Euyxan ]oumalVol. l2, No. 1, pp.
59-64, 1994
Pexgamon
0262373(93)EOOO7-F
The Five PartnersModel:
FranceTelecom,Alcatel,and
the GlobalTelecommunications
Industry
IOSEPH R. D’CRUZ, Associate Professor of Strategic Management, University of Toronto;
ALAN M. RUGMAN, Professorof International Business, University of Toronto
This paper uses the D’CruzlRugman Five Partners
Model’ to show how France Telecom has effectively
partnered with suppliers, customers, competitors,
and the non-business infrastructure to develop
France’s telecommunications cluster. The Five
Partners Model is a cooperation-based framework
for organizing economic activity to create
international competitiveness for globally oriented
firms. It is compared to the more traditional
competition-based framework used by
multinational corporations. A contrast is drawn
between Alcatel and France Telecom in their
attempts to craft national, regional, and eventually,
global strategies for competitiveness in
telecommunications. The comparison is useful and
timely due to the increasing convergence of
communications’ technologies, the impact this will
EUR )PEAN MANAGEMENT JOURNAL Vol 12 No 1 March 1994
Management
Copyright 0 1994 Elsevier Science Ltd
Printed in Great Britain. All rights reserved
02~2373/94$6.00+0.00
have on the strategies of other firms, and the
implications for the strategic management of large
firms competing in global markets.
A comparison of the competitive strategies of
France Telecom and Alcatel illustrates two very
different means of positioning for competitiveness
in the global telecommunications industry.
Moreover, the organizational structures of these
companies embody fundamentally different
approaches to achieving international
competitiveness. France Telecom embraces a more
cooperative strategy which depends upon sharing
and accessing resources with partner organizations.
Alcatel adheres to the more traditional structure of
a multi-divisional, multinational corporation.
The Five Partners Model
The Five Partners Model is a means of organizing
economic activity among partner organizations through
cooperative relationships in a business network. The five
partners include the flagship firm, which as the leading
partner is usually a multinational firm, key suppliers,
key customers, competitors, and the non-business
infra.structure.2 The non-business infrastructure refers
to the non-traded service sectors, government, edu-
cation, healthcare, social services, and not-for-profit
cultural industries. See Figure 1.
The flagship firm has the resources and perspective to
develop global strategies for the network. Moreover, the
flagship firm’s global scope and experience enables it
to provide the strategic direction for the network. This
strategic direction is a vision of competitiveness for the
network as a whole. The flagship firm plays a large role
in determinin g the markets to be served and the
products/services to be produced by the network. This
59
THE FIVE PARTNERS MODEL

Network Commercial Other

4Relationshipsw RelationshipF Competitors Other
* Consumers
Selected
Joint
ventures
for raw+
I
materials

Suppliers Flagship.
Raw
Material
Producer -

Non-business Infrastructure

Figure 1 The Flagship Firm Provides Strategic Leadership for its Partners in the Business System

strategic hand, so to speak, orchestrates the relation-
ships among the network partners to achieve the
strategic purpose envisioned by the flagship firm. The
leadership of the flagship firm, in this network model
of competitiveness, is manifested in several key activities
including:
. adopting a relationship-based, cooperation
paradigm for network activities;
. restructuring and relocating the loci of production
and service provision for numerous activities;
. benchmarking network activities and processes to
global standards.
The partner organizations yield the strategic leadership
role to the flagship firm because it is the global strategic
purpose of the network as a whole which prompted the
partners to join the network initially. Therefore,
presumably, it is in the best interests of the partners and
the network as a whole to operate under this umbrella
of strategic intent. These partners undertake much of
the responsibility to execute and operationalize the
network’s strategy.
the product/service and with more business in total frorr
the flagship. Information and resource-sharing betweer
the flagship and key suppliers often occurs in the
product design phase, in order to benefit an efficienl
process during the production phase. The closeness 01
the relationship is assisted by the frequency and
constancy of the communications between these parties.
This communication can be of an informal nature, 01
can be highly ordered such as with electronic dataI
interchange (EDI). The relationship between the flagship
firm and its key suppliers is critical to the success of the
business network. The key suppliers and the flagship
essentially work together to design and implement the
configuration of the business system. Success in this
process drives competitiveness as large global firms
compete against facets of each other’s business systems.
Relationships with certain competitors also can follov+
a more cooperative approach. Market sharing arrange.
ments, joint research and development projects,
cooperative training ventures, supplier developmen t
programmes, etc. are simple examples of collaborative
relationships.

