Contemporary Management and Value Chain Analysis at China Telecom - Essay Example

? Contemporary management and value chain analysis at China Telecom BY YOU YOUR SCHOOL INFO HERE HERE Case analysis China Telecom is China’s largest fixed line telecommunications company, as well as the country’s third largest wireless provider. The business currently boasts a total asset worth of 632.2 billion yuan and 320 million customers who subscribe to fixed line telephone service, wireless Internet and mobile communications (China Telecom 2010). China Telecom, through a combination of innovative product and service marketing, redevelopment of organizational structure, cultural awareness, corporate social responsibility, and strategic cost management, has experienced approximately 500 percent revenue growth since 2002. This is a significant accomplish for an organisation that must operate in a dynamic, competitive, and price sensitive environment whilst also managing multiple international cultures in its many divisions that operate globally in Asia, North America, and Australia. China Telecom is able to maintain a cost leadership position among competition by maximizing its supply chain and replenishment planning software, thus providing not only efficiency in service delivery but total price value in a region of the world that is willing to defect to other brands based on price sensitivity (Boone and Kurtz 2007). China is a collectivist culture, meaning that individuals in society value group membership and the establishment of group-minded goals with little emphasis on individuality common to Western consumers (Hofstede 2012). Because of this, word of mouth advertising and appealing to group-minded consciousness in the target market requires the organisation to be aware of pricing models compared to competitors as well as pricing that will ensure long-term brand loyalty. Even though China Telecom is a fixed line service provider as the primary service and product, the business recognises trends in social culture and therefore has adopted a model of innovation and modernisation. Growth in Internet usage in the country of China exceeds the growth rates of the rest of the world and China Telecom continues to evolve its wireless Internet options therefore diversifying business practices and divisional competencies. Table 1 illustrates the growth in Chinese consumer Internet usage over a 10 year period. However, in order to effectively manage these innovations, the business must focus on cross-cultural management, engage in transformational management, continue to decentralise business divisions and leadership, as well as conduct routine quality assurance/auditing practices as part of strategic management and risk management models. Table 1 Source: www internetworldstats.com (2010). China Telecom continues to be a leader in supply chain management allowing the firm to maximize its total brand value and price value components in its business and profitability models. The organization utilises manufacturing and distribution from ZTE, Comba Telecom, SimTech, UT Starcom, and Grentech (Meng 2009). China currently maintains an unfavourable exchange rate with the rest of the Westernised world, therefore it procures its products domestically to ensure yuan exchange and thus maximizing profit. This also avoids tariff costs for importing mobile devices and service provision information technology equipment. In order to maximize efficiencies in supply, China Telecom must be strategic-focused and work with collaborative supply chain systems to ensure partnerships and efficient distribution networks for purchasing needs. Outside of the financial and managerial aspects of total value chain considerations, China Telecom maintains many strengths in relation to corporate social responsibility and understanding how to develop cultural awareness to create a unified and loyal corporate culture. In May of 2012, China Telecom was awarded the Best Managed Company in Asia by FinanceAsia, a respected financial and management consulting company (China Telecom 2012). China Telecom received this award for its dedication to improving society and giving back through philanthropy to improve urban lifestyle as part of its corporate social responsibility models of business. The following Figure 1 illustrates the path of CSR followed by China Telecom. FIGURE 1: The Corporate Responsibility Wheel for China Telecom Source: http://www.chinatelecom-h.com/eng/company/csr.htm Chinese consumers are notoriously sensitive to environmental issues and demand a certain level of corporate responsibility from large businesses that generate significant profit (Boone and Kurtz). This attitude impacts the sentiment of consumers in China as it relates to the long-term value and quality of the brand, thus impacting marketing from the operational level. However, this company stands out publicly as a leader in CSR, which might be attributed to its sudden profit growth from 2007 to 2011 that increased its net liquid value by nearly three hundred billion yuan. When companies use press releases and other promotions mediums to illustrate their generosity and focus toward CSR as a corporate lifestyle and philosophy, it provides consumers with trust, respect and also gives the services and products a well-known brand reputation and visibility. China Telecom excels in providing this marketing prowess. The largest challenge faced by China Telecom is the emergence of self-contained wireless Internet capabilities offered by various smart phones throughout the world. China Telecom has devoted much of its resources to using fixed line services which is slowly being phased out in not only China, but throughout the industrialized world. This means the business must develop capital expenditure planning and innovation in order to determine how to maintain competitive advantage whilst competition continues to streamline services to provide more hand-held wireless capabilities to clients domestically and abroad. In order to accomplish this, the business must examine its centralized management hierarchy to provide more feedback and talent management through human capital development to reach the goal of innovator and evolutionary business modelling through service and product diversification. Keeping highly centralized management systems is a significant short-term weakness for China Telecom. Figure 2 illustrates the rigid, centralized management hierarchy. Figure 2: Centralized Hierarchy of Divisional Controls 2. Evaluation of management and value chain China Telecom, despite it rigid hierarchy that is vertically structured, the business does utilise transformational leadership style under the models that suggest visionary, charismatic, trust-inspiring, and open management systems. Transformational leadership moves away from the transactional philosophy in which