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Marketing Strategy of ADC Telecommunications

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Marketing Strategy of ADC Telecommunications
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Marketing Strategy of ADC Telecommunications - December 8th, 2010

ADC Telecommunications (NASDAQ: ADCT) is a communications company located in Eden Prairie, Minnesota, a southwest suburb of Minneapolis.

n 1935, Ralph Allison founded the Audio Development Company in the basement of his south Minneapolis home, inventing ADC's very first product, the audiometer, an electronic device designed to test hearing. It was later renamed to ADC Telecommunications, Inc.

Two years later, fellow engineer Walt Lehnert joined Allison, and together they diversified the company's product line to include amplifiers and transformers for the broadcast industry. By 1942, the company had designed a sophisticated audio system for the University of Minnesota, and the resulting jacks, plugs, patch cords and jackfields became the cornerstones for ADC's later entry into telecommunications.

In 1949, ADC sold its audiometer product line and Ralph Allison left the company to form a new business in California. ADC diversified and focused its efforts in the area of transformers and filters for power lines, military electronics, telephone jacks and plugs. In 1961, ADC merged with Magnetic Controls Company, a manufacturer of power supplies and magnetic amplifiers with strong ties to the U.S. space program. The resulting company, ADC Magnetic Controls, had a decade of mixed success. Although transformer sales boomed during the 1960s, other new product initiatives failed to materialize. Perhaps the most significant product innovation during this period was the bantam jack, a miniaturized component that eventually became the standard for telephone circuit access and patching. Building on its growing sales of jacks and plugs in the early 1970s, ADC introduced prewired, connectorized jackfields, wired assemblies and test equipment for telephone operating companies. By 1974 the company was on solid ground, and by 1976, ADC had become the largest independent supplier of test boards in the United States.

Public Company
Incorporated: 1935 as Audio Development Company; 1953 as Magnetic Controls Company
Employees: 8,000
Sales: $1.37 billion (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: ADCT
NAIC: 33421 Telephone Apparatus Manufacturing; 33429 Other Communications Equipment Manufacturing; 334419 Other Electronic Component Manufacturing; 334417 Electronic Connector Manufacturing

Company Perspectives:

ADC's mission is to extend its leadership as a global supplier of systems and solutions that enable communications service providers to serve their customers with high-bandwidth connections offering faster, cost-effective and integrated voice, video and Internet/data services in the last mile of the communications network.

Company History:

ADC Telecommunications, Inc. is a Minneapolis-based supplier of networking products and systems for telephone, cable television, Internet, broadcast, wireless, and private communications networks. ADC's systems and solutions enable local access and high-speed transmission of communications services from service providers to consumers and businesses over fiber-optic, copper, and wireless media. The company is a diversified niche marketer that has chosen to work closely with industry giants as a collaborator, rather than a competitor. Its systems and integration solutions are divided into four groups: broadband connectivity; business broadband; residential broadband; and integrated solutions. It has direct sales offices located in the United States, Canada, Europe, the Pacific Basin, Australia, and Central and South America.

Innovators in Telecommunications and Data Processing: 1930s--70s

Audio Development Company (later renamed ADC Incorporated) was founded by two Bell Laboratory engineers in 1935 as a telecommunications company that created custom transformers and amplifiers for the radio broadcast industry and also audiometers to test children's hearing. In 1941, while participating in a project to develop a sophisticated audio system for Coffman Union at the University of Minnesota, ADC also began to produce jacks, plugs, patch cords, and jackfields, foreshadowing its future involvement in the telephone industry.

Magnetic Controls Company was founded and incorporated in Minnesota in 1953, part of the wave of technological development during the postwar era. The company produced high-quality custom power supplies and magnetic amplifiers and was involved in military and space exploration programs. In 1961, Magnetic Controls merged with ADC Incorporated, and the new company, which used the umbrella name Magnetic Controls Company (ADC's trade name was retained in telecommunications), advanced its most significant innovation, the Bantam jack. This product was an amalgam of miniaturized components and became standard for telephone circuit access and patching. Magnetic Controls launched an ongoing involvement with major space missions in 1962, eventually designing and manufacturing sensors for the Columbia space shuttle.