Typically, network relationships entail close cooperation
and the sharing of resources and information. In the case
of key suppliers, this tight relationship with the flagship
firm often is manifested in near or total exclusivity of
supply to the flagship. In return for this dedication of
resources, the key supplier is rewarded with production
responsibility for a greater share of the value-added in
Key Customers also are an integral part of this type 01
network. The flagship firm shares its strategies with it:
‘Key Customers’ and in so doing, learns from the
customer input and achieves buy-in on the network
strategy. The ‘Key Customer’ accepts the flagship firm’:
leadership in regard to that area of the customer’:
business which is supplied by the flagship. For example,

60 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 1 March 1994


the telecommunications strategy of a large firm will be
shaped by the recommendations of the flagship.
The non-business infrastructure contributes to the
network by providing human and technological capital
Institutions such as universities and government labor-
atories can provide equipment, facilities, and other
arrangements in return for capital funding from the
flagship firm. Members of the non-business infrastruc-
ture also may receive assistance in obtaining other
resources such as physical space and human resources.
Rationale for the Five Partners Model
The highly integrated and interdependent global
economic system of today has meaningful consequences
for the organization of economic activity. The role of the
nation state and the treatment of national borders are
changing in order to accommodate the global flows of
international trade and investment. The role of the
multinational enterprise is changing in a concomitant
manner. Because the multinational enterprise plays the
primary role as a coordinator of international production
and investment, it is reasonable to expect that it must
somehow evolve to reflect this borderless world. Specifi-
cally, one would expect that the multinational enter-
prise’s structure and systems would change in order to
allow the enterprise to be more responsive and adaptive
to its external environment.
The concept of isolated and completely independent
firms competing against each other in the bid to optimize
individual economic gain may be outdated. It must be
questioned as to whether individual firms have the
resources and capabilities to compete effectively against
global competitors which are already benefiting from the
coordination of strategies, resources, and competencies
in network-like structures. Obviously, the Japanese
keiretsu and Korean chaebol are examples of this latter
approach to competition.
The Five Partners Model is a co-
I
operative model bfbehaviour which
includes hitherto neglected
dimensions of inter-organizational
behaviour.
Another important aspect of international competition
is the manner in which firms define their business. The
above challenges in the marketplace have prompted
many firms to focus on their core competencies3 and
capabilities 4 in order to develop a competitive
advantage. Consequently, businesses often are defined
by aspects of the value chain5 as opposed to industry.
When companies determine that they are competing in
value chains (or business systems), not in industries,
then it opens the way for forging linkages with other
organizations which have advantages in other parts of
the value chain. In this manner, the product/service is
EUROPEAN MANAGEMENT JOURNAL Vol 12 No 1 March 1994
THE FIVE PARTNERS MODEL
delivered to the customer through a business network,
not through a single, integrated firm.
The Five Partners Model is responsive to this way of
understanding competition and competitive advantage.
It explicitly fosters cooperative relationships among
numerous partners as a means of exploiting each
partner’s competence in a business system. Long run
competitiveness, therefore, depends upon achieving
mutually beneficial relationships which attempt to assist
each partner in becoming competitive in its chosen
business system activity(s).
The Five Partners Model, as a cooperative model of
behaviour, necessarily embraces dimensions of inter-
organizational behaviour which usually are not con-
sidered important aspects of competitiveness formulae.
Specifically, these dimensions include trust, relationship
stability, relationship longevity, and shared inter-
organizational purpose. France Telecom and Alcatel are
an example of network/cooperation-based competitivess
versus rivalry-based competitiveness among single firms
which depend upon the internalization of economic
activity.6
Profile of France Telecom
France Telecom became a state-owned company on
1 January 1991. It evolved from its predecessor DGT
(Direction G&r&ale des Telecommunications), a publicly
administered apparatus of the national government.
DGT’s role in the 1970s and 1980s was to develop
France’s telecommunications infrastructure and, essen-
tiaIly, build an internationally competitive industry. The
catalyst for this centrally directed industrial policy was
the poor state of France’s telecommunications infra-
structure in the 1960s. During the period of ‘the
reconstruction’ after World War II, France concentrated
on rebuilding roads, railways, water, and electricity
infrastructure, as well as primary industries. Telecom-
munications, as a state monopoly, suffered due to the
short-sighted and negative view in which it was held
by the De Gaulle govemment.7 Consequently, France’s
telephone system was one of the least advanced among
OECD nations at the end of the 1960s.
Despite the weak infrastructure, France had one of the
world’s leading telecommunications research institutes
in the Centre National d’Etudes de Telecommunication
(CNET). The CNET was founded in 1944 to coordinate
civilian and military R&D in telecommunications. Since
that time, it has played a leading role in researching
transistors, micro-processors, integrated circuits, digital
switches, optical fibres, satellite technology, and video
communication. A second specialized institution, the
Ecole Nationale des Telecommunications (ENST), is an
elite engineering school which trains telecom-
munications engineers and managers for the industry
(private firms, in DGT, or in CIVET).
Pressure from DGT managers and CIVET in the late
196Os, forced the government to address the poor
61
THE FIVE PARTNERS MODEL

