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The objective of this project was to help us learn and develop an understanding of the high growth high competition markets. We chose the beer sector, the automobile sector and the telecom sector for the same, with more detailed coverage of the telecom sector. We decided to take a look at and tried to develop a common framework which can be applied to such markets and came up with our three point analysis. We also compared all the three sectors on Porter's five forces model to find out if there are any common trends which can help identify potential markets, and entry strategies to be successful in such scenarios of hyper competition.
In general, industry growing at a high rate can accommodate many players at the same time and as a result the competition is not very high. But there are some industries where the competition is fierce despite it being a high growth industry. Players indulge in high competition to capture the maximum share of the growing market. Telecom is one of these industries and we have studied dynamics of this industry.
Players planning to enter in such an industry needs to use a strategy taking into account these factors since there are a large potential in the market to capture but at the same time, due to high competition it's not easy to tap this potential. The players need to make an in depth analysis of the market to study the potential and its growth. Also the product is to be launched at its growth phase. Due to the high competitiveness of the market it is equally important to come out with a product which can differentiated with the rest of the products and provides a unique value. We have studied the strategy used by some international players which entered in this industry and evaluated their strategy on our framework.
At the same time, we tried to compare telecom industry with some of the other industries like New Cars and Beer industries which are also high growth, high competitive industries. We compared the strategy of new players in these industries to that of telecom industry.
Indian Beer Industry-
Beer market in India consists of low/no alcohol beers, premium & standard lager, specialty beers and stouts. The market growth is quoted in terms of Price and Volume. The Indian beer market grew at a strong rate between 2004 and 2009. The Indian beer market generated total revenues of INR 181.2 billion in 2009, representing a compound annual growth rate (CAGR) of 17.2% for the period spanning 2004-2009. In volume terms, market consumption increased with a CAGR of 14.1% for the period 2004- 2009, to reach a total of 1.4 billion liters in 2009. The market's volume is expected to rise to 2.1 billion liters by the end of 2013, representing a CAGR of 10.5% for the 2009-2013 period. Standard lager was the highest beer to be sold in the Indian market in 2009 generating a total of INR 173.1 billion, equivalent to 95.6% of the market's overall value. Sales of premium lager were for about INR 7 billion.
Table & Graph below displays the Revenue statistics of the Indian beer market from Yr 2004-09.
As we can see from the graph the Indian beer industry is an industry of high growth.
The pie diagram shows the market share of various players. Although the market is concentrated but we need to delve a little into it to know that why it is a high pressure market.
Porter's Five Force Analysis -
To develop an insight into the competitive forces acting it the beer market, we take help of five force model. The Key players in the market are the big manufacturers. The big players are the retail and on-trade companies and the suppliers are the producers of malted grain, hops and bottles.
The Indian beer market is highly concentrated, the top three players holds around 87.8% of the total market by volume. The big players own a variety of recognized brands and operate in various segments of the market. They have the capacity and the resources to expand the production when required. As there are many segments and varieties within the beer market, there is a high degree of product differentiation.
The buyers in this market are fragmented. Although supermarket chains in metros are often able to negotiate on price with the producers. The switching costs for the buyers are low which increases the buyer power. The producers differentiate their products at multiple levels first by segment wise(lager or strong etc.) and then by brand, style, ingredient etc. The producers and the retailers operate in distinct businesses and hence there is a little likelihood of forward or backward integration. The overall buyer power is high.
The beer industry traditionally operates in non-vertically integrated business. Hops and barley is purchased from independent producers, the supply of bottles is made by another supplier, beer will be made from these materials and bottled on the site. The big players have attempted to decrease the supplier power by growing their own hops and procuring barley from the grass root level in villages.
The barley producers are small time farmers and they can alternatively sell the produce in market as animal feed or for producing spirits. The quality of inputs is very vital for the taste and composition of beer and therefore, the supplier power is moderate to high.
The investment required in developing plant and machinery is high. Also producers need to distribute the products widely which need an efficient supply chain management. There are stringent regulations by government and companies need to comply with the taxation and pricing policies set by the government. Large players compete on price as well and this may drag the margins down. So, there are moderate barriers to enter into the market.
