Vodafone Analysis: The Business Environment and Strategic Business Units - Case Study Example

 Vodafone Analysis Report Table of Contents. Page 1. Executive Summary 3 2 Introduction 4 3 The Business Environment 5 4 Strategic Business Units (SBU) 5 5 The Vodafone Strategy – Relative Positioning 6 6 The Strategic Event – Acquisition of Hutch 7 7 Value Additions 10 8 Corporate Culture 10 9 Stakeholders Map 11 10 References 13 11 Appendix 14 1 Executive Summary In a short span of less than three decades Vodafone plc has grown to be colossus. Beginning with just one Telecom circle in UK in 1982, it has acquired the status of Number One Mobile Operator in the world (in revenues) and Number Two in terms of customers (after Telecom China). With the acquisition of Hutch this status would also change to Number One. Historically Vodafone has always shown exceptional aggression since its inception. It has either gobbled up the competition, or has made it a partner or collaborator. Its strategic goal is to become world number one and remain there. It has covered most of the world and its latest foothold in India is a vital step in achieving that objective. Each of its business enterprises in every country is a Strategic Business Unit (SBU) in its own right and operates under the local cultural requirements. The Unique Selling Point (USP) of the company is its ability to launch new products and services ahead of others. This not only gives it the unique advantage of being loved by customers but keeps the competition from putting it under any pressure. The strategic event of the acquisition of Hutch was discussed in details and its importance in the overall scheme of things was explained. This event provides the opportunity to expand with the growing economy of India which is now an economic force in Asia. It also adds value for all stakeholders. In the backdrop of these events, Vodafone’s current corporate strategy was examined and was found to be largely satisfactory and corporate culture it has nurtured will help it to expand smoothly in the future as well. 2 Introduction Vodafone is a Giant with footprints over a large part of the Globe. Its enormous presence in the Telecommunication Market is a remarkable story. In 1982 Racal Electronics plc, a subsidiary of Racal Strategic Radio Ltd, bid for and got a cellular licence for a Telecom Circle from the Telecommunications Department. The Network was named Racal Vodafone. The name Vodafone comprises of Voice, Data and Fone, and when combined gave the impression of transfer of voice and data over mobile phones. Vodafone plc was formally launched on 1st January 1985 and by the end of 1986 Racal bought out its two minor partners stake for GBP 110 million and Vodafone came into 100% ownership of Racal. Racal Strategic Radio Ltd was divided into Racal Telecom and Racal Electronics in 1988. In 1991 Racal Telecom was separated from Racal Electronics and out of it emerged the Vodafone Group plc. In 1996 it bought majority stakes in Talkland and did the same with Peoples Phone and Airtouch Communications in 1999. In 1999, the stage was set for formation of Verizone Wireless and finally it was formed out of Vodafone’s US assets being merged with Bell Atlantic in 2000. In 1999 too Vodafone made an unsuccessful bid for Mannesmann who owned the largest mobile network in Germany. But later the Mannesmann Board agreed to the then highest ever offer of GBP 112 billion in 2000. Within two months the EU also gave its approval. Of course the result was that the Mannesmann group was broken up and all other non related businesses were sold off to pay for this takeover. It then took Europe by storm and now completely dominates the area. Vodafone wanted a more meaningful presence in the USA and in 2004 it made another unsuccessful bid for AT & T and this failure was not taken to kindly by its investors. 3 The Business Environment The investors grew restless with this failure and with expansion having reached saturation point in Europe, Vodafone looked towards emerging markets for growth that had started to stagnate. With this intention it entered the Indian market in 2005 by buying a 10% stake in Bharti Televentures, owners of the Airtel brand, but the Indian market was in its nascent stage then and Vodafone exited from this market within a year although it retained the Airtel stake. It however realized that it would be missing the bus and the bustling Indian economy beckoned it again. India is the only country in the world in which both CDMA and GSM technology companies are growing side by side and growing at a fast clip. The last decade has seen slow but steady growth in both sectors. While it took 10 years to cross 100 million customers it took less than three years to grow beyond 200 million. India is also the country with fastest growth of mobile connections in the world. This was an opportunity that Vodafone would not miss at any price as it had already reached peak levels in Europe and USA. Asia is the only area that was still open and growing. In May 2006 Vodafone declared to its stakeholders that it will look for growth in the Emerging Markets and India was its focal point. 