Critical Analysis and Evaluation of Vodafone and Its Competitive Environment in the UK - Essay Example

1. Introduction This report is a critical analysis of Vodafone, a world’s largest mobile telecommunications company, and its competitive environment in the UK. The mobile telecommunications industry in the UK will be examined using Porter’s five forces model to determine the attractiveness and profitability of the industry. The analysis also examines the key business strategies that Vodafone has pursued in the past to gain its competitive standing in the UK communications market. This is done by utilizing the internal analysis which involves the identification of the resources, capabilities and core competencies that aligns the firm’s business to its key strategies. SWOT analysis is also conducted to explain Vodafone’s competitive situation by bringing the internal and external analyses together. 2. Industry Analysis 2.1. Porter’s Five Forces Analysis According to Porter (2008), threat of new entrants, intensity of existing rivalry, bargaining power of buyers, bargaining power of suppliers and threat of substitutes are the five competitive forces that influences a player’s competitiveness in an industry. These forces can be used to analyze the attractiveness of the mobile telecommunications industry in the UK, and specifically the competitive standing of Vodafone in the industry. 2.1.1. Intensity of existing rivalry The UK mobile telecommunications industry is highly concentrated. The main competitors of Vodafone in the telecommunications market include O2, Everything Everywhere (inc. Virgin Mobile) and 3UK (Ofcom 2011, p.292). Everything Everywhere Ltd. was officially launched in July 2010 after as a merger between Orange and T-Mobile UK. See Appendix I. 2.1.2. Threat of substitutes Although product substitutes do not pose a significant threat to Vodafone, it is wise noting the existence of substitute products that include video conferencing, landlines, e-mail and social networking sites and VOIPs such as G-talk, Skype and Yahoo messenger (Arthur 2011). These services are experiencing an enormous growth over the recent past triggering pressure on the mobile telecoms industry in the UK. 2.1.3. Threat of new entrants The mobile telecoms industry is highly protected and regulated by significant barriers to new entrants (Ofcom 2011). These include the high initial capital requirements, gaining customer loyalty, maintaining high levels of efficiency and the low costs among competitors. As a result, new participants will find it difficult to enter this market. However, retailers have the potential to enter the business in the form of virtual operator network to compete on commodity services and leverage the distribution channel (Ofcom 2009). 2.1.4. Bargaining power of suppliers Suppliers play a crucial role in the mobile network operators market; they are actually the providers of mobile devices, network infrastructure, digital and software services (Grzybowski 2004). The bargaining power of the suppliers is too strong and thus, requires the network providers to maintain close relationships with them. However, Vodafone’s global presence enables it to have a significant purchasing power that consequently allows it to secure exclusive deals with the suppliers (Vodafone 2011). In addition to that, Vodafone has developed their own branded phones so as to reduce the power of Nokia on the phone market which has significantly helped to reduce the company’s dependence on the suppliers. 2.1.5. Bargaining power of buyers The enlargement of subscriber bases in the UK and in the emerging markets has marked recent developments in the mobile telecommunications market. According to the (Vodafone 2011, p.8), the mobile telecommunications industry has about 5.6 billion customers. The fierce competition in the telecommunications industry, particularly in the markets, gives customers a large choice of fixed line and mobile operators from which they can select services. This means that their bargaining power is high; the consumers may therefore demand for more features, texts and minutes, for less money. Porter’s forces analysis indicate that most of the forces in the telecoms industry are high. Among them include the intensity of existing rivalry, bargaining power of buyers, bargaining power of suppliers and threat of substitutes. The analysis indicates that the industry is not attractive, and therefore, new entrants are hindered. 2.2. Strategic Group Analysis The organizations in the UK mobile telecoms industry are categorized into strategic groups according to the characteristics of the strategies they pursue or the basis at which they compete. The major strategic actors in this industry include O2, Vodafone, Virgin Mobile and 3UK (Ofcom 2011). Some of these players use price and others non-price competition. High Price Low Low High Quality Vodafone’s strategic group offers high quality products at relatively higher prices than the other strategic groups in the industry. 2.3. Industry life cycle Just like any industry, the mobile telecommunications industry undergoes a circle of life that include going through the stages of birth, growth, shake out, maturity and decline. See Appendix 2. The early stage in the life cycle of this industry started with Vodafone and BT Cellnet as they launched their networks in 1985 (Grzybowski 2004). This birth stage was characterized by the two companies seeking to develop winning strategies that enable them gain a market share. In the growth stage, the products and services of the industry players had started gaining acceptance and demand started to rise. The rapid growth in demand of the products started attracting new entrants and other two networks, One2One and Orange joined in 1994. The growth of the industry was also stipulated by the prohibition of operators supplying services directly to the customers. Therefore, subsidiaries were established to serve this purpose. This initial moderate growth was “transformed into exponential in