Analysis of Diversification Strategy of Deutsche Telekom Ag

TILBURG UNIVERSITY

Analysis of diversification strategy of Deutsche Telekom AG

throughout 1994-2009 time period

Contents

Executive summary 3

Chapter 1. Introduction 4

1.1. General information 4

History of the firm 4

Business / Industry description 4

1.2. Purpose of analysis 5

Chapter 2. Methodology and data collection 5

2.1. Methods 5

General framework 5

Industry codes 6

Diversification and relatedness measures 6

Technological diversification 7

2.2. Data collection 7

Chapter 3. Analysis 8

3.1. Diversification pattern in 1995 8

3.2. Entries and exits 9

Globalization and geographical expansion 9

Periodization 10

Period 1 - 1995-1999 - Growth and liberalization 10

Period 2 - 2000-2005 - Restructuring and 4 pillar strategy 12

Period 3 - 2006-2009 - Convergence and focus 12

3.3 Diversification pattern in 2008/2009 13

BSD-MNSD model 14

3.4 Diversification and financial performance 14

Chapter 4. Discussion 16

4.1 Discussion of diversification path 16

4.2 Recommendations and future 16

References 18

Appendices 20

Appendix A. Revenue decomposition in 1995 and 2008 20

Appendix B. 2-digit code grouping for all subsidiaries 20

Appendix C. Rumelt classification measure methodology 20

Appendix D. Dynamics of revenue 20

Appendix E. Exits and entries in different businesses across selected time period. 20

Executive summary

This report analyzes corporate strategy of Deutsche Telekom AG, one of the largest telecom carrier groups in the World and Europe, over 1994-2009 time periods.

We use multiple data sources like Amadeus, SDC, annual reports, academic articles and publications to track major changes in diversification strategy, relatedness in business portfolio, major entries and exits, as well as to identify important patterns of diversification strategy and its drivers.

We use multiple diversification and relatedness measures, particularly Rumelt's classification method, Herfindahl and Entropy indices, BSD-MNSD model, to analyze differences between diversification in the beginning and end of analyzed period.

We identified three periods with different diversification patterns and external factors, which triggered them (fast technological innovation, deregulation, increase in competition, convergence and others). Until 2000 DT followed technological innovations trying to establish strong position on emerging markets. In 2000 DT attempted to structure its business portfolio and focused on synergies within four selected domains. Since 2006 convergence of telecommunication industry start to take place and DT tries to capture value from this trend by reorganizing its organizational structure to pursue synergies. At the same time major sell-offs happen to focus on core competences and gain resources for next step.

Our analysis shows that next emerging business is mobile content business. DT has weak position in this business, although it definitely has some basic competences to start with. However, to pursue this opportunity and compete with existing giants it needs to engage in alliances rather than through acquisitions or organic growth.

Chapter 1. Introduction

1.1. General information

The Germany firm Deutsche Telekom AG (further DT) is considered number one telecommunications company in Europe and is alleged to be the third largest in the world (Kranenburg & Hagedoorn, 2008). It has strong positions in Western and Central Europe, and is active in telecommunication industry, as well as number of other industries.

History of the firm

Deutsche Telekom AG was formed in 1995 as the former state-owned monopoly Deutsche Bundespost was privatized. In the first post office reform in 1989, the Deutsche Bundespost was divided into three divisions: Deutsche Bundespost Postdienst (postal services), Deutsche Bundespost Telekom (communications services) and Deutsche Bundespost Postbank (postal bank) (Vogelsang, 2003). In 1995 the divisions were further privatized in the second post reform which leads to the creation of three companies: Deutsche Post AG, Deutsche Telekom AG and Deutsche Postbank AG (Vogelsang, 2003). In 1996 private shareholders were holding more than 25% of the DT stock.

Business / Industry description

The industry DT is operating in can be defined either broadly or narrowly. When defined narrowly, one can talk about network service providers/operators/carriers. In this case industry will consist of large wired and wireless network operators as well as smaller scale internet providers and other players.

However, it is reasonable to define the industry more broadly, as Information and Communication Technologies (ICT), in which case it will represents complex ecosystem comprising of basic equipment and consumer electronics manufacturers, software engineering (OS and applications) and network carriers and providers (see Fransman (2007) for discussion of ICT ecosystem).

One of the important characteristics of ICT industry is continuous innovation. Therefore industry is very turbulent and dynamic. However, operators are more close to supplier-driven type of innovators, because