THE NEW STRATEGIC COMPLEXITY: NTT DILEMMAS AND OPPORTUNITIES by DANIEL RYAN HESSE A. B. Government and International Studies University of Notre Dame (1975) M.B.A. Finance Cornell University (1977) Submitted to the Sloan School of Management in Partial Fulfillment of the Requirements of the Degree of Master of Science in Management at the Massachusetts Institute of Technology May 1989 ) Daniel R. Hesse 1989. All rights reserved The author hereby grants to MIT permission to reproduce and to distribute copies of this thesis document in whole or part. Signature of Author _ _ Sloan School of Management May 2, 1989 Certified by C Steven H. Star Senior Lecturer Thesis Supervisor Accepted by Alan F. White Associate Dean for Executive Education Lecturer - 2 - THE NEW STRATEGIC COMPLEXITY: NTT DILEMMAS AND OPPORTUNITIES By Daniel Ryan Hesse Submitted to the Alfred P. Sloan School on May 2, 1988, in partial fulfillment of the requirements for the Degree of Master of Science in Management ABSTRACT Japan's 1985 Telecommunications Business Law established competition in the telecommunications industry. Nippon Telegraph and Telephone (NTT), which had been the monopoly domestic telecommunications service provider, now faces competition from new carriers and from its traditional equipment suppliers (NEC, Fujitsu, Hitachi and Oki). With the explosive growth of the Japanese economy, NTT faces excellent market opportunities, but it also faces dilemmas. The newly privatized NTT must position itself to meet both the short- term and long-term earnings expectations of the financial community and foster competition at the same time. If the government does not believe the market has achieved the desired level of competitiveness, it may re-write the Telecommunications Business Law in 1990. (which may call for the "break-up" of NTT). The thesis examines the nature of the NTT-supplier relationships, and the ways in which competition is altering these relationships, through a detailed study of NTT's product development and product procurement processes. NTT will be searching for new partners. The paper delineates NTT's strategy options and describes why the current industry structure, with one dominant national carrier, may be the ideal structure for both Japan and foreign companies. Finally, the thesis discusses the implications that the new competitive environment has for American telecommunications firms wishing to sell equipment in Japan. Thesis Supervisor: Steven Star Title: Senior Lecturer .. ~..~rr,*r ~.Ict~h.s~li~rr7**i .l~.j~'3111~·*.·T(~X~5-i~3~itLl~iEn.ZV~S ~~ YO.nl"rr. T 'r-r- i·r .-1.-.· "..~'I-·· ""I^' --. · 1.III-` -- -- I~~~-~-~ TABLE OF CONTENTS PAGE CHAPTER ONE INTRODUCTION AND METHODOLOGY............... 5 CHAPTER TWO THE JAPANESE TELECOMMUNICATIONS MARKET 11 Competition.................... 14 Substitutes.................... 27 The Government.................. 28 Customers....................... 43 CHAPTER THREE THE PRODUCT DEVELOPMENT PROCESS.. The NTT Reorganization............ The NTT Procurement Process....... The NTT Decision Making Process.. A Short Case History: Northern Te leco. ... lecom... CHAPTER FOUR THE CHANGING RELATIONSHIPS WITHIN THE NTT FAMILY.................... 88 The NTT Family Companies.......... 93 Technology Strategy............... 101 End-User Strategy................. 126 CHAPTER FIVE NTT DILEMMAS AND OPPORTUNITIES 146 The Government................. 146 Customers...................... 158 Competitors.................... 159 The New Relationships.......... - - 165 CHAPTER SIX THE IMPLICATIONS OF INDUSTRY CHANGE FOR THE AMERICAN TELECOMMUNICATIONS FIRM IN JA PAN .................................. 168 The NTT Market.......................... 177 Strategy Implementation................. 182 Conclusions ............................ 201 ""' ~ '* · ~· ,ur·rx·-~t,~ .~,,,.,.,..., ~"" "' ~~ C"~U~.'~1-~2. KI~Nli~·?VTr~LII-**·-i*niCWL)~UIILZ~-~I~rll·rr~*BL)I*CCIIXl;~~nla~.~ rrrrllll~iY*urrr..n- nC~~-*X ~~~lr.ruiy r~.n.rr~-- _I-^- _II------__~~ - 4 - LIST OF EXHIBITS TYPE & NUMBER TITLE PAGE Table 2-1 Market Shares for Type I Carriers Figure 2-1 The NTT Product Portfolio Table 2-2 Tax and Financial Support Measures Figure 3-1 NTT/NT DMS-10 Joint Development Timetable Figure 4-1 Elements of Modern Technology 103 Strategy Figure 4-2 Telecommunications R&D in Japan 123 - 5 - CHAPTER ONE INTRODUCTION AND METHODOLOGY Japan's economy is in transition. Japan is moving from a protected, closed trading environment to an open market virtually devoid of overt trade barriers. In no industry is this transition being played out with more intensity, tribulation and conflict than it is in telecommunications. Japan's telecommunications industry has been developed largely through the efforts of one firm, Nippon Telegraph and