condition of France’s telecommunications industry.8 In
the early 197Os, the French Government decided to
invest heavily in order to develop a national telecom-
munications industry.’ Its commitment to this
programme was evident in the restructuring of DGT into
a separate division of the Ministry of PIT. DGT received
autonomy from the Ministry of Finance for budgets and
employee compensation, thereby de-politicizing DGT
and protecting it from changing political priorities.
DGT’s strategy to develop France’s telecommunications
infrastructure consisted of the following elements:
design of long-term infrastructure programmes.
These programmes would be based on French
technology and would allow French companies to
enjoy the growth in a large domestic market.
Examples of long-term programmes included
digital switching, videotext (Minitel), ISDN, and
fibre optics;
protection of the domestic market;
involvement in R&D. This included DGT’s
relationship with CNET and also, funding of tele-
communications projects for other organizations;
development of competition among equipment
suppliers. In the 196Os, equipment contracts were
dispensed according to quotas for a small group
of suppliers established by DGT telecommuni-
cations engineers. DGT unbundled its R&D and
production contracts in order to promote more
open competition.” Using CNET’s Central
Service of Price Control, DGT was able to pressure
suppliers to reduce prices. Third, DGT pressured
the purchase of Ericsson France and LMT by the
French company Thomson in 1976. This purchase
placed Thomson ahead of CGE, ITT, and AOIP
in terms of market share.” In the latter part of the
197Os, DGT favoured the development and
strengthening of Matra and Sagem’s (French
firms) telecommunications sectors;
5. assistance to export through political and financial
support.
DGT Business Network in the 1970s
and 1980s
Figure 2 indicates that DGT had developed close
relationships with suppliers and the non-business infra-
structure in the 1970s and 1980s. In particular, DGT’s
relationship with the research community and education
institutions were well-developed. In addition to CNET
and ENST, DGT created another engineering school,
the Institut National des Telecommunications in 1979.
Two management schools specific to telecommuni-
cations were also administered under DGT - the Ecole
Nationale Superieure des Postes et Telecommunications
and Cadre Superieur de Gestion de I’Institut National
des Telecommunications. Industrial policy coordination
with government ministries was highly developed.
DGT’s relationships with key suppliers, primarily
Thomson and CGE, consisted of technology transfers,
assistance to export, and cost control.

