The global market for telecommunications is expanding rapidly Essay

1. Introduction

The global market for telecommunications is expanding rapidly. It is not a question of “demand pull” or “supply push”. Both are happening. The interaction of these two forces has made telecommunications one of the leading growth sectors in the world economy. It has also made telecommunications one of the most important components of social, cultural and political activity.

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As a result, due to privatisation and deregulation mostly, the global telecommunication industry is undergoing tremendous changes the recent decade evolving technological capabilities and increased competition. These important factors in the environment of the telecommunications firms interacted in determining the ownership structure of the industry as a whole and moreover, as competitive boundaries are shifting in service provision, telecommunication firms need to acquire new skills and develop or sustain a competitive advantage in order to succeed in the future.

According to Joshi et al, (1998), telecommunication firms have two distinct choices to pursue growth, acquire new skills and to increase their skill-base in order to compete successfully. The firm can either build its product/service offerings in the new deregulated environment with its own resources, or it can collaborate with other firms. In an industry environment where time and speed are critical, and in addition, where resource commitments in a particular market segment, or technology might be too risky for a firm by itself, the formation of strategic alliances becomes the main avenue to acquire new capabilities and sustain competitive advantage. (Joshi et al, 1998)

2. Strategic alliances in the Telecommunication Industry

In the period leading up to the Telecommunications Act of 1996 and the years following, there have been an unprecedented number of mergers, acquisition and alliances. According to Wilcox et al, (2000), companies long considered rivals have sought each other out in order to join forces to compete in the new environment. Moreover, firms are increasingly forced to combine internal technological strengths with those of other firms as R&D costs soar rapidly and technological dynamics speed up. Products require more and more sophisticated technologies and emerging technologies have the potential to undermine the competitive positions of incumbents. (Capron and Mitchell, 1997)

Many of these alliances are ‘learning alliances’ through which companies can speed up their capability development and exploit knowledge developed by others (Grant and Baden-Fuller, 1995). In fact, many telecommunication firms will be induced to form these ‘learning alliances’ if they lack specific technological capabilities and they can overcome this deficiency tapping into other companies’ technical assets. (Grant, 1997) Because most valuable knowledge is often cumulative and tacit in nature, it is hard to transfer between organizations through market transactions (Mowery, 1988; Mowery et al., 1995; Osborn and Baughn, 1990). Establishing a network of alliance partners on the contrary is an efficient way to create knowledge and to transfer this knowledge between organizations (Lane and Lubatkin, 1998).

The World Business Press annually reports announcements about thousand of new strategic alliances corporations intended to research and develop new technologies, create new products, sell new services, or penetrate new markets. (Knoke et al, 2002) From the beginning of 90’s, Europe and the United States have witnessed multiple mergers and acquisitions involving leading telecommunications companies.

The marriages of the American AT&T with TCI and Media One, MCI with World- Com, and Vodafone with Mannesmann set the stage of a rapidly changing global telecommunications market, while players such as British Telecom (BT), AT&T, and DoCoMo acknowledged their plans to build competitive advantages in the world market through combinations with other companies. (Chan-Olmsted and Jamison, 2001) The following table summarises some of the major acquisitions taken place from 1998 until 2001.

Other strategic partnerships between major telecommunications operators from North/South America, Europe, and Asia are forming almost daily, although the pace has slowed since the decrease in telecommunication and Internet stock prices tightened capital markets in late 2000 (Rosenbush, 2001). The trend towards alliances goes beyond the traditional wire-line telecommunications sector. There are also mergers between major wireless players such as Vodafone and Airtouch, between old and new media companies such as Time Warner and America Online, and between old and new network companies such as US West and Qwest. (Chan-Olmsted and Jamison, 2001)

The nature of competition today in the global telecommunications industry seems to centre around market activities that aim at gaining competitive advantages through strategic combinations of resources and presence in multiple products and geographical areas.

3. The concept of Alliances, Mergers and Acquisitions

As its core, strategic alliance is a trading partnership that enhances the effectiveness of participating firms by providing mutually beneficial access of technologies, skills or products. (Johnson & Scholes, 2002) According to Hill and Jones (2004), strategic alliances run the range from formal joint ventures, in which two or more companies have an equity stake, to short-term contractual agreements, in which two companies may agree to cooperate on a particular problem. Because various interpretations of the term exist, Lee (1999) defined strategic alliance as possessing simultaneously the following three necessary and sufficient characteristics:

* The two or more telecommunication firms that unite to pursue a set of agreed upon goals remain independent subsequent to the formation of the alliance.

* The partner firms share the benefits of the alliance and control over the performance of assigned tasks.

