NTL and the Strategy of Growth - Essay Example

NTL and the Strategy of Growth On March 3, 2006, one of the largest cable, broadband, and telecommunications companies in the U.K., NTL, bought out another large competitor, TeleWest, to add flexibility and market strength to its business strategy. On the surface, the merger appears to be an aggressive maneuver to enhance the competitive advantage for NTL in the multi-polar U.K. home and business multimedia marketplace. A closer analysis, however, shows that this merger, along with other strategic alignments, may be a somewhat desperate attempt to redefine a struggling business model and the strategy for growth is really a survival tactic. While this move should enhance NTL’s short-term financial outlook and may generate a measure of excitement for customers and investors, the gains may not outweigh the long-term strategic liabilities inherent in both companies pre-merger and likely, post-merger. Fiscally, growth may prove to be a risky strategy for a company that has dealt with financial difficulty in the recent past. Yet, market conditions may have left NTL with little alternative but to seize growth opportunities when they are possible. This study will analyze how NTL’s recent acquisition of TeleWest fits and contrasts with the outline Bob de Wit and Ron Meyer present in their book Strategy Synthesis (2005). The book creates a fundamental framework for scrutinizing the strategic coherence from business, corporate, and network levels, the industry and international contexts, as well as the organizational context and organizational purpose. Because NTL is such a large and diversified organization, the unit of analysis will be mostly limited to NTL’s residential cable, digital television, and pay TV services within the U.K, all under the umbrella unit, NTL Cable PLC. It will begin by providing a general overview of NTL, and its recent acquisitions. The study will then analyze how actual events and strategies from NTL’s brain trust compare with the topical outline from de Wit and Meyer. Finally, this study will discuss the results of this analysis and provide a prognosis for the future of this growing company. A brainchild of the new global economy, NTL Incorporated (NTLD) is a U.S. company, founded in Delaware in 1993, as International CableTel, and headquartered in New York. The business opportunity was created in 1991, with British deregulation of cable and telecommunications services, and founder George Blumenthal’s 1993 acquisition of Insight UK’s cable systems and its roughly one million household customersi. Changing its name to NTL Incorporated in 1996, the company has continued to construct, acquire, and diversify, and upon the TeleWest merger, is slated to become the largest cable and telecommunications provider in the U.K. in terms of customers. The company’s growth, however, has not always coincided with the strength of its financial outlook. Recovering from a bankruptcy filed in 2002, the company has struggled to attain a strong level of profitability and gain strong investor confidence, although NTL has improved its financial position in recent years. According to its annual report, NTL earned nearly two billion dollars in 2005, and predicts to service over 12 million households and businesses following the TeleWest merger. In addition, NTL is in the process of acquiring Virgin Mobile, and the marketing rights to use the well-respected brand nameii. This acquisition will make NTL the region’s only “four play” organization, offering broadband, cable/pay TV, telephone, and mobile phone services. In 2005, NTL introduced a Video on-Demand (VOD) service called “front row” that became a pioneer endeavor. Even with these maverick moves, however, the stock value has decreased by over 56 percent from April 2005 to April 2006iii. On the business-level, NTL appears, for the most part, to employ an “outside-in” perspective as opposed to an “inside-out” perspective. The cable industry is a heavyweight marketplace considering the massive start-up and technology costs. There are few companies competing and therefore, market-share is vital. By growing so aggressively, they have capitalized on the opportunity to gain the leading cable market share. Due to economies of scale, NTL should be able to offer extremely competitive pricing packages. The same economies of scale, however, could play to a major weakness of the company. NTL and TeleWest have both previously experienced a major customer backlash due to poor serviceiv. NTL management will likely need to reorganize and reprioritize customer service, or its chief competitor, News Corp.’s BskyB will gain an important competitive advantage by maintaining a customer-oriented approach. Like NTL, BskyB has also undergone a multi-billion dollar spending spree to gain market share and enhance consumer optionsv. This race to the top emphasizes the need for growth. The acquisition of the Virgin name by NTL will include like-titled cable channels and an overall marketing strategy geared toward attracting younger consumers. By growing market share and adapting itself to new technologies and emerging demographics, NTL has exploited the market to grow the company, even though it may be hazardous to the company’s internal structure. Mergers tend to be risky for external, financial, and especially, for internal reasons. In addition to the monetary and asset costs to acquire, as well as stockholder reception, mergers are often accompanied by shakeups in the corporate structure. One of, if not the most, vital component in determining the success and failure of NTL’s growth will be corporate strategy. By spending considerable time as members of the U.K.’s second-tier cable providers, NTL and TeleWest had become natural competitors and rivals. The acquisition process was arduous and filled with stalls since 2003, mostly due to issues relating to financial restructuring. Two former TeleWest senior managers will join the enlarged NTL board of directors, the rest of the shareholders have been bought out and new stock reissued. Former TeleWest shareholders will compose of 25 percent