GRADUATE SCHOOL OF BUSINESS
STANFORD UNIVERSITY
S-SM-30 B
FEBRUARY, 1998
AT&T CHINA (B)
February 1995: Bill Warwick had been in charge of AT&T China exactly two years. The
events of those two years had been amazing, even to this seasoned executive of one of the world's
largest corporations. The internal and external challenges that confronted him two years ago had
turned out to be every bit as difficult as he had expected. After bold moves in China and exhausting
battles at home in New Jersey, AT&T China had emerged with a new internal structure that
reflected a radical change in the overall corporate organization, initiated a market strategy designed
to change the rules of the game in the world's fastest growing telecommunications market, and led
the parent corporation to stake out a prominent position in the debate over the economic and
political relations between the United States and China.
INTERNAL REORGANIZATION
The creation of a regional business unit announced by CEO Bob Allen in November 1992
was an initial step towards giving more authority to AT&T China as a regional entity. However, the
specifics were left very vague. Warwick was not even given independent P&L responsibility for
AT&T's operations in China. It was up to him to work with the headquarters and the 21 BUs to
design a structure that would both serve the operational needs in China and be acceptable to
AT&T's overall corporate structure.
Throughout 1993, the battle was fought between the "regionalists" and the staunch BU
supporters. The former, including Warwick, believed that a more independent regional entity
encompassing all of AT&T's capabilities was essential to pursue the unique and highly countryspecific Chinese market. The latter group believed that any regionally oriented strategy would
undermine the overall BU structure and philosophy, which they saw as crucial to AT&T's overall
success. The battle had gotten so intense that, during one period, Warwick was making monthly
trips, 20 hours each way, between Beijing and New Jersey. During this crucial period, Warwick's
personal characteristics, his position as one of AT&T's highest-ranking officers, his 30 years of
experience with the firm and his breadth of experience (including formerly heading a BU) were key
to the eventual outcome.
Prepared by Eric Li and Gabriel Li, both MBA’ 95, under the direction of John Roberts as the basis for classroom
discussion rather than to illustrate either effective or ineffective handling of a managerial situation.
Copyright 1998 by the Trustees of the Leland Stanford Junior University. All rights reserved.
AT&T CHINA (B) – S-SM-30B
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During numerous meetings with AT&T's corporate leadership and BU heads, Warwick and
his team presented the need to establish AT&T China as a regional entity to develop and implement
the overall China strategy encompassing all of AT&T's capabilities. They explained that the BU
strategy did not fit the Chinese market. The rapid and parallel growth in all segments of the telecom
industry, the lack of customer sophistication, and the need for fast and flexible decision making all
demonstrated the necessity of a cohesive, coordinated decision-making process. For instance, the
urgent need to expand the telecom infrastructure in China meant that the Network Infrastructure
unit would be the primary force in marketing. This would require all other units to coordinate their
strategies, including pricing and offerings, to support Network Infrastructure to ensure overall
success.
After months of discussions and negotiations with the BU heads, a new structure for
AT&T's international activities took shape on a model of shared responsibilities. The new structure
was a matrix system that involved five regional units (China, Asia Pacific, Latin America, Europe
and North America) and four product groups that encompassed the BUs. Each of the nine units was
to be headed by a corporate officer, and each element in the 4x5 matrix would have its own income
statement.
The structure gave Warwick, as the officer in charge of the China region, significant
decision-making authority in China and independent P&L responsibility. He was given primary
responsibility in marketing and manufacturing strategies, product offerings, and pricing.
Representatives from the business units in China reported both to Warwick and to their respective
BU heads in the U.S. However, Warwick would have the primary control of their day-to-day
activities and greater influence over their performance evaluations. At the same time, the BUs and
their representatives in China retained significant decision-making power, with the right to refuse
deals on which they would actually lose money.
Warwick also won the power to re-distribute revenue among BUs. This meant that if a
particular sale required one BU to lose money or make only very small margins, but allowed
another to achieve much higher margins, Warwick could move some revenue from the latter to the
former. Although he could not force a BU to take a deal that would lead to a loss, he could have
AT&T China absorb the loss and compensate the BU. This structure gave Warwick significant
flexibility in marketing.
Further more, AT&T China also became the first AT&T regional entity to have its own
Human Resources and Manufacturing Delivery departments. HR was needed because of the unique
human resource allocation and development needs in China, including the hiring and training local
Chinese and managing expatriates from the U.S. The huge demand for equipment had led to
products landing in China from various facilities around the world. The uncertainty and inefficiency
in Chinese Customs made the processing of these extremely complicated. The dedicated
Manufacturing Delivery group sought to facilitate this process.
