Guest Visionaries - Sir Geoffrey Owen

Sir Geoffrey Owen is former editor of the Financial Times and author of From Empire to Europe: The decline and revival of British industry since the Second World War (1999). He is currently Senior Fellow at the Institute of Management at the London School of Economics.

In this contribution Sir Geoffrey tackles the question (raised in Section 7 of the Key Questions zone) of the extent to which the explanation for the global competitive advantage of firms lies at the national level rather than the firm level.

Country-Specific Factors in the Future of the Telecommunications Industry

How important is the national environment in determining competitive advantage in high-technology industries?

Nokia's extraordinary success over the past few years derives in part from the fact that its home country, Finland, together with its Nordic partners, was one of the first to develop a cross-border mobile telephone network. This "early mover" advantage, created by government policy, gave Nokia a platform on which its management was able to build. Similarly, Vodafone's position as the world's largest mobile telephone operator has its origins in the Thatcher government's decision - taken earlier than in other European countries - to deregulate the British telecommunications network. Operating in a competitive domestic market gave Vodafone experience which it put to good use as it built up its activities outside Britain.

The difficult question in these and other cases is to establish how much weight should be given to country-specific, as opposed to firm-specific, factors as the determinants of corporate success. Another way of approaching the issue is to look at companies which were disadvantaged by their national environment in the past, but later rose above those disadvantages to establish a world-leading position. In this context the current situation at the British company, Marconi - formerly the General Electric Company (GEC) - is of particular interest.

Until the mid-1990s GEC was widely regarded as an also-ran in the world market for telecommunications equipment. There was speculation that it might withdraw entirely from this business in order to concentrate on its largest and most profitable division, defence electronics. Since 1996, however, the company has undergone a remarkable transformation. Following the retirement in that year of GEC's long-serving managing director, Lord Weinstock, the new management team decided that the best hope for profitable growth lay in telecommunications, and that all the company's energies must be devoted to that end.

The defence electronics business was sold to British Aerospace (now BAE Systems), and the proceeds were used to finance several large acquisitions of US telecommunications equipment companies. The subsequent change of name to Marconi - drawing attention to Britain's pioneering role in radio communications a hundred years earlier - was intended to symbolise the change of strategy. It also served the useful purpose, made all the more important by the company's growing presence in the US, of eliminating confusion with America's General Electric Company (GE).

The reasons for GEC's earlier decline in telecommunications have been the subject of numerous studies. Most commentators agree that a major factor was the failure of the Post Office, between the 1950s and the 1980s, to forge a stable and constructive relationship with its three main suppliers of exchange and transmission equipment, GEC, Plessey and Standard Telephones and Cables (STC). As the dominant purchaser, the Post Office was in a position to shape the relationship in whatever way it thought fit. In practice, however, it veered uneasily between the desire to promote competition among the suppliers and the need for cooperation, especially on projects which were too big for any one of the three companies to undertake on its own. Unlike their Japanese counterparts, the British authorities were never able to find the right balance between cooperation and competition.

These problems were compounded by some bad technical decisions, starting with the premature leap into electronic telephone exchanges in the 1950s. This setback was followed by several years of argument between the Post Office and the suppliers over the relative merits of the intermediate "crossbar" system and of the semi-electronic exchanges which came to be known as TXE-2 and TXE-4. Then, in the 1970s, came the decision to launch System X, a fully electronic system which was designed to modernise the British network and to re-establish the British equipment suppliers in export markets. But System X was dogged by technical and managerial problems, and, by the time it entered service in Britain in the early 1980s, other companies, including Alcatel in France, Siemens in Germany and Ericsson in Sweden, were already selling their own electronic exchanges overseas. System X was a late entrant in a crowded market, and it never achieved the export breakthrough that had been hoped for.

The Post Office, which was converted into British Telecom in 1981 (and privatised three years later), dropped STC from the System X programme, and the two remaining suppliers joined forces in 1988 to form GEC Plessey Telecommunications (GPT). A year later GEC and Siemens made a joint take-over bid for Plessey, and in the subsequent reshuffle of assets Siemens acquired a 40 per cent stake in GPT.

