Vodafone's Entry into Japan: An Analysis

Globalization is regarded as a tool which has facilitated the movement of businesses from independent market economies to an inter-reliant and incorporated global economy thereby reducing trade barriers between countries and continents. (Hill, 2007). With the reduction of these trade barriers many companies have grown from Small and Medium Enterprises (SME) to Multi-National Enterprise (MNE). Through international growth and globalization these MNE’s are recognisable world wide. One such organisation is the Vodafone group which is a telecommunications company founded in the United Kingdom. Vodafone is currently ranked as the 11th most valued brand in the world and 2nd in Europe. (Vodafone, 2009).According to Anwar (2003) they have achieved this status by using different market entry strategies to expand their enterprise via acquisitions and joint ventures with Orange (UK), Air Touch and Verizon (USA) and Mannesmann (Germany). Although Vodafone has been successful in the above listed countries, its entry into Japan failed after a few years due to reasons which will be explained later in this essay. This is the main reason for the choice of Vodafone as a case study.

This essay will first give an outline of Vodafone’s history and then provide a review of theories which influence global expansion and internationalization, as they relate to market entry, business strategy and culture. Following this a case study of Japan’s mobile market and an analysis of Vodafone’s operations and strategies as they affect its entry to and exit from the market will be provided. Finally, recommendations based on their choice of strategy will be made.

Company Background

Vodafone was created in 1991 as a subsidiary of Racal Telecom (RT) which was formed in 1984. RT was created from a joint venture between Racal Strategic Radio Ltd (80% which was a subsidiary of Racal Electronics Plc and winner of one of the first two cellular telephone network licenses in the UK), Millicom (15%) a US-based Communications Company and the Hambros Technology Trust (5%), a UK-based venture capital fund. The name Vodafone was coined with the first four letters of its name denoting its services (VOice Data Fone). (Vodafone, 2009)

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Vodafone has become a very prominent mobile operator in the world with a large presence in Europe, America, Asia, Middle East and Africa. Its services include but are not limited to mobile advertisement, network business, distribution business, retail shops, data services, Short Messaging Service (SMS), multi-media portal, third generation (3g) licences and data and fixed broadband services. (Vodafone, 2009)

Over time Vodafone has expanded into different parts of the globe including, Belgium, France, Greece, Germany, Italy, France, Romania, USA, Egypt, Kenya and South Africa to mention a few. (Vodafone.com, 2009) Vodafone’s early success has been attributed to its usage of key niche strategies and first mover advantages regarding location economies. This helps gain market share which leads to economies of scale and earning curve advantages through the utilization of its core competencies in foreign markets. (Anwar, 2003; Pan et al, 1999)

Vodafone entered the Japanese market in 1999 when it inherited stakes in nine regional mobile phone companies through its merger with US rival Air Touch making it the second largest shareholder in the market at that time. Another reason for their entry into the Japanese market was that they considered the market as very vibrant and it would give them a technological edge over domestic and European rivals. (Anwar, 2003; Dodourova, 2003; Kim et al, 2009)

Theoretical Review

In considering global expansion, companies need to make decisions about the choice of market to enter, timing, products to be sold and market entry mode. (Hill, 2007). Market entry modes refers to the way in means an organisation chooses to enter a particular market such as are exporting, franchising, foreign direct investment, international joint ventures and wholly owned subsidiaries. (Hill, 2007; Root, 1994) Although all these forms of entry have been used by Vodafone, for the purpose of this paper specific attention will be paid to the use of acquisitions and joint ventures (JV’s) as entry modes, since they have been used repeatedly by Vodafone in different locations including India, Japan, Egypt, Germany, The Netherlands, Sweden, Italy, Greece, Portugal, Spain and Australia. (Vodafone, 2009; Anwar, 2003).

