In the late 1990s, Telefónica de España's position seemed parlous: the incumbent telecom operator's fixed-line business was declining and gross earnings had fallen for three consecutive years. From 1999 to 2000 alone, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) declined by 10 percent and its cash flow by 15 percent. At the same time, the sector was liberalizing, competition was intense, and growth opportunities were unclear. Consequently, employee morale was low and the future outlook gloomy.

Yet during the past four years, the organization has transformed itself: its cash flow keeps climbing, the declining earnings trend has been reversed and the workforce drastically reduced, and the return on invested capital (ROIC) has almost doubled. Telefónica de España is the only wireline operator among its peers that has grown in terms of revenues and EBITDA. And it is now a leading European broadband operator, with a stronger customer focus and a compelling vision.

Telefónica de España's turnaround was part of a wider change at the parent Telefónica Group, which over the past decade has expanded into 40 countries and achieved the highest shareholder returns among its industry peers. Telefónica de España experienced one of the biggest business...