Presentation - Session 07

7/27/2019 Presentation - Session 07

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Analysing and DevelopingStrategy



© Copyright Coleago 2010

Learning Objectives

Framework Basis of competitive advantage, direction andimplementation

GenericStrategies

Porter s generic strategies and the applicability to thetelecoms sector

StrategicDirection

Using the Ansoff or Market Options matrix togenerate strategic directions

Methods of Implementation

Understanding the benefits and drawback of alternative methods of strategy implementation

Case Studies Two case studies of how mobile operators appliedstrategy to increase profitability

1





Framework for the generation of strategic options

Generic Strategies

Cost leadership

Differentiation

Cost focus

Differentiation focus

Alternate Directions

Development Strategies

Market penetration

Product developmentMarket development

Diversification

Do nothing

Withdrawal

Harvesting

Exit

Alternate Methods

Internal development

Acquisition

Joint development

Basis of CompetitiveAdvantage Strategic Direction Method of StrategyImplementation

© Copyright Coleago 2010 3


http://slidepdf.com/reader/full/presentation-session-07 5/51© Copyright Coleago 2010

Learning Objectives


GenericStrategies


StrategicDirection





4



Porter initiated the discussion of generic strategies with “CompetitiveStrategy” (1980) & “Competitive Advantage” (1985)

Porter identified three generic strategies:

cost leadership,

differentiation,

and focus.

The focus strategy has two variants:

cost focus and

differentiation focus.

Basis for Competitive Advantage

Lower Cost Differentiation

C om p e t i t i v e S c o p e

Br o

a d T ar g

e t

Cost Leadership Differentiation

N ar r owT

ar g e t

Cost Focus DifferentiationFocus




Generic strategy: Cost leadership

In industries with high fixed costs, such as telecoms, capacityutilisation must be maximised. Increasing customer numbers isof overriding importance in order to increase capacity utilisationand reduce average costs.

Lower costs allow your company to opt for a cost leadershipstrategy.

The overwhelming strategic importance of cost is implicit in

many of the portfolio or matrix models because of the emphasison market share and hence volume and maximising capacityutilisation .

In order to reduce unit costs, mobile operators with a relativelylow market share may try to increase overall volume by hostingMVNOs.

In theory true cost leadership can only be achieved by one firmin the industry. But given the law of diminishing returns, oncevolumes exceed certain levels, cost differences betweenleading businesses will be small. Thus, once a certain scalehas been reached no further cost advantages may be available.



C om

p e t i t i v e S c o p e

Br o a d T r a

g e t


N ar r owT

ar g

e t





Generic strategy: Differentiation

A differentiation strategy is based on equipping a product or service with some tangible or perceived unique attribute.

The cost of differentiation must be lower than the premiumbuyers are prepared to pay for the differentiated service or product.

Differentiation is a strategic option for followers, rather than for market leaders.

If a product is a "problem child" you could invest to catch upwith the leader. This strategy is more risky than investing todifferentiate the product for two reasons:

– Firstly the market leader has a cost advantage which willmake it more difficult for the follower to catch up.

– Secondly a differentiation strategy does not directly challengethe market leader and therefore reduces the chances of adamaging competitive response such as a price war.



C om


Br o a d T r a

g e t


N ar r owT

ar g

e t





Generic strategy: Differentiation

By definition telecoms services are standards based and intheory a commodity without scope for differentiation.

In practice all telecoms operators try to differentiate their serviceoffering from competitors by means of their brand and certainservice attributes that cannot be replicated:

– exclusive content,

– unique roaming deals,

– an exclusivity period for new devices, e.g. the iPhone or certain Blackberry models,

– special promotional and tie-ups with other brands



C om


Br o a d T r a

g e t


N ar r owT

ar g

e t





Generic strategy: Focus

The focus or niche strategy aims to gain competitive advantageby building on advantages of segment specific specialisation,such as a better understanding of buyers or leverage anadvantage.

Pursuit of a focus strategy amounts to choosing a competitiveplaying field where competitive advantage can be achieved.

In pursuing this niche strategy, for this special group of buyers

the firm aims to be the "best" supplier. A focus strategy may be an option for telecoms operators withmuch lower fixed costs than a mobile of fixed network operator,for example:

– MVNOs, prepaid international calling card operators, certain

internet services that are highly scalableWithin the chosen segment the firm can achieve competitiveadvantage either because it is the cost leader or because itoffers a differentiated product. Hence the two variants of thefocus strategy, cost focus and differentiation focus.



