Nortel also lost ground in the 3G wireless market to a host of new startups with focused business models and an optical/IP emphasis that appealed to that market (Jander and Bulkey, 2001). In 2001, Nortel made the decision to exit the DSL business after experiencing weak demand. Last, but not least, Nortel's management was slow to react to market conditions. As evidence, closest direct rival Lucent Technologies overtook Nortel in 2001, growing its share of the global market from nine percent in the further quarter of 2000 to twenty-one percent in the second quarter of 2001. Analysts attributed this success to Lucent's quicker restructuring of its business that allowed it to undercut Nortel's prices (Kharif, 2001b).

Who Was Responsible?

Clearly, market conditions were a huge factor in Nortel's decline. However, Nortel's downfall is also largely attributable to its own strategies executed by its CEO John Roth and the company's senior management team (Erwin, 2004). Poor acquisitions and investments distracted Nortel from concentrating on developing its own technology. Once an innovator in optical networking products, the company now found its technology being eclipsed by the research and development efforts of competitors such as Cisco and Ciena. This problem was further compounded by Nortel's broad focus across too many market segments.

As a company, Nortel had its own share of internal issues. Its risk management policies were far too liberal and exposed the company to massive amounts of bad debt. Executives had foolishly counted on the demand for Internet bandwidth to keep ballooning indefinitely. Further, the company lacked the ability to quickly restructure and cut costs. For example, it did not divest of non-core, unprofitable businesses as soon as it should have, giving room for competitors to win deals by offering lower prices, a move well received in a sluggish economy.

What Should Have Been Done?

By June 2001, Norte had laid off 20,000 of its 94,500 employees, cancelled future dividends on its common shares and closed manufacturing facilities. Still, the company lost close to $19 billion in the second quarter of that year (Golden Capital Securities, 2001). Perhaps these drastic measures wouldn't have been necessary if Nortel had done things differently. No doubt the dramatic downturn in the telecommunications infrastructure market would have impacted the company and forced a response, but the consequences...

The first is that Nortel should stick to what its good at doing. This involves making the necessary research and development in core products to remain competitive and to engage in acquisitions and investments that are synergistic with core competencies. And, pursuing core market segments is essential to market share retention. The telecommunications infrastructure market is too broad and too complex for a company, even one of Nortel's gigantic proportions, to be successful. The second lesson for Nortel is the need for sound corporate governance. This involves risk assessment such as was needed with Nortel's forecasts, loans, investments and acquisitions. Even after developing core competencies and implementing corporate governance procedures, market conditions will always require that a company respond quickly. In this endeavor, Nortel should have management expertise in restructuring and an organizational structure that supports change.
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