Porter's five forces model on Vodafone
Introduction to Topic
In previous years, the research process for this year's Working Nation reports began with a series of in-depth interviews with a panel of senior opinion leaders from the worlds of commerce and academia. From that earliest stage, it became clear that one of the most frequently reoccurring issues in the minds of today's business leaders is the relationship between different generations in the workplace - not just those that are already there, but also the generations about to enter the workplace in the next few years.
This view ties in with the opinion expressed by many contemporary commentators (and corroborated by numerous research surveys) that younger generations are using developments in technology and communications to change working cultures in unprecedented ways; creating new kinds of companies as well as new kinds of employees that believe it is their right to design their working lives to meet their own bespoke requirements.
In the previous Working Nation report, The Nature of Work, it was confirmed to a certain extent that technology is indeed giving younger people greater confidence to achieve their goals, more opportunity to follow non-traditional career paths and more freedom to explore ways of working away from fixed locations that weren't previously thought possible.
Professor Richard Scase, business strategist and author of the book Global Remix, agrees that this trend is one of the key drivers behind the breakup of the traditional workplace structure, especially in the corporate sector, and the rise of a new ‘café culture' in its place:
Businesses have to encourage flexible, remote and other working practices that are appropriate to colleagues, according to their individual preferences and needs. But, alongside this provision, corporations have to redesign their workplaces as cafés to encourage the exchange of ideas and informal collaboration in the development of projects, products and services. Small businesses are more likely to allow for these personal differences than large companies. That's why the iPod generation is more attracted to working in small firms, they are given more space and personal autonomy.”
The general environment in which Vodafone operates is composed of several dimensions in broader society that influence the mobile telephony industry, Vodafone, and it's competitors. These environmental segments are economic, demographic, political/legal, technological, sociocultural, and global. Our analysis chose to focus on the segments with the greatest impact on the mobile telephony industry, including demographic, political/legal, and technological segments.
1. Demographic - Opportunity
The mobile phone market was one of the fastest-moving segments in the telecommunications industry in early 2000, beating all forecasts for growth in recent years. Between 1997 and 1999, the mobile phone market more than doubled, growing from 203 million to 475 million customers. Estimates of worldwide growth continued, as evidenced by investment in infrastructure (equipment and transmission networks) between 1997-1999, which increased by 50 per cent. The European market was Vodafone's target. Mannesmann, Vodafone's target for acquisition was
based in Germany. Germany at the time, has the lowest penetration rate in Europe, a large number of potential users, and potential revenue per customer well above the European average. The penetration rate in Finland was nearly 3 times that of Germany, so there was quite a bit of growth left in the German mobile phone market.
2. Political/Legal - Threat
European regulation favoured convergence, the ability for mobile phone operators to offer the same voice and data services as fixed line operators, allowing for direct competition between the two. Direct competition was a difficult issue facing mobile phone operators because they would undoubtedly have to interact with the existing fixed line operators and agree to their terms in order to provide service to their customers. Industry regulators would closely have to watch the interaction between fixed-line and mobile operators in order to keep competition fair and prevent collusion. European regulation managed the mobile phone market by requiring licenses for the wireless spectrum. The European licenses were offered under auction, which meant that only the most financially sound mobile phone operators could consider winning a bid for the license. As a result, Vodafone's acquisition of Mannesmann could put at risk their opportunity to win a bid for spectrum licensing.
European regulation mobile phone operator and manufacturer alliances should also have been considered. Industry regulators should have payed close attention to these alliances, making sure that collusive strategies were not in place to restrict mobile phone manufacturers from cooperating with competing mobile phone operators.
3. Technological - Opportunity
A new factor emerged in mobile telephony, the convergence of fixed-line telephony and wireless telephony. This potential convergence raised some debate as to whether or not mobile phones were a substitute for fixed-line phones, or simply a complementary product. Either way, this convergence favored the mobile phone market due to the fact that the mobile phone industry was growing and fixed-line customers all had the potential to switch to mobile operators because the same services were available. Some uncertainty existed in picking a type of mobile phone network standard. Some operators might have developed an intermediate infrastructure that would allow full convergence, and there was a chance that it would not be widely adopted. Mobile phone operators could instead hold out, sticking with the existing GSM network and focusing on the next generation (3G) rather than the
intermediate UMTS standard. While fixed-line phone operators enjoyed an existing billing relationship with their customers, the mobile phone operators had an opportunity to build more modern customer relationship management processes. This could create a better relationship with the customer and have higher
economies of scale than could be achieved with existing fixed-line operator customer relationship management.