C om


Br o a d T r a

g e t


N ar r owT

ar g

e t








Learning Objectives


GenericStrategies


StrategicDirection





11



A tool to generate strategic options (development strategies): TheMarket Options or Ansoff Matrix

Market PenetrationConsolidationMarket penetrationSell more of the same to the

same market

Product DevelopmentWith existing capabilitiesWith new capabilitiesSell new services or

products to existingcustomers

Market DevelopmentNew segmentsNew territoriesNew usesWith new capabilities

DiversificationWith existing capabilitiesWith new capabilities

NewExistingProducts

E

x i s t i n g

N e w

M a r k e

t s

H i g h

L o w

S c o p e

f o r

L e v e r a g e

High LowScope for Leverage

The Ansoff Matrix




The Ansoff Matrix: Market penetration

Market penetration increases overall volumes and is relevant inindustries with high fixed costs such as telecoms.

In markets that are in the maturity stage of the product life cycle, amarket penetration strategy becomes more difficult. Trying toachieve increased market penetration by gaining more customers islikely to become a costly fight for market share.

In mature markets, increased market penetration can be achieved

by selling more to existing customers or retaining customers longer: – The rate of use can be increased, for example increasing the

number of calls per existing customer.

– Customers can be induced to trade up, e.g. increase the speedon a DSL or cable broadband line, opt for a cable TV packagewith more channel.

– Renew and extend the contract.

Market PenetrationConsolidationMarket penetrationSell more of the same to thesame market

Product DevelopmentWith existing capabilitiesWith new capabilitiesSell new services or products to existing

customers






The Ansoff Matrix: Market penetration, an example from fixed telecoms,British Telecom

In 1994 British Telecom (BT), launched a highly successful TVadvertising campaign “it s good to talk”. The campaign includes

several ads with situations showing the benefits of making moreand longer calls. The campaign was highly successful, increasingfixed line calls by 10% and also improving BT s brand perception.

David Cowan, a measurement consultant who worked with BTsays:

– “The ’It’s Good to Talk’ campaign tackled the root causes of repressed telephone use and helped establish the value of communication”.

The campaign resulted in an increase in UK average phone usefrom eight to ten minutes per day.

The return on investment for the ad campaign was excellent. For amedia spend of UK£ 44 million and production costs of UK£ 8million, the ad generated a return of UK£ 297 million.



customers








The Ansoff Matrix: Product Development

If there is no further growth for an existing product, productdevelopment may be the only way to achieve growth.

The benefit is that new product sales leverage existing assets:

– A contribution to shared costs is earned which reduces the costbase for existing products. This increases the competitiveposition for existing products, thus reinforcing a cost leadershipstrategy.

Telecoms operators continually extend their offering, notably in theregion of content, network based services or type of devices.

– In mature markets voice related revenue are declining, henceoperator focus on data services delivered to handsets, or enhancing existing data service e.g. SMS chat, instead of simplepeer-to-peer SMS.

– Fixed network operators start to offer IPTV, i.e. they develop their internet service offering.



customers






The Ansoff Matrix: Market Development

Within an particular market or country operators attempt to reachnew market segments:

– HSPA allows mobile operators to address the broadband internetaccess market

– Telematics is a new use or segment, i.e. mobile data is used for example for vehicle tracking.

– Advertisers may pay to send SMS or MMS to mobile users. – Operators also try to reach new customers in existing markets

e.g. older or younger people, e.g. Orange s “Tiny Tods” segmentare children aged 1 to 4 using simple ruggedised phones.

Where operator cannot grow in their home market they seek toextend geographic reach:

– High R&D costs for services drive globalisation the telecomsindustry and operators apply for licence in new countries.

– In other cases the engine for globalisation is the brand. – In the media business distribution is the basis for globalisation.

The Murdoch satellite TV empire now incorporates satelliteplatforms in Australia, Asia, Europe, the Middle East and USA.



customers






Market development example: Portugal Telecom faces a mature homemarket, therefore seeks growth outside Portugal




The Ansoff Matrix: Diversification

Related diversification refers to situation where a firm stays broadlywithin the industry, but needs to acquire new competencies and

resources. A firm can pursue a strategy of related diversification by means of vertical integration, i.e. extending the value chain backwards or forwards.

