Vodafone Issues, Risks and Opportunities

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This report aims to examine the issues faced by Vodafone Group Plc. It analyses the issues in depth by using industry framework like Porters Five forces to analyse the effect of micro economic factors of mobile phone market on the Group and to gauge the Group’s performance. The report also uses PESTEDG and Situational (SWOT) analysis in order to determine the factors that influence Group’s operations and decisions. Moreover, the report analyse the strategy of the Group in context of its global network comprising of its strategic partnerships, acquisitions and takeovers, depicting its operational capabilities.

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The findings reveal that the Vodafone Group Plc uses acquisition as its growth strategy and has mainly used shares for its acquisitions, which facilitated its emergence from the telecom crisis. Vodafone has a record of successful takeovers and its triumphant integration has enhanced its operational capabilities that can aid development of new services, technologies and applications. The report reveals that a high level of competition exists in the European market of the Group. Major brands such as O2 and T-Mobile are major competitors of the group and they have built a robust and sturdy corporate image in the market. Indirect competition is also increasing through Internet-based services. These, along with the European regulatory measures is predictable to limit further the levy for the network providers imposing further need for price cuts, which could harm the profitability of the company (Saplitsa 2008).

It is explicit that the Group has superior skills in acquiring companies and integrating them into its operations. The Group allows self-governance to their strategic partners and ensures them to work in a matrix structure to compete their local entrepreneurs. Vodafone have established a global presence with a differentiated image by promoting a Vodafone life style and enjoying a differentiating advantage is capable of leading a competition (Saplitsa 2008). The Group has invested huge amounts of capital in the cellular data networks which allows its customers to use data i.e. Internet on the phone. But it is facing threats in context of handsets having Wi-Fi capability that would allow a user to go on the web using the wireless LAN hotspots thus rendering its investment in the current business model a worthless electronic scrap.

The following recommendations have been made:

• Cost reduction and increase revenue in developed markets;
• Development of new products (Goods and services);
• Extension to developing markets; and
• Selling businesses that are not profitable (Saplitsa 2008).

1.0 Introduction

Background

Vodafone Group is the world’s leading mobile telecommunication company with headquarters in Newbury, Berkshire, England. Vodafone has global network in Europe, the Middle East, Africa, Asia, Pacific and the United States. The company’s goal is to be the communications leader in an increasingly connected world. Vodafone apart from basic telecommunications services offers other advanced services like Vodafone At Home and Vodafone Office integration, Vodafone Passport enablling customers to take their home tariff abroad, Vodafone Live! and Vodafone 3G. Vodafone have experienced many challenges and issues whilst its expansion and global reach, may it be in respect of acquisitions and takeovers and regulations (Banzhaf & Som 2006).

1.2 Aims

The aim of this report is to analyse the issues faced by the group whilst considering the main risks and opportunities that could influence the performance of the Group, and to recommend a possible solution, that might enhance the performance of the company. There are currently around three billion mobile customers globally; the majority are in the western world. However, 70% of the growth in customers in the next five years is predicted to come from emerging markets, especially China, India and the rest of Asia (Saplitsa 2008). Vodafone Group, operating in both emerging and mature markets, has acquired a very small share in Asian markets. The economics of the mobile phone market may affect the Group’s market share and may encounter significant threats in long run.

1.3 Scope

The report focuses on the analysis of the Group’s business environment, including analysis of its macro-environment (PESTEDG), Vodafone’s strategic analysis and business strategy development on Porters five forces followed by the group’s SWOT analysis. The report also outlines the Group’s penetrations into various markets via strategic partnerships and takeovers, when needed, and its operational capabilities. Lastly the report concludes, followed by its recommendations. All analysis is performed given the data and information available up to 2008.