The substitutes for the beer are the other alcoholic beverages such as wine and spirits. Other substitutes can be the non-alcoholic breezers. The retailers keep a variety of these drinks along with the beer and hence beer is exposed to substitution. Some of the pubs and bars solely focus on beer and have a high demand for it. The various drinks are suited for different occasions and consumption also depends on the taste preferences of the buyer. Overall there is a moderate to high power of substitution.
The Indian beer market is highly concentrated, the top three players holds an aggregate share of around 87% of the total market. Buyer has a large variety to choose from and the change over costs is low. Key players have introduced premium products but the volume and revenues are coming from mass market products. Branding is something which every player is taking seriously and a lot of expenditure is being done on brand building. These factors boost rivalry, which is assessed to be moderate overall.
Comparison on our framework:
After studying the industry characteristics, we have identified three important attributes or course of action to be followed by a player to be successful. These attributes are elaborated with the help of the product 'Fosters' beer which was a new entrant in the market and which now has nearly 30% of the market share in Indian beer industry.
1. Market Study -
For any player to be successful in the Indian market, an in-depth understanding of the market is a must. The beer consuming behavior, social pressure on alcohol consumption, the acceptance of alcohol in family sphere is few things which are unique to Indian context. Such unique behaviors are vital for success or failure of any product. Segmentation should be primarily done to identify the potential market and through market analysis gaps can be identified where product placement can be done. Traditional industry focused on mass market with little product differentiation, Fosters was successful in providing an alternative to the buyers in form of a Fresh and premium product with a sporty appeal. This appeal worked well with the rise of dispensable income and the growth of younger population.
2. Phase of PLC-
The company should enter at the growth phase of the PLC as it is the right phase for a new entrant. One of the key reasons for the growth of Fosters was that it was positioned for the upcoming generation. As the industry is in its growth phase the brand grows with the market and it get stronger with the passing time.
3. Product Differentiation with value propositions-
Product differentiation is very vital in an industry were buyers switching costs are low. Key players needs to continuously innovate and improve their offerings so as to avoid the buyer switchover. Fosters entered the market with a value preposition which was unique and had a strong appeal to the target buyers. Although placed in a premium range, it was a runaway success due to the value it provided such as taste, freshness and the cool image.
Indian Automotive Industry
Indian Automotive market is the 7th largest in the world. The market is dominated by car market and is growing fast. New cars constitutes the most of this car market since the car is still seen as luxury in India and used cars are not preferred for the same.
According to New York times, "india's strong engineering base and Indian Car market is growing at a fast pace and small car in the auto sector dominates the growth."
The New cars market in India has grown at a CAGR of 13% in terms of the volume during 2005-09. The volume for year 2009 has hit 1592 thousand units. In terms of value the car market has grown to USD 25.9 billion in year 2009, representing a CAGR of 17.6% for the 2005-09 which is higher than that of China (CAGR 17.3%). Japan has showed a negative growth during this period of 3.7% during this period.
Maruti Suzuki, Hyundai Motor co. and Tata motors dominates 95 % of the Indian Car market with Maruti being at the top. Shares of all the companies by volume are shown in the graph below.
Porter's force Analysis for the market:
Assuming the car manufactures as the players and end users i.e. consumers and fleet operators as the buyers for these players.Since the consumers are individual customers and hence a large number of customers are in the market. At the same time the market has many manufactures with high level of differentiation hence the consumers have large choice. Hence it is a polypsony market.
The Switching cost is not high in the market hence the market is very price sensitive but manufactures have spent in the brand building and hence have been able to reduce the buying power to some extent.Some of the leasing companies who buy in bulk have good buying power and they can influence the prices. Overall the market has moderate buying power
Key inputs required by Manufactures are commodity items like steel, aluminum but at the same time some of the fabricated items which are outsourced and not made in house. Since the raw material have little to differentiate so the switching cost is low but due to the safety factor and other quality concerns of the raw material increases the buying power of the supplier. Though the supplier market is quite fragmented still some of the steel industry mergers have further strengthened the supplier buyer. Some of the typical supplier supply to most of the manufactures and each manufacture makes small share of its sales. Over all the supplier power is moderate in the sector.