of the enlarged NTL Incorporated stockholder poolvi. This will bring new perspectives into the senior leadership, and may require new thinking and some degree of open-mindedness in the boardroom. According to analysts, there have been drops in morale among employees in both companies due to a proposed £1.5m cost savings plan post-merger. Financially, NTL is in many ways still recovering from its 2002 bankruptcy filings and TeleWest, from its financial restructuring in 2004. And, as author Jo Best states, “The merged company also runs the risk of inheriting the worst faults of either party, with ropey customer service or network performance having dogged both at some stage in their historiesvii.” Unless the transition can be orderly and consistent, it is likely to create internal divisions that can undermine the responsiveness of the company. The synergy between both NTL, and its former TeleWest employees will be vital to the long-term and short-term success of the larger organization. While the merger may complicate the internal corporate structure of NTL, it may enhance leverage on the network level. As a service provider of all trades, as well as the recent innovative technological breakthroughs, the company affords some measure of independence in the marketplace. NTL’s recent growth leaves them with only one major rival, BskyB, and its headquarting in the U.S. provides the privilege of residence in a business-friendly location. A vertically integrated company, NTL should enjoy the benefits of economies of scale given a coherent and successful corporate strategy. Therefore, a coordinated internal effort should provide bargaining leverage for purchasing and procurement purposes. On the other hand, NTL will likely encounter enhanced governance costs, high capital investment and a reduction in outside knowledge. In such a monopolized entity such as the U.K. cable market, however, the benefits seem to outweigh the risks. The Cable television and multimedia industries are two of the most dynamic and most influenced by technological innovation. Therefore, understanding the industry context is crucial when deciding whether or not to grow and acquire. According to analysts from Fitch Ratings, competition in the multimedia market has heated up after the innovation of “triple-play” services, being cable, broadband, and telephony. Now that several companies across Europe have achieved this goal, companies are working even harder to distinguish themselvesviii. In such an environment, NTL has succeeded in bypassing its competitors though the use of innovation. In 2005, NTL sold its broadcast ventures to help pay the cash-requirements for the TeleWest merger and to improve the offer for Virginix. Both acquisitions combine to propel the company to the forefront of the industry, and in the race to gain market share, the aggressive growth may not be over. According to Gartner analyst, Neil Rickard, who said regarding the NTL-TeleWest merger, “This is not the endgame. I would expect more mergers and acquisitions, perhaps even involving these two companies.x" In addition, the 2005 unleashing of VOD services was a first for the U.K. NTL has been at the forefront of Digital Television (DTV) innovation as well, offering 130 digital stations and 1.4 million customers by the end of 2005xi. In this competitive and relatively limited-access industry, being able to adapt to a changing industrial context is a necessity, as companies attempt to distinguish themselves as more innovative than the others. NTL, despite its internal issues, appears to have used the industrial context to its advantage. While the company is technically a foreign-based multinational, NTL has done relatively little to expand out of the U.K., and into continental and international markets. On the whole, NTL’s “four-play” option is a unique convenience for Europe, yet is only enjoyed in the U.K. There has been a significant push over the past few years to create a standardized network, especially in the broadband and pay TV markets. Events such as the Broadband World Forum conference in Venice, Italy in 2004, the Digital Hollywood at CES conference in Las Vegas, U.S. have brought in leaders from the cable and telecommunications industries to work to globalize and standardize digital technology. NGO’s like the International Telecommunications union have recommended over 2900 international standards, and are working diligently on standardizing the global marketxii. NTL, however, does not yet appear to adopt the global convergence perspective outlined by de Wit and Meyer. Even with its breakthrough innovation, NTL has been reluctant to expand outside the borders of the U.K., although it has previously worked with American company L3 Communications on constructing a trans-Atlantic cable linexiii. NTL has also partnered with Microsoft for DTV and interactive gaming options, but these partnerships have been focused primarily on strengthening NTL’s prowess in the U.K., and not for expanding beyond the borders. It is very possible, however, after adjusting to its new size and scope, it would make sense for the newly enlarged NTL to compete in the European and possibly the worldwide cable and broadband marketplace. It would appear wise, in the short term, to avoid expanding services beyond that which they currently operate, as global expansion will require additional investment when the company has paid about 6 billion dollars to acquire TeleWest, and roughly 1.7 billion dollars for Virginxiv. By virtue of its aggressive growth strategy, and the capital outlays it requires, senior leadership plays a dominant role in choosing the direction of NTL. Therefore, it would appear that the company has adopted the organizational leadership perspective when defining its organizational context. Unlike some companies in more static industries, however, market conditions and the threat of competition facilitate the necessity for NTL’s leadership to be responsive to rapid change. Unlike the organizational dynamics perspective, which states that leaders are left with relatively little decision-making power relative to forces beyond