How Vodafone takeover Hutch and enters into Indian market
With this takeover, India will soon become Vodafone's third largest market with 24.4 million subscribers, after Germany and the United States. This is the biggest deal since the $231bn Mannesmann deal in 2000. This goes in line with Vodafone's policy of being in the top three players, wherever it operates. But given the rate at which Hutch's customer base is growing in India, the country will soon be the company's top market. Vodafone has also agreed to sell its 5.6 percent direct stake in Bharti Airtel to the group for 1.6 billion USD.
Vodafone will assume $2bn in debt and bring its total financial burden on the acquisition to $13.1bn. The company has signed a memorandum of understanding with the competitor Bharti Airtel about infrastructure sharing. The company has an aggressive plan for the Indian market and has plans to aim for a 25 percent share of the Indian mobile market by 2012.
At present, Vodafone has ownership interests in 27 countries across 5 continents. Currently Germany is the largest market for Vodafone with 30.6 million subscribers (as of December 31, 2006) while US (where it has 44.4 percent stake in Verizonis the second largest with 26.2 million users.
While most of the countries where Hutch operates have reached the saturation level Switzerland (96 percent), Germany (80 percent), US (76 percent), France (78 percent), Turkey (67 percent) and Romania (70 percent) , India offers huge growth potential with only 15 percent teledensity.
Vodafone couldn't have gotten the timing more right, as it has its 3G rollout in India slated for early 2008. As customers across the world look to migrate to high-revenue 3G services like mobile TV, video and audio downloads; Vodafone can make use of its early move. Also, with Hutch's existing mix of corporate and high-end users in India, the country has immense potential for the 3G market.
Hutch also enjoys the highest ARPUs (average revenue per user) in India. While ARPU figures for the last quarter will soon be announced, Hutch was the only company in the GSM market to witness an increase in its ARPUs in the previous quarter. On the revenues front, Hutch recorded the highest growth in overall revenues amongst all GSM players. This will be a comforting factor for Hutch as it has recorded the growth at a time when average industry ARPU have declined by 3.21 percent. This decline didn't spare even market leaders like Bharti Airtel.
With the acquisition of Hutch, Vodafone makes a head start in the promising Indian market. By acquiring a company that already had tasted success in India, Hutch takes its initial steps well. If the company can adjust with the highly competitive Indian market, which is ruled by low prices and freebies, the company is sure to take the success story of Hutch forward.
By using the five forces model of competition, competitor analysis takes place by understanding how the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products, and the rivalry among competing firms will effect competitors in an industry. These five forces have a direct effect on Vodafone's strategic competitiveness and above average returns.
1. Rivalry with Existing Competitors
Vodafone's position as cost leader, competitors have a hard time competing on basis of price because the competitors will fall on their face if any aspect of the logistics or operations are inferior.
2. Bargaining Power of Buyers
The buyers in the mobile telephony industry are strong. These powerful buyers can reduce the cost leaders prices, but not past the level of their closest competitor. This ensures Vodafone will continue to profit at above average returns compared to its closest competitor.
3. Bargaining Power of Suppliers
Suppliers of the mobile telephony industry are strong. Vodafone, by being a cost leader, operates with margins greater than its competitors, which, in turn, allows them to absorb price increases from its suppliers easier than its competitors. By being a large, focused player of the mobile telephony industry, Vodafone could hold suppliers costs down, and it could make a profit even if its competitors are making only average returns.
4. Potential Entrants
While the threat of new entrants is weak, Vodafone must continue to reduce costs below that of its competitors. By maintaining high levels of efficiency, Vodafone can help make the entrance into the mobile telephony industry unattractive to its potential competitors.
5. Product Substitutes
Vodafone faces a low threat of product substitutes. The focused cost leadership strategy that Vodafone operates under makes it difficult for a comparable substitute to be produced at a lower rate by their excellent use of economies of scale, their buying power, and their absorption of temporary price increases that come from suppliers that don't need to be passed on to the consumer.
Vodafone is pursuing a focused cost leadership business-level strategy through their exclusive focus on the mobile telephony industry. Because Vodafone did not have the distractions that faced their competitors (such as fixed-line telephony) they are able to save money and pass the savings to their customers or maintain a profit even when their closest competitor is only achieving average returns. Vodafone maintained a broad competitive scope and focused on cost for their competitive advantage.
Before telling you about the Vodafone five force model, you have to understand that what do you mean by Porters Five Force Model
Porters force model analysis
There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector.
As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry's likely profitability is conducted in Porter's five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.
Main Aspects of Porter's Five Forces Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization's behaviour in a competitive market. These include the following:
• The rivalry between existing sellers in the market.
• The power exerted by the customers in the market.
• The impact of the suppliers on the sellers.
• The potential threat of new sellers entering the market.
• The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market.
