Brief History and Business Model of Vodafone Group Plc - Assignment Example

? Company Risk Management Analysis and Brief History of Vodafone Group Plc Vodafone Group Plcis a Communications Company with operations all over the world. Its headquarters are in Newbury, England. The company is an international mobile carrier for consumer and enterprise customers with a significant presence in Europe, Asia, the Middle East, Africa, the Pacific and the United States. Vodafone Plc has a history going back to 1982 when it started as Racal Telecomm and was awarded the first mobile license in the UK. In 1985, the company was the first to enable an analogue mobile telephone call in the UK, two years later it launched Vodapage, a paging network that covered over 80 percent of the country. A year later in 1988 Vodafone was listed on the stock exchange. After three years in 1991, Vodafone separated from Racal Electronics and since that time, it was quoted as Vodafone in the stock exchange. In 1999, Vodafone merged with AirTouch Communication producing one company known as Vodafone Airtouch plc. The dawn of the twenty-first century saw greater developments for Vodafone Plc as it introduced Vodafone Live! in 2002 and went on to commercially launch its 3G services in Europe. A year later in 2005 the company launched a fixed mobile convergence product in Germany called Zuhause and acquired controlling interests on Hutchison Essar Limited in India. Since 2007, the company has been involved in a number of acquisitions and partnerships in Europe, Asia and Africa. Currently, Vodafone holds a market leadership position as the largest mobile carrier in terms of subscriber base. Vodafone’s Business Model Business models are very important for the existence of every business enterprise (Casadesus-Masanell, Ramon, and Ricart 2011). Models give a business a sense of direction and purpose (Chesbrough 2010) and basically define what the business is all about, what it seeks to achieve and the steps it will take to achieve the outcomes (Osterwalder and Pigneur 2010). The business model of Vodafone Plc is quite simple; it consists of five steps with the shareholder in between. The first element in the model consists of Assets; these include networks, supplier relationships, distribution, people, and brand (Vodafone 2013). Vodafone aims to have a great mobile network in all of the markets in which it operates. This mainly involves providing their customers with far-reaching coverage, reliable mobile connections, and increasing speeds and data capacity. Figure 1: Vodafone’s Business Model (Source: Vodafone 2013) Vodafone plc indicates in its annual report (2013) that it combines ongoing high level of network investment with a commitment to securing the best possible portfolio of the spectrum. The next asset for Vodafone is people; the company has a highly skilled, motivated and diverse workforce. Vodafone expects its employees to be key in advocating for its products and services. Distribution is the other asset owned by Vodafone; the company reaches its customers through the over 15 thousand stores it owns as well as through a broad network of exclusive distribution partners and third-party retailers. According to Vodafone (2013), the Internet is becoming an increasingly important channel for distribution. The fourth item is the brand; Vodafone is ranked as one of the first most valuable telecoms brands in the world being worth over US$27 billion. This brand strength is one of the major drivers of purchasing decisions for consumers and enterprise customers. The final asset listed by Vodafone is its supplier relationships, the company has a large-scale global reach and is a key strategic partner with a large number of suppliers with whom it works together to develop innovative services and offer many new innovations. The next element in Vodafone’s business model is it its customers. According to Vodafone (2013), the company boasts over 404 million customers globally making it one of the biggest mobile operators in the world. The ranges of its customer base it also wide and diverse, from large multinational companies to individuals all over the world. Revenue is the third element of Vodafone’s business model. The company generates service revenue through the supply of communication services all over its networks. Whereas the company generates a third of its revenue from customers under contract, the remaining two-thirds of its customers buy their services on a prepaid basis. Cash flow is another element of its business model that Vodafone relies upon for its operation. Vodafone (2013) indicates that its free cash flow has reached 5.6 billion UK Pounds. Conversion of revenue to cash flow is key both to ongoing reinvestment in the business and rewarding shareholders. The company holds strong market positions in all its markets which when combined with efficient networks provide a healthy cash flow. Shareholder remuneration forms part of the assets of Vodafone’s business model. The company’s ordinary dividend which is funded from its cash flow is the primary form of its shareholder remuneration. The company has increased the ordinary dividend per share by over 22% over the last three years. The main aim of the company is at least to maintain the ordinary dividend per share at its current levels. The final step in Vodafone’s business model is reinvestment in the business. According to Vodafone (2013), its track record demonstrates that there has been a successful balance between the capital requirements of the business and its desire to sustain an attractive annual cash return to its shareholders. Strengths and Vulnerabilities of Vodafone’s Business Model According to various studies (Johnson et al. 2008; Osterwalder & Pigneur 2015; Chesbourg 2010) the business model of a company provides the backbone for strategy and success of its operations. However, Osterwalder & Pigneur (2010) indicates that no business