The Indian Market is dominated by three strong major players. All the players are highly competitive and have introduced high value cars and are using high level of design and marketing to promote their products and capture the market. Still to some extent the competition has been reduced to high product differentiation and different segment of consumers. Overall the competition is moderate in the sector.
New Entrants can enter the market either by setting up the new startups or by exports. For the Indian consumers, car is still a luxury so the brand and reputation is still very important and hence it is not easy for a new entrant to directly enter in the market.
The car manufacturing involves a high fixed cost and also the economies of scale are high due to mass production hence reducing the chances of new entrant. But at the same time when the whole world was hit by recession, Indian market could still manage to grow and hence it attracts foreign players to enter in Indian Market
The substitutes for the new car are used car, alternative forms of Personal transport and public transport. Due to environmental issues, hybrid vehicles can also become a threat to the cars. Cycles and other environmental friendly transport add to this threat. Public transport is inconvenient in India hence it doesn't add much threat to the Cars.
Study of market Entrant - Hyundai as per our Framework
Any company entering in such an industry which has the capability to grow fast but at the same time is made competitive by the players in order to capture maximum share of the market needs to follow a strategy developed by the following framework. We have studies Hyundai's strategy on this framework which launched Santro in Indian market in 1998.
Market Depth Study
Only 2 decades ago, car was not very common in India. Cars used to be considered a luxury items in the 90s. Even many rich people did not have a car. Now,Â IndiaÂ is one of the fastest growing markets in the world. Hyundai studied the behavior of the market before launching Santro. It could understand thatÂ IndiaÂ is ideal for inexpensive cars.
Enter at the growth phase of PLC
After the liberalization when the big MNCs started setting up their bases in india giving employment to many and providing a handsome salary. These MNC people had the need for the car. Santro whose original car was Atos in Europe (introduced in 1997) and was an ideal car to satisfy the need of the customers. Santro was launched when the demand of the cars was on a high growth stage and with its product it could capture huge market.
Product differentiation with Value Proposition
Hyundai Santro was launched catering to the needs of the middle class people who needed more comfortable car than Maruti 800. Hyudai was launched with an interior design better than most of its competitor in its segment and was prices less than its closest competitor Maruti Zen.
Indian Telecom Industry-
The story till now :
The Indian telecom sector is a vibrant and hypercompetitive sector, one which is luring many global majors to invest in India with the promise of higher future earnings. The Indian telecom sector, particularly the wireless communication sector is only 15 years old (Bharti and Essar launched mobile services in only mid 90's )
The sector has developed a lot since those days of Rs 16/min calls and tariffs now average at 50p/min. The Indian market is not only about subscribers but also about technology. This is a hypercompetitive industry with an average of 8 players in each circle on both the major standards viz GSM and CDMA. Both the technologies have their respective groups (COAI for GSM and AUSPI for CDMA) and both claim superiority over the other, but it is GSM which has been the major driving force behind Indian telecom's success and more than 70% of the operators use GSM exclusively, while only MTS uses CDMA exclusively (RCOM and TATA have hybrid networks with both GSM and CDMA )
Current Situation :
The Indian mobile sector offers hope to the operators who are investing billions of dollars in India. The ARPU here is very low ( Rs 120 approx ) compared to countries like USA ( 120USD approx. ). This is because of many reasons like lower value of Indian currency, higher choice to consumers and the trend of unlocked free market handsets. The advent of dual sim, and now triple sim, mobile phones has led to a spurt in the growth numbers of the subscriber base of all operators but this is largely double counted as most people have multiple numbers. Hence, even though operators add millions of subscribers every month, only a fraction become active users and the rest just make use of promotional schemes and discard the sim cards later on. This has led to newer operators like Uninor and Stel facing operational losses.
Market Segmentation :
The Indian market in the prime metro and Category 2 circles has become saturated with teledensity reaching 90% in many areas. This has led to operators focusing on the rural market for growth where there are many subscribers still untapped by any player. The state incumbents, MTNL and BSNL, have had very slow growth due to the QOS being provided by them and also the GOI restrictions and bureaucracy involved in sanctioning network expansion and up gradation of existing network capacity ( BSNL's 50 million line tender was cancelled after Nokia complained of corruption and favouritism )
International players like Telenor, Etisalat and Vodafone have presence in the Indian market either via JV or subsidiaries. Etisalat has launched the Cheers mobile brand in only a few select places and is not a commercial network till now whereas uninor has completed roll out obligations in 13 circles.