rewards are always contingent on performance and, instead, develops leaders within follower groups by inspiring, setting goals and then acting as a role model for others to achieve similar loyalty and dedication (Bass 1998). Transformational leadership models suggest building long-lasting relationships with employees, thus reducing power distance at the cultural level. This is extremely difficult for China Telecom to produce effectively in a country where social factors promote a high level of acceptance of levels of power from subordinate groups under Hofstede’s cultural models (Hofstede 2012). Managers in this region are used to being segregated from the lower levels of employees and thus must transform not only vertical structures to decentralize, but also change very long-standing social principles engrained into the Chinese collectivist culture. It would seem, however, that influence from cross-cultural learnings abroad and expatriate management that continue to provide value to the transformational model now currently improving relationships within China Telecom. China Telecom just recently opened a new services division in Australia, a highly individualistic country, exchanging management staff as a means to improve its organisational model and transformational leadership style. Numerous awards for cultural development would seem to speak testament to the company’s newfound ability to adopt diversity into its international business models. Consider the actual Article 23 of the company Code of Conduct that considers employee relationships and corporate culture: “Every employee shall devote to teamwork and develop an awareness of the overall situation, forge the conscientiousness of joint creation and development, be open-minded in sharing knowledge, and experience the joy of success with others” (China Telecom 2011, p.8). China Telecom realizes that in order to be an effective company that values diversity and gains the benefits of corporate loyalty and dedication, it must integrate multiple international cultures into its business models and practice what is proverbially preaches. Thus, ample evidence of ongoing decentralization as well as cultural training are present in contemporary telecom activities which continue to lead to better knowledge sharing and employee growth. Contingent rewards based on performance or through the traditional management-by-exception models no longer provide contemporary employees with the cross-cultural skills needed to compete internationally nor fulfill the more complex emotional and security needs associated with basic psychological models of human behaviour. The management at China Telecom continues to evolve, using transformational philosophy, to be more active participants in the social environment, thus creating relationships based on embrace of cultural differences and also to inspire top performance. In a business model that is constantly evolving and under consistent risks of competitive growth in this industry, the organisation cannot afford to maintain its rigid power distance and vertical control hierarchies if the business is to integrate domestic with foreign talent as the business expands. Researchers in cultural studies recently performed a quantitative study using participant employees from China Telecom in order to measure the level to which employees fit the cultural dimensions profile offered by Hofstede and Shalom H Schwartz. The study provided data that China Telecom is in the primary stage of cultural development and not yet fully considered an organisation that is fully integrated with its own unique diversified culture (China Papers 2010). However, this is not necessarily a competitive weakness as other telecom industries were included and produced similar results in the quantitative study. This is largely due to the complexity and expansionary elements of most telecom companies with the understanding that corporate culture takes a long time to develop and secure. Where China Telecom excels over competition in this area is the constant evolution toward better feedback systems, better engagement with senior management and reduction of culturally-driven power distance. This improves relationships and company reputation with external stakeholders. Chinese employees refer to this phenomenon of slow development as pulling guanxi, or “the efforts to establish and build up relationships with others where no previous relationships existed, or where an existing relationship is not close enough to be useful” (Sage Publications 2011, p.191). China Telecom utilises its traditionalist values and culture, whilst also recognizing its limitations to creating a unified culture based on pre-existing social beliefs and values. However, this acknowledgement is a strength that continues to bring China Telecom ever closer to achieving cultural unity domestically and abroad. Figure 1 below illustrates the value chain model most appropriate for China Telecom as proposed by Michael Porter. Figure 3: Value Chain Analysis Model Source: Porter, M. (2011). Value Chain Analysis. http://www.12manage.com/methods_porter_value_chain.html Under this model, inbound logistics deals with cost management as it relates to supply chain, with operations (facility management, service activity, production, etc.) and distribution. Marketing and service delivery make up margin concerns as it relates to strategic profitability and cost control systems. Technology, purchasing, tangible infrastructure and the HR function support business activities under this model. In order to assess a competent and thorough value chain analysis, it is necessary to segment China Telecom according to business priority and divisional function. For the sake of analysing the most relevant aspects of this company, information technology and operations/marketing will be evaluated as most factors related to other support services fit into the typical framework for companies of this variety. China Telecom maintains significant weaknesses in areas of distribution and promotion in marketing. Currently, the company expends significant advertising expenses for its fixed line services domestically. The company’s 2011 financial statements illustrate that advertising and other marketing administrative expenses exceed 20 percent of its projected 2010 budget (China Telecom Annual Report, 2011). Research has already determined that the consumer demand environment is shifting toward individualized and self-contained wireless access through portable devices and thus demand is beginning to fluctuate for fixed line services and some in-home wireless networking customers. Thus, the business is not being proactive with marketing expenses since these are associated with margin and ratio concerns, providing limited value to shareholders and other stakeholders. High marketing expenses would be better