From the start this looked to be an unstable partnership - GPT was both a competitor of Siemens and heavily dependent on the German company for technological support - and there was speculation in the closing years of Lord Weinstock's tenure as managing director that he might sell GEC's 60 per cent shareholding in GPT to Siemens.

In the event Weinstock's successors took the view that, despite the disappointments of the 1980s and 1990s, GEC had sufficient technological and financial strength to re-establish itself in the world market for telecommunications equipment. Their first step was to buy out Siemens's 40 per cent stake and to merge GPT with Marconi Spa, an Italian subsidiary which, somewhat independently of the rest of GEC, had developed unique technology in optical and digital switching systems. Then came two major purchases in the US - Fore Systems for $4.2bn and Reltec for $2.1bn - the main purpose of which was to position GEC in the fast-growing market for internet switching equipment. Further acquisitions followed, including MSI, a UK software house specialising in wireless network consultancy and planning, and the public networks division of Robert Bosch in Germany. Marconi's clearly stated aim was not only to catch up with its European competitors, but also to lift itself into the same league as Cisco, Lucent and Nortel in the US.

Is the fact that Marconi is based in the UK an advantage or a disadvantage as it pursues its new strategy, or has geographical location become irrelevant in what is now a global industry?

The domestic environment is certainly less important as a determinant of international competitiveness than it was in the "old" telecommunications industry, when companies like GEC and Alcatel derived the bulk of their business from a single local monopolist. Export performance during those years was crucially dependent on how the national telecommunications authorities handled their procurement policies. Now these privileged links have largely ceased to exist, and suppliers are operating in a more open market. Yet there are at least two ways in which domestic conditions could still make a difference.

One relates to government policy in telecommunications. According to a recent American study, the UK currently offers a more favourable environment for the development of the internet and of e-commerce than, for example, France or Germany. One of the UK's advantages, the authors argue, is a much more liberal regulatory framework - a consequence of the Thatcher government's liberalising policies, which have not been reversed under "New Labour". If, as the US study suggests, internet and e-commerce grow faster in Britain than in other parts of Europe, this will create opportunities for Marconi to build up its business in switching equipment.(1)

A second country-specific factor is the strength of the science base, and here, too, the UK is well placed. If Marconi is to fulfil its ambitious goals, it will need to develop a technological advantage, and this will require, not only investment in its own research laboratories, but also close collaboration with academic scientists. The company's recent decision to set up a new research centre in Cambridge suggests that this factor is being given considerable weight in its planning. This does not, of course, preclude similar relationships with universities in the US, but Marconi is a British company with a long history of working with British universities; that is a heritage on which the present managers of the company seem eager to build.

Michael Porter, in his studies of international competition, introduced the concept of a global platform. "A country is a desirable global platform in industry if it provides an environment yielding firms domiciled in that country an advantage in competing globally in that particular industry" (2). For most of the postwar period the UK was an undesirable global platform for manufacturers of telecommunications equipment - hence the decline in Britain's share of world exports. Now the domestic environment looks very different. Whether Marconi succeeds or not will be dependent primarily on firm-specific factors - in that sense globalisation has made differences between nations less significant - but country-specific factors seem likely to play an important supplementary role.

To illustrate my argument I have relied mainly on British examples. Taking advantage of the interactive nature of the TelecomVisions.com website, however, I would be interested to hear comments from others about the relative importance of the national and firm levels in explaining the future global competitive advantage of firms.

(1) Rudy Baca, The building blocks of growth in the new economy, Legg Mason Precursor Group, Spring 2000.

(2) Michael E. Porter (ed), Competition in global industries, Harvard 1986, p39.

If you wish to comment on Sir Geoffrey's contribution, please go to Area 5 - Miscellaneous (including Guest Visionaries) of the Workshop zone.