-=--b-f-
Administrative/ Traditional Network linkage
Bureaucratic commercial
relationship relationship Coordination with other

I
PlTs within international
*Technology
standardization bodies
transfers
*Assistance to
Customers are
mere users

Other suppliers DGT’s engineering schools

l Agreements with part of the educational
PTOs and telcos in system
foreign countries Involvement in design and
teaching of university

Figure 2 DGT’s Business Network During the 1970’s (adapted from D’CruzlRugman)

62 EUROPEAN MANAGEMENT JOURNAL Voll2 No 1 March 1994


Unlike its relationships with the non-business infra-
structure, DGT did not have close relationships with its
customers or competitors. In terms of the latter, DGT
depended on international standards organizations
(CCITI’) to coordinate relations with other public
telecommunications operators (PTOs). Customers were
viewed as users and their input was not actively
solicited. DGT was a technology driven enterprise,
organized on a geographic basis to match its operational
organization. Moreover, its monopoly position left it free
from external market constraints and demands.
DGT Becomes France Telecom
While DGT was considered a technological success in
the 197Os, it became apparent in the mid-1980s that
DGT’s administrative structure was a hindrance to
continued success in the next decade. Changes in
regulation, technologies, and economics have increased
international competition, created more demanding
customers who could ‘shop around’, and increased the
need for network management.
Regulation
The liberalization of telecommunications regulations in
the US and UK, and Japan opened up the competitive
field to new players. Movement towards European
integration and harmonization of regulatory infrastruc-
tures had shifted the power of telecommunications
policy-making from national bodies to the European
Commission.12 The liberalization of telecommuni-
cations services in other countries prompted foreign
carriers to adopt aggressive pricing strategies and new
services. DGT’s administrative status prevented it from
responding to the competition, leading the government
to conclude that ‘state-guided’ liberalization was
required.13
Technology
Technological advancements spawned the development
of numerous new services. As network penetration rates
and first line installations reached high levels, growth
in traffic depended on increasing customer usage.
Customers were becoming sophisticated users and
demanded useful and accessible services.
Economics
The slowdown in network growthI rates required
better network management to increase productivity;
and ca acity growth could no longer correct forecast
errors. Ps With new technological developments,
distance became less important as a cost driver for toll
calls. l6 Consequently, the cross-subsidization of local
calling costs with toll revenues needed to be rebalanced.
It became obvious that the international competition and
rapid technological changes demanded operational
flexibility, financial freedom, a marketing focus, and
international expansion by DGT. In 1992, only 3.3 per
cent of France Telecom’s revenues were generated
abroad.r7 France Telecom was created at the beginning
of 1991 as a state-owned company. This autonomy from
EUROPEAN MANAGEMENT JOURNAL Vol 12 No 1 March 1994
THE FIVE PARTNERS MODEL
the public administration infrastructure gave France
Telecom the flexibility to develop a corporate strategy
independent of the Ministry of Finance. The objectives
of France Telecom, as stated during the ‘corporatization’
process, were:ls
. to reduce indebtedness (highest among Western
m-OS in 1990);
. to restructure telecommunications rates;
. to modernize the network;
. to internationalize.
The independence would allow for professional mar-
keting and product/service development and invest-
ment, divestiture, and joint ventures internationally.
Figure 3 shows the business network of France Telecom.
It indicates that France Telecom has established joint
ventures with international competitors such as
Deutsche Telekom, Southwestern Bell, and US West.
Stronger links with key customers have been established
through the newly developed marketing and sales
programmes. France Telecom, Alcatel, and Matra have
jointly developed and launched a mobile phone system.
France Telecom’s close relationship with its key
suppliers can be seen in the division of France Telecom’s
purchasing profile - Alcatel56.1 per cent, Matra 16.1
per cent, Sagem 9.7 per cent, and Philips 7.9 per cent.”
In terms of the links to educational institutions, France
Telecom still retains control over the administration and
teaching at the specialized schools.
Alcatel: The Multinational
Equipment Supplier
Alcatel is the largest telecommunications manufacturer/
supplier in France and in the world. It was formed in
1983 when CGE (Compagnie G&&ale d’l&ctricite) and
Thomson merged their telecom business under CGE’s
control and the new name of Alcatel. While France is
its home base, 75 per cent of its revenues come from
foreign sales. Alcatel has benefited from the vast
investments made in France’s telecommunications infra-
structure since 1960. The French telecom infrastructure
is almost 70 per cent digitalized and has one of the
highest productivity rates and levels of service quality
in the OECD. There are more than 300 firms, employing
48,000 people, in the telecommunications equipment
industry.20 Matra, the second largest producer, manu-
factures primarily in Europe for European sales. The
third largest producer, Sagem, manufacturers in France
and sells in Europe. Other competitors include Philips,
Siemens, Bosch, and IBM.
Unlike the public telecommunications operator, France
Telecom, Alcatel’s vision is not a nationalistic vision for
France. While France Telecom wishes to push the
development of the French telecommunications industry
as per its DGT legacy, Alcatel’s vision is decidedly
global. Alcatel wants to use France and later, the EC,
as a base for global telecommunications manufacturing.
It is important, therefore, for Alcatel to be able to oppor-
63
THE FIVE PARTNERS MODEL