An acquisition is a situation whereby a firm acquires a company in an intended market while a joint venture involves the combination of two or more firms to create a company. JV’s enable firms to split the necessary risk and capital required for international ventures. They usually involve a foreign company with a new product and a local firm with access to distribution and local knowledge such as culture, political and business systems. However, using JV’s has its disadvantages as firms face difficulties merging different cultures and some parties may not understand the strategic intent of their partners which may lead to problems (Root, 1994; Pearce and Robinson, 2007;Hill,2007 ). On the other hand, acquisitions allow firms to make very rapid international expansions and can be accomplished quickly. However, they are very expensive and legal regulatory requirements and organisational culture may act as barriers. Despite these drawbacks they are considered a very safe means of global expansion. (Ives and Jarvenpaa, 1991, Pearce and Robinson, 2007)

The internationalization model (Uppsala) advices that global expansion is a learning process and that the more experience a firm gathers it strengthens its dedication to foreign markets. (Hollenson, 2004).

However, most firms have to consider the level of global integration and local responsiveness (both are at alternative ends of the standardization scale) required in the target market. This is known as I-R framework, since it is a necessity for firms operating in multiple country locations to be responsive to market (cost reduction) and governmental demands (local needs) for each location. Bartlett and Ghoshal (1989) divided the framework into four strategies, namely global, International, Multi-Domestic and Transnational. However, many companies tend to shift from one strategy to another in an attempt to meet local demands and capitalize on competitive advantages. (Bartlett and Ghoshal (1989) in Roth and Morrison, 1990; Hill, 2007, Pearce and Robinson, 2007)

Vodafone attempted to move from the global to the transnational strategy because they largely ignored local responsiveness and lost market share as a result of the international strategy. The advantages and disadvantages of the global and transnational will now be examined.

Global integration indicates the fusion of different national economic systems into one global market. A key aspect is the pressure of cost reduction while local responsiveness refers to the readiness of firms to make modifications to their products, services, and ways of doing business at local levels considering local culture and needs. (Hill, 2007; Pearce and Robinson, 2007)The core focus is of the global model is on high global integration since firms sell standardized products in and across all national markets with minimal levels of local adaptation. Also, most business decisions are made from the firm’s central office as there is a great need for resource sharing and cross border co-ordination which is sometimes difficult to achieve. Organisations use this strategy due to high levels of competition in the global market and all Strategic Business Units are mutually dependent. As a result of this the firm attempts to maximize the advantages of location economies and the experience curve and it is not very concerned with responsiveness to local markets. Location economies refer to the advantages a company would accrue from being in a particular location and the experience curve that shows the level of experience gained based on reduction of production cost. Many MNE’s, such as McDonalds in the United Kingdom, have used this strategy successfully. Others for example Vodafone in Japan, have failed due to the level of local responsiveness needed for the location. (Daniels et al, 2009; Hollenson, 2004; Hill, 2007; Weber, 2007, Kim et al, 2009; Pearce and Robinson, 2007; Bartlett and Ghoshal (1989) in Roth and Morrison, 1990)

The Transnational strategy focuses on satisfying the condition of local responsiveness and global integration irrespective of pressure levels for both factors. It’s has been suggested that this strategy be used if cost pressure and local responsiveness are high or low as they fluctuate depending on the level of development of the country or location and globalization. (Bartlett and Ghoshal (1989) in Roth and Morrison, 1990; Hill 2007)

This approach allows MNE’s to tailor their products and marketing practices to the intended market and more profit is made in a situation where cost reduction pressures are not great and the firm can increase price. Although in situations where cost reduction pressures are high the organisations make try to make profit from other means. (Roth and Morrison, 1990; Weber, 2007)

According to Hill, (2007) this strategy is difficult to implement as firms attempt to balance economies of scale, attain low costs through location economies, experience curve effects, local responsiveness and global learning (Global learning refers to the transference of knowledge and products between the firms head office and its subsidiaries).

The difficulty arises from organisational problems because there is a need for firm central control and organization to achieve efficiency, local flexibility and decentralization to attain local market receptiveness. This is aside from the need to acquire global and organisational learning for competitive advantage.

