SK Telecom Global Business
I. Company Analysis
SK Telecom is the #1 wireless communication services provider in South Korea in terms of subscribers. The company serves more than 22 million cellular users (50% market share), most of which have data-capable phones. In addition to mobile and wireless data services, the company provides mobile satellite broadcasting, telematics, and digital home security and maintenance. SK Telecom also operates Internet portal NATE.com and manages the SK Wyverns baseball club. The company holds a controlling stake (about 43%) in the #2 South Korean alternative local-exchange carrier SK Broadband.
SK Telecom strives to strengthen its core business area for long-term survival, and will continue to explore business opportunities in enterprise and global markets with Information and Communication Technology leadership.
(Source: SK Telecom website, www.sktelecom.com)
II. Industry & Business Analysis
1. Industry Environment analysis
The telecommunications industry was broadly defined to include the transmission of a wide range of information, from traditional phone-to-phone communications to broadband media, particularly terrestrial cable systems and data communications. Although revenue from traditional services of voice and messaging in mature markets is growing more slowly due to competitive and regulatory pressures, there remains a significant growth opportunity in mobile data.
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Telecommunications industry had grown rapidly and in 2009 had global revenues of over USD 1.2 trillion in the OECD. Telecommunication markets have expanded at a fairly constant annual growth rate of 6% since 1990, even during economic downturns. Mobile revenues accounted for 41% of all telecommunication revenues in the OECD in 2007, up from 22% just a decade earlier.
In this environment, the telecommunication companies continue to be able to innovate and develop new products and services that provide customers advanced high-speed wireless data services, including mobile access to the Internet, wireless e-mail, digital picture and video transmission, mobile video, music and application downloading, video calling and two-way short messaging service (“SMS”).
There are many burdens to penetrate to telecommunication market; severe competition with competitors, competitive pressures to price declines, continuous R&D investment to differentiate service, differentiation with innovative technology, government regulation to licenses for the wireless spectrum and protect the local key industries, high initial cost and fix-cost for developing and maintaining networks, high marketing & sales cost to increase the awareness of brand, and consumers' choice of converged communication.
The telecommunication industry has high entry barriers and a low threat of product substitutes, but these attractive forces do not sufficiently offset the threats posed by the strong bargaining position of suppliers and buyers in combinations with the intense rivalry competitors face. But telecommunications industry continues to be attractive due to growth opportunities in enterprise and broadband markets. It provides essential services that serve a fundamental human need to communicate for work and social purposes.
2. Competitor analysis
1 Vodafone (EU)
l #2 telecommunication company in global with 300million subscribers
l History of Vodafone
- Incorporated under English law in 1984 as Racal Strategic Radio Limited
- Changed the name to Vodafone Group Plc. in 1991 and Vodafone AirTouch plc with merger AirTouch Communications in 1999
- Since then, the Group entered into various transactions, which consolidated the Group's position in the United Kingdom and enhanced its international presence to 27 countries
- Promote with Korean mobile phone manufacturer such as Samsung and LG
l Strategies for expansion to oversea
Ø Pursue the scale of economic
Ø Grow focusing on investment to oversea
Ø Expand to Europe nationwide with power of EU (no restriction)
(Source: Vodafone, Annual report 2009, website: www.vodafone.com)
2 NTT DOCOMO (Japan)
l One of the world's largest mobile communications operators with more than 55 million customers in Japan
l Japan's premier provider of leading-edge mobile voice, data and multimedia services with more 60% market share in Japan (Do Communications Over the Mobile Network)
l In 2001, introduced FOMA™, the world's first 3G commercial mobile service based on W-CDMA, which has transformed the mobile landscape in Japan while bringing the DOCOMO brand global recognition in Asia, Europe and North America
l Strategies for expansion to oversea
Ø Possess financial firepower and Invest with abundant capital
Ø Keep the special model by DOCOMO style
Always on Time
Marked to Standard
Ø Enter to developing countries such as Vietnam and Cambodia
Ø Aggressive invest of government
(Source: Docomo, Annual report 2009, website: http://www.nttdocomo.co.jp/english/)
III. International Business Strategy Analysis
1. Ideal International Business Strategy Analysis
1 Analysis of pressure for global integration
Globalization of markets: basic needs of customers are not so different globally. Convergence of customers for mobile telephone product makes the phone product companies go global. Wireless mobile service industry is similar. There are no important varieties of needs globally.