The 1960s and 1970s ushered in technological advancement in all areas of telecommunications and data processing. Public and private computer use increased, and telecommunications evolved into the computer age, with telephonic digital transmission and the expansion of data communications. As an innovator in these fields, Magnetic Controls grew dramatically. In 1970, when Charles Denny was encouraged by shareholders to quit his marketing executive job at Honeywell and to take over leadership of the company, the company's earnings stood at $6 million. These compounded at 20 percent a year for the next 20 years.

Magnetic Controls Company pioneered yet another industry standard during the 1970s--the digital signal cross-connect product line to access and cross-connect digital telephony circuits. The company also developed specialized test boards for long-distance telephone companies, and designed and manufactured power conversion equipment for major data processing manufacturers. In addition to proliferating new products that addressed the digitalization of the industry, Magnetic Controls continued to introduce telecommunications hardware, including prewired connectorized jackfields and wired assemblies.

A New Focus on Fiber Optics: 1980s

By 1981, Magnetic Controls Company had sales of $61.5 million; by 1983 sales rose to $76.3 million. Nonetheless, the company was struggling. Although its telecommunications products were profitable, its magnetics division, which manufactured transformers and power supplies for mainframe peripherals, lost $1.2 million in fiscal 1983. The company made the decision to sell its magnetics assets in 1984, writing off the magnetics division as a $3.95 million one-time loss, and moved forward as solely a telecommunications company.

The company next repositioned itself in the growth industry of telecommunications--investing in acquisitions, trimming expenses, and purchasing shares of its own stock. In 1984, Magnetic Controls Company acquired TMS Systems, Inc., a private Massachusetts-based company that manufactured telephone call management equipment and software. With TMS functioning as a separate subsidiary, Magnetic Controls now sold the TMS product line as well as telecommunications components and local and remote-access test systems. It began subcontracting assembly work in Mexico and implemented a computer-based manufacturing resource planning system to streamline domestic manufacturing operations.

By 1985 the company's focus was decidedly on telecommunications. It purchased Aetna Life & Casualty Company's Fiber Optic Component division in Westborough, Massachusetts, and changed its corporate name to ADC Telecommunications, renaming its new subsidiary ADC Advanced Fiber Optics Corp. The newly named company focused its efforts on manufacturing, selling, and servicing two groups of telecommunications products: communications connectors and electronics. Rather than trying to compete with the industry giants in its fields, ADC's product strategy was to manufacture and sell products in diversified industries, finding and occupying niches not already filled. New orders, backlogs, revenues, and operating income soared to new highs, the increased demand for ADC's products the result of technological change and deregulation in the $40 billion long-distance telephone service.

ADC's customer base in the early 1980s was a diverse pool of public telecommunications networks, telephone operating companies and other common carriers, and private telecommunications networks used by large businesses and government agencies. IBM, AT&T, the Bell Operating Companies, MCI, GTE, ITT, Allnet, and Northern Telecom were among the more well-known companies it served, with no single one representing more than ten percent of net sales. Foreign buyers accounted for eight percent of revenues; by 1988, they were at 15 percent, with marketing efforts in Europe, the Pacific Rim, Canada, Latin America, and the Middle East.

In 1988 slightly over half of ADC's business was in public networks. ADC products were divided into five categories: network management and control products, termination products, test products, transmission products, and access products--the last the most significant at approximately 60 percent of sales. Responding to a demonstrated growth area in new technology, ADC took steps to become more involved in the fiberization process of local loops and local area networks (LANs).

ADC narrowly avoided a buyout when the Lodestar Group, a New York investment fund specializing in mergers and acquisitions, acquired a 6.4 percent stake in the company in 1989. Shares of ADC were at $16.75, making the market value of the company $221 million. Instead, ADC acquired Kentrox Industries, maker of products for high-speed private telecommunications networks, for $31 million and restructured its operations into three areas: telecom, diversified markets, and operations.

