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Catching the Next Big Strategy Wave

We’re going to stay in the telco sector for now. There have been on-again, off-again stories about how the New York Stock Exchange wanted to delist the three largest Chinese telco players. I’ve been a strategy consultant for a long time—all the way to partner and senior partner in corporate strategy and corporate finance. I’ve worked with telco companies all the way back when SMS was still a big thing, and companies were trying to figure out how to protect their SMS business. I worked at a time when internet service providers were seen as a cash cow. I worked at a time when Apple was negotiating to launch the iPhone and when Facebook began.

In every single big value shift in the telco sector, the telco companies got left behind because they saw themselves as the provider of the plumbing on which all the other fancy stuff sits. They saw themselves as a real estate company, and they didn’t care who built what on their real estate. They just felt they had to own the property, and it didn’t matter if someone built an extremely valuable building that generated a ton of cash.

But there has been a shift. Companies like AT&T have made what I would call the anti-consensus bet. Verizon’s share price is through the roof relative to AT&T. Verizon is making a bet that they are going to be a pure play telco, and their primary focus is going to be managing the infrastructure of a telco company. AT&T and Verizon have bid multiple billions of dollars to buy the latest wireless spectrum in the auction from the FCC to launch 5G. But AT&T has made a different bet. They’re thinking that if they own the infrastructure, why not put something on it that generates a greater return? They’ve made the bet to go after streaming. I don’t think anyone can say whether that’s the right bet because strategy by nature is a guessing game. Even if you do the right analysis, you don’t know how competitors are going to react, you don’t know if something like COVID comes along.

The insight is that in any sector in the world, there is an underlying infrastructure that underpins that sector.

And if you map out a value chain. Let’s do a retail example. The first step in a value chain for building a La Senza lingerie store in a mall is that a bank needs to fund the purchase of the land. A real estate company then prepares the land and builds a mall. La Senza then leases a store, but they could be very smart in the way they manage that store. They could have something like the Apple experience where the sales per store is so high that they’re earning incrementally more cash flow per dollar spent than the company that owns the land where it’s built. The company that owns the land might be envious and say, “Hold on a second. These La Senza stores are making a fortune. We’re going to get into selling lingerie.” But that’s a difficult decision because what is your core business? Do you know how to do that? When you want to catch the next big strategy wave, an easy way to see that is to simply map out the layers in your sector.

Let’s look at another example. Aluminum companies largely sell to automobile companies, which have phenomenal branding, stick a Porsche logo on it, I am assuming Porshe makes some cars using aluminum (they may not), and sell it for a fortune. I’ve spoken to aluminum executives who are incredibly envious of how much money the end users of aluminum make. Shouldn’t an aluminum company do what AT&T is doing and say, “We don’t want to just create the infrastructure, the base, but we want to go downstream”? Then the question becomes: how far downstream do you want to go? How far downstream can you go?

There is obviously money to be made in creating the “dumb infrastructure,” whether it’s just the land, the telco infrastructure or the aluminum. You have to remember that some sectors, by default, have low returns, and there’s nothing wrong with that. But pursuing another sector, another part of the value chain, another part of that layer of the infrastructure for higher returns sounds good if you can do it—but a lot of people cannot do it, and that’s always going to be the difficult thing.

The insight is that when you get caught up in stories about catching the next strategy wave and so on, remember that there’s always going to be someone who needs to provide the telco infrastructure, and you can be really good at that, and you can innovate. Not many people are innovating in that, but that doesn’t mean nobody could.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #12. 

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