Globalization of production: Standardization of wireless mobile communication technique drives the globalization of market.
2 Pressure for local responsiveness
Customer divergence: customer and country divergence are high due to following factors.
l Economic conditions and infra systems for wireless network are different.
l Country's size, geographical features, attitude and usage of wireless communication are different.
Host government policies: It is one of most important factor.
l As the wireless industry is nation's social infra industry and it has important effect to nation's economic and social system, host government might be sensitive and hostile to foreign company.
Both pressure for global integration and pressures for local responsiveness are high. Therefore international business strategy should be transnational strategy. (Site Selection Issue for SKT)
Main factors that SKT have to consider to select the site are as follows.
l Contents and goal definition:
For SKT, the main reason for globalization would be profit maximization through market extension in global market. And they should establish almost all value chain (R&D, marketing, production [initial CAPEX investment], A/S, etc) in foreign country.
l Government factors:
since wireless mobile business directly related with country's infra system and needs large amount of initial investment, government factors including invisible factors (red tape, restriction, expropriation…) should be investigated and fully considered. Also stability of the economy and currency is critical.
l Input oriented factors:
searching infrastructure is critically important mainly in two ways. 1) This industry needs large investment. Infrastructure for resources effects on feasibility of investment, amount & period of investment. 2) If the infra systems for providing the service are already well established, it would be easier to enter the market. But in other sense, the country may do not want the SKT's support and investment and there might be strong competitors or strong entrance barrier.
l Output oriented factors:
current market size, potential growth and profitability are key considering factors. If the market is already matured, there would be little chance to SKT. This situation means high competition and little chance of extra profit in the market. In the point of growth and potential, SKT should focus on ARPU (Average revenue per user). Company's profit mainly determined by ARPU. Although SKT success in gathering large amount of users, low ARPU can't make up their investment and make profit. ARPU are mainly determined by country's economic status, culture and attitude of the people.
Also market structure, especially geographic agglomeration is important. If the country is too wide or mountainous, amount of investment could be extremely high and possibility of success could be decreased.
l Firm-specific fit factors: geographical distance should be considered. Since the company provides wireless mobile service and investment executed based on geographic area, the company could establish the economy of range (distance and area). It means the company should consider cluster effect when they decide configuration policy. Also the country with in near distance may have similar culture, geographic situation and other common factors. It will help the company execute more easily.
2. Entry Mode selection
The type of entry mode 1) Ownership, 2) Exporting/importing, 3) Collaborative Strategies
l Greenfield investment:
if high potential and growth are expected in the target country, highest profit could be earned. But risk of investment is high and the target company could restrict this type of investment.
It could be easiest way to enter the target market. But it would be hard to find the adequate target in developing country and the country may not permit.
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(Exporting/importing): this type of strategy is not adequate for SKT's business.
SKT may form consortium with Korean company or with local company in the target country. Practically easy way to enter the target country concerning the industry's characteristics. By the type of contract, the company could lose the key control power of the JV and still burdened most portion of financial investment.
this type of strategy is not adequate for SKT's business.
Concerning the regulation of the countries, entrance barrier and industry characteristics, JV type of investment would be preferred for SKT.
IV. Company's Case Analysis
1. What SKT did (Source: Detail information below basically based on SKT's global strategy report/ see list of reference)
SKT decided to expand its business abroad from 1995 due to the following reasons.
l Strong need to develop new market and create demand due to the saturation of local telecommunication market (over 90% of Koreans utilizing mobile communication) and domestic competition getting fierce
l Advanced mobile technology which is competent worldwide
l Indirect positive effect on IT industry through mobile industry's entry into foreign countries (eg. contents and services)
Ø Internationalization Phase and Entering Countries
Beginning Phase (1994-1998)
SKT initiated its internationalization in 1995 through establishing Joint-Venture in India and entered into Thailand and Brazil sequentially. During beginning phase, the site selection decision was made mainly based on future market potential of candidate countries without sufficient consideration of systemic governmental factors and various input& output-related factors due to its' lack of internationalization experience. Since SKT did not appropriately cope with unexpected environmental challenges (eg. stricter than expected governmental control, variation of exchange rate and economic crisis), it withdrew its business from these countries and got financial loss.