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
• This force is located at the centre of the diagram;
• Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents' position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
• Economies of scale: for example, benefits associated with bulk purchasing;
• Cost of entry: for example, investment into technology;
• Distribution channels: for example, ease of access for competitors;
• Cost advantages not related to the size of the company: for example, contacts and expertise;
• Government legislations: for example, introduction of new laws might weaken company's competitive position;
• Differentiation: for example, certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs - that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
• Product-for-product substitution (email for mail, fax); is based on the substitution of need;
• Generic substitution (Video suppliers compete with travel companies);
• Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
• This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
• Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;
• Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
• Where the switching costs are high (switching from one Internet provider to another);
• High power of brands (McDonalds, British Airways, Tesco);
• Possibility of forward integration of suppliers (Brewers buying bars);
• Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
The nature of competition in an industry is strongly affected by suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete - the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines organizations' competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly.
Analysis to Vodafone's Porter's 5 Forces
The Porter's Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of a firm's current competitive position, and the strength of a position a company is looking to move into. Despite the fact that the Five Force framework focuses on business concerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simpleness of its application inspired numerous companies as well as business schools to adopt its use (Wheelen and Hunger, 1998).
With a clear understanding of where power lies, it will enable a company to take fair advantage of its strengths, improve weaknesses, and avoid taking wrong steps. Therefore, to apply this planning tool effectively, it is important to understand the situation and to look at each of the forces individually.
In conducting an analysis of Porter's Five Forces, it is required to brainstorm all relevant factors for the company's market situation, and then check against the factors presented for each force in the diagram above. The next step is to highlight the key factors on a diagram, and summarize the size and the scale of the force on the diagram. It is suggested to use signs, as for instance, “+” and “--" signs for the forces moderately in company's favor, or for a force strongly against.
After identifying favourable and unfavourable forces for the company's performance and industry's attractiveness, it is important to analyse the situation and examine the impacts of the forces. One of the critical comments made of the Five Forces framework is its static nature, whereas the competitive environment is changing turbulently. Are the five forces able to foresee industry expansion? Is it the corporate strategist's goal to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favour, or is the goal to become part of the ongoing commerce with the intention to produce innovative ideas that will expand the size of the industry? Is it true that the environment poses a threat to the organisation, leading to the consideration of suppliers and buyers as threats that need to be tackled, or does it offer the ground for a constitutive industry player co-operation?
By thinking through how each force affects a company, and by identifying the strength and direction of each force, it provides with an opportunity to identify the strength of the position and the ability to make a sustained profit in the industry.
Limitations of Porter's Five Force Model
Porter's model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations.
Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond one's immediate competitors as there are other determines of profitability. Specifically, there might be competition from substitutes products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An example would be plastic bottles, cans and glass bottle for packaging soft drinks. There may also be potential threat of new entrants, although some competitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can, customer loyalty. Finally, it is important to appreciate that companies purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, or mergers with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption.
It is important to be aware that this model has further limitations in today's market environment; as it assumes relatively static market structures. Based originally on the economic situation in the eighties with its strong competition and relatively stable market structures, it is not able to take into account new business models and the dynamism of the industries, such as technological innovations and dynamic market entrants from start-ups that will completely change business models within short times. For instance, the computer and software industry is often considered as being highly competitive. The industry structure is constantly being revolutionized by innovation that indicates Five Forces model being of limited value since it represents no more than snapshots of a moving picture. Therefore, it is not advisable to develop a strategy solely on the basis of Porter's models but to examine it in addition to other strategic frameworks of SWOT and PEST analysis.
Nevertheless, that does not mean that Porters theories became invalid. What needs to be done is to adopt the model with the knowledge of their limitations and to use them as a part of a larger framework of management tools, techniques and theories. This approach, however, is advisable for the application of every business model.
SWOT ANALYSIS OF VODAFONE
SWOT has a long history as a tool of strategic and marketing analysis. No one knows who first invented SWOT analysis. It has features in strategy textbooks since at least 1972 and can now be found in textbooks on marketing and any other business disciplines. It advocates say that it can be used to gauge the degree of “fit” between the organisation's strategies and its environment, and to suggest ways in which the organisation can profit from strengths and opportunities and shield itself against weaknesses and threats (Adams, 2005). However, SWOT has come under criticism recently. Because it is so simple, both students and managers have a tendency to use it without a great deal of thought, so that the results are often useless. Another problem is that SWOT, having been conceived in simpler times, does not cope very well with some of the subtler aspects of modern strategic theory, such as trade-offs.
Determine an organisation's strong points. This should be from both internal and external customers. A strength is a “resource advantage relative to competitors and the needs of the markets a firm serves or expects to serve”. It is a distinctive competence when it gives the firm a comparative advantage in the marketplace. Strengths arise from the resources and competencies available to the firm.