Expansion into the Video Services Industry: 1990s

Beginning the 1990s with a new president--Denny's chosen successor and former AT&T executive Bill Cadogan--ADC entered the video services delivery market, acquiring American Lightwave Systems, Inc., a leading supplier of fiber optic video transmission equipment for cable operators for $10.7 million, with an agreement to make payments totaling at least $4 million over the next three and a half years. ADC also acquired Telinq Inc. in 1990 and utilized its newly acquired fiber-optics expertise to develop a local loop system with the goal of providing economical fiber directly to private homes. Fiber products contributed approximately $18 million to ADC's total sales in 1990, having doubled every year since 1987. Cadogan directed the company to pursue the course of an early follower--rather than a leader--in the developing industry, while expanding its fiber division toward a goal of $250 million in sales by 1995.

In 1991 ADC acquired Fibermux, a maker of high-speed, fiber-optic equipment for local area networks (LANs), for $50 million, $40 million of which was loan money. Fibermux proved so successful an investment that ADC paid off this loan in 1993. In 1992 ADC formed a collaborative development venture with Fulcrum Communications in Birmingham, England, devising a system to carry voice and video signals over fiber-optic cable to businesses and residences in North America in a more cost-effective way. ADC also created Networx, a new transmission platform that integrated cable management and private networking products, using synchronous optical network and the asynchronous transfer mode (ATM). The cornerstone of Networx was Sonoplex, a multirate, multimedia system that brought fiber to the customer's work or residence site, while making use of existing copper lines. In 1991 ADC had formed a similar partnership with South Central Bell, Mississippi Educational Television, Northern Telecom, IBM, and Apple Computer to create Fibernet, a network linking students at four high schools in Clarksville, Corinth, West Point, and Philadelphia, Mississippi, with teachers at Mississippi State University, Mississippi University for Women, and Mississippi School for Mathematics and Science to create "electronic classrooms."

Leading As an "Early Follower" in ATMs

ADC's and its competitors' marketing strategies were dramatically affected in 1992 by workforce reductions and early retirement programs implemented by large local exchange carriers. With sales at $316 million and shares priced at $56.75, ADC had become a leader in a growth field in 1993. The advent of ATM technology and the scrambling of television, computer, and telephone industries to board the information superhighway had wireless telecommunications booming with a growth rate of 25 percent. Seeking to build a stronger relationship with its customers to secure longevity, ADC adopted strategies including simplifying product lines; providing more detailed support materials; and improving ordering, customer service, quality of products, and maintenance support.

The company's products included fiber-optic video, data, and voice transmission systems, and its clients included phone companies, TV broadcasters, and all major cable TV operators. Its new cellular radio switch was undergoing testing by seven large cellular phone operators. ADC continued to market new products, including an Ethernet converter, a coaxial cable delivery option for its Homeworx broadband access system, and a Sonoplex flexible access platform. ADC's Homeworx system was selected by Rochester Telephone Corp. in May 1993 for a six-month video-on-demand trial.

ADC became an "early follower" in the asynchronous transfer mode (ATM) market, announcing a multiyear agreement with Loral Data Systems for an ATM switch. The ATM switch would create the capability of handling the massive flows of simultaneous high-speed digital information that the industry projected would be generated during the latter half of the 1990s and into the 21st century, arising from the blending of the communications, computing, and entertainment industries. The company also landed a coup in March 1994 when Ameritech chose ADC to supply equipment for its $75--$100 million video system, to be developed over the next five years. This $4.4 billion project would bring 70 channels of analog television and 40 channels of digital video to customers, with unlimited program choices and interactive, customer-controllable programming.

A New Era of Leadership: 1994 and Beyond

In 1994, as the Internet began its early growth phase, Charles Denny announced his retirement as chairman of the board and was replaced by Bill Cadogan. The company's revenues had grown to $366 million in 1993, with a market value approaching $1 billion. As ADC Telecommunications, Inc. moved into a new era of leadership, its strategies included a new focus on cable TV and cellular communications, increased international presence, and increased fiber-optic and electronic product offerings in the multimedia market. In 1995 it bought Australian Fiber Optics Research, making inroads into the Australian market. It also increased its presence in China when it sold its digital cable television transmission system to China's Hunan Post & Telecommunications Administration in a two-year deal worth potentially $14 million. That year, the company's total revenue exceeded $500 million for the first time.