-I-
Administrative/ Network linkage
+ Competitors
Traditional l Southwestern Bell
Bureaucratic commercial l US West
relationship relationship
l Deutsche Telekom
Coordination with other PTO’s within Joint-ventures to exploit 3rd country mkts
international standardization Common products
Coordination for customer management

Customers
l Business
l Household

Continuation of the DGT’s

ENST B ENSPlT
Research community Educational Infrastructure

Regulatory Body
Non-Business
Government
Sector

Figure 3 The Business Network of France TBl6com

tunistically access the French telecommunications infra-
structure, such as the engineering schools, in order to
fulfil its vision.
Through an export-driven strategy, Alcatel wants to be
a dominant player in the global telecommunications
equipment industry. Figure 4 shows that Alcatel is
structured as a typical multinational, as opposed to the
network of France Telecom. Alcatel’s business strategy
is:
. to be active in every product segment, using
focused divisions
- PBXs, public switching, microwave, mobile,
space, fibre, etc.;
to pursue a global scope for each business
- presence in all major markets except Japan
- increased North American presence via
purchase of Rockwell’s Network Transmission
Systems Division and 15 per cent of Loral
- first position in world equipment markets in
switching, cable, microwave, cables. Major
seller in space and mobile equipment;
to use the EC as a home base
- 85 per cent of employees and 75 per cent of
revenues in Europe
- 30 per cent market share in Europe, 6 per cent
of the US market and 17 per cent of the world
market;
to grow by acquisition
- 1986 merger with ITT European subsidiaries
- 1990 joint ventures with Aerospatiale and
Alenia Spazio
- 1990 purchase of Fiat’s Telettra
- 1993 joint venture with US Sprint.
France Telecom and Alcatel: Different
Visions
Currently, Alcatel and France Telecom are not direct
competitors. France Telecom is a service provider (PTO)
and Alcatel is an equipment manufacturer. However,
as the line between hardware and software (manufac-
turing and service) blurs, it is a very real possibility that
they will become direct competitors. The likelihood of
this scenario happening is high when it is considered
that Alcatel’s R&D budget increasingly is focused on
software. In 1992, 80 per cent of its R&D budget was
spent on software development versus 50 per cent in
1987.2* to date, Alcatel has undoubtedly benefited from
DGT’s network strategy and the development of the
French telecommunications infrastructure. In terms of
that strategy, DGT was unquestionably successful in:
. developing a large and technologically competitive
industry in France;
. creating a significant knowledge base in telecom-
munications engineering and management;
. building a dominant company in the domestic
market.
Arguably, DGT’s strategy had several significant

EUROPEAN MANAGEMENT JOURNAL Vol 12 No 1 March 1994

 THE FIVE PARTNERS MODEL

SociQtc5 General
ITT FIAT Employees
Gknbrale Public
7% 6% 6% 6% 75
%
I
Alcatel-Alsthom tel NV Netherlands
I,OO%J-Alc
I I 1