2. Market Structure of Vodafone Group

Vodafone Group Plc is a leading mobile telecommunications company. It has a noteworthy existence in Europe, the Middle East, Africa, Asia Pacific and the United States through the Company’s subordinate undertakings, strategic parterships, allied undertakings and investments. The Group’s mobile subsidiaries function under the brand name ‘Vodafone’. In the United States the Group’s associated undertaking operates as Verizon Wireless (RFP Connect 2010). In the last few years, the Group has made arrangements with the network operators in countries where it does not have an equity stake. These Partner Market Agreements facilitates the Group and its partner operators to collaborate in the development and marketing of global products and services, with varying levels of brand image usage. The Group’s common stocks are listed on the London Stock Exchange (FTSE) and the Company’s American Depositary Shares are listed on the NASDAQ Stock Market (RFP Connect 2010). Vodafone Group Plc is a public limited company incorporated in England and has been operating in 26 markets (together with Partner Networks in a further 14 countries, with approximately 151.8 million registered customers and approximately 398.5 million total ventured customers (Banzhaf & Som 2006). Vodafone has focused several strategic goals, including, ultimate customer satisfaction, efficiently managing their debt to equity ratios, efficient global team, and expanding to emerging markets (Huvard et al. 2006).

2.1 Vodafone’s Acquisition and Integration Strategy

Companies that are aiming to be a global leader are progressively revolving strategic alliances as they do not have enough resources to prosper on their own (Wittmann 2007). Vodafone involved in various mergers and acquisition to lead different national markets Vodafone uses acquisition as its growth strategy. Vodafone has mainly used shares for its acquisitions, which has made Vodafone emerge from the telecom crisis. To enhance competitive positioning in a changing market merger and acquisition activity should be ingrained in corporate strategies (Karwal 2009). Vodafone merger and acquisition strategy followed same pattern every time they entered a new market. At first it identified the major players in the market and analyze whether they are compatible to challenge the service providers in different local market or not. The second step was to give a mission to the merged company to be a ‘challenger company’ in each national market. The strategic partners cooperated with a united goal of to compete as a challenger. This way Vodafone differentiated itself from a conventional telephone company. Moreover to sustain the common goal and overcome obstacles related to cultural alignment Vodafone allows self-governance to their strategic partners and ensure them to work in a matrix structure to compete their local entrepreneurs. However, Zollo and Singh (2004) argued that the acquiring company must ensure that the merged company is partially or fully integrated to the structure and process of acquiring firm. On the other hand McLennan and Troutbeck (2002) mentioned that understanding and assessing the partner’s cultural values, sourcing and capability is equally important as integration with the acquiring company. The growth at Vodafone was chiefly by acquisition. Although Vodafone supported their strategic partners in terms of cultural alignment and operations, the company pursued a diverse strategy for branding and crafting their identity. The branding decision usually depended on factors like the influential power of the local brand, its culture and most important the compatibility of operational structure of the acquired company. Vodafone added their brand name with the company they acquired for example; Vodafone acquired Mannesmann of Germany and renamed it as ‘Vodafone Germany’.

2.2 Operational Capabilities of Vodafone Group

Vodafone Group PLC operational capabilities support a product and service innovation strategy, which according to Kapur et al. (2006) is as follows:

• Market Penetration planning: selecting the appropriate market segments and developing the relevant products for them.
• Market segment management: selection of target audience to maximise returns and enhance profitability.
• Systems Development Planning: developing system that would facilitate effective and efficient process that leverages the development of investments.
• Product Development Planning: Product development life cycle, from concept to service, including people, processes and technology.
• Alliance management: structuring the organizational facility required to utilize the physical and intellectual assets of partners for multiparty gain (Henten et al. 2004).

The Group’s capabilities dwell on its management to successfully accomplish the acquisitions while maintaining an effective, low cost, organizational structure and their ability for research and development to facilitate pioneering technologies. Vodafone is able to sustain hi-tech leadership in mobile telephony systems. This capability should also be considered as their core competencies because these abilities give them a source of competitive advantage over its competitors (Huvard et al. 2006). Acquiring and merging capabilities has allowed Vodafone to grow their customer base globally. By empowering in research and development, 3G platforms for mobile telephony for both voice and data allowed Vodafone to maintain a competitive edge. The Group has precious, exceptional, and costly to replicate capabilities; hence it is potentially capable of developing new services, technologies and applications (Dodourova 2003).

