel chose to prioritize Code Division Multiple Access (CDMA) over Global System for Mobiles (GSM) to serve less than 20% of the market (North America), even though GSM had already established itself as the industry standard with an 80% market share.
Despite having a technological edge early on and conducting successful deployment tests, the business decided not to commercialize Long Term Evolution (LTE).
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Failure to Innovate
When, in the 20th century, consumer preferences shifted to Internet Protocol (IP) technology from traditional circuit-switched networks, Nortel failed to adapt to this innovation.
Whereas its competitor, Cisco Systems, saw the potential of IP networks to revolutionize the way that businesses communicated and positioned itself as the leader in IP-based networking solutions.
At the same time, Nortel kept focusing on traditional circuit-switched networks. This proved to be a significant contributor to Nortel’s lack of business innovation.
There was no comparison between Cisco’s growing IP market and Nortel’s market.
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Inadequate Economic Decisions
In June 2009, Nortel Networks CEO Mike Zafirovski stepped down, stating that the company had hit “a natural transition point” as it started liquidating.
Soon after his decision, Nortel Chairman Harry Pearce stated that the company’s previous accounting problems and legal issues were resolved during Zafirovski’s tenure. However, he expressed regret that the transformation had been hampered by the company’s legacy cost structure and a deteriorating economic environment.
And how could we not talk about the dramatic restructuring of Nortel that took place way back in 2001? The top management laid off two-thirds of its workforce (60,000 staff) with writedowns of nearly US$16 billion.
But the fact is there are accounting scandals, liquidating failures, failed credit supports, and so many other financial decisions that answer the question of why Nortel failed.
Legal Issues
Nortel became embroiled in a series of legal battles and patent disputes, which consumed significant time and resources.
In 2007, the company was accused of bookkeeping irregularities, and both the U.S. Securities and Exchange Commission and the Ontario Securities Commission laid charges against former senior financial officials from Nortel.
These issues distracted management from focusing on the company’s core business and innovation.
Every decision that followed thereafter resulted in Nortel filing for bankruptcy and pulling out all the support for the products purchased by users.
Why Nortel failed is directly connected to:
- Lack of innovation
- Scandals
- Espionages
- Lack of strong leadership
- Bad economic decisions
- Accounting mismanagement
- Product innovation failures
- Way too many acquisitions
- Rise of the Internet
The good news is that your business and team can learn from the mistakes and have an innovation strategy at your disposal.
Contact us today to find out how we can help you.
