Nortel: Built to Last?
Nortel: Built to Last?

Nortel: Built to Last?

September 1 st 2000

John Roth has been called the greatest creator of wealth in the history of Canada. Between late 1997, when Roth became CEO of Nortel Networks (formerly Northern Telecom) and September 2000, Roth supervised an increase in market capitalization of 796 per cent, from $38 billion to more than $300 billion. And, from 1997 to 1999, Nortel's revenues increased 44 per cent, to $32 billion.

No CEO—not Jack Welch of General Electric, not Michael Eisner of Walt Disney, no one—can match this performance.

Nortel's success under Roth can be traced back to a strategy Roth announced in an e-mail to all Nortel employees in December 1997. Roth wanted Nortel to take a "right-angle turn" from copper wire to optic fibre. "I want Nortel to make the Internet as easy to access as the voice network, and as fast, as reliable, as secure, and as much a part of our everyday lives as the dial tone is today," wrote Roth. The insight underlying Roth's strategy dates further back, to a little chart Roth drew in 1994, which showed that data traffic would surpass voice traffic no later than 1996 at the then existing trends.

Roth was right.

Nortel was the first company to transport 10 gigabits of information per second along a fibre optic cable, four years ago. Other fibre optics manufacturers are only catching up to this benchmark as of this year.

Today, Nortel is North America's number two manufacturer of telecommunications products (Lucent is number one), the global market leader in optical information transportation, the champion for an all-optical telecommunications network, and the most heavily traded stock on the Toronto Stock Exchange. Despite a sharp decline in the value of Nortel shares in the third quarter of 2000, leading investment managers continue to consider it the "best of breed" company in telecommunications and fibre optics.

But will it last?

The recent decline in Nortel stock value may be nothing more than an instance of temporary market insanity: a combination of the ripple effects of the crash with the tantrum-throwing of get-rich-quick investors suffering from a deluded sense of wealth entitlement.

Two sets of dynamics

Apart from its competitors, including Lucent and Cisco, two sets of dynamics will affect Nortel's future most significantly: 1) the demand for bandwidth at the intersection of telecommunications technology and the global economy and 2) the mindset of Nortel's board and top management.

The economy-technology intersection seems favourable for Nortel's future. Telecom analysts RHK suggest that the demand for bandwidth from global networks could increase 300-fold in the next decade. This would be the result of what RHK calls the "third wave" of Internet access: the adoption of high-speed access by Internet users in homes and the adoption of very-high-speed access by business users.

At the same time as more users demand high-speed access, those same users spend more time on-line, because of the increased benefits offered by increased speed in access. People are changing their social, business, and entertainment habits because of the services and applications enabled by fast, virtually free Internet access. This growth in demand is taking place not only in North America, but also—at a phenomenal rate—in Asia, particularly China and Korea.

These trends would seem to validate Nortel's strategy: a strategy focused on building an international high-performance Internet with the capability of delivering maximum bandwidth and driving down the costs of network service providers.

The mindset of Nortel's board and top management is more difficult to gauge.

Nortel is a great 100-year old company. Will it endure as a great company for another 100 years? Is John Roth leading a company that will be built to flip or built to last? Will John Roth give in to pressure from the capital market to keep showing extraordinary short-term results, to keep increasing the numbers—and for no better reason than just The Money? Or will he and his successor CEOs at Nortel continue generating substantial value by persistent and purposeful hard work over the long run?

If John Roth is to cultivate a lasting legacy, he must pay at least as much attention to the purpose and design of economic life as he does to the quarterly results of Nortel. As Jim Collins of Built To Last (Harper Business, 1994) fame recently commented: "The essence of greatness does not lie in cost cutting, restructuring, or the pure profit motive. It lies in people's dedication to building companies around a sense of purpose—around core values that infuse work with the kind of meaning that goes beyond just making money" (Fast Company, March 2000).

Does Roth have what it takes to build Nortel into a great, enduring company? Only time will tell. But this is how Roth responded to a question from National Post Business managing editor Charles Davies, after being designated "Canada's Outstanding CEO of the Year 2000" (NPB, November 2000).

NPB: "When you do leave Nortel, what would you like to leave behind?"

John Roth: "I'd certainly like to leave it in a good position in the marketplace. I'd like to leave it with a strong brand. That means it must have customers who see it as a valuable company. When I took over as CEO, I said I wanted to make Nortel the most valued company—valued by its customers, valued by its employees. If you've got those two right, you probably end up being valued by your shareholders."

Gideon Strauss
Gideon Strauss

Gideon Strauss was the editor of Comment from 2000 to 2010. He is currently Associate Professor of Worldview Studies at the Institute for Christian Studies, a graduate school of philosophy in Toronto, and a senior fellow with the Center for Public Justice in Washington DC. Gideon also facilitates vocational discipleship in churches in his native South Africa.


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