4 Strategic Business Units (SBU) Although centrally controlled from its headquarters in UK every Vodafone operation in each country is a Strategic Business unit (SBU) by itself. A common thread that runs amongst all of them is that all of them offer innovative technologies line 3G and Live feeds and a variety of connectivity options. As a result they all generate huge cash during their operations. They do face competition but they overcome it by offering goods and services ahead of others. This situation has become stagnant in Europe because the mobile penetration is already at 105% and all competition is offering similar services. It is the emerging markets like India where the doors of opportunity are still wide open due to is low penetration (13%) and a sustained growth of over 30% per annum. Application of Porter’s 5 force analysis reveals that in Europe profitability will take a dip due to saturation of the market whereas in India the same promises a very rosy picture. The growing use of mobiles, strong economic indicators, large and growing population and liberal economic policies will expand the markets diminish the powers of buyers and suppliers to impact profitability. As India is a huge market the competition also has equal opportunities hence their power is curtailed too. The nature of the product i.e. the mobile faces no threat from substitute, and the threat of new entrants is non existent due to high regulatory standards and a well established procedure of entry by auctioning of Telecom circles. Vodafone therefore retains the competitive advantage in the emerging markets that it has largely lost in Europe. 5 The Vodafone Strategy – Relative Positioning Vodafone is in a unique position in its industry. It is Telecom Giant which is vulnerable because of its size and has to be wary of competition as well as regulatory authorities that might feel that it is throttling the customer by stifling competition. Its employees are well trained to keep Regulators happy and it is quite the best in compliance in all its markets. It has to maintain a fine equilibrium and constantly watch its step. The best way out of this is to adopt a very open minded Consumer Relations Policy. By keeping its ears close to the ground it has been able to introduce innovative schemes and new products, both high end and low-end to entice its customers. This has resulted in a relatively very healthy cash flow for the group. It can raise huge amounts from internal accruals and is able to borrow heavily in times of need, as it indeed will do for the acquisition of Hutch in India. The stakeholder’s status is also bound to become wider with the acquisition of Hutch, as will be observed during this discourse. The investment will be larger, the market will expand dramatically, customers will increase to dizzying numbers and employee strength will jump to new heights. 6 The Strategic Event – Acquisition of Hutch This time Vodafone eyed Hutch which is the fourth largest operator in India and has operations in 16 telecom circles in India with a subscriber base of 19 million Hutchison Whampoa of Hong Kong (along with two Indian partners) owned 67% of Hutch Essar Lt (HEL) and the balance 33% is held by Essar Group. Vodafone decided to bid for the entire stake of Hutchison and starting at a bid price of $ 8 billion it finally paid a price of $ 11.1 billion on an Enterprise value of $ 19 billion for 52% of Hutchison’s holdings. Surprisingly the deal was done in less than 2 months. But there was high drama before, during and after the deal went through. There was great speculation on pricing. Payment methods, control issues, Government permission and so on. There was intense competition too from the big Indian and the non-Indian players. This raised the stakes and Hutch got the best of deals out of this competition. No sooner than Vodafone declaring its interest in buying 67% of Hutch Essar Ltd (HEL), Essar who own the balance 33% announced in January that they were keen to takeover the senior partner Hutchison’s share. At this stage besides Essar, four other prominent players were onto the act. They were the Hinduja Brothers from UK. Reliance Communications, Maxix and Orascom... Hinduja had a stake of 5.1% in HEL which they had sold to Hutchison Telecom International Ltd in June 2006. It now regretted the move and was keen on a 51% stake, Orascom the Egyptian Cellular operator had agreed to take 10% of Hutchison’s stake in HEL but the Ministry of Company affairs threw a spanner in the works declaring that the foreign stakes cannot be sold to another foreigner without first taking the Indian stakeholders into confidence. Essar the Indian partner in HEL had already lodged a complaint to the Ministry that achieved this desired response. This made Orascom to declare an intention that they too were serious contenders for a larger stake. Reliance Communications is the largest CDMA operator in India and the second largest mobile operator in India after Airtel. It wants a GSM footprint across the Indian market and getting HEL would enable it to achieve it faster. It got Private Equity players, Blackstone and Pacific Texas to join hands and declared that it could pay $ 13.5 billion for the whole of HEL stake. On the side Maxis of Malaysia