their control, NTL’s management has repeatedly altered the company’s scope of business by controlling the flow of investment for growth. At the same time, however, BskyB’s aggressive investment strategy and the continued need for competitive innovation forces NTL’s leadership to grow or fall behind. This makes leadership’s role even more important, as it must balance between enough growth to gain and retain competitive advantage, while at the same time, avoiding overspending and fiscal irresponsibility. It is a fine line that senior management must be cautious about overstepping. This is especially important for a company that is not far-removed from bankruptcy, and that has made a sizeable investment in acquiring another company with a recent history of financial instability. Changes as large as the NTL-TeleWest merger are also likely to create some degree of operational chaos as well within the company. As mentioned previously, NTL will have to find a method of integrating, as smoothly as possible, the former leaders and employees of TeleWest to avoid internal turmoil. Upon analyzing the previously mentioned strategic considerations, decision-makers must understand to what purpose those that have hired them want the leaders to fulfill. Even though nearly all of its operations take place in the U.K., NTL is an American corporation, and it’s ultimate owners are the shareholders and financial conglomerates that invest in it. Fortunately for the company’s operational strategy, many members of the NTL board of directors are current and former leaders in the telecommunications industry, and not all are financial gurus and famous political figures. Former CEO, Simon P. Duffy now serves as the lead strategist who oversaw the TeleWest merger, and is presiding over the Virgin buyout. Current CEO, Steven Burch, and seven of the eleven directors have significant levels of upper management experience in the telecommunications industry. The other four directors come from a financial backgroundxv. With such a conglomerate serving on the board, it is understandable for a growth strategy to be implemented. The majority is technically knowledgeable and has led companies with similar environments. In the publicly owned corporate world, however, profitability and investor confidence are key to a company’s survival. From a profit perspective, NTL does not appear to be operating in the best interest of shareholders. A five-year analysis shows the company’s share price to have achieved a high degree in fluctuation. While the stock has slightly rebounded in calendar 2006, it would appear that investment in NTL stock would be risky, at best, given the historical link between mergers and instabilityxvi. Upon a thorough strategic analysis, NTL does appear to have, for the most part, a coherent and consistent organizational strategy. It has used market forces and its internal knowledge to make decisions that have allowed the company to gain a competitive advantage, especially in the cable and pay TV sectors. It is questionable however, if this strategy does not create an excessive degree of risk that could literally destroy the company. According to its web site, NTL has invested over 13 billion dollars in creating the versatile array of multimedia services to its customers. While the company has gained significant results from this investment, the shareholder value is questionable given the instability of NTL’s stock price. Nearly all of the investment has been located in the U.K. only, making it susceptible to market forces in one location. On the other hand, by diversifying its services, NTL is competitive in several different industries within the broader multimedia market. This gives the company more inroads toward profitability and lessens the risk of loss. Either way, NTL’s brain trust must make this investment pay off in the form of profits, or investors will lose patience and create a potential financial nightmare for the company. Growth and acquisition may generate some degree of excitement, it will only be temporary, and the results will have to back up the hype. Operationally, NTL post-merger will have to create a synergy from senior leadership down to technicians and customer representatives in order to execute the bold growth that leadership has chosen. Internal conflicts and divisions could lead to a chaotic atmosphere that could reflect in cost overruns and customer service breakdowns. This consistency must begin by a coherent strategy from the boardroom and effective communication of the strategy downward. Leadership must also use sound judgement when analysing and exploiting the market and the opportunities it provides. As previously mentioned, while NTL is a vertically integrated and rather sovereign entity, it has successfully adapted to the dynamic multimedia market. Philosophically, NTL has implemented the growth strategy because its leaders have decided that it is the best way to improve the long-term prospects of the company. NTL has successfully used the “outside-in” business strategy to change with the market and it has exploited the industrial context to gain the leading market share. It has gained network-level leverage by diversifying and expanding the company’s internal structure. Finally, NTL’s leadership and the industry knowledge from the boardroom are good fits to execute this strategy. The questions that remain revolve around whether or not they have stretched themselves too much for the financial well being of the organization. If NTL is capable of recouping the massive investment it has made, and the company continues to innovate in the market, it would be logical for the company to expand into international markets. Currently, however, that may be impossible without major financial setbacks. At what point does NTL’s leadership reign in the spending? Or, have they already over-invested? The next few years will determine whether or not growth was the correct strategy to incorporate. Overall, the strategy does make sense using de Wit and Meyer’s framework, although it does help to raise questions about NTL’s internal stability. Notes: Read More