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NEW MARKETING STRATEGY - CHANGING THE RULES OF THE GAME
With the new internal structure, AT&T China embarked on an even more ambitious task in
marketing. The company decided to make the offering of total-package, comprehensive products
and services its primary marketing strategy. While still selling "boxes" if needs must, AT&T China
would seek Chinese customers/partners on a regional basis to provide for "ear-to-ear"
telecommunications needs. This would include the full range: equipment, transmission networks,
wireless networks, network management systems, training, etc. A regional partnership would
encompass the entire telecom development process of a region from long-range planning to
implementation. Pricing would be based on the total package rather than individual product lines
and services.
AT&T China selected several faster growing Southeastern provinces as a testing ground for
the new strategy. A demonstration project showed the impact of AT&T's unique capabilities and
was followed by some initial successes. A $100 million deal was signed with the Guangdong
province, even as Northern Telecom was setting up its manufacturing joint venture in the province.
The contract covered all the telecommunications development needs for a particular region in
Guangdong. The Chinese seemed to have begun to realize the importance of overall long-term
planning and integrated products and services in the development of telecom infrastructures, and to
recognize AT&T's unique capability to provide these. Several other similar deals with other regions
were in discussion. Whether the new strategy would prove to be effective in the long-run and in a
large-scale still remained to be seen.
POLITICAL ROLE IN U.S.-CHINA RELATIONS
Among the aggressive moves AT&T China had taken since 1993, the most daring was
probably the decision to take a prominent stand regarding U.S.-Chinese relations. This included
speaking out against the foreign policy of the U.S. government when necessary. The renewal of
China's Most Favored Nation (MFN) status was the first significant battle AT&T fought in this is
arena.
The leadership of AT&T, like much of the American business community, believed that the
linking of human rights issues with trade was inappropriate, ineffective, and damaging to American
interests. In March 1995, U.S. Secretary of State Warren Christopher visited Beijing to use the
possible withdrawal of MFN status to pressure the Chinese government on human rights.
Christopher attended a breakfast meeting at the American Chamber of Commerce in Beijing, of
which Warwick was a governor. At the meeting, Warwick, on behalf of the Chamber, delivered a
keynote speech urging the Secretary and the Clinton Administration to change their policy. The
following key points were made by Warwick:
AT&T CHINA (B) – S-SM-30B
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· The U.S.-China relationship had historically been based upon overriding national interests
that transcend differences in political systems and philosophies.
· The United States' open policy toward China had helped nurture the recent economic and
social transformation in China. Market-oriented reforms, combined with foreign trade and
investment, had brought about significant improvements in the welfare of the Chinese
people.
· The fundamental reality was that China was an emerging superpower, especially in
economic terms. China would indeed become a key player in global security and the engine
of growth for the world economy.
· In today's borderless world economy, China would be crucial to American companies'
global position. The mere threat of revoking MFN status had led to a competitive
disadvantage for American companies against their global competitors.
· Linking human rights and MFN undermined the vital economic and security interests of
the United States. And further more, it was ineffective in achieving American objectives on
human rights.
Warwick's speech was widely reported, both in China and the U.S. At the same time, in
conjunction with other American businesses, AT&T initiated strong lobbying efforts in Washington
to urge the U.S. government to reverse its policy. CEO Bob Allen also made speeches in various
forums in the U.S. urging a change in policy. Two months later, President Clinton reversed the
policy and officially de-linked human rights and the renewal of the MFN. Throughout the tense
period of the conflict, AT&T was clearly the most outspoken American corporation in both the U.S.
and China. As Art Kobler, AT&T's international public regional director, explained: "It was such a
gut issue to us that we just had to take a stand."
AT&T's effort in regards to the MFN issue had a clear and profound impact on its position
in China. The Chinese government recognized the significance of a strategic relationship with
AT&T. In the view of the Chinese, AT&T was no longer just a company with technology. Instead,
by virtue of its size and reputation in the U.S., it could play a key role in Sino-American relations.
This was one differentiation none of its competitors could offer. A late-comer, AT&T quickly
became a high-visibility company throughout China, and both Beijing and the various agencies and
regional PTAs had become much more receptive to AT&T.
As Warwick reviewed the progress and changes of the past two years, he knew that
tremendous challenges still laid ahead. Inherent uncertainties existed in a matrix organizational
structure. It still involved conflict and negotiations among various interests to move every business
deal forward. Even though Warwick had significantly greater control over AT&T China than two
years before, the shared accountabilities of a matrix system still required cross-reporting
relationships. While such a system had its benefits and seemed to have worked well for some large
international corporations, it had failed elsewhere. There was still a question whether it would be
sustainable for AT&T.
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Even greater uncertainties remained with the new marketing strategy. It would require time
and education to change the customers' just buying hardware. In the interim, the market was still for
straight hardware sales in the face of brutal price competition. AT&T's marketing team had been
making presentations on the total-package concept, but they were continually being asked to break
out the overall pricing by products.