– A mobile operator can choose to assemble its own content rather than using a white label provider.

– A mobile operator may decide to launch a TV channel or programme, i.e. enter an entirely different business. However,the “relation” would be the brand, or game shows that have SMSinteraction, or infotainment content. Orange launched a TVchannel and some operators offer TV on mobile phones.

Unrelated diversification takes a business into a completely newfield, i.e. into a different industry.

– Because it is unrelated, it is often difficult to establish a strategiclogic for such moves, other than perhaps a limited degree of synergy.



customers






The Ansoff Matrix: Diversification; PLDT invests in an electricity utility togain operational and market synergies


D l i h f l ki i F d b k d



Development strategies, another way of looking at it: Forward or backwardintegration along the value chain and diversification

Operator

Backward Integration

Diversification into activitiesconcerned with the inputs into thecompany s current business

Forward IntegrationDiversification into activities whichare concerned with the company soutputs

Horizontal Integration

Diversification into activities whichare complimentary to presentactivities





Learning Objectives

FrameworkBasis of competitive advantage, direction andimplementation

GenericStrategies


StrategicDirection





22



High

Three alternate methods by which to implement a strategy once it has been selected *:

internal development,

joint development,

acquisition.

The choice between the methods as a trade-off between:

cost,speed,

and risk.

Methods of strategy implementation

Low Slow Low

Fast High

Medium Medium Medium

InternalDevelopment

Acquisition

Joint

Development

Cost Speed Risk

* Johnson & Scholes (1989)


Example: M Commerce product development strategy implemented by



Example: M-Commerce product development strategy implemented bymeans of a joint development with banks





Learning Objectives

FrameworkBasis of competitive advantage, direction andimplementation

GenericStrategies


StrategicDirection





25



Case study: E-Plus Germanyfrom underperform tooutperform



, a 4th entrant 1800 MHz mobile operator in Germany (subsidiary of KPN,Netherlands) struggled to gain market share and as a result its EBITDA margins were well

below its peers.In a mature market in terms of penetration e-plus managed to gain market share andincrease its margin by:

– developing a wholesale activity, attracting MVNOs and branded resellers to its network,

– launching new own brands, each aimed at specific market segments.

The e-plus MVNO / Reseller Business Model

Source: e-plus website

Case study: E-Plus Germany from underperform to outperform




Too weak to go it alone: e-plus abandoned focus on its core brand

e-plus is much weaker than its main rivals T-Mobile and Vodafone: The e-plus servicerevenue is lower than their EBITDA.

A lower cost way to gain scale is with MVNO and resell partners.e-plus also realised that its brand will not succeed in business markets. Instead multiplesegment focused brands would yield market share gains.

2004 result presentation

Price competition

Focus on strengthening business segmentappeal of e-plus brand

Mentions branded resellers, but not MVNOs

2005 results presentation

“Strategy: Multi -brand challenger and MVNOapproach”

2006 annual report

“E-Plus focus on partnerships, such as with Aldi”

Gradual Change of Focuse-plus Market Share of B ase

12.3% 12.7%13.3% 13.6%

15.2%16.4%

13.3%14.8%

0%

2%

4%

6%

8%

10%

12%

14%16%

18%

2001 2002 2003 2004 2005 2006 2007 2008


Th l lti b d ll t t



The e-plus multi-brand pull strategy

Source: KPN e-plus investor presentation, Sep 2006


Th i f ki g ith MVNO



The economics of working with MVNOs

Source: KPN e-plus investor presentation, Sep 2006




Positioning of the e plus own brands



Positioning of the e-plus own brands

Original brand positioned a price competitive traditional mobileoperator with out line rental and low call rates.

Launched in August 2005 as the first flat rate brand in Germany,attractive for heavy users.

The brand is also the main brand in KPN„s Belgian operation.

Only sold on-line, no line rental and no minimum usage, attractive for low users, low prepaid call rates.

Aimed at Turkish people in Germany.

Most recent brand aimed at youth market. Combines low cost callingwith free music downloads and access to over 1 million titles invybemobile Musicstore.