3.0 Business Analysis of Vodafone Group Plc

The business analysis of Vodafone group comprises of PEST analysis looking at looking at the political, economic, social and technological influences, then Porters Five Forces Analysis; the threats of new and existing competitors, the power of suppliers and buyers and the threat of substitutes – in economics of mobile phone market followed by Situational analysis (SWOT); strengths, weaknesses opportunities and threats.

3.1 PESTEDG Analysis of Vodafone Group Plc.

The PEST factors have major impacts on how the Group operates and make decisions.

(P)olitical

Political factors include the tax policy, labor law, environmental law, trade restrictions, tariff, and political stability. Vodafone values customer relationship and hence is willing to shift their approach away from unit pricing and unit based tariffs to propositions that deliver much more value to customers in return for their loyalty (Butod 2009).

(E)conomic

Economic factors comprise the economic growth, interest rates, exchange rates and the inflation rate. Vodafone exerts justified price to its customers that enables them to purchase their product in a broad sense (Butod 2009). The Group has global network coverage to support its huge customer base that offers its customers global synchronization and a flawless wireless access allowing them to travel the globe on a special rate on the same network which is billed back to their home country (Banzhaf & Som 2006).

(S)ocial

Social factors include the demographics and psychological aspects and include health awareness, population growth rate, age group, career outlook and prominence on wellbeing. Vodafone caters the need for a handset that can be used as a fine gadget for every age group (Butod 2009).

(T)echnological

The swift expansion and growth of the mobile industry coupled with the increasing number of Internet users guarantee many potentials in the near future for a enormous global market that merge both innovations and technologies leading to an extensive demand for wireless data services in the future. Users in general look for high-performance wireless Internet access. However, existing cellular data services do not fulfill the needs of different users and providers. From a user’s perspective, data rates are leisurely and the connection set up takes long and is rather complicated. Moreover, the service is too expensive exceeding the amount that could be afforded by the general citizen (Kamel & Wahba 2004). Vodafone is highly inclined towards providing network coverage for its customers at a justified price. Vodafone takes a careful and considered approach to the location of our base stations to provide enhanced coverage and quality service particularly in high usage areas (Vodafone 2009).

(E)nvironmental/Ecological

Vodafone aims to be recognised as a ‘green’ brand in at least 75% of the developed markets by March 2012. A range of initiatives taken by the group includes handset recycling, implementing universal energy efficient charger, reduced packaging and E-billing (Gyves & O’Higgens 2008).

(D)emographics

Vodafone Group has been operating in 26 markets (together with Partner Networks in a further 14 countries, with approximately 151.8 million registered customers and approximately 398.5 million total ventured customers (Banzhaf & Som 2006). Vodafone considers all demographic and psychological factors and aims to provide good coverage for our customers whether they are in the countryside, in towns or within buildings (Gerpott & Nejc 2007).

(G)lobal

Vodafone is one of the most successful global companies, growing from holder of one of the first two mobile communications licenses in the UK, to being a dominant global brand. The Group’s is subject to regulation governing the function of their business activities. The regulation usually takes the form of industry specific law and regulation covering telecommunications services and general competition law applicable to all activities (Vodafone 2009).

3.2 Economics of Mobile phone market

Porter’s five forces analysis is a framework that is usually used for the industry analysis and business strategy development.

In the following analysis, the attractiveness of the Vodafone Group will be examined by elaborating upon Porter’s five forces model.

The bargaining power of suppliers

In the case of Vodafone Germany, the only network service provider to all mobile companies is the government. This makes the government monopolise of providing this service which build up a power of supplier over Vodafone. As a result, Vodafone consider this as a fixed cost, which it applies on the customer service charge. Porter (2008) argued that, in a monopolistic suppliers market, supplier has the power over companies, as it is the only provider of the product or the service they offer and there is no substitute of them. As a result, it has the authority to control the prices and the quality of the product or service. Supplier is serving many companies. However, it will not hesitate to get as much profit as it can from every company (Porter 2008). In order to manage the fixed cost, Vodafone has to apply a service charge, which helps on covering this cost and be applicable to customers that as a result raise another force to the company, which is the intensity of competitive rivalry.