model is without strengths and weaknesses. Vodafone’s business strategy offers it a number of strengths and vulnerabilities which the company has to understand and work around for long-term success. One of the strengths of Vodafone plc is its international presence and brand recognition; the company’s brand is strong all over the world and is a great advantage in competition with other communication companies, particularly in emerging markets. Vodafone also has a solid platform in Europe consisting of some of the strongest and newest services, including 3G and 4G; this opens growth in the mobile broadband services segment. Similarly the strength of the business model employed by Vodafone is that it has provided the company with the opportunity to gain a controlling interest in strong growth markets such as South Africa, India, Egypt and Romania. This points out to the strength of the company’s assets and its cash flow. With regard to customers as one of the strongest elements of its business mode, Vodafone has well-defined cost reducing initiatives such as managed purchasing and outsourcing (Anderson 2009). These enable the company to provide value for the customers at affordable rates thus strengthening its market. Vodafone also boasts stable operating profits despite the recent downward profit trends in Europe and globally, which were largely influenced by the recent economic slowdown. For about five years now the company has established a clear route to delivering fixed broadband services in all its relevant market; this is a marketing strength that helps to ensure customers are satisfied (D’Aveni 2007). Vodafone’s business model displays several weaknesses. The first weakness is that there is that some of its networks experience slow revenue growth. The HSDPA network has particularly been affected by this with the slow consumer market take-up of 3G data services. As regards customers, there has been slow customer growth in DSL wholesale markets, particularly in the UK and Italy in the past three years. There has also been slow subscriber growth in some markets arising from lower promotional activity as well as poor economic conditions (Zhang & Linag 2011). Factors beyond the company’s control, especially in its target markets have adversely impacted its operations, for example, exchange rate movements in South Africa have considerably harmed the company’s operations. One of the main weaknesses of Vodafone’s model can also be identified in its lack of substantial capacity to offer bundled services due to specialization in mobile serviced, which lead to higher churn rates. The company may thus be pressured to compete exclusively on price (Anderson 2009). Risk Factors facing Vodafone Risk can basically be described as the possibility of suffering loss (Dorofee 1996). There are three conditions for risk to exist under any given circumstances; the potential for loss, uncertainty about the eventual outcome of something, and the choice or decision required to deal with the uncertainty and potential for loss (Charrette 2000). Vodafone plc faces a number of risk factors in its operations. The first risk factor is that the company is heavily dependent on the continued operation of telecommunication networks. Organizations and individuals look to companies like Vodafone to maintain services at good levels. Major failure in the company’s networks or IT systems may pose the risk of service interruption for customers; this can result in serious damage to the company’s reputation leading to customer loss. The other risk facing the infrastructural assets of the company is that there may be an infrastructural attack by malicious individuals or groups which if successful could negatively impact the availability of critical systems. The company’s network is also susceptible to interruption through theft or malicious damage to the network components (Vodafone 2013). Vodafone also faces the risk of loss of consumer confidence and legal action resulting from failure to protect customer information. In the modern era where personal information is guarded seriously against malicious use, protection of customers’ private information is one of the most important duties of a communication company (Zott & Amit 2008). Mobile networks carry and store large amounts of confidential business and personal data. Vodafone hosts increasing quantities and types of customer data both in its enterprise and consumer segments that need to be protected against loss. Service environments need to be sufficiently secure to protect the company from loss or corruption of such information (Arena & Azzone 2010). The failure to offer adequate protection to customer information may have a material adverse effect on the reputation of the company leading to legal action against the group (Vodafone 2012). Vodafone faces the increased competition that may reduce the company’s market share and consequently, reduce its profitability. Market share is one of the greatest factors that affect company profitability, particularly in the highly volatile communications market (Baxter et al. 2010). Vodafone faces intensifying competition with all its operations looking forward to securing a share of the potential customer base around the world. Competition with other companies has the potential to lead to a reduction in the rate at which the company adds new customers and subsequently decreases the size of its market share and a decline in the company’s average revenue per customer. The acquisition and maintenance of customers cost money (Hoyt & Liebernberg 2011). Competition may also lead to the increase in costs of customer acquisition and retention. The next risk facing Vodacom is that regulatory decisions and changes in the regulatory environment could adversely affect the business of the company in many markets (Vodafone 2013). Vodafone plc has ventures both in mature markets and emerging markets spanning large geographical