Extract from KPN Annual Report for the Year 2007

E-Plus moved away from a „push (reliance on handset and dealer subsidies) to a „pull strategy (attractive andsimple tariffs inciting the prospective customer to ask for our products rather than rely on the reseller s advice).E-Plus new brands „BASE (flat fee), „ Simyo (Internet only) and „Ay Yildiz (Turkish community) are deliveringsignificantly improved AMPUs and ARPUs in comparison to the E-Plus brand. Also for the E-Plus brand handsetsubsidies were tightened.

MVNO-type contracts were signed and implemented with well-known German partners such as Medion (Aldi Talk),Freenet and Conrad to focus on new distribution channels besides captive channels; and

We are expanding our captive distribution, with 251 stores at the end of 2007 compared to 197 at the end of 2006.

3 brands positioned in a price / value matrix 2 brands target Youth and Turkish ethnic


Wide MVNO and reseller brand partner portfolio to target segments



Wide MVNO and reseller brand partner portfolio to target segments

Source: KPN e-plus presentation, June 2007


The strategy started to impact rapidly



The strategy started to impact rapidly

Monthly ARPU - €

15

17

19

21

23

25

27

2004 2005 2006 2007e-plus German Mobile Industry Average

e-plus managed to its ARPU closer to the industry average while at the same timereducing subscriber acquisition costs.

e-plus Subscriber Acquisition Cost € per Gross Add

-

20

40

60

80

100

120

140

160

2005 2006 2007 2008


E-plus moved from underperform to outperform in only 3 years



p us oved o u de pe o to outpe o o y 3 yea s

The multi-brand and pull strategy started in 2005 and e- plus EBITDA margin started toimprove sharply.

While after 2005, the German mobile industry as a whole experienced a decline inEBITDA, e-plus managed to grow its EBITDA, i.e. e-plus capture a greater share of theindustry profit pool.

EBITDA Growth

-10%-5%

0%5%

10%15%20%

25%30%

35%40%

2003 2004 2005 2006 2007

e-plus German Mobile Industry Average

EBITDA % Margin

0%

5%

10%

15%

20%

25%

30%

35%40%

45%

2003 2004 2005 2006 2007 2008

e-plus German Mobile Industry Average




Case study: O2 UK, a tiredincumbent, manages asuccessful turnaround

Case study: O2 UK, a tired incumbent, manages a successful turnaround



UK Mobile Network Operator Market Share

0%

10%

20%

30%

40%

50%

60%

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

% o

f I n s

t a l l e d B a s e

O2Vodafone

T-MobileOrangeHutchison 3

y g

Cellnet (O2) was one of the two original cellular operator in the UK, part of theincumbent fixed network operator British Telecom.

Cellnet always lagged behind Vodafone, the second operator and fell further behindfollowing the launch of One to One (now T-Mobile) and Orange, dropping to 4th placeby 2002.

By 2002 Cellnet was a tired, uninspiring brand.

By 2002 O 2 haddeclined to 4 th place





O2 brand launched 2002 (previously Cellnet); brand well-received inmarket-place.

O2 sponsors the England Rugby Team and Arsenal football teamleading to huge positive exposure as England win 2003 world cup and

Arsenal win premiership in 2003/04 and 2004/05.

O2 sponsor the Millennium Dome in 2007, which is expected tobecome Europe's No 1 music venture in 2008.

O2 customers offered free tickets and preferential booking to eventsat the Millennium Dome.

Branding &Promotion





Advertising campaign to reinforce brand and promote new products

MainCampaigns

2004

MainCampaigns

2004

Branding &Promotion





Competitive to market

Internet-only tariffs resulting in sales via internet of between 15-20%

Launch Bolt Ons, Happy Hour, Business Zones; all successfulpricing initiatives

Bundled prices: O2 customers get fixed broadband services at adiscount

Pricing &Bundling





Elements of the turnaround strategy

In 2005 focus moves to direct channels with an increase in direct outletsfrom 260 to 300 stores and the internet.

Terminates agreement with third party retailer Phones4U, as they are notconsistent with O2 brand.

Since the launch of the Customer Plan programme in 2005, the focus

shifts from customer acquisition to retention / lifecycle management.Each new contract customer enters a preset lifecycle communicationsprogramme with specific offers and information:

– “Welcome” (up to 3 months)

– Nursery (3 to 6 months)

– At 6 months, all customers migrate to “Best Plan Advice”

– Highest value contract customers go into “Select” programme with owndedicated customers service

Distribution

Customer

Care






In 2005 O2 embarks on a customer orientated investment programmeand a change management programme with the launch of the“Customer Plan” programme:

– Invests heavily in customer management software .