Telephone (NTT), the focus of this study. NTT provided the technical and financial resources, and a stable, expanding market so that the four members of the "Denwa family" (NEC, Fujitsu, Hitachi and Oki) could grow and prosper. NTT built a "human network" between the companies to ensure cooperation and joint commitment. For political, but primarily for competitive reasons, these relationships are breaking apart. The four equipment manufacturers are becoming so large and capable that they threaten NTT's leadership of the industry. More important, each is vying with NTT for "account control" with Japan's major business customers. It is the battle for influence over the customers' buying decision that is the most divisive. NTT is facing new competitors on several fronts. New local, long distance and special services carriers have been given authorization to compete with NTT. NTT's local services ... '..li'n"-~14) · I-ii~j;P~3~^rr~·~i)~P~_l~i(·*-~~l*~·S~~ I~C1-I~"~LFJ;r.~~~'l~:j.~*~m(~~c~~l~lil~ .Y*n ~r*r.·~·x~-··ic;; -r" ~-····-·r -~·-··~x-~~·· · · · ~ · -·---·· - 6 - also face the threat of "bypass" from national and international long distance carriers, most notably Kokusai Denshin Denwa (KDD). By far the most significant threat NTT faces comes from the regulators themselves. The Ministry of Posts and Telegraphs (MPT) is studying, and apparently is leaning toward, the eventual break-up of NTT into many companies. The political environment is also evolving into a competitive one, as MPT and the Ministry of International Trade and Industry (MITI) contend for power. The thesis The study of NTT and the Japanese telecommunications market is fascinating and highly relevant to participants in the world's telecommunications markets, but these are not ideal subjects upon which to establish an analytical framework. This thesis is a study in contradictions. I am not a newcomer to the field of telecommunications. In my twelve years with AT&T, I have held positions in the following areas: international services, product management, sales, network engineering, strategic planning, field operations and human resources. On the subject of Japan, I was, and still am, a relative novice. Before embarking for Japan, I read through a significant amount of secondary research material on the telecommunications market and on the Japanese people. I went ,-. -mi~;;··~j·\· a ,+-irr.·rxlrr;·13~or;liF~,~=r-C~·-/Fu~s;.;t·E*~.lpr~r~Ciil'~:*'r~6)iY. ~ir~SL~1~.~·~Smll~C~~~i~TC~ljRI~~~LXCIIl ~'?"?*~ m(.lY7"J*-r^*,~*.Ix~n~rrrr*r r~·~·^- - 7 - to Japan with a number of firmly-held beliefs and convictions about the Japanese. What I discovered in Japan was that my logical, cogently-arguable generalizations about the Japanese were merely reflections of my ignorance. The longer I was in Japan, the more confused I became, particularly while involved in the labyrinthian pursuit of identifying what constitutes the "Japanese way" of doing business. The stereotypes quickly faded. As I gathered more data, through interviews, the fabric of the industry story became more colorful, detailed, complicated, multi-leveled, and filled with what appears to the Westerner as contradictions. NTT itself is faced with contradictions and dilemmas. It is being asked to help increase national competitiveness while at the same time opening its markets to foreign companies. NTT is expected by the financial community to improve earnings while it is directed by the regulators to ensure that competition prospers. It is expected to achieve financial returns on its R&D investments while disseminating technology for the good of the nation. NTT managers can, in the same breath, describe their company as the picture of economic strength and success ("The World's Most Valuable Company"), 1 which also fears for its very survival. l"The World"s Most Valuable Company," Fortune, 10 October 1988, 92. h ~r '~* r _( .*(;.'*. I*·'~X. i FL~~~"~.Li~E~iZ~*' ~P^·~SPr..·r~'2*l·?~·rl~^~·i·.'·(uj~'l~? Ih~l.ucrr.lr--rx^ -r* p·.nlr.ugllftll~:i~·&·c~~..s~lb~YA'-rrrr (."l*I.;FII·.*'m~(·"ur*L"'~L . ,-..'"cxx-~~ro*l-r-l-1-111~ -·---- - 8 - The evolving relationships between NTT and its four major suppliers present the most compelling and important story in the industry. It will be interesting to see if these long- standing, cooperative relationships can be maintained in the face of advancing competition. NTT is becoming increasingly uncomfortable with a scenario that positions its most feared competitors as its key suppliers. I approached the analysis from three vantage points. The first is from a Japanese policy-making perspective. I believe the thesis forwards strong arguments that would support the maintenance of a singular NTT as part of an optimal industry structure that supports both national competitiveness