regions. The company, therefore, needs to comply with an extensive range of requirements that regulate and supervise the licensing and operations of telecommunications networks and services. In all regions in which Vodafone is operating, there is pressure on political and regulatory institutions both to deliver direct consumer benefits and protect consumers’ interests, particularly during recessions (Ellul & Yerramilli 2012); these conditions can lead to adverse impacts on the Company’s business. There is also the danger that financial pressures on smaller competitors can drive them to call for protection from government regulators. Similarly, increased financial pressures on the government can lead them to target foreign investors for further taxation or license fees thus affecting the incomes for Vodafone (Vodafone 2012). Finally, another substantial risk that Vodafone plc faces involves possible disadvantages of its existing service offerings in comparison to those offered by converged competitors or other providers of technology (Vodafone 2012). In a number of markets Vodafone faces competition from providers with the ability to sell converged services (Bundled services) on their existing infrastructure which the company cannot replicate or offer at similar competitive prices. The combination of services may also allow the competitors to offer subsidies for the mobile component of their offering thus making the latter cheaper than Vodafone can manage. This could result to erosion of the company’s customer base and reduce the demand for our core services thus impacting future profitability (Vodafone 2013). Advances in smart phone technology also place more focus on applications, operating systems, and the devices of communication rather than underlying services provided by the operators. Development of applications that make more use of the Internet rather than traditional services offered by mobile communication companies such as voice and messaging could erode revenue for Vodafone and other mobile operators (Kaplan & Mikes 2012). These developments could significantly impact the future profitability of Vodafone. The major risk factors that face Vodafone plc also affect each other one a number of ways to contribute to the overall risk facing the corporation. As depicted in the diagram below, there are interconnections between the risk factors affecting Vodafone which can produce a synergistic overall risk on its operations based in its business model. Figure 2: Interconnections between the risk factors affecting Vodafone The risk of breakdown of telecommunications networks is closely related to malicious infrastructural attacks and theft or malicious damage to network components, these three could negatively impact the availability of critical systems thus harming the operations of the company. On the other hand theft or malicious damage to network components is a risk that is closely related to failure to protect customer information; the latter is a result of the former. A risk like changes in the regulatory environment in which Vodafone operates could be related to competition from converged competitors because such changes could be politically motivated to favor smaller converged competitors especially if they are from the country of operation. Vodafone’s Risk Management Strategies Risk management involves a number of practical considerations by the implementing company for successful implementation. The first factor to be considered is that a risk-management culture (Chacko, Tufano & Verter 2001) should be inculcated in the organization and various mechanisms must be strategically designed in the structures to manage risk (Alberts & Dorofee 2002). Successful risk management involves coordination between all the departments of an organization or all the players in the organization to develop risk management strategies (Charette 2000). However, individual departments or branches of a group must have individual initiative, flexibility, and autonomy (Kaplan & Mikes 2012). The next steps in risk management involve determination of all possible risks facing the business operations of the organization, quantifying operational and strategic risks, and integrating the risks (Derofee et al. 1996). The last step involved determining the interrelationships between the risks, i.e. which risk depends on the other and so on (Ellul & Yerramilli 2012). Vodafone has come up with various risk management strategies for risks facing the company’s business operations. With regard to failure and interruption of telecommunication networks belonging to the company, Vodafone has built specific and back-up and resilience requirements into its networks. The company also monitors its ability to replace strategic equipment quickly in the event of failure. The other mitigation strategy employed for high-risk components is maintenance of dedicated back-up equipment ready for use (Vodafone 2012). Vodafone has enhanced its critical infrastructure to prevent unauthorized access and reduce the likelihood and impact of a successful attack. Network contingency plans for risk management are linked with the business continuity of the company and its disaster-recovery plans which are in place to deal with residual risks that cannot be mitigated for. According to Vodafone (2013), both a crisis management team and an escalation process have been put in place in all regions. This is one of the best risk management strategies that have been put in place by Vodafone. With regard to the risk of suffering loss in customer confidence and legal suits due to exposure of private information, Vodafone has ensured that all the hardware and software applications containing or transiting confidential personal and business data have security features in them. The company conducts security-related reviews according to its policies and security standards. The security governance and compliance of the company is