Page 1: Introduction
Organisations gain many different operational benefits from producing goods or providing services on a large scale. As they get larger, often through the integration of business units under a single umbrella company, average unit costs fall and they benefit from economies of scale.
Organisations must, however, aim for an optimum size of production, i.e. the size which suits them best. If the optimum size of an organisation is exceeded, the business becomes difficult to manage and inefficiencies, known as diseconomies of scale, occur.
The competitive climate in which organisations operate changes constantly and therefore businesses should frequently evaluate their size to decide on a scale appropriate to the current markets in which they operate. This case study focuses on the challenges facing Lucent Technologies, following its demerger, announced in September 1995, from AT&T.
Lucent Technologies was born out of one of the most shocking announcements in American corporate history. In 1995, AT&T, then one of the world’s largest companies, presented a plan to split itself into three. At that time, AT&T had businesses in 200 countries, and operated the world’s largest telecommunications (telephone) network, handling over 190 million calls daily. It stood as a world-wide corporate phenomenon - the vertically integrated corporation – manufacturing goods and providing services at different stages of production. It owned Bell Laboratories, one of the world’s largest and most highly-respected research laboratories.
So why should a large successful business decide that it needed to go through a demerger? After all, as AT&T, the company was reaping the benefits of many economies of scale, providing services such as long-distance telephony, products from microchips to personal computers and bank cash machines, and equipment such as telephone exchanges and transmission equipment.
The answer is that the complexity of managing all the different parts of the business was beginning to overwhelm the advantages of integration. Any business organisation must be responsive and flexible in order to best meet changing market needs. The aim of demerging to create Lucent was to resolve the internal conflicts which had sprung up within AT&T, and produce a company which could react quickly and take advantage of business opportunities.
The demerger was the world’s largest ever corporate split-up. It represented a bold plan which fundamentally changed an industrial giant to create three smaller, more focused organisations.The three resulting companies were:
- Lucent Technologies (including Bell Laboratories)
- A communications services company which retained the AT&T name and logo
- A business computing company which changed its name in 1996 to NCR Corporation.