The following year was one of unprecedented deal making for ADC; it acquired seven companies, including Solitra Oy, Da Tel Fibernet, Information Transmission Systems, and the wireless infrastructure equipment group of Pacific Communications Sciences Inc. By 1997, with two more acquisitions under its belt, the company's revenue had exceeded $1 billion, and it was competing with such industry giants as Lucent Technologies, Motorola, and Northern Telecom. Its three-pronged strategy was to sell to phone companies riding the waves of deregulation and Internet growth; to cable TV companies preparing to offer new telephone and data services; and to wireless phone companies. A relatively new market for ADC, wireless operations were in the vicinity of $65 million.

But even though ADC's sales kept growing, its stock price took a sudden plunge in early 1998 as the company reported a net loss of $13.2 million for the first quarter ended January. Analysts attributed the drop to a faltering performance in the company's normally thriving broadband connectivity group. However, throughout the year, ADC continued to reach record year-over-year levels for each quarter's sales and earnings; annual sales growth was 18 percent for a grand total of $1.5 billion by year's end, and earnings per share grew 17 percent. ADC purchased Israeli Teledata Communications Ltd. for $200 million in cash, broadening its international exposure and expanding its product range, and also acquired Princeton Optics, a maker of optical components critical to maximizing available bandwidth within the fiber-optic network.

In planning its course for the next millennium, ADC was focused on being a total solutions provider for the last mile, or local loop, providing the fiber-optic technologies, Internet connectivity and transmission systems, and network software to make high-speed, multiservice communications possible. ADC's strategy was to capitalize on the evolving global communications market and to address key areas of the communications network infrastructure by designing products that enabled its customers to connect physical networks, access network services, transport network traffic, and manage networks.

Principal Subsidiaries: Fibermux Corporation; Kentrox Industries, Inc.; Skyline Technology, Inc.; ADC Broadband Communications, Inc.; Pathway, Inc.; Teledata Communications, Inc.; PCS Solutions, LLC; ADC Broadband Wireless Group, Inc.; ITS Service Company, Inc.; TPO Limited; ADC International OUS, Inc.; ADC OUS Holdings, LLC; Telesphere Solutions, Inc.; ADC Telecommunications Sales, Inc.; Princeton Optics, Inc.; Codenol Technology Corp.; AOFR Americas Inc.; ADC Teledata Communications Ltd. (Israel); Tdsoft Ltd. (Israel); G-Connect Ltd. (Israel); T-Link (Israel); TDC Teledata Communication GmbH (Germany); ADC Telecom Canada Inc.; ADC Europe N.V. (Belgium); ADC Telecommunications Netherlands B.V. (Netherlands); ADC Telecommunications GmbH (Germany); ADC Telecommunications U.K. Ltd.; ADC Telecommunications Australia Pty. Limited; ADC Telecommunications Holdings Pty. Limited (Australia); Teledata Communication Australia Pty. Ltd.; Teledata Manufacturing Australia Pty. Ltd.; Teledata Holdings Australia Pty. Ltd.; TDC (UK) Limited; Teledata Communications Hellas LLC (Greece); Teledata Communications Do Brasil Ltd. (Brazil); T.D.C. Holdings B.V. (Netherlands); Teledata Communications (Philippines), Inc.; ADC Wireless Systems, Inc.; ADC Wireless Systems Holding Company, Inc.; ADC Metrica (U.K.); Metrica, Inc.; ADC Telecommunicaciones Venezuela, S.A.; ADC de Mexico, S.A. de C.V.; ADC Telecommunications Singapore Pte. Limited; AOFR Pty. Limited (Australia); ADC Mersum Oy (Finland); ADC Solitra Oy (Finland); ADC Mersum U.S., Inc.; ADC Solitra, Inc.; ADC de Juarez, S. de R.L. de C.V. (Mexico); ADC de Delicias, S. de R.L. de C.V. (Mexico); ADC Telecommunications China Limited (Hong Kong); ADC Telecommunications (Nanjing) Co. Ltd. (China); Nanjing ADC Broadband Communications Co., Ltd. (China); ADC International, Inc. (Barbados); ADC Telecommunicaciones Do Brasil LTDA (Brazil); ADC PHASOR Electronics GmbH (Austria); Nanjing ADC Teleco Equipment, Ltd. (China).

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