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Rivalry of existing competitors

Vodafone has to cover its fixed costs. So when Vodafone gets the service from the government, it pays this cost even much of these costs are not only fixed cost but also sunk cost. However, the more customers, the less cost and the more profit. Alternatively, the cost of additional customers using the service is practically low and lower. As a result, to apply this cost to customers it must take into consideration the existing competitors, which build up a force to the company to keep on the market prices and to the degree of the service quality (Porter 2008). Rice (2010) mentioned that, competition is particularly critical to profitability only if it drops exclusively to price as the competition on prices transfer’s profits straight from the service provider to its customers. Cutting down prices are typically easy for competitors in order to see and match competitors price. However, continual price war makes customers pay a smaller amount for products. The power of rivalry reflects on the force of competition and the foundation of competition. The magnitude on which competition takes place, and whether competitors meet to compete on the matching dimensions, will have a foremost effect on profitability (Rice 2010).

Shifting threat of new entry

One of the major forces, which made a great threat to Vodafone, is that the new market entrants’ offers lower prices to reach as fast as they can a critical mass. However, the low price offered by the new entrant causes a problem to Vodafone in order to cover the high cost of the service provider. Therefore, Vodafone should stick with the prices, which make them able to cover their costs and sustain their profitability. As a result, customers may shift to the entrants who offer the service with lower prices. (Chen & Chong 2001) argued that, any changes of the prices or qualities will have an optimistic or pessimistic effect on the threat of new entrant. However, with elevated barrier of entry, the number of new entrants would significantly diminish and thus influence the negotiating power of customers and suppliers. Porter (2008) suggested that the goal of competitive strategy is to determine a position in the industry where the company can best shield itself against the five competitive forces or can manipulate them in its business model.

The bargaining power of customer

When a new entrant or even existing competitors makes more offers such as free text messages and downloads offers, Vodafone has to follow up with the market or customers will switch to the company, which has the best offers. However, this makes vigour in Vodafone to retain its customers. So it has to manage its costs to follow the competitors’ offers and even try to make more offers so it can be able to attract more customers. Grundy (2006) stated that, with the availability of several alternatives, customers have elevated bargaining power. Thus, poorer barrier of entry for new products boosts bargaining power of buyers. On the other hand, elevated entry barrier may result in higher concentration of market would lead to lower bargaining power of buyers (Grundy 2006).

The threat of substitute product or service

When the price of cell minute decreases, customer substitutes their fixed line with the cell line. So, if Vodafone incurs costs, it will still have to keep the prices low or customers will look for another substitute that builds up a force to Vodafone that should take it into consideration. Major brands such as O2 and T-Mobile are building a stronger image and incidence in the market (Banzhaf & Som 2006). It is argued that, if the price or quality of the services decline, customers will look for substitutes. However, substitute services have the similar consequence as direct competition in taking business away. Substitutes become more or less intimidating over time is because of growth in technology that crafts new substitutes or alter price-performance assessment in one course or the other (Narayanan & Fahey 2005).

4.0 Findings

The following section discusses the potential issues faced by the Group and their proposed solution.

4.1 Increasing share in Asian markets

There are huge untapped markets that Vodafone needs to venture out, which would enable it to grow its market stake in the world market. Also emerging markets like India and China where Vodafone has a minor holding in the telecommunication sector offers a huge opportunity for Vodafone to expand its customer base. These markets have over 150 million customer base where Vodafone has a holding of 3.27 percent (Banzhaf & Som 2006).

For the Group to increases its coverage in the emerging markets, it has to get more representative selling more mobile plans whilst reducing cost and releasing capital to widen its network. The Group should focus on increasing their retail base by adding agents and subscribers without having to build and maintain a costly distribution infrastructure (Agarwal & Ramaswami 1992). The Asian market was growing exponentially. If Vodafone share growth was going to keep pace, they needed a partner who could grow with them and handle product distribution issues by deploying logistics services and building the required infrastructure (Hamel 1991).