CASE STUDY

The Japanese mobile industry was considered a year or two ahead of the rest of the world and was ready for Vodafone to enter because Japan’s market was more technologically advanced than most other European telecommunication markets. It was the pioneer country for the third generation network {3G} and the European market was becoming saturated and competition and regulatory pressures were forcing prices lower. (Economist, 2004; Fackler and Belson, 2005; Yamauchi et al 2004).

Also the Japanese market was highly competitive and Japan was the first country to introduce a packet switched wireless network {DoPa}; the first to introduce wireless internet {i-mode} in 1999; the first to introduce camera phones, 3Gs in 2000 and 3.5G in 2003. Japan had advanced broadband communications system as early as 2000. (Yamauchi et al 2004; Kim et al 2009; Chen et al 2007)

In addition, the Japanese market is known for its opposition to foreign investors and has always been considered as a hard market to penetrate as consumers usually favour local brands over foreign products. Also Japan’s governance has a strong hold on corporate activities and many organization owners usually do not do sell or merge with foreign investors unless they are convinced of the firm’s performance levels which in turn makes acquisitions and mergers with foreign investors a difficult process.(Anonymous,2002)

VODAFONE IN JAPAN.

As mentioned earlier Vodafone entered Japan in 1999 as a result of its Acquisition of Air touch in America which gave it a 26% stake in J-Phone a Japanese mobile phone group by 2000 Vodafone had acquired an estimated 60% of J Phone. Vodafone took its time before entering the Japanese market. This approach paid off as they could not afford a hostile takeover as was the case when they acquired Mannesman in Germany because this could have affected their relationship with other Japanese stakeholders. (Anonymous, 2002; Blokand, 2007; Anwar, 2003)

After its acquisition J Phone seemed to be making progress as it rose to become the 3rd largest telecommunications group in Japan by 2002 as its subscriber base had exceeded 12 million in the same year. J Phone’s target population prior to its acquisition was young adults and they had developed handsets with gadgets that were appealing to the young generation. They also introduced the Sha-mail (Picture messaging service) which marked the beginning of the picture messaging trend in Japan. Their marketing campaigns involved using Japanese pop stars and idols to attract new customers (Blokand, 2007; Dodourova, 2003)

However, with the introduction of Vodafone’s globally standardized product things began to change. Vodafone introduced handsets which were acceptable in Europe to Japan ignoring the fact that Japan was more technologically advanced than Europe. As a result of this J Phone (re-named Vodafone KK in 2003) began to loose its customer base. Also in an attempt to create a global brand Vodafone delayed the launch of its 3g service (which allows customer watch videos and use teleconferencing) because they wanted to create a global product allowing their local competitors such as the KDDI group and NTT DoCoMo to commence 3g usage one year ahead of them. Eventually, when Vodafone KK’s 3g package was finally launched supply was limited because the 3g handsets were being shipped from overseas. (Hill, 2009; Blokand, 2007; the Economist, 2004) Also inadequate investment in network infrastructure caused Vodafone to suffer bad network connection that caused them to lose subscribers. (Euro-Technology, 2009)

Vodafone’s choice of strategy for its expansion into Japan is obviously the global strategy advocates the standardization of all products and services irrespective of the level of local responsiveness required in the location.

Vodafone attempted to change strategies by involving so level of local responsiveness(from global to transnational) via the introduction of handsets tailored for the Japanese market to rectify its underestimation of Japanese customer’s peculiarity by offering them what they required instead of what the company wanted. Also the Japanese government in 2004 brought in new regulations against handsets which could be roamed since there was a propensity for them to be used by criminals. (Euro-Technology, 2009; Anwar,2003)

However due all the above listed reason Vodafone KK struggled to retain its market share from 2002 to 2004 (See Diagram) .Its competitors like DoCoMo, who was the market leader with about 56% share and KDDI with about 23%.

