Why Nortel Fell
Left: CEO of Nortel Networks, Mike Zafirovski
So Nortel Networks (TSX: NT) is issuing its last death rattles behind the door of bankruptcy protection.
This, according to the pundits who always have something to say, signals hard times for others in the technology industry. Expect the fallout to affect BC, where tens of thousands toil in tech.
Nortel, they opine, was hobbled by the tech crash in 2001 and as it was attempting to recover, became victim of the worst economic conditions in 50 years. Heard that before? Of course. It’s today’s blame mantra.
I beg to differ. Nortel fell, not because of the economy, but because it had a business model that was woefully inadequate for these times.
The telecom equipment manufacturer soared in the 90s because it bet its manufacturing on the growth of the internet. Smart move.
(Not so smart was its idea to expand and speed sales by financing them. Giving money to a customer to buy your stuff works in expansions, but isn’t very sustainable. The minute there’s a contraction, it starts to fall apart. But that’s another story)
After the crash, Nortel continued with traditional manufacturing and sales, and never again soared. It was using the same old business model – command and control, make it and sell it -- common to 20th century manufacturing. Its CEO was a former operations chief for Motorola, another manufacturer. He knew how to make manufacturing businesses run like clockwork.
Contrast that with Cisco, Nortel’s main competitor, which was also smacked by the tech crash, and afterward converted its business model. Instead of efficient production, it now encourages rapid, continual, innovation through massive collaboration.
Cisco mandates that everyone within the organization work with anyone else of their choosing. The result: it’s producing masses of ideas and new products in record time and has taken control of the industry.
It also has $US26 billion in the bank. Nortel is holding a firesale to raise cash.
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