4.2. Network Security

The 3rd generation (3G) mobile phone technology is bringing with it a wealthier blend of content and providing more services (Kamel & Wahba 2004). This raises the concern of ethics as Vodafone can now offer a wide variety of content to mobile phones with this new technology (Sherif & Khaled 2004). 3G will enhance the sales of the telecommunication companies. However, it brings additional responsibility that includes the need to protect young people from inapt contact, including vicious games, gaming and erotic material. There are a wide variety of impending hackers to different types of networks, which includes internal as well as external hackers. Syed (2003) supports that argument stating that in order to provide optimal quality service to customers; Vodafone should always improve its diverse systems and endow with better solutions for its customers. In context of security it is vital to classify the security policy issue which reflects a set of rules and practices that detail and regulate the norms of security services to protect its vital resources (Kamel & Wahba 2004). This is usually put in practice by the need to inform different users, staff and managers of their responsibility for protecting technology, information and other vital and perceptive organizational resources. However, it is imperative that the policy itself classify the means through which these necessities are to be met. Furthermore, there is a requirement to distinguish what precisely is to be protected and what are the potential threats (Kamel & Wahba 2004).

5.0 Conclusions

In conclusion, over the years the Group has made exceptional evolution in executing against their strategic goals and has remained innovative. They have restructured the business to intimately align themselves to their goals, contributed by their outstanding and passionate leaders and people in the organization (Huvard et al. 2006). Vodafone Group is operating the leading mobile network worldwide with presence in both developed and developing market. From the analyses, Vodafone and its environment, the major risks, that are critical in terms of the future profitability of the Group are 3G market take‐up, level of regulations and new entrants in the market. The Vodafone Group has established a global existence and having invested highly in marketing, leads competition. The Group has invested huge amounts of capital in the cellular data networks which allows its customers to use data i.e. Internet on the phone. But it is facing threats in context of handsets having Wi-Fi capability that would allow a user to go on the web using the wireless LAN hotspots thus rendering its investment in the current business model completely. The Goup, even though has attained an enviable position in the telecommunication industry needs to carefully address the threats in the horizon, in order to ensure its future sustainability (Banzhaf & Som 2006).

6.0 Recommendations

The key goal of the optimal strategy is to create sustainable value for shareholders, considering both opportunities for benefit and threats to success (Saplitsa 2008).

The following is highly recommended to Vodafone Group Plc;

Venture in untapped Markets (emerging economies): A source of expansion could be in up-and-coming markets by building more strategic alliances. They are less penetrated hence the customer growth is the principal source of revenue (Agarwal & Ramaswami 1992).

Development of New Products: New technologies, devices and services are accessible to all. It is expected from Vodafone to provide a number of new services such as high speed internet access, innovative technologies like integrated mobile and PC, such as VoIP (Kapur et al. 2006).

Cost Reduction: In order to maintain competitiveness, Vodafone should reduce their expenses through further integrating, outsourcing and exploiting the economies of scale to their fullest extent. Integration across the Vodafone Group’s operating companies (Saplitsa 2008).

Increase Revenue: Vodafone faces increasing competition, but the hub of competition in many of the Group’s market continue to shift from customer acquisition to customer retention as the market for mobile telecommunications has become increasingly penetrated. Hence, Vodafone’s endeavour should be to stimulate additional voice usage and substitute fixed line usage for mobile in a way that enhances both customer value and revenue (Sotgui & Ancarani 2004).

Sell Unprofitable Businesses: As the foremost goal of the Group is to produce higher returns for its shareholders, Vodafone should invest in transactions that yield a return above the cost of capital and overall create substantial value for shareholders. Equally, it should sell businesses, which do not meet performance requirements (Saplitsa 2008).

In order to remain competitive in the market, the Group also needs to forecast the market economics in which it is operating and thus be prepared with the change of regulation (Kamel & Wahba 2004).