Expansion Phase (1999-Present)
In Expansion period, SKT applied more systematic approach for its internalization in terms of setting strategic objectives, deciding sites and selecting entry modes based on learning from previous failures in India and other countries. It entered into Vietnam, China, US, Taiwan, Israel, Malaysia and etc. Its internalization became more diversified comparing to beginning phase in terms of strategic objectives and sites selection: 1) creating new demands through entering into growing markets with high future potential such as Vietnam and China, 2) building stable customer base in established large market such as US and testing new technologies and convergence business ideas with qualified customers, 3) driving the penetration of services and contents business following successful entry of mobile communication business.
(Detail information by main country)
A. Objectives of Internalization
l To create new demand through entering into market with high growth potential
l Vietnam is a good place for first entry before expanding its entry into other Southeast Asian countries
B. Considerations for Site Selection
Economic: Continuous 7~8% yearly economic growth, Economic growth expected to accelerate after its entrance to WTO
Social/ Political: Communist country. Weak social infrastructure
Telecom Industry: Currently low utilization rate of mobile communication as 46%, however, obvious growing trend in its usage. Low call quality since 3G is not set up yet.
Government Regulation: Restriction on foreign companies' establishment of direct subsidiary and Joint-venture. Business continuity issues exist due to ‘Social Collaboration Agreement' system. Foreign companies should withdraw from Vietnam and return facilities and stocks owned by company after the termination of its Agreement with Vietnam government
C. Entry Mode & Strategy
l Establishment of Joint-Venture between SKT, LG electronics and Dong-A Elecom
l SKT closely co-worked with government to adopt CDMA technology for mobile telecommunication service before it actively started its business
l SKT obtained government's approval on its business proposal as a form of BCC in 2001 (due to Vietnam' government's restriction on foreign company's establishment of subsidiary or Joint-Venture)
l Kicked-off SLD consortium with LG Electronics and DongA Elecom.
l Lauch of the first brand ‘S-Fone' in 2003
l Distribution of CDMA 1x EV-DO service in five big cities in Vietnam such as Hochimin, Hanoi and Danang
D. Interim Evaluation
l S-Fone recorded 5 million users in 2008 but profit per one user is far below its average profit in Korea
l SKT applied to government's bidding for 3G infrastructure project but failed to be selected in spite of its advanced technology due to government's favor to local companies
l Even though mobile communication market would dramatically grow after installation of 3G, SKT may not be a major company getting benefit from it
A. Objectives of Internalization
l To build presence and create demand in the biggest market with high growth potential
l Expand its business in China with contents and services following mobile communication business
B. Considerations for Site Selection
l Economic: Continuous double digit growth. Explosion of middle-high income consumers
l Social: Communist country geared toward open policy . Easy to enter due to its similarity to Korea in terms of social, cultural and geographical aspect
l Telecom Industry: The biggest mobile communication market with over 500 million users. Fast growth of new users (over 7 million monthly)
l Government Regulation: Government's strong regulation on infrastructure business including telecommunication industry. Government owns over 70% of stocks of all national companies
C. Entry Mode and Strategy
l Establishment of Joint-Venture with China-Unicom which is the 2nd biggest telecommunication company in China
l MOU with China-Unicom on CDMA technology in 2000
l Establishment of self-owned portal company (Viatech) and wireless internet JV (UNISK) from 2000 to get understanding on local regulation and business environment
l Establishment of Joint-Venture with ChinaUnicom which is the 2nd biggest telecommunication company in China with 150 million users in 2004
l Due to limited information on SKT's performance in mobile communication industry, we could not do interim evaluation.
l SKT expanded its business in China further to cover SNS (Cyworld), Entertainment (Beijing SidusHQ), Music (TR Music) and Game (Magicgrid) during 2007-2008
A. Objectives of Internalization
l To build stable user base with large pool of established customers
l To test its new technology and convergence business ideas
B. Considerations for Site Selection
l Economic: Mature and saturated market
l Social/ Political: Stable political status. Advance social infrastructure. Diversity in ethnicity, values and preferences
l Telecom Industry: 3G is established. Allowance of MVNO
l Government regulation: Low level of government regulation comparing to developing countries.