served through limited promotional literature and other high cost advertising and apply these funds toward reworking innovation for service delivery and other expenses related to operations. In terms of promotion, China Telecom falls short of value within the value chain model. Furthermore, this business does not have significant research and development costs allocated in its most recent, published budget. Why is this? According to Wilson and Segal (2003), many companies that specialize in R&D services are not investing in mainland China with most of these being funded by foreign corporate entities or companies. This lack of foreign direct investment in R&D organisations is limiting first the skilled labour that could benefit China Telecom to improve services. Secondly, this reduces the economic stability of the region, thus making it more difficult to procure investment loans and capital growth that could lead to better systems and service delivery at China Telecom. Lack of foreign direct investment affects the overall value of the company’s risk profile and, in the long term, potential technological innovations that are often procured by outsourced R&D staff to avoid high costs of payroll. Evidence in research did not identify the current R&D budget or systems at the firm, however as part of strategic policy and planning, such R&D sourced by foreign investment firms and corporations improves the ability to reduce payroll as a reduction of overall operating expenses. Though this R&D issue is not representative of short-term weaknesses with the organisation, it does indicate that the business is affected by the environmental conditions in China that can lead to profit loss, availability of new technological know-how, the recruitment labour pool in human resources, and many other operational concerns. It should be noted as part of the value chain analysis that China Telecom seems to lack foresight into long-term strategic position with an emphasis on short-term revenue production that will not be sustainable into the next several years due to changing consumer preferences and a limited product life cycle associated with certain phone and internet services. Mobile subscribers at China Telecom have increased by nearly 40 percent in the last two years (China Telecom 2012). The business’ own data illustrates that mobile subscriptions are evolving at an extremely rapid pace, thus largely outperforming fixed line services. To maximize the total value of the organisation, it should develop a better auditing and performance management system that identifies trends and then works toward innovating to meet with sudden spikes in subscribership or loss in pre-existing high volume revenue-producing services and products. Part of this system, in the value chain, is the firm infrastructure and research did not indicate that China Telecom maintains a strategic control and auditing system to track trends in the consumer sales environment effectively, thus reducing total value chain worth. Content and application development, however, as it relates to service provision and delivery is excellent as a value-added activity. Research identifies that Chinese consumers are drawn toward innovative and colourful applications and software accessories which determine the majority of their mobile product purchases. In fact, many businesses develop these mobile apps as a means of appealing to consumer needs and guaranteeing higher sales (WantChinaTimes 2010). China Telecom seems to have considerable research knowledge about what is driving consumer lifestyle and social attitudes as part of its marketing focus and therefore can provide worthwhile and relevant content as it relates to social consumer values and preferences. This reflects a well-developed marketing research system and then applying the appropriate capital to ongoing development of unique and innovative mobile content. This would seem to offset the losses associated with advertising for a fixed line service that is already moving from the growth stage of the product life cycle into maturity where sales decline and new innovations are required to make up for the differences in lost sales volumes for this particular type of consumer service. The ability to understand what drives consumer values and social lifestyle is a significant value-added activity that continues to keep China Telecom at the top of the competitive hierarchy year after year. In an environment, as aforementioned, where consumers are willing to defect quickly based on price sensitivity and perceived quality, with little brand loyalty, this is a major accomplishment to satisfy customers whilst also trying to develop a new and decentralized management structure focused on improving cultural unity and relationships. It should be offered that China Telecom, despite its short-term and long-term deficiencies, is well structured for meeting consumer demand. Where the business lacks is in strategic focus and systems/process controls that examine the broader factor of the macro-level financial and consumer sales environments. Competitor analysis requires understanding pricing models of clients and then examining the China Telecom profit expectations dictated by senior management to determine new pricing models or innovative incentive marketing/promotional programmes. Such a system would improve the quality of the technologies being offered to customers but also provide insight into what structural and process changes would bring the most long-term value to the business. If China Telecom, under a comprehensive value chain analysis, scored a 1-10 for total business efficiency, it should be listed a six or seven score for its many strengths. However, the business requires more long-term focused leadership at the highest levels that take into consideration the short life cycle of products and thus devote more energy to creating innovation in order to successfully compete in this dynamic marketplace abroad and on China mainland. References Bass, B. M. (1998). 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(2009). China Connect: China telecom supply chain: A Defensive Sector that Outperformed; Further Re-rating Unlikely. Citibank. (accessed July 27, 2012 at http://www.borsaitaliana.it/bitApp/view.bit?lang=it&target=StudiDownloadFree&filename=pdf%2F76975.pdf) Sage Publications. (2011). The legacy of China. (accessed July 30, 2012 at http://www.sagepub.com/upm-data/26865_6.pdf) WantChinaTimes. (2010). Chinese firms target consumers with mobile phone apps. (accessed July 30, 2012 at http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20120805000007&cid=1202) Wilson, E. and Segal, A. (2003). Trends in China’s transition toward a knowledge economy, Identifying uncertainties. (accessed July 27, 2012 at http://www.cidcm.umd.edu/publications/articles/WilsonSegalFINAL2003.pdf) Read More