1 Alcatel France Alcatel Standard Alcatel BELL

Belgium
Alcatel
ltalia
Italy
Other Countries
Australia
Austria
Brazil
Canada
Mexico
New Zealand
Network Portu al
Systems Switze #and
Taiwan
Radio Space T$;Y
Defense
I-
Alcatel Cables
Cables
h I a I I I I 1
Austral./NZ Belg. Can. l%. Ger. Gr. k Nor. SW. US

‘lgure 4 Alcatel is Structured as a Multinational Corporation

veaknesses in that: DGTlFrance Telecom cooperation-based strategy and

DGT was technology, not market, driven and it
missed some key areas including mobile
communications;
DGT dominated the industry and few other large
competitors emerged. The industry is comprised
of numerous small firms which are not inter-
nationally competitive on their own and which are
dependent on DGT - 90 per cent of firms account
for only 5 per cent of exports and 20 per cent of
employment. z The ten leading companies, all of
which are part of an industrial group (Alcatel,
Matra, Sagem, Philips, and Bosch), account for
90 per cent of exports and 60 per cent of
employment;23
4B the development of the French telecommuni-
cations industry has not seemed to have acted as
a catalyst, either as an example or as a facilitator,
to develop the international competitiveness of
other French industrial sectors.
The question remains, however, whether France
Telecom’s business network structure or Alcatel’s multi-
divisional, MNE structure places either firm at an
advantage in the global trade of telecommunications
products
1 and services.
Alcatel’s competition-based strategy. Each firm is
attempting to position itself to be competitive by
becoming a dominant player in the global telecom.
munications industry. Whether France Telecom’s
network structure or Alcatel’s multidivisional MNE
structure proves to be superior has yet to be seen. It is
apparent, however, that the forces of globalization arc
pushing each corporation to look well beyond France’s
borders. France Telecom still obtains only a small
portion of its revenues (less than 5 per cent) from outside
France; and therefore, it faces the challenge of com-
peting with firms which already are more globally
oriented. Alcatel is still an EC-dependent company (75
per cent of revenues in Europe) that has yet to develop
a truly global strategy that includes a significan’
presence in all the Triad markets.
The Five Partners Model presents a different way o
thinking about both strategy and structure. It says tha
a cooperation-based strategy in a business networl
structure is a viable approach to follow in order tc
achieve international competitiveness. The mode
challenges the effectiveness and appropriateness of the
traditional multinational structure in today’s rapid11
changing global economy.

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EUROPE,AN MANAGEMENT JOURNAL Vol 12 No 1 March 1994 65

THE FIVE PARTNERS MODEL

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1
JOSEPH R. D’CRUZ, Professor ALAN M. RUGMAN,
of Strategic Management, Faculty Professor of International
of Management, University of Business, Faculty of Manage-
Toronto, Ontario, Canada ment, Universify of Toronto,
M5S lV4 Ontario, Canada M5S lV4.

Joseph R. D’Cruz is Professor of Alan M. Rugman is Professor

Strategic Management. He is one
of Canada’s leading authorities on
international competitiveness and
business strategy. He teaches
Business Strategy and lnfer-
national Business at the Faculty of Management,
University of Toronto. He was also an Adjunct Pro-
fessor at IMD International, Switzerland. He has his
doctorate from the Harvard Business School, where he
wrote a thesis on ‘The Overseas Procurement of Raw
Materials by the Japanese Steel Industry’. He has
subsequently written extensively on the subjects of
globalization and business strategy.
of lnfemafional Business. A
professor for twenty years, he
has held visiting appointments
at Harvard University, the
London Business School,
Columbia University and MIT. He was a member of
Canada’s lnfemafional Trade Advisory Committee
during the free trade negotiations. Professor Rugman
is the author or editor of 18 books and he has
published over ZOOpapers in refereed journals. His
lafesf publications include Global Corporate Strategy
and Trade Policy (Routledge, 1990) and
Multinationals and Canada-United States Free
Trade (Universify of South Carolina Press, 1990).

66 EUROPEAN MANAGEMENT JOURNAL Vol12 No 1 March 1994