C. Entry Mode and Strategy
l Establishment of Joint-Venture with Earthlink which is ISP (Internet Service Provider), SKT decided to utilize MVNO not building its own MNO considering cost issue
l Sign on the Agreement to develop EV-DO service and do co-marketing targeting global market with Verizon Wireless, SiRF, and Magnolia in 2004
l Establishment of Joint-Venture with Earthlink which is ISP (Internet Service Provider)
l Launch of Helio in 2008 in collaboration with Virgin Mobile USA
l Establishment of Mobile Money Ventures in collaboration with Citi to launch mobile banking service
l SKT withdrew its business with losing 90% of its original investment of 400 M USD
2. Evaluation and key learning from previous case
Most of SKT's foreign investment turned out to be failure. According to SKT's audit report, SKT invested almost KRW 2,000 billion accumulately and remained value is only KRW 500 billion. And according to IR information as of 3Q, 2009, contract regarding investment in China seemed to be fired. SKT is reluctant to release the information about global business and internally their global business procedures are stopped.
l SKT failed to transfer it's core competence which was acquired in domestic operation to global market.
l Name value of SKT was not effective in global market especially in USA.
l SKT was not fully ready for global extension. They had no experience in global market.
l Targeting whole geographic areas in USA for economy of scale and varying performance in different areas (eg. big success in western area, no users in southern area, limited users in eastern area)
l SKT failed in predicting the profitability of local area customer. The ARPU was too low to compensate the initial investment.
l Invisible repulsion and hostility
l The risk of initial investment and government should not be underestimated.
V. Company's TO-BE Analysis
1. Should SKT really go to global market?
As shown above, SKT has been invested large amount of invest to large range of area. But the result turned out to be failure and huge amount of damage.
SKT should reconsider about global business by next question.
l What make SKT to go to global market? Is it option or obligation for long-term survival?
l Is global expansion is profitable and helpful for value maximization?
l What is the real KSF in global industry market and does SKT have that kind of core competence?
l Most of all, are there accessible and feasible global market remaining for SKT?
2. Does SKT still have the chance globally?
Wireless mobile industry is changing and growing rapidly. Due to characteristic of wireless mobile industry, initial investment should be done at “introduction” and early “Growth” stage in industry life Cycle. It means the “timing” of decision and investment is crucial for success and there would not be another chance in same way. Moreover, the company should start to install and invest at least 1~2 years in advance to be chosen as a service provider in that country. SKT spend lots of time already and the output was failure.
These situation means
l The chances with high potential and growth are losing and hard to get back.
l Attractiveness and profitability of remaining possible site may be not so good.
l The type of investment and international Business should be change as the global market situation has been changed.
3. Our suggestions
(Needs for global)
SKT is No.1 company in Korea with high profitability and achieved high rate of growth. Although past global business outcome was so pessimistic, the pressure for global extension would be raised in near future. (Due to lots of stakeholders, pressure for endless growth and new growth plan/model……)
In our team's opinion, Globalization is not the only best way for the Company.
(Needs for strategic change)
The company's international business type should be divided in two types mainly.
Ø Strategic option A: Initial Investment for the developing country area
Ø Strategic option B: global investment for the country whose wireless industry cycle in mid/late growth stage or maturity cycle.
(Where, when, how to compete)
Ø Strategic option A
This investment type is similar to what the company did until now. If SKT still could find the target country which needs large scale of investment from SKT and the country has large potential and profitability, SKT may concern about execution of invest positively.
n Where: SKT should consider potential target country based on past investment experience. Since SKT failed in first target area and investment timing has gone, it is pessimistic to find adequate target area. Based on the data which represent the “user of wireless service in main area”, Africa, Middle East, Latin America, and Asia/Pacific could be the potential target area. (See exhibit No 2)
n When and how: since the timing of investment is crucial, investigation and decision should be made ASAP. How to execute and compete will vary based on each country's environment.
n Pros & Cons: As we know, this type of investment will generate highest profit. But highest risk always exists and possibility of success is still unclear.
Ø Strategic option B
This type is based on M&A and Strategic association. If the initial investment type is too risky and the company lost the chance of initial investment, SKT could concern the next stage of investment.
n Rationale: SKT acquire the existing company or go into strategic association with the target company in country whose wireless mobile service industry is developed. By this type of investment, SKT could reduce the risk and time-consuming although the level of return/profit could be reduced.
n Where, when and how: current main target area would be western/ eastern Europe and North America. Additionally, the country which is in the process of growth in wireless mobile industry such as China and already developed in Asia such as Japan could be the potential target area. Timing of execution would be determined by each country's status, rivalry, regulation and etc.
The acquire cost may exceed the cost of initial investment type. But by this type, SKT can avoid the initial huge risk and acquire the verified company immediately. Otherwise, SKT could utilize pre-made infrastructure by such as MVNO system through strategic association or JV.