Determine an organisation's weaknesses, not only from its point of view, but also more importantly, from customers. Although it may be difficult for an organisation to acknowledge its weaknesses it is best to handle the bitter reality without procrastination. A weakness is a “limitation or deficiency in one or more resources or competencies relative to competitors that impedes a firm's effective performance”.
Another major factor is to determine how organisations can continue to grow within the marketplace. After all, opportunities are everywhere, such as the changes in technology, government policy, social patterns, and so on. An opportunity is a major situation in a firm's environment. Key trends are one source of opportunities. Identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities from the firm.
No one likes to think about threats, but we still have to face them, despite the fact that they are external factors that are out of our control, for example, the recent economic slump in Asia. It is vital to be prepared and face threats even during turbulent times. A threat is a major unfavourable situation in a firm's environment. Threats are key impediments to the firm's current or desired position. The entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firm's success.
Because SWOT is such as familiar and comforting tool, many students use it at the start of their analysis. This is a mistake. In order to arrive at a proper SWOT appraisal, other analyses need to be carried out first.
• Since opportunities and threats mostly arise from the environment, SWOT analysis needs to take account of the results of a full environmental analysis.
• It is impossible to gauge what an organisation's real strengths are until you have assessed its strategic resources - in fact, strategic resources and strength are the same things. There is a tendency for students to put down anything vaguely favourable that they can think of about a company as strength. This temptation needs to be resisted - strength is not strength unless it makes a genuine difference to an organisation's competitiveness. The same is true of weaknesses.
Capital Investment In The Telecommunications Industry Today
In today's economy, many news sources are filled with reports of the increasing levels of telecommunication industry capital investments. As a telecom industry executive, where can you turn for a business financing resource you can trust? Here are a few tips on finding the right capital investment source for your telecom business.
First of all, look for a full service capital investment specialist. An industry leader is a much more stable financing source than a smaller single service financier. Look for a major corporation that offers asset based solutions, lines of credit and capital investment programs as well as ordinary loans. Once you have found such a company, you can rest assured that they are a full service organization suited to all your capital investment needs.
Next, investigate the capital investment company's track record of success. Have they been able to deliver results for other telecommunications professionals in the recent past? What are some of the companies for which they have obtained results? How much financial asset did they obtain for these companies? Are any testimonials available from satisfied customers? Find out what companies have walked the path you are about to embark on before you commit to a business financing resource.
In addition, be sure to carefully examine their policy on customer service. As a business financing resource, they should be willing and able to answer all your questions fully and offer you the support that meets or exceeds your expectations. Make sure they have a full staff to offer you quality client support services.
A business financing resource needs to be specially adapted to handling the new lending and credit challenges in today's marketplace. Today's credit crisis, created in part by bad lending practices, makes it increasingly difficult for some business owners to find venture capital.
However, a company with strong experience and deep resources for telecommunication industry capital investment is able to better weather the credit storm and find business owners the resources they need to expand and thrive. Internationally and domestically, lines of credit resources are harder to find. Therefore, you need an industry leader with creative financial solutions to serve as your advocate.
Selecting a business finance resource is more important today than ever before. In order to establish your credit worthiness to lenders, it is important to present yourself and your company in the best possible financial light and ensure that your business needs are represented well to investors.
There are special risks attached to loans in the telecom industry. Technology depreciates as the loan matures, and dependability is a non-negotiable. Any lapse in uptime will damage your image in the marketplace. The news has reported many high-profile companies merging or outright failing in recent years. Even though many potential lenders were financially unaffected by the mortgage crisis, it has left an indelible mark on their psyche and their lending confidence.
Because of all the special considerations when it comes to telecommunications industry capital investment, it is important to have a strong business financing resource by your side during the borrowing process. They are an invaluable partner when you need to secure wealth resource in the telecom industry.
Vodafone must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. If it fully understands the nature of the Porter's five forces, and particularly appreciates which one is the most important, it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. The situation is fluid, and the nature and relative power of the forces will change. Consequently, the need to monitor and stay aware is continuous.
Some issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take to in order to develop barriers to competition.
By virtue of its connectivity and advertising strategy Vodafone is successful in grabbing the highest market share in India, but there are still some recommendations from my study point of view is that Vodafone needs to make its network service more stronger than other service providers to dominate the market in future too.
Vodafone should introduce cheaper recharge cards than the other because its competitor IDEA had introduced it.
Vodafone should sign more celebrities from cricket and Bollywood.
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Strategic Management by Garth Saloner, Andrea Shepard, and Joel Podolny