the second half of 1990s” (Grzybowski 2004, p.7). In the shakeout stage, an industry grows slowly due to increased competition. Companies struggle to acquire significant market share and as a result prices are lowered with the intense rivalry. At this stage, if a firm is weak, then it will exit the industry (Johnson, Scholes and Whittington 2008). Companies such as Orange and T-Mobile have been forced to merge forming Virgin mobile so that they can survive in the industry. The UK telecoms industry is at the maturity stage. The players in this industry have made their services available to a large number of new customers (Grzybowski 2004). In addition, technological innovations have resulted into an extended range of available services. The rise in the number of mobile subscribers has raised the communication possibilities and thus spreading mobile services within the social circles. The demand has, therefore, been leveled off thus stabilizing the market. See appendix 3 for the provider revenues in the industry. A time will reach when the industry will be at its decline stage. During this period, the demand for communication services in the industry will reduce significantly with almost everybody being connected to avoid being locked out of the social communication network. This stage will also be characterized by a decline in the industry revenue. 3. Internal analysis 3.1. Resources A company’s resources can be categorized into two: threshold and unique resources. According to (Jeff 2008), “threshold resources are those resources that are required as a minimum in order to compete in a market” while ”unique resources are those resources that are difficult to obtain and provide a clear opportunity for competitive advantage” (p. 55). The table below indicates Vodafone’s threshold and unique resources. Type of resource Resource Threshold resources Qualified employees extraordinary committed and dedicated to maintain services to their customers. Good management team focused on making right decisions for the long term benefits of the business. Unique resources Latest technologies that offer the customers with best experience. Strong network infrastructure with more than 224000 base stations sites worldwide (Vodafone 2011, p.2). A high free cash flow of £7.0 billions that reflect a strong working capital performance (Hoovers 2012; Vodafone 2011). Additional licences and spectrum in numerous markets. 3.2. Capabilities Vodafone’s capabilities comprises of both threshold and core competencies. Threshold competences refer to the qualifying levels of service that a company requires to survive and remain competitive while core competencies refer to the unique competences that adds value to the customer and provides a competitive advantage (Johnson, Scholes and Whittington, 2008). The capabilities are summarized in the table below. Type of competence Capability Threshold competences Driving innovation through new technologies and enhancements on the existing capabilities. Delivering fixed and mobile communications services in global and local markets. Core competences Enhancing the billing and customer relationship management systems by redesigning and improving their retail presence, customer care services to ensure a better experience with the company (Vodafone 2011). Provision of 3G and 4G technologies that enhance coverage, speed and quality of voice and data services. Offering millions of its customers with the possibility to send and receive money through their mobile phone by the use of the M-Pesa services. 3.3. Strategy (generic model) 3.3.1. Differentiation strategy Although it is moving to cost leadership strategy, Vodafone’s strategy has been founded on differentiation strategy. The company has maintained its technological leadership through their ability to adapt advanced technologies and drive technology initiatives that help them create value added products and services in the efforts to meet the total communication needs of the customers (Vodafone 2010). It uses differentiation strategy to entice both the existing and new customers. As part of this strategy, the company has also expanded its businesses globally through joint ventures, horizontal integration, and strategic alliances to encounter the fierce competition. While expanding, the company has diversified its products and services (Vodafone, 2011) and focused its resources on creating value-added services which, in turn, acts as key differentiators that enable them maintain sustainable growth. However, the fierce competition in the industry has forced the companies to compete on prices. This is where Vodafone is headed so that it can survive and strive in the industry. They will have to streamline their efficiency and cost effectiveness by leveraging their economies of scale. 3.4. Strategy fit According to (Robert 1998), a firm should align its resources and capabilities with the strategy it pursues in order to achieve a sustainable competitive advantage. Vodafone has aligned its resources and capabilities to its strategy in the attempts to secure the opportunities in the external environment. The company has been focused on creating value to its brand portfolio by using its cutting-edge technology (Vodafone, 2010). It has used its financial and technological resources to expand globally through acquisitions and thus, building a brand reputation as a world leader that attracts more customers. Through innovative technologies, the company has been able to diversify their products and services so as to lure new customers and, at the same time, maintain the existing ones. Vodafone’s Strategy “A More Valuable Vodafone” Strong network infrastructure, qualified staff, good Management, strong capital base, innovativeness, and spectrum and licences 3.5. Value chain Katsioloudes (2006) views an organization as collection of discrete, but interrelated economic activities. Vodafone’s differentiation strategy defines the configuration of its value chain activities and their interrelations. Its