Changing the Game :
The market also has a major new player, TATA Docomo which changed the landscape of the Indian telecom space. The company was a pioneer with its launch of the pay per second plan, with a uniform call rate of 1p/sec to any phone anywhere in india from anywhere in India. This was accompanied by marketing blitz which focused on the savings a person could make by making short calls and paying only for the time he spoke on the phone. Due to this early mover advantage Docomo had over Uninor and Etisalat, it has been able to achieve significant subscriber numbers in all the circles it is active in and has become one of the top 5 players in many. Due to this early mover advantage, and leveraging on the already existing BTS of Tata Indicom, Docomo was able to successfully enter the Indian market and garner favourable reviews in the media and from consumers. This strategy of per second billing has been emulated by incumbents like Airtel, Idea, Vodafone etc with limited success, but Docomo has been able to retain subscribers to the word of mouth publicity it received early on. The Indian mobile market is a tough one to compete in and not all can succeed easily. Uninor which launched with much fanfare and confidence, with the CEO declaring that they will not enter the price sensitive end of the market had to eat its words and enter this segment with the launch of the dynamic pricing plan with call rates as low as 0.4 Paise/sec. This is because it wasn't able to get even 100000 customers in most circles which it entered. Similar is the case of Etisalat which also has less than 10k subscribers in all circles.
Data or Voice ?
The ARPU in India is mostly due to VAS like CRBT, Voice and text whereas the foreign operators' main markets have high ARPU due to higher data usage. However, such a business model was not possible in India due to lack of spectrum to enable high speed data. CDMA operators were able to bypass this limitation by launching EVDO on their already allotted 800mhz band while GSM operators had to wait for the 3G auctions which just recently completed. The ARPU for a data card is 5x the ARPU for a voice user ( Source : RCOM ) and as such most players are focusing on the data end of the market with offerings for GPRS and other VAS packs which can get users to loosen their purse strings more. With the auction of the 3G spectrum completed and allocation to happen in September 2010, the operators, both indian and foreign are hoping for a renewed growth in their revenues. However, it is to be noted that with the exception of STEL, Docomo, Aircel and VF, no foreign operator participated in the auctions. Hence, international operators are targeting the lower end of the market which is more price sensitive than the higher end data based market. Whether this strategy is successful or not remains to be seen, but from earlier examples of such operators with focus on the lower end ( BSNL, even though has 3G never focused on it and posted a loss of 1800 Cr in July) it seems a hard fought battle will be seen in the markets.
Comparison with developed markets :
Indian markets are still too small when compared to markets in Developed nations like USA. The largest Indian operator, Airtel, had an operating income of only 2B USD in 2009 while Verizon USA had an operating income of 7B USD in 2009. This is despite the fact that Airtel has more users than Verizon. This is a primary reason that airtel is focusing on the data market with offerings like mobile office and has bid around 1.8Bn USD for the lucrative Mumbai and Delhi markets in the recent 3G auctions.
Recent Trends in Tower Consolidation:
Since telecom requires large Capex, new operators have traditionally found it hard to match the coverage and service level provided by the incumbents. To counter this and utilize money better, operators are now entering into tower sharing and rental agreements and specialized tower holding companies have been formed. This reduces the time to market for new operators and also reduces the fixed costs incurred by them. The major tower sharing companies in India are Indus towers ( Idea, Airtel and VF) and GTL Infra ( RCOM and Aircel ). Aircel also has a tower haring tie up BSNL giving it access to 40000 BSNL BTS along with 22000 of its own. The valuation of each tower in these agreements ranges from 38 lakhs ( Indus ) to 20 lakhs ( GTL Infra ). These agreements are also necessary in cities where the civic guidelines require the number of towers to be limited. The tenancy ratio of towers is expected to be 2.41 from the existing 1.65 by 2013 due to this consolidation activity which is much higher than the PAT break even level of 1.5~1.6 ( for tower companies )
Subscriber Growth and MNP :
With the eventual starting of MNP in September 2010 in metros and nationwide by June 2011, it is expected that the new entrants will gain at the expense of existing players and a churn of customers dissatisfied with the service provided will switch over to them . This however, will not be a market changer due to the fact that all major players are expected to lose and gain a similar number of customers.
