Hopes were high when Lucent Technologies named Richard McGinn a CEO in 1996. A strong marketer,
McGinn was personable and adept at explaining the company’s bright prospects to the investment community. He promised investors dazzling growth in revenues and earnings. Given the climate of the times and seen from an altitude of 50,000 feet, the promises looked credible to the board and to investors. The combination of Western Electric and Bell Labs spun out of AT&T, Lucent would in 1997 concentrate on the booming telecommunications equipment market, from consumer telephones to network switching and transmission gear. With Bell Labs, it had an R&D resource that nobody else could match.
But McGinn had difficulty getting things done inside the company. “We got ahead of our capacity to execute,” said Henry Schacht, who came back from retirement to replace McGinn after he was fired in October 2000. The collapse of the telecommunications bubble eventually took down almost every player, but Lucent’s decline began even before that. The company fell sooner, harder, and farther than its competitors.
In a technological marketplace moving at Internet speed, McGinn did not change the slow-moving and bureaucratic Western Electric culture. Lucent’s structure was cumbersome, and its financial control system was woefully inadequate. For example, executives couldn’t get information about profit by customer, product line, or channel, so they had no way of making good decisions about where to allocate resources. McGinn’s people asked him in vain to fix this situation. He failed to confront nonperforming executives or replace them with people able to act as decisively as their counterparts at competitors such as Cisco and Nortel.
As a result, Lucent consistently fell short of technical milestones for new product development, and it missed the best emerging market opportunities. The company spent an enormous amount to install SAP, enterprise software that connects all parts of the company through a standard software platform, but the money was largely wasted because the company didn’t change work processes to take advantage of it.
Lucent did meet its financial targets during the first two years, surfing on its customers’ unprecedented wave of capital investment. But these early revenue gains came largely from Lucent’s old voice-network switch business—a business with unsustainable growth prospects. Even before the wave broke, the company was struggling to deliver on McGinn’s commitments.
A leader with a more comprehensive understanding of the organization would not have set such unrealistic goals. The hottest demand was for products Lucent didn’t have, including the routers that guide Internet traffic and optical equipment with high capacity and bandwidth. Bell Labs was working on both of these products, but was painfully slow to develop and introduce them.
The missed opportunities in routers and optical gear are widely perceived as strategic errors. In fact, they show how execution and strategy are intertwined. In 1998 Lucent talked with Juniper Networks about acquiring it but then decided to develop routers in-house. But one part of execution is knowing your own capability. Lucent didn’t have the capability to get its products to market fast enough. At the very least, good execution would have kept growth projections from getting so far out of hand when the company didn’t have a presence in one of the hottest growth markets.
Similarly, the strategic error in optical gear originated with poor execution—in this case, the failure to understand changes in the external environment. As early as 1997, Lucent engineers were pleading with senior management to let them develop fiber optic products. But the
leadership was used to listening its biggest customers— AT&T, its former parent, and the Baby Bells —and those customers had no interest in optical gear. This is a classic case of the so-called innovator’s dilemma—companies with the greatest strength in a mature technology tend to be least successful in mastering new ones. But the innovator’s dilemma itself has an execution solution that isn’t generally recognized. If you’re really executing, and you have the resources, you are listening to tomorrow’s customers as well as today’s and planning for their needs. Nortel was hearing the same arguments from its big customers, but it saw the emerging needs and organized itself to supply them.
Second, in the mad rush to grow revenues, Lucent set out in too many directions at once. It added myriad unprofitable product lines and acquired businesses it couldn’t integrate—or even run, especially in the many cases where leaders of the acquired companies left because they couldn’t abide the bureaucratic culture. Costs ran wild. The three dozen acquisitions, along with a roughly 50 percent increase in the workforce to some 160,000, led to redundancies, excess costs, and lowered visibility.
The endgame began well before the telecommunications market imploded. Under pressure to meet unrealistic growth projections, people left to their own devices did anything they could. Salespeople extended extraordinary amounts of financing, credit, and discounts to customers. They promised to take equipment that customers couldn’t later sell. Some recorded products as being sold as soon as they were shipped to distributors. The result was a ravaged balance sheet. In 1999, for example, while revenues grew 20 percent, accounts receivable rose twice
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as fast, to over $10 billion. The company also amassed a huge amount of debt, largely from financing its acquisition binge, that put it near bankruptcy. It forced Lucent to sell businesses at fire-sale prices. The situation became so serious that the company flirted with losing its independence through its relationship with the French company Alcatel.
During the tech boom, neither industry people nor investors imagined that business could possibly drop so sharply. A leader skilled in execution would have probed his organization to get a realistic assessment of its market risks. According to published accounts, McGinn did not do so. And during his last year in office, he clearly was completely out of touch. Several times he had to revise financial estimates downward. To the very weekend when the board fired him, he insisted Lucent was dealing with its problems.
In a postmortem, the Wall Street Journal reported:
People familiar with the company say several executives told Mr. McGinn as long as a year ago that the company needed to drastically cut its financial projections because its newest products weren’t ready yet and sales of older ones were going to decline.
“He absolutely rejected” the advice, says one person familiar with the discussion. “He said the market is growing and there’s absolutely no reason why we can’t grow. He was in total denial.”
Indeed, in a recent interview, Mr. McGinn said that during Lucent’s spectacular rise to stardom in the years after its spinoff from AT&T, he never gave much thought to how or whether the company might fall from grace.