* The partner firms contribute on a continuing basis in one or more key strategic areas, e.g., technology, product or service. (Lee,1999)

As such, a strategic alliance is collaborative relationship of two or more companies created to accomplish a number of strategic objectives. Strategic alliances are adopted widely by many corporations as a major vehicle for survival in the era of borderless competition. Especially in the telecommunication industry, many alliances involve firms having closely related products, technologies and markets. This can result in controlling the fast changing technology or on the other hand gaining of economies of scale or scope. The merger of Qwest Communications with LCI forming one of the largest service providers is a good example of a successful strategic activity. As said by Wilcox et al, (2000) this alliance was indented to reduce costs, increase market share and gain synergies of scale and scope. Another concept of strategic alliance is when companies are seeking diversity with other companies offering different products, technologies and markets. These strategic alliances often result in gains in market access, development or and control of technologies, or access to information technology sought by one of the partnering firms. (Wilcox et al, 2000)

Das et al., (1998) examined further the concept of the alliances in the telecommunication sector and came to the conclusion that there are two types of alliances, the ‘technological’ and the ‘marketing’ alliance. Technological alliances typically involve activities upstream in the value chain such as R&D, engineering and manufacturing. These strategic alliances seeking value creation through synergy. On the other hand, Marketing alliances tend towards the downstream activities of sales, distribution and customer service. Das et al., found that the abnormal returns from technological alliance announcements are greater than those from the marketing alliance announcements highlighting the importance of the value created through technological alliances such as cost reduction attributable to the creation of economies of scale and scope and easing the transfer of tacit knowledge. (Das et al. 1998)

A more detailed analysis on why alliances (marketing and technological), and mergers and acquisitions have become so important strategically to the global telecommunication industry the last years will follow by analysing the motives that drive telecommunication firms to form these short of strategic plans.

4. Motivation of Alliances, Mergers and Acquisitions

According to Lynch, (2000) strategic alliances are made to reduce or eliminate technological gaps between corporations through the development of new technologies, to improve qualities and enhance performance, and to continually expand/ maintain market share in existing/new markets through the development/production of customised items. Firms are forming alliances today as they pursue connections to global information networks. More than 90% of Fortune 1000 firms use alliances as a key strategy. (Raphael, 2002)

Generally, strategic alliances have been made to expand existing markets, cope directly with the competitors, share resources and risks, overcome barriers to market entry, acquire complementary technologies and finally secure the flexibility of organisational structure. (Lee, 1999) The following tables are showing the motives for acquisitions but from different point of views. The first table reports the results of a research made by Capron and Mitchell (1997), on what managers believe are the potential motives that drive a telecommunication company to form a strategic alliances.

Source: Todeva and John, (2001) Shaping the Competition and Building Competitive Advantage in the Global Telecommunication Industry: The Case of BT Plc

Among these, the following five motives are the most relevant to strategic alliances made by telecommunication companies. The first motive to consider is to take advantage of strategic alliances with similar companies in other countries in order to penetrate to their markets. A good example of a telecommunication company which entered into strategic alliance with competitors to achieve a number of strategic issues such as of entering into a foreign market is British Telecom, (BT). British Telecom is within the group of the largest national telecommunication carriers with a global reach trying to reposition itself and to protect its market. However, since the deregulation of telecommunication services has made the British market conditions more competitive, the pursuit of overseas sales and operation expansion was a necessity. Therefore, in November 1996, the boards of British Telecom in order to penetrate the American market approved a plan to merge their company with the American MCI to create the world’s first trans-Atlantic telephone carrier. (Capron and Mitchell, 1998) Up to then the global alliance map of the British Company included 44 alliances in 24 countries that involved other telecommunication services and equipment firms. (Raphael, 2002) The deal, valued at $22 billion, would have been one of the top ten mergers and acquisitions in history and would have created the fourth-largest telecommunications company in the world. The proposed name for the new company was “Concert”, and it was to be based in London and Washington. BT already owned a 20% stake in MCI, dating back to 1994, and it now sought to acquire the remaining 80% of MCI in exchange for stock and cash. The two companies planned to set up a new management structure that would be evenly balanced between the two. (Raphael. 2002) However, the acquisition of MCI by BT managed to wave the European Union telecommunication market. After that, companies scrambled to position them selves for a new era of competition. And finally, in 1998 governments forced to open their lucrative voice telephone sector. (Capron ; Mitchell, 1998)