– Set up new call centre in Glasgow and increase own retail toincrease direct customer contact.

– Restructure staff such that 75% are customer facing: resulting in 500back office and management being made redundant and increasecustomer facing staff by 2,000.

– Launches “Thanks a million” a scheme whereby every employee incompany receives a bonus of £1k (on top of other bonuses)

provided O2 gets top customer satisfaction score.The Customer Plan programme results in a highly positive culturechange within O2.

CostReduction &

Customer Focus






In 2004 O2 starts a joint venture MVNO with Tesco, the UKlargest supermarket chain (grocery market share of over 30%),with a no frills prepaid only offer branded Tesco Mobile.

Following the acquisition of O2 by Telefonica, O2 leverages thescale of Telefonica group to get access to the latest and besthandsets.

– Wins exclusive rights to sell the Apple i-phone

– First to market with many handsets including Blackberry Pearland Curve devices

In 2006 launches fixed broadband and bundled offers.

In mid 2007 launches SIM-only proposition.

– By the end 2007, SIM-only accounts for 10% of contractmarket and O2 estimated to have 60% of this market.

MarketDevelopment

Product

Development





Measurable Results of the Turnaround Strategy

Independent customer satisfaction surveys showed that O2 movedfrom 3rd in 2005 to 1st place in 2006.

2006 O2 the first company to be 1st in Contract, Prepay and Retailin UK customer satisfaction survey.

2007 O2 remains 1st in customer satisfaction survey for contractand 2nd prepay and retail.

Churn fell from 38% January 2005 to 26% by end 2007.

In 2002 O2 was the smallest of the 4 incumbents; by 2007 it was thelargest network in terms of subscribers.

In 2006/07 O2 breaks into both Financial Times “best place to work”(No 26) and Sunday Times “best” big company (No 5) for the firsttime.

By 2006 O2 s EBITDA margin had improved to above industryaverage.

Customer satisfaction…

leads to reducedchurn and

increased marketshare…

while staff morale is

improved despiteredundancies...

producingtangible benefitsto shareholders




O2 delivers measurable improvement in market share



O2 increased its network market share of the installed base from 24.0% in 2002 (#4) tobecome #1 with a share of 26.5% by the end of 2007.

The joint venture MVNO with Tesco was crucial in increasing network market share.Tesco Mobile contributed 2.1% points out of the 2.5% point improvement.

UK Mobile Operator Market Share of Base

0%

5%

10%

15%

20%

25%30%

35%

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

O2 Vodafone T-MobileOrange Hutchison 3

O2 Market Share of Base

0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007

Tesco Brand

O2 Brand

Source: Ofcom & O 2Source: Ofcom


Churn reduction and more postpaid customers



The O2 brand market share also increased as a result of lower overall churn relative tothe market average.

O2 also improved its share of postpaid customer relative to the market average whichnot only reduces blended churn but also improves ARPU.

% of Customers Postpaid

30%

31%

32%

33%

34%

35%

36%

37%

38%

2001 2002 2003 2004 2005 2006 2007

O2

Market Average

Monthly Churn

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2002 2003 2004 2005 2006 2007

O2

Market Average

Source: Merrill Lynch Source: Ofcom & O 2


The turnaround strategy eventually delivered above industry EBITDA margin



Initially the cost of turnaround initiatives and a more rapid rate of customer acquisitionincreased costs and EBITDA margins improved less than the industry average.

However, as margins declined from 2004 onwards due to lower mobile termination rates andincreased competition, O2 started to outperform the market in terms of EBITDA margin.

EBITDA Margin %

20%

22%

24%

26%

28%

30%

32%

34%

2002 2003 2004 2005 2006 2007

O2

Market Average

In mature markets quick wins areunlikely. A turnaround strategy willinitially reduce cash flows, for exampledue to restructuring costs such asredundancy payments, rebranding costs,and increased capex. More rapid growthwill also lead to a short term negativeimpact from customer acquisition costs.Network investment may be required tomain QoS. If executed correctly,eventually EBITDA and cash flow willimprove.

Source: Merrill Lynch




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Presentation - Session 07

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