According to a recent research report by Crisil ( Jul 30, 2010), the Mobile subscriber base is expected to touch 860 million by 2013-2014 and more than 80% of the additions will be from the rural areas, the market segment that late entrants like Uninor and Etisalat are focussing on ( They did not bid for 3G ) while the incumbents like Airtel and VF will profit from the start of 3G services with an anticipated 100 million active 3G users by 2015 ( EBITDA margins will be 4% to 9% higher than 2G players ) .Total subscriber base has grown 44.6% YoY with teledensity of 52.74% in 2010 while revenue growth was actually negative in the dec09-mar'10 quarter with decline in Mins of use from 440 to 390 ( Airtel ) which is due to the entry of new players and the trend of multiple sim cards by many users in the prepaid segment which has inherently less ARPU compared to postpaid.
While CAGR for mobile services has been 25% from 2006 to 2010, the growth is expected to slow down due to entry of many national and regional players and also reduction in price of service from an average of Rs 1.24/min to approx. Rs 0.54/min.
According to Crisil, the new entrants are expected to lead to a steep decline in ARPU for existing players and will make significant cash losses. The entrants have a high cost of 0.65~0.70 INR/min which is putting extreme pressure on these companies. Breakeven period estimated in such a scenario is 4~6 years and profitability is seen only in the medium to long term. Industry will return to profitability only when consolidation/buyouts are completed by 2013+ and industry profitability should improve to 26% by then.
Porter's Five Force Model :
Analyzing Telecom Industry on Porter's five forces
Customers : The power of customers is high. With the availability of cheap dual sim mobile phones, the customers always have the option of switching to the cheapest option available while still keeping their primary number active at all times. The prevalence of prepaid ( 97% of new connections are prepaid ) further escalates this problem as there is no customer loyalty and the number of active sims are very low ( less than 40% sims sold are active sims )
The regulatory hurdles set by DoT, GOI have hurt the operators much as they cannot get equipment from suppliers of their choice. The GOI has banned the purchase of equipment originating in China and as most international players are manufacturing in China (Even NSN - Nokia Siemens Networks ) this has come as a major blow as Chinese equipment is the cheapest in the market. The infrastructure required like interchange exchanges etc are well placed around the country. The only problem facing the operators is a lack of spectrum availability in the 900Mhz and 1800Mhz band ( India doesn't use 1900 Mhz band ) is a major cause of concern as the operators cannot grow and acquire more customers if spectrum is not released on time. Compared to international average of 15Mhz, Indian GSM operators have only 4.4Mhz start up spectrum with upto 10Mhz in some cases ( MTNL Delhi, BSNL MP ). Even the 2100 Mhz UMTS 3G band was auctioned at a high price only due to artificial scarcity created by the defence ministry.
Threat of new entrants:
The threat of entry by new playersdoesn't affect Etisalat much as the company itself is a new entrant and thus enjoys no brand/customer loyalty. At this point of time, company is in a similar situation to all other new entrants except Docomo and the real threat is from incumbents like Airtel/VF/IDEA/Rcom etc.
Competition within the industry:
The telecom industry is hyper competitive with 7~8 players in each circle all with similar product offerings. The company faces many hurdles along the way to becoming cash positive. The existing players have the advantage of higher subscriber base which they use to launch On Net packs. These packs by their very nature bind subscribers to a particular network as any subscriber who has such a pack will ask all his/her relatives etc to switch to that operator. These packs are also cost effective as cost/min is very low as no IUC is paid to terminating network. Thus, the incumbents use their existing subscriber base to prevent churn. The new entrants also don't have established networks with similar coverage like the existing players. Typically it takes 3~5 years for coverage to become optimum. Till then, blind spots will be an issue for new entrants. This is a learning curve for the entrants which they cannot avoid. Hence, premium customers with higher ARPU will stay with the older operators for better Quality of service. The new entrants also have the disadvantage of using the 1800Mhz band while older players have the 900Mhz band. The number of towers required to cover the same area is 1.7x in the case of 1800 Mhz band compared to 900Mhz due to higher signal attenuation. As a result their fixed costs and capex also increase drastically.