A second motive of strategic alliance, which is closely related with the expansion plans of British telecom is the securing of market share and holding off of competitors. Some alliance cases which formed the 90’s under this category are the formation of Unisource by Tellia in Sweden, PTT in Switzerland, KPN in Netherlands and Telefonica in Spain. The main objective of this multination alliance was to stem the expansion of British Telecom to the European and Global market. (Lee, 1999) Moreover, similar alliances aiming to secure the global telecom network was the creation of Global One by Deutsche Telecom, France Telecom and Sprint. (Raphael, 2000)

Continuously, as Lee (1999) suggests, “a very important factor that drives companies to form alliances is the need to enter into new business areas or expanding existing service markets by acquiring new service elements or securing more efficient distribution channels from partner companies”. A number of strategic alliances were formed for this purpose. The American AT&T, for instance allied with McCaw Cellular and GTE for wireless data services and with NTT for international telecommunication business. (Lee, 1999) In similar vein, British Telecom, up to that time had changed dramatically the role of the existing telecommunication companies. Instead of being geographically based and hardwired for voice service, they were competing on the basis of coverage and functionality. Thus, the degree and quality off access and the variety and differentiation of features were becoming the key concept for every telecommunications multinational. Coverage and functionality were interrelated because of network effects: Network providers become more attractive to customers when they are able to deliver a critical mass of connected customers and content providers/packagers and vice versa. The critical mass, in turn, allowed BT to exploit scale economies and develop and market viable features that made the network more valuable for these customers. (Chan-Olmsted and Jamison, 2001) At the end, what has to be also mentioned for the purpose of the report is that other telecommunication companies reacted accurately in order to catch up with the competition. For instance, the joint venture between Sprint, Comcast and Cox Cable, and the PCS consortium formed between Bell Atlantic, Nynex, US West and Air Touch (which were later acquired by Vodafone), would belong to this category. (Amesse, 2003)

The fourth motive is the pursuit of economic rationalisation. Since the IT industry has inherent characteristics such as economy of scale and scope, the integrated management and provision of telecom network facilities including cable TV and broadcasting networks by a company was more efficient and economical than what where numerous service providers trying earlier, thus, to manage and provide telecom and broadcasting services through separate network facilities. (Lee, 1999)

Finally, the fifth motive that influences telecommunication companies to form alliances is the sharing of resources and risks. Mainly, because of the construction of global telecommunication network or even participation in global telecom market would require huge investment with considerable risks. Strategic alliances might distribute such risks and reduce burdens of participating firms through sharing of appropriate resources.

5. Factors facilitating the strategic alliances in the Telecommunication Industry

Policies on deregulation and market competition

The factors facilitating strategic alliances in the telecommunication industry could be divided in two categories: external and internal. Among the external factors, the first to be considered would be the governmental policies on deregulation and market competition. Deregulation became apparent in terms of both breadth and depth. It affected the industry with respect to depth by opening up competition not only within long distance market, but also in the markets for all other services including the local telephone service with the adoption of the Telecommunication Act in 1996.

An appropriate example of this was the alliance fever in the US market which was ignited by the 1984 divestiture of AT&T. (Lee, 1999) The AT&T divestiture has stimulated competition in long-distance telephone services and equipment markets. Thanks to the competition consumers could enjoy price reduction, new facilities and improved services. It also affected the depth of the industry through the deregulation of networks in terms of providing services, particular cable services. As a result, telephone and cable companies could now each offer the same services, and moreover, entry into the different segments of the industry became quite open.

Deregulation affected the breadth of the telecommunication industry as a number of developed and developing countries became or spread up deregulation within their industries. (Amesse, 2003) Examples of the internalisation of competition can be seen in most national markets that have exposed their telecommunication to privatisation and liberalisation. Following the privatisation of the Brazilian telecommunication sector for example, at present the main competitors there are Telefonica which owns the main carrier Telesp, and MCI World Com Inc. who bought a controlling stake in the long-distance carrier Embratel. In Germany, the largest European market, following deregulation of the communication service provision, the Deutsche Telecom market has been seen eroded by companies with foreign participation, such as E-Plus, Intercom and Mannesmann in mobile telephony, and MCI World Com Inc. in fibre optic cable networks, among others. (Todeva and John, 2003)

Market competition

The second factor is the inducement of market competition. The introduction of competition in telecommunication services started in 1998 when most governments in all over the world, have tried to increase intra-market competition between regional telephone companies, cable TV companies and long-distance telephone operators in order to protect the consumer. (Lee, 1999, Amesse, 2003)

Opening of Market and Globalisation

The third factor is the opening of the market and globalisation. In the telecommunication industry which has large potential of globalisation, the search for competitive advantage through strategic alliances increased corporate integration across national boundaries, creating a stable alliance network structure consisting of a core block by corporations from different nations, rather than a structure characterised by nationally and regionally homogenous blocks.