managed and constantly monitored through software tools deployed in all markets. The company’s data centers are managed to international information security standards to ensure up to date security measures are in place (Vodafone 2011). Vodafone also faces the risk of increased competition in all its markets. The company’s strategy for management of this risk involves continuous promotion of its differentiated propositions by focusing on its strengths such as network capacity, quality and coverage, value of products and services, and quality of customer service. The company has been enhancing its distribution channels to get closer to customers and applying targeted promotions when appropriate to retain specific customers. According to Kaplan & Mikes (2012) monitoring and modeling competitor behavior is one of the best risk management strategies. This is another strategy that the company applies through network builds and product offerings to understand future intentions and be able to react in a timely manner. This is also a very strong and successful risk management strategy by Vodafone. For the risk of changes in the regulatory environment affecting its business, Vodafone has a number of strategies in place to address any eventualities. First, the company monitors political developments in all its existing and potential markets closely to identify specific risks in its current and proposed commercial propositions. Regular reports are prepared by the company’s executive committee on the political and regulatory risks in all regions. What follows is that the risks identified by the committee are considered in the entire business planning process of the company, including in competitive commercial pricing and appropriate product strategies. Authoritative and timely interventions are then made both at the national and international levels in line with regulatory and legislative propositions that do not represent the interests of the Group. The company also adopts the strategy of holding regular dialogue with trade groups representing network operators and other industry bodies in order to understand underlying political pressures that influence regulatory and legislative decisions (Vodafone 2013). With regard to the risk of its existing service offerings becoming disadvantaged in comparison to those offered by converged competitors, Vodafone has already started providing fixed-line telecommunication services in markets they were not offering them (Including voice and broadband). The company is also exploring opportunities to provide services beyond mobile in existing markets through partnerships, acquisition and joint ventures (Vodafone 2013). Vodafone has developed strategies to seeking to strengthen its relationships with customers through acceleration of the introduction of integrated voice, messaging and data tariffs to avoid customers reducing their out of bundle application through substitution with products from competitor companies. Recommendations for further Risk Management by Vodafone plc Proper risk management requires clear understanding of risk measures. There are three measures associated with risk, these include probability, impact, and risk exposure (Alberts 2002). Probability of risk is defined as the measure of the loss that is bound to occur upon realization of a threat. Impact is defined as the measure of the loss that will occur upon realization of the risk while risk exposure provides a measure of the magnitude of the risk on the basis of current measures of probability and impact (Alberts & Dorofee 2002). Risk management involves the systematic approach for the minimization of exposure to potential losses (Kaplan & Mikes 2012). The main activities involved in the management of risk include assessment of the risk, planning for its mitigation and mitigation of the risk. Overall the strategies for management of various risks by Vodafone are quite impressive, the company has evidently thought out all the risks affecting it systematically and developed strategies to deal with those risks in the most effective ways possible. All of the risk management strategies revealed above is both strong and effective in providing cover for each respective risk. However, not all the risks can be adequately mitigated for, some risks are bound to produce adverse effects if they happen despite the level of planning and mitigation implemented by the company. One risk that Vodafone is not managing adequately is the risk of its existing service offerings becoming disadvantaged in comparison to those offered by converged competitors. It has been observed that the current market trend is largely biased towards smart phones, applications and functionality of hardware. None of Vodafone’s strategies in this regard focus on partnering with smart phone or application manufacturers or marketers in a relationship that will further secure the company’s income in this market segment. The company should try to tap into the popularity of these products by trying to work with strategic partners to integrate its services with smart phones, tablets and other applications so as to package its services based on the strength offered by smart phone technology and popularity. As a risk management strategy, this should help the company tie its products to the advantages offered through smart phones, tablets, and their applications and therefore benefit from this market. This would ensure the company maintains its profitability by competing favorably with its rivals. References Alberts, C., & Derofee, A 2009, A Framework for Categorizing Key Drivers of Risk (CMU/SEI-2009-TR-007), Software Engineering Institute, Carnegie Mellon University, Pittsburgh. Alberts, C., & Derofee, A 2002, Managing Information Security Risks: The OCTAVESM Approach, Addison-Wesley, Boston. Anderson, C 2009, Free: The future of a radical price, Random House, New York. 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