Threat of substitute products:
The telecom industry is facing a huge threat from new technologies like VOIP. The cost/min in VOIP is less than 20% of the cost incurred in a telephone call. As such, many users are switching over to VOIP for long distance calls, the bread and butter of telecom companies. The companies have been able to co exist only because of the low broadband penetration in India. However, with broadband expected to increase 5x in the next 5 years( TRAI ) the telecom companies have a genuine reason for concern. The telecom lobby is asking DOT to ban VOIP calls and have met with limited success with SIP providers being blocked by many ISPs. The companies have used the security issue that such calls cannot be traced or intercepted in real time and so the GOI has blocked VOIP for the time being unless the SIP gateway is located in India on the NIX.
However, how long such a ban can last is not known and it is unreasonable to assume that the GOI can/will favour this type of ban on a technology for long. Many new VOIP players have set up base in India with complete license and are offering much cheaper services (TATA, Net4India etc )
Comparison on our framework:
1) Market Depth Study :
Our framework suggests that a high growth high competition industry should be entered only if the market is not saturated and there is sufficient depth in the market. The telecom market in India is far from saturation and the teledensity is just 52% till 2010. There is ample scope of growth in the lower end of the pyramid with many rural areas still untapped. The potential is there for growing at a CAGR of 25% (Crisil ) but the growth will be slow and will happen once industry wide consolidation takes place. The current number of players in each circle is too high for new entrants with huge capex and fixed costs to break even with them expected to be cash positive in 6~8 years. While Docomo understood the market well and targeted the price sensitive end of the market from the beginning with its revolutionary PPS plan, Uninor and Etisalat weren't so lucky. Their analysis was half done with Uninor CEO claiming that they will not enter the price war (Uninor recently launched plans as low as 0.4 Paise/sec ) and their late entry into this segment has cost them dearly.
2 ) Phase of PLC :
The company should enter at the growth phase of the PLC as this is the right phase for a new entrant. There is sufficient market depth and untapped potential in the market to grow alongside the incumbents without entering into a dog fight based on price. This is important in such high growth high competition industries as the Capex required is high along with high fixed costs. If a price war is fought, then the new comers without access to high cash flows will be in a disadvantage (Uninor is facing severe cash crunch problems: ET May 2010 ) unless the parent company provides capital infusion at cheap rates ( MTS got huge capital influx from Govt of Russia)
3 ) Product Differentiation with value propositions ( Firm strategy )
The new entrants are differentiating their service offerings based mainly on price, a strategy which may turn out to be their Achilles' heel. The only entrant to have been able to make an impact via this route was TATA Docomo which had the first mover's advantage. The company offered a revolutionary pay per second (PPS) plan when it launched. The company understood that users don't want to pay for the whole minute if their usage is only a fraction of that. Leveraging on that and focussing on the cost savings a user can make on small calls in a month, the company launched a nationwide ad campaign. The result is that Tata Docomo is one of the top 5 players in many circles it operates in. The company has also successfully bid for many circles in the recent 3G auctions with backing from the parent company ( TTSL ). The company plans to offer an array of high tech services with focus on cheap data. To this effect, Docomo has already launched a 6GB/month for Rs 98 GPRS plan on its 2.75g network. The ratio of active sims for Docomo is much higher than Uninor ( 60% to <30% ) as a result. Thus, being able to offer a value proposition to the customers with a differentiated service can help a new entrant achieve success in a high growth high competition industry. Uninor and Etisalat haven't been able to achieve this success due to their low understanding of customer demands and slow reaction time. For Etisalat, the strategy now will be to go in for a low key launch and target the lower end of the customers. It will target the price sensitive market ( 30p/min for local calls ) and thus hopes to break even in 8 years( Interview on CNBC ) The brand name chosen is Cheers Mobile and Aamir Khan has signed on for a fee of over 3Cr/yr. Etisalat doesn't want to be in the higher end data market and as such is not focusing on 3g ( UMTS ) or 2.75G ( Edge Advanced ) with no pricing or availability information for this provided to the media till date. Their strategy is similar to Uninor's which is also targeting the price sensitive market with offers of up to 0.4Paise/sec for all calls.