The telecom-equipment sector is on the threshold of a radical restructuring. Companies that act early in such industry turbulence typically emerge as the new leaders, while those who don't are often acquired or exit the market. Consider the strategy put into play a decade ago by U.S. defense-industry giant General Dynamics. During the Cold War, General Dynamics had grown into a defense conglomerate. But the collapse of the Soviet Union led to a rapid decline in demand in the early 1990s. So General Dynamics significantly cut back its portfolio to focus on submarines and armored vehicles—two business units where it could become the market leader.

Ten years later, General Dynamics is the clear leader in both sectors. Its revenues have grown beyond Cold War highs despite a much narrower set of products, and its margins are the best in the business. Its share price has grown more than fivefold, outperforming all other defense majors and the S&P 500.

Highly focused companies—those with a small number of strongly positioned businesses—fared much better than diversified companies over the last decade. Nokia's leadership in mobile handsets, for instance, resulted from the company's decision to shrink in order to grow from a refocused core. Founded as a pulp and paper mill on the Nokia River in Finland in 1865, the company grew into a conglomerate by expanding into rubber, energy and electronics. But under Jorma Ollila in the early 1990s, Nokia shed most of its businesses to focus on mobile phones and infrastructure. An even tighter focus on establishing the second generation GSM standard—combined with innovative design, effective low-cost supply-chain management and rapid globalization—enabled Nokia to displace Motorola's leadership in the mobile phone market in the late 1990s. As demonstrated in its recent quarterly earnings announcement, this leadership position has allowed Nokia to continue to grow in market share and earn superior margins even in the global telecom recession.

For the Japanese and Korean telecom-equipment makers, three sweeping trends make the General Dynamics and Nokia lessons worth considering. Firstly, the equipment makers traditionally operated as national champions dominating their home markets. As suppliers to captive national customers, the companies enjoyed reliable margins and expanded until they became unfocused, telecom-equipment conglomerates.

But the introduction of IP-based protocols and adoption of global standards for third-generation, or 3G, wireless will reduce the traditional barriers to market entry in most markets. As a result, the ultimate driver of winning strategies will be a shift to economics and away from traditional local customer relationships. Roughly 70% of an equipment maker's cost structure can scale globally, providing lower average unit costs for the market leader. Thus it will be more difficult for smaller national champions to compete against the significant cost advantages of the global leader or to match the leader's investment in new product development.

Secondly, major shifts in strategy at telecom firms are forcing their equipment makers to restructure. Customers are larger, more focused and more sophisticated. For example, Vodafone now has operations spanning the globe; it purchases infrastructure and handsets for more than 100 million subscribers. And the telecom marketplace is becoming more segmented into pureplays like Vodafone. Former telecom monopolists NTT, BT, France Telecom and AT&T have spun off part or all of their wireless businesses. These focused companies no longer need the vendors' full product portfolios. Moreover, the telecom companies are insisting on open standards instead of traditional proprietary systems. These trends dilute the strategic rationale of the equipment-conglomerate approach.

But the strongest factor of all is demand shock. In the 1990s, telecom company spending on networks skyrocketed, stimulated by deregulation and a spate of new market entrants. Between 1996 and 2000, global telecom firms' capital outlays grew by 26%. But world-wide revenues for suppliers of switches, wireless products and optical equipment dropped by 13% in 2001, and are projected to fall another 15% in 2002. And as the nearby chart shows, an upturn in spending on telecommunications equipment does not look imminent.

None of this triple-whammy of shifts in economic structure, customer preferences and demand is new. The U.S. aerospace industry faced a similar inflection point with the collapse of the Soviet Union. Will Asia's telecommunications equipment makers "shrink to grow" as General Dynamics and Nokia did? Or will they continue to seek growth with a broader, less competitive product set? The shift to 3G provides a window for the major Japanese handset players. Sharp, NEC or Matsushita ought to be able to leverage their early lead in making innovative data-enabled 2.5G and 3G handsets to decisively break out of their domestic market into the global top tier.

The business model will also require change. Winning the cost game against Nokia will require applying the lessons from Dell's aggressive low-cost global outsourcing and supply-chain management, a distinct change from a model of using the handset business to support the component manufacturers of the keiretsu—Japan's trademark networks of interlocking businesses that own stakes in one another as a means of mutual security.

Success will also require the hallmarks of the highly effective way in which Sony, Honda and Canon entered the American market: innovation, the right pace of decision-making and rapidity of execution. This may require adaptations to the present management style of bottom-up consensus building, or nemawashi. Although credited with providing Japanese companies with innovativeness, this can also lead to bureaucratic gridlock that slows radical decision-making and swift action.

But the major Japanese electronics conglomerates have few options except to consider such radical choices, as earnings fall in their traditional mainstay IT and consumer electronics businesses and their embattled bankers tighten credit. Making major changes in strategy, structure and business models are not easy in the best of times. But for companies in industries going through significant turbulence, the cost of inaction is high.

Mr. Garstka is a vice president with Bain & Company in Tokyo and leader of the firm's Technology & Telecom practice in Asia. Practice members Hiroshi Nakanishi, Wataru Hitomi and Takahiro Fujiwara also contributed to this article.