One of SKT's core competences is know-how and various service programs which can create additional value. Utilizing this assets, SKT position and strategy would move from wireless service provider to contents service provider.
List of References
Ø <http://economy.hankooki.com/> 서울경제
Ø <http://www.mk.co.kr/> 매일경제
Ø <http://www.kobaco.co.kr/> 한국방송광고공사
Ø SK Telecom website, www.sktelecom.com/eng/
Ø SK Telecom Sustainability Report 2008
Ø Vodafone website, www.vodafone.com
Ø Vodafone, Annual report 2009
Ø China Mobile Limited, Annual Report 2008
Ø SourceOECD Emerging Economies, Volume 2009,Number 18, August 2009 , pp. 58-83(26)
1) SKT's global investment status.
(amount: KRW hundred of million)
begging book amount
Ending book amount
SKT Americas, Inc.
SK TELECOM(CHINA) HOLDING CO.,Ltd.
CYWORLD China Holdings
SKY Property Mgmt. Ltd
SK Industrial Development
SKT HOLDINGS AMERICA
SK China Company
(Source: SKT audit report, 2009)
2) global subscribers status.
(Source: S K 텔레콤의 글로벌 전략(경영교육연구 제 10권 제 2호/ 고동희 교수, 김영곤 교수)
3) Industry characteristic analysis
1. Threat of New Entrants è Low
In telecommunication industry, it is difficult to identify new competitors, because the mobile phone operators must compete for spectrum licenses.
2. Barriers to Entry è High
(a) Economies of Scale è Moderate
The telecommunication companies were expanding internationally, and the potential benefits of economies of scale allow to lower costs for both companies and to minimize the threat of new entrants.
(b) Product Differentiation è Low
There are difficulties in product differentiation without innovative technology and service.
(c) Capital Requirements è High
Capital requirements of the telecommunications industry present a significant barrier to entry because of spectrum licenses in auction
(d) Switching Costs è Low
Because product differentiation is low between the telecommunication companies, switching costs are bound to be low.
(e) Access to Distribution Channels è Low
Countries' regulations governed distribution channels through the use of spectrum licenses and protection of local company. This policy should be considered a strong barrier to new entrants.
(f) Cost Disadvantages Independent of Scale è Low
There are no cost advantages that the telecommunication industry has established that new entrants can not duplicate.
(g) Government Policy è High
Government controls the entry into the mobile phone industry through their spectrum licenses and protection of local company.
3. Bargaining Power of Suppliers è High
Mobile phone manufacturers are seemed to the primary supplier to the telecommunication companies. Bargaining power of suppliers was high because the mobile brands were also important to consumers
4. Bargaining Power of Buyers è High
Accordingly, the industry firms battle for higher quality, greater levels of service, and lower prices than their competitors, and the consumers benefit. The customers could switch to another telecommunication companies because the products and services are undifferentiated and standardized.
5. Threat of Substitute Products è Low
Substitute products for the telecommunication industry could be considered fixed-line phone products and wireless internet network. These prices are lower, but its quality and performance are insufficient compared to wireless service of telecommunication. Switching costs are low but the advantage goes to the telecommunication industry.
6. Intensity of Rivalry among Competitors è High
(a) Numerous or Equally Balanced Competitors è High
There are many equally balanced competitors in the telecommunication industry, and industries with these characteristics tend to have strong rivalries.
(b) Slow Industry Growth è Low
Because the telecommunication market is undoubtedly growing, there is little pressure to take customers from competitors.
(c) High Fixed Costs or High Storage Costs è High
Telecommunication companies have high fixed costs due to spectrum licensing and the establishment of wireless network points of access. As a result, these companies try to maximize their productive capacity, which leads to excess capacity and intense rivalry.
(d) Lack of Differentiation or Low Switching Costs è High
Because buyers in the telecommunication industry believe its service is a commodity, rivalry within the telecommunication industry is high. Switching costs for consumers are also low, so competitors can easily attract buyers through pricing and service offerings.
(e) High Strategic Stakes è High
Nearly all telecommunication companies considered it their primary market, so competitive rivalry is intense.
(f) High Exit Barriers è High
Specialized assets such as spectrum licenses maintain a high resale value. Fixed costs of exit, strategic interrelationships, emotional barriers, government and social restrictions are all high.
SK Telecom, Annual report 2009, website: www.sktelecom.com/eng/
SK Telecom Investor Presentation, Dec. 2009