also got interested and decided to join this league and showed interest in joining hands with the above trio to get a stake in HEL as well. The stage was now set and each player was trying its best to get away with the spoils. Amongst all this Hutchison was sitting pretty and finally declared that it was asking for bids and the highest bidder would get it all. Finally bids were called in February and after much boardroom wrangles Vodafone added a few billions to the war chest by revising the Enterprise value of HEL to $18 billion. This made Hutchison’s stake worth $ 11.1 billion and eventually the deal was settled between them and Vodafone emerged the winner. The war was not over yet as the crucial permission of Foreign Investment Promotion Board (FIPB) was required to finally allow the transfer to be completed. Under Indian law the stake of a foreign company is limited to 74% of a company’s shareholding. If the investment is held in more than one company then the total stake would also be limited to the same 74%. Vodafone has cleverly overcome the problem by buying the 52% stake of Hutchison Whampoa and letting the other 48% in the hands of Essar (33%) and others (15%). It further made a strategic decision to make its Indian partner Essar nominate the chairman and for itself it took the vice chairmanship. This way it kept everybody happy and yet obtained full control of the management. In the third week of April 2007 it also got the approval of the FIPB and that has now finally sealed the deal in its favour. Now the floodgates of this brave new venture are flung wide open for Vodafone. It will begin its quest in right earnest. 7 Value Additions With the HEL acquisition Vodafone has added value for both its customers and its stakeholders. In India special emphasis will be on ultra-low cost handsets for the masses and live content delivery for the high end consumers. Vodafone has fair competition in almost all countries it operates in. Its market share is dominant in many cases but it plays by the rules of the Regulatory authorities of the country of operation. This keeps the regulators and the competition happy and it avoids any controversy that might disturb its smooth conduct of business. It is branching out to the Asia Pacific Region, the hub of emerging markets, in a big way due to a no growth situation in its home base of Europe. These two are music to the stakeholder’s ears. The company is very innovative and introduces new technologies very frequently. The latest is the introduction of 3G. This gets it favourable consumer opinion and keeps it ahead of competition. It is constantly delivering value for money to its customers and winning them over with service and products. Reduction in costs and increase in revenue models is the mantra of Vodafone thrust and it relies heavily on IT softwares and infrastructure to deliver this. It frequently delivers customers new devises that fit in his fast changing lifestyles in modern times across cultures and borders. It also believes in decentralizing its operations to be able to respond fast to local needs and appetites. 8 Corporate Culture Vodafone believes in adopting ethical business principles and encourage all their employees to be forthright on all issues. They also address the issues in the communities across different cultures they serve through their products and services. They promote e-learning amongst their employees and employ best practices for keeping their customer complaints at the lowest level. The corporate reporting structure is fairly strong and hierarchical and very transparent. They believe in following all regulations in the countries they operate from although they do assist in policy formations by giving their informed opinion on policy matters without dictating their terms. They have programmes to educate their staff worldwide to understand the needs of both regulators as well as the customers. 9 Stakeholders Map As on 31st December 2006 the Vodafone stakeholder’s status looked like this. Revenue: £29,350 million (year ended 31 March 2006) £26,678 million (year ended 31 March 2005) Group EBITDA: £11,766 million (year ended 31 March 2006) £10,740 million (year ended 31 March 2005) Shares in issue: 58,045,057,933 as at 29 December 2006 Employees: Average of 61,700 during year ended 31 March 2006 Customer base: Approximately 198.6 million registered proportionate customers and approximately 600 million venture customers as at 31 December 2006. Global network: Equity interests in 25 countries Partner Networks in a further 35 countries 32.7 million Vodafone live! active devices at 31 December 2006. There were an additional 7.2 million registered Vodafone live! venture devices in the Group's associated undertakings. 13.6 million 3G devices at 31 December 2006. There were an additional 2.6 million Vodafone live! with 3G and Vodafone Mobile Connect 3G/GPRS data card devices in the Group's associated undertakings. 1 The time was ripe for a new surge. . 10 References: Available at: http://www.vodafone.com/start/investor_relations/vodafone_at_a_glance/fact_sheet.html Appendix Map of Vodafone in Europe: Red: Vodafone Violet: Vodafone's affiliates Orange: Vodafone's partners Read More