competitiveness, therefore, lies on the ability to conduct some of its activities in a unique way than its rivals by creating buyer value hence commanding premium prices. Vodafone’s primary activities are categorized under; inbound logistics, operations, outbound logistics, marketing and sales, and service (Gentzoglanis 2010). Vodafone’s inbound logistics activities include the centralizing and managing of its relationships with the suppliers. The firm also assesses financial stability, corporate responsibility, delivery and quality management requirements through a consistent supplier performance management process. Operations activities include the company’s ability to understand the strategic values of IT that enables it perform its business operations in an efficient and effective manner (Vodafone 2011). Vodafone’s outbound logistics include their ability to deliver an integrated customer experience that is superior. The company uses the web, telephone, mail and self-service portal to deliver products and services to their customers. The marketing activities include real-time marketing, aligned partners, micro segmentation and direct distribution. In doing so, the company builds and manages their relationship with the customers. Finally, the services include the delivery of customer services through a number of own and branded stores globally. The secondary activities include technology development, human resource management, general administration and procurement (Gentzoglanis 2010). Vodafone is agile in adopting advanced technologies that help in creating new products and services, differentiated from those of the competitors. Vodafone’s administration focuses on the customer; they offer administrative services with simplicity, speed and trust. Under human resources management, the company assists it employees to align themselves with a common set of behaviours and values. In procurement, Vodafone drives SCM to leverage its economies of scale so as to reduce the procurement costs. 3.6. SWOT: Bringing the external and internal analysis together This report utilizes SWOT analysis as an analytical instrument to create a quick overview of Vodafone’s strategic position. 3.6.1. Strengths Vodafone’s key strength is its global existence. The company operates in more than 70 countries (Vodafone 2012). Vodafone has also made a number of acquisitions especially in the emerging markets hence spreading its brand name. In doing so, the company has retained its Vodafone brand name while it controls the existing network in the acquired markets. Through this, the company is able to incorporate future technologies so as to enhance their ability to introduce various products by considering the stability of the networks as well as the pace of the market. 3.6.2. Weaknesses Vodafone’s expansion is done through acquisitions rather than organic growth. This was done at the expense of direct control of the subsidiaries’ operations. At the same time, Vodafone adopted a centralized operational structure with its leading business unit headquartered in the UK. This has consequently led to a neglect of local markets as well as the local differences allowing smaller local competitors to gain market share. The exploration of new technologies by the company requires huge infrastructural and R&D costs (Vodafone 2010). 3.6.3. Opportunities Even though the telecommunications market is highly saturated, it offers tremendous opportunities through a careful exploitation of profitable market segments. Strategies such as offering the ageing population simple phones and lower pricing plans while serving the younger generations with sophisticated solutions is an opportunity that can benefit Vodafone. The extension of the company’s geographical coverage would provide it with further opportunities to enjoy the benefits of their investment in the 3G technology. The strategic alliances with other companies enable Vodafone to avoid late-entry in the distribution of their services in the wider market. 3.6.4. Threats The UK telecommunications industry is characterized by an intense competition. Major brands such as T-Mobile and O2 exploit the customer’s price sensitivity and consequently build a stronger image in a way that customers are able to note their presence. Another threat to the company is indirect competition through Skype and other internet based services (Stelzer 2010). Together with UK legislative measures, this limits the tariffs offered by the service providers and in turn, forces them to cut down their prices. The SWOT analysis informs Vodafone of a good fit for the company by utilizing its key strengths to circumvent the threats and seek ways of turning the weaknesses into strengths so that they can explore various opportunities in the environment. 4. Conclusion The telecom sector is among the biggest industries in the UK. The industry is characterized by intense competition with Vodafone, O2, 3UK and Virgin Mobile being the main competitors. New entrants to this industry not only require a huge capital, but also an intensive approach. 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Appendices Appendix I: Competitive Market Share Service operator Mobile subscriptions in millions (Since 2005-2010) 2005 2006 2007 2008 2009 2010 Vodafone 15.2 15.0 16.8 17.7 18.8 20.1 O2 17.0 19.0 20.0 21.4 22.4 24.3 3UK 3.5 3.8 4.0 4.5 4.9 5.6 Orange 15.3 16.9 17.3 16.8 17.2 T-Mobile 14.9 15.3 15.7 16.4 16.9 Virgin (merger between T-Mobile &Orange) 31.2 Total subscriptions 65.8 70.1 73.8 76.7 80.3 81.1 Sources: Ofcom 2011/ operators Appendix II: Industry Life Cycle Source: Johnson, Scholes and Whittington: pg 68, 2008. Appendix III: Mobile telecoms retail revenues, by provider. Service provider Revenues £billions (2005-2010) 2005 2006 2007 2008 2009 2010 Vodafone 3.7 3.7 4.0 4.0 3.7 3.8 O2 3.3 3.8 4.0 4.3 4.4 4.6 3UK 0.9 1.0 1.1 1.2 1.3 1.4 Orange 3.1 3.0 3.2 3.4 3.0 T-Mobile 2.1 2.5 2.7 2.7 2.5 Virgin (merger between T-Mobile &Orange) 5.2 Total subscriptions 13.1 13.9 15.0 15.4 14.9 15.0 Read More