Diagram I: Mobile Phone Subscribers Net Growth

Source: The Economist, 2004(September 30th Edition)

By 2004 when KDDI had moved most of its subscribers to the 3G technology and DoCoMo had moved about 10%, Vodafone had been able to connect only 1% of its subscribers (Economist, 2004). By February 2005, Vodafone had gained 527,300 subscribers while KDDI and DoCoMo had gained 10 million and 17 million 3G subscribers respectively. By October 2005, Vodafone’s figures dropped by 103, 100 subscribers while DoCoMo and KDDI had attracted 1.65 million and 1.82 million subscribers respectively. At this time, Vodafone KK had captured only 4.8% of the market. (Blokand, 2007; the Economist, 2004; Lewis, 2006)

Vodafone sold its Japanese branch to Soft Bank in March 2006 and by October in the same year Soft Bank reported a year-on-year sales revenue increase of 144.3%, with operating profits up a staggering 260.4% because they used a purely localized approach and catered to the markets needs. (Jing, 2009)

Nevertheless, Vodafone’s global strategy succeeded in Germany although according to Weber (2006) Germany was a few years behind Japan considering the obtainability of mobile services, such as data services, 3g, cameras and music phones. It was able to utilize its economies of scale and experience curve advantages, to maximize profits.

Vodafone applied a slightly different strategy in entering this market as it merged with Mannesmann via a hostile bid for the company whilst it was in financial trouble. Mannesmann acquired Orange (UK) in 1999 and faced difficulties recuperating its investment. Vodafone saw this opportunity and bid for Mannesmann to subvert other companies like WorldCom or AT&T acquiring the company. (Boemer, 2007)

On entry into the market in 2000 Vodafone divested some of Mannesmann subsidiaries to recover funds. However, it is apparent from the above that the challenges Vodafone in Japan were much more complex in comparison to Germany. Its main competitors are T-Mobile, E plus and O2. At inception the Vodafone introduced its standard products from the United Kingdom like Voice calling and SMS’s, mobile internet was not introduced until 2003 as it was not popular and Vodafone decided not to begin this service in Germany till 2005. (Boemer, 2007; Weber, 2006; Henten et al, 2004)

Vodafone utilized different forms of marketing approaches but the most successful was its loyalty packaged dubbed ‘stars’ introduced in 2002 helped it increase its market share substantially. Furthermore by 2005 Vodafone had gained 35% market share followed by O2 which had 32% then E Plus with 19% and T-Mobile had 14%. This was a total opposite of Vodafone performance in Japan. (Von Kuczkowski, 2005)

In addition Japan is noted for being at the helm of technological development called “gijutsu rikkoku” in Japanese which means “technological nation building” and it exports its technology. Therefore it is possible to assume that the Japanese would be more interested in high-tech gadgets and services than Germans. (Boemer, 2007; Weber, 2006)

The difference in cultural practices must not be ignored because the German business circle was not controlled by ‘Guan Xi’ which refers to the relationships between people in a community the higher and tighter the level of ‘Guan Xi’ a person has in China and Japan the better his business prospects within the country .(Yeung and Tung, 1996)

Vodafone Japan did not generate a trustworthy brand image in the Japanese market and failure to tailor their product to the needs to its customers, which is a major faux pas in marketing and company survival made matters worse.

Recommendations

Vodafone in Japan would have succeeded if it had avoided using a global strategy as it had the capability to succeed, if it had considered the tastes of the people and attempted a transnational approach to its expansion plans.

Also, Vodafone should have used its competitors’ products and services offering as a benchmark for its own services. Instead of taking a ‘one size fits all approach’ into Japan as this had a negative impact on its services and performance.

Similarly, if Vodafone had tried to satisfy its customer base of students and the younger population before endeavoring to penetrate a new market of families and the corporate world.

Moreover, considering that J-Phone had been on a market increase streak for over five years, Vodafone should have used J-Phone’s local knowledge of the market and combined its experience create a winning team instead of trying to create a global brand and cut cost by introducing a large number of handsets that could be sold throughout the world.