At&T and Olivetti: Analysis of a Failed Strategic Alliance

Abstract

This case examines the early stages of an alliance between two firms. The case deals with the reasons why the alliance makes sense, and documents how the alliance degrades and eventually fails. It demonstrates how the different expectations of partners can affect the nature and tone of their relationship.

Excerpt

UVA-M-0430

AT&T AND OLIVETTI:

ANALYSIS OF A FAILED STRATEGIC ALLIANCE

In 1983 the long‑awaited breakup of the government‑sanctioned monopoly of American Telephone and Telegraph (AT&T) took place. Shorn of its monopolistic might, the company began to implement a strategy that would ensure its success in the increasingly competitive, high‑technology market. Faced with technology giants such as International Business Machines (IBM), Digital Equipment Corporation (DEC), and West Germany's Siemens A.G., AT&T saw an opportunity to marry its traditional strength in communications equipment with the computer know‑how of another company. AT&T's vision was to merge both voice and data in integrated systems, but the firm lacked the computer expertise and the distribution channels necessary for the proliferation of a new generation of AT&T voice/data products.

Eyeing the growing demand for high technology products in Europe, AT&T viewed this market as essential for its own long-term growth. The European market had underdeveloped telecommunications (less than one-fifth of the $ 25 billion in world-telecommunications equipment sales were made in Europe in 1984), and the use of computers was slow but growing. As a result, the company sought a strategic alliance in Europe to gain instant access to elusive and often nationalistic distribution channels. AT&T's highly publicized marriage to Ing. C. Olivetti & Co., the Italian office machine manufacturer, engrossed industry watchers on both sides of the Atlantic.

AT&T confirmed rampant speculation about the plan on Wednesday, December 21, 1983, when it announced the purchase of 100 million shares of Olivetti for $ 4.26 million. The agreement gave AT&T 25 percent of Olivetti for the first four years of the alliance, and provided an option to increase that percentage to not more than 40 percent for five years thereafter. Analyst Steven Chrust of Sanford C. Bornstein stated that, “the clearest advantage to AT&T from this relationship is the European presence it will have through Olivetti. AT&T needs these relationships to establish itself overseas.” Robert E. Sageman, then president and chief executive officer of AT&T International, AT&T's overseas marketing arm, said the accord represented a “long-term and extremely important relationship,” but he cautioned that a lot of work was still needed “to put flesh on the bones of the agreement we have.”

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Keywords: alliances partnerships relationships business-to-business, b2b