Networks and Information Superhighway

The fourth factor is the emergence of global satellite networks and information superhighway. Such global networks would induce the collaboration among telecommunication companies and accordingly a number of strategic alliances would also occur. (Lee, 1999)

IT Technology

The fifth factor is the integration of IT technologies. Rapid advancement of IT technologies resulted in the integration of once-independent technologies, and such trend reduces the life cycle of most products and services and increases the R&D costs and risks. (Trillas, 2002) The integration of technologies also renders the boundaries of existing industries ambiguous and makes intra-industry competition more fluid. This results in facilitating strategic alliances. (Lee, 1999)

Internal factors that facilitating strategic alliances are such variables as the necessity of rapid introduction of new products, diversification, efficient market entry, economies of scope, upgrading of R&D capabilities, increase of development and manufacturing cost, economies of scale and so forth.

6. Achieving sustainable competitive advantage

Sustainable competitive advantage involves every aspect of the way that an organisation competes in the market place- prices, product range, manufacturing quality, service levels which enables the organisation to develop especially advantages that can be sustained over time. (Lynch, 2000) However, some of these factors can easily be imitated: for example, prices can be changed virtually overnight (especially among the big telecom players) or other companies to provide the same services and facilities as British Telecom.

Therefore, the real benefits come from advantages that competitors cannot easily imitate, not those that give only temporary relief from the competition. In order for a product/service to be sustainable, competitive advantage needs to be more deeply embedded in the organisation. British telecom’s advantages in services and facilities come from its brand investment, its well-developed global distribution service and its sheer size in the market place which should deliver economies of scale.

However, the development of a sustainable competitive advantage requires long-term plans, huge investments and can take many forms. Such activities may possible involve seeking something unique and different from the competition, and so it follows that there will be a wide range of possibilities. According to Lynch (2000), the advantage should be sufficiently significant to make difference because modest advantages that hold no real benefits to the customer or the organisation are unlikely to be persuasive. It should also be sustainable against environmental change and competitor attack, and finally, recognisable and linked to customer benefit, meaning that an advantage needs to be translated from functional advantage inside the organisation- for example low cost- into something that the customer will value, such as low price. Otherwise, advantages have no persuasive and competitive edge.

The development of a sustainable competitive advantage may well require a degree of experimentation along with adjustments based on the developments by competitors. However, in the telecommunication industry this is difficult to accomplish successfully since everything are based on the knowledge and know-how of each organisation. The embodiment of knowledge within the telecommunications makes this sector one of the most capital intensive and knowledge intensive industries. In fact, knowledge base of a telecom company refers to accumulated technical skills and expertise in the organisation. Technical assets or capabilities are asset-stocks that are gradually accumulated over time, and can be eroded due to changing capabilities of competitors. (Leonard-Barton, 1992)

Much of the knowledge within an organisation is tacit and is therefore immobile. Moreover, knowledge and especially know-how is to a considerable extend firm specific and acts a specialised resource for many of the organisational processes. (Garud, 1997) Knowledge thus, features many of the key characteristics of a strategic asset capable of establishing sustainable competitive advantage. And, moreover, the apparent importance of knowledge, especially in the telecommunication industry, has given rise to a stream of research focusing on knowledge as the single most important resource within the organisation. (Monlouis, 1998)

The accumulation of knowledge capital is facilitated usually by engaging in relationships and activities that provide an opportunity for knowledge transfer and knowledge creation. (Todeva and John, 2001) Such activities are the motives that drive companies to form alliances, mergers and acquisitions. The strategic behaviour by British Telecom shows the tendency of new competence building through strategic alliance and long term collaborations. Since1992, BT had formed more than 50 alliances in 44 countries, (Todeva and John, 2001) many of these have been non-equity alliances or involved minority shareholdings.

It appears more concentrated with rapid expansion of its international network of operation in order to sustain competitive advantage, rather than restructuring its core operations within the home UK market. There are though few examples of diversification in business partnerships within UK to boost its image and to try to pre-empty competition from new market entries. The investments by BT’s Community Partnership Programme in: Arts and Marketing Partnerships and Education and Employment Partnership diversify the company and led to new internet offerings. (Todeva and John, 2001) Furthermore, BT managed to diversify and gain knowledge in a different sector of the industry, such as business communication services and applications, with the formation of an alliance with specialist consultancies to develop “Best-of-Breed” intranet systems under the BT’s services. The Six partners are:

1. Associated Design Consultants,

2. Lernout and Hauspie

3. Interactive Developments

4. Key 3D

5. Lloyd Northover Citigate, and

6. Module Communications (Todeva and John,2001)

They specialised in graphic designs, advanced speech and language, new media consultancy services, E-commerce, communication and intranet analysis and interactive communication. By forming this alliance, BT aimed to capture skills and knowledge on an emerging peripheral market for communication design applications, on online publishing technologies and finally to implement E-business solutions. (Todeva and John, 2001)

The rareness of other similar firms with relevant resources and networks is another factor that assists in acquiring a sustainable competitive advantage when form a strategic alliance. BT proposed merger with Cable and Wireless Plc. in 1996. Part of British Telecom’s motivation was the building of its Asian presence since Cable and Wireless held 57% of Hong Kong Telecom and to extend its capacity in broadband services and its business network in the Far East. In the same vein the alliances with the Spanish Telefonica and the Portuguese Telecom in order to extend its European business network in Spain and Portugal accordingly, was deeply aiming in opting for a deal with MCI for an expansion into Latin America. (Todeva and John, 2001)

7. Recommendations for the Telecommunication Industry

It is not surprising that strategic alliances have been the dominant theme of the global telecom industry considering the magnitude of product and geographical convergence that has occurred in the last decade. Many of them were very successful and changed once for all, the industry environment. One the other hand there were some strategic alliances which have led to failure. Many researchers have said that up to 2010 there will be only 5 dominant market players. The issue therefore, is to develop the appropriate strategic plans to sustain as long as possible the competitive advantage. Accordingly, the extent that these types of strategy deliver a sustainable competitive advantage for the telecommunication sector is based on mutual development of trust. The advantages which arise from the encouragement of trust between alliances partners are enormous since due to mutual trust partners can overcome the dilemmas of control, integration and learning which are inherent in organising strategic alliances.

Successful integrations require trust, which actually translates to a risk of losing one’s core competence to a partner and decreasing organisation’s autonomy. One former Global One executive has claimed, ‘there is no trust among the partners’. (Chan-Olmsted and Jamison, 2001) Very often the information asymmetry between partners further contributed to the distrust. For example, these kinds of asymmetries were observed between the MCI and BT management and BT management and its shareholders. Specifically, MCI management did not tell BT management how much money MCI was losing in the US and then BT shareholders did not trust BT management to deal in the best interest of the shareholders. The information asymmetry and distrust problem is again evident when Deutsche Telecom failed to notify its Global One partner, France Telecom, before its bid for Telecom Italia, a competitor of France Telecom. (Chan-Olmsted and Jamison, 2001)

The decision to trust is, on the one hand, based on calculative considerations and on the other hand, influenced by social factors. According to Mellewigt, (2003) trust can primarily be produced through the rejection of exploiting a near-term profit at the expense of the alliance partner, and continues; “as it possible both to over invest and under invest in trust, a favourable combination of trust and distrust is dependent on the risk of the trust situation. Optimal trust exists when one creates and maintains prudent economic relationships biased by a willingness to trust”.

Equally, what also counts into the strategic alliance are the positive reputation signals that an alliance partner might have such as its credibility and its trustworthiness which are also regarded as valuable intangible resources which allow a company to build up sustainable competitive advantage.

8. Conclusion

The changes that took place in the telecommunication industry during the 1990’s can be attributed to both the introduction of new technologies and regulations and to the dynamics of demand and the industry. These changes led to many types of collaborative arrangements between telecommunication firms ranging from joint ventures to mergers and acquisitions. A growing number of firms have turned to strategic alliances as a mean of improving their competitiveness in an age of increasing international competitive pressure, the globalization of markets, and generally decreasing trade barriers. Mergers and acquisitions are a fact of daily commercial life in the telecom market.

The traditional views of strategic alliances focus on their static influences concerning market power, scale and scope economies and resource appropriation. Moreover, it has been stressed that alliances, mergers and acquisitions provide a means for buyers and sellers to adapt quickly and successful to new technologies and markets. In many cases, attempting to create new business or adapt existing business through internal growth would take longer than the competitive environment allows or would simply be impossible owing to lack of knowledge of the organisational and technical capabilities needed.

This study have shown and analysed some of the major alliances within the telecommunication industry. These alliances have changed the shape of the sector by creating very powerful market players. One such player is British Telecom Plc. The author engaged in a more in-depth analysis for the specific company since its reputation and the enormous alliance background. The motives that drive these companies to form strategic alliances and the factors that facilitating strategic alliances were also discussed.

At the end the author analysed to what extend can these types of strategy deliver a sustainable competitive advantage for the telecommunication sector and how companies should behave and react in order to become the major players in the telecommunication field.

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