Competitive Strategy for Dialog Mobile

Competitive Strategy 1 Competitive Strategy for Dialog Mobile Competitive Strategy 2 ABSTRACT The study aims at devising a competitive strategy for Dialog Mobile, the provider of mobile telephony services which is the core business of Dialog Telekom PLC. Dialog which currently has customer base of over 5 Million and a revenue share of over 60% is the market leader in Sri Lanka’s mobile industry.

However due to aggressive competitor price wars, the entrance of multinational giants such as Bharthi Airtel, global and domestic economic downturn, fluctuating inflation and high cost of energy combined with a bullish expansion strategy, Dialog had to face a loss of Rs. 2. 88 Billion in 2008 from a profit of 8. 91 Billion in 2007. This forms the background for Dialog’s competitive strategy. Since the industry has an Oligopolistic structure, constant price wars are putting the industry at risk.

In order to be sustainable in such an environment it is crucial that Dialog focuses on customer retention and acquisition via customer centric policies, processes and a culture of relentless pursuit towards exceptional customer service. This would have to be backed by lean processes, prudent investments and rigorous project management. Dialog should also consider the feasibility of following an outsourced model by handing over high cost activities such as network infrastructure management and IT to selected vendors. Competitive Strategy 3

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Dialog GSM is the country’s largest cellular network providing services to over 5 million customers across the island (Dialog, 2009) In addition to its core business of mobile telephony, Dialog Telekom operates Dialog TV, a direct-to-home satellite television service, Dialog Broadband which offers fixed-line services and broadband internet and Dialog Global which provides a wide range of international telecommunication services. The scope of this study is limited to the formulation of a ‘Competitive Strategic Plan’ for Dialog Mobile – which is the largest revenue contributor.

The total mobile subscriber base as at 31st December, 2008 was 5. 51 Million, out of which12% consists of post paid customers. The ARPU for post paid was Rs. 1404, while Prepaid was Rs. 319 as at 31st December 2008 (Dialog, 2009). Competitive Strategy 7 Preliminary Business Analysis Value Creation Dialog Telekom PLC’s Vision and Mission provide insight into the ways in which the company strives to create value to its customers. Vision: “To be the undisputed leader in the provision of multi sensory connectivity resulting always in the empowerment and enrichment of Lankan lives and enterprises” (Dialog, 2009).

Mission: “To lead in the provision of technology enabled connectivity touching multiple human senses and faculties, through committed adherence to customer driven, responsive and flexible business processes and through the delivery of quality service and leading edge technology unparalleled by any other spurred by an empowered set of dedicated individuals who are driven by an irrepressible desire to work as one towards a common goal in the truest sense of the team spirit (Dialog, 2009). Competitive Strategy 8 Figure 1 Value Creation Customers’ perceived benefit CS =PB – MP Value Created PF = MP – PC Organizational cost

Being a mobile telecom service provider in a nutshell the company provides value to society by enabling people to be accessible at any time from any place at an affordable price. With regard to the ‘reason for the company’s existence’ it would be prudent to initially take into account the following requirements/characteristics of mobile telecommunication; • The existence of significant entry barriers due to the need for approval from TRC (Telecommunication Regulatory Commission) for commencement of operations Competitive Strategy 9 • Extremely high capital and operational expenditure requirements for nfrastructure (base stations, towers, contact center and service outlets, systems) and maintenance • The requirement for specialized knowledge regarding every aspect of Mobile communication • The need for a significant workforce in order to start operations and maintain status quo post commencement • An extended payback period resulting in the need for revenue generation in order to be sustainable (consumption of the service sans significant profit generation is not financially viable) All aspects mentioned above make it impossible for a single or small group of individuals to replicate the production of mobile telecommunication.

This is in line with the reflections of Coase (1937) who stated that firms are more efficient at coordinating activities in comparison to markets. Dialog Telekom would have the benefit of economies of scale & economies of team production, thus drastically reducing cost of production. The other significant advantage is the common ownership of productive resources such as engineering, legal, IT, accounting, charging etc. Competitive Strategy 10 Micro Economic Analysis Cost Structure

Dialog Telekom being a mobile network operator has to collaborate with many suppliers and stakeholders in the value chain in order to run the operations and provide sufficient value to the customer and thereby earn profits. Figure 2 DTL cost structure Banks, Finance companies Suppliers of support services such as dealers & franchisees Government taxes Network equipment suppliers Dialog Telekom Other suppliers of capital items – PCs, headsets etc Hand set dealers & retailers Direct costs – Airtime and SIM card retailers

Customers Competitive Strategy 11 The above diagram shows a ‘helicopter’ view of the various stakeholders and the way in which cash flows in and out of the company. The key source of revenue is the Corporate and retail consumer base. Table 1 Direct costs Table 2 Operational costs Figure 3 Value chain Network related costs formed a major portion of direct costs, while selling expenses formed a major portion of operational costs (Dialog, 2009). Competitive Strategy 12 Five Forces Analysis Figure 4 Five forces analysis

Threat of new entrants Threat posed is relatively high not withstanding significant entry barriers ICT company ‘Maxis’ is poised to launch operations to become the 6th mobile operator – Supplier power Many suppliers Suppliers currently wield relatively low power – Existing rivalry amongst competitors 04 fixed line operators 05 Mobile operators 29 ISPs Intense rivalry amongst competitors – Buyer power Buyer power is relatively high Switching costs are low Many mobile operators to choose from Threat of substitution VOIP and CDMA can be considered substitutes However, hreat posed is minimal – Competitive Strategy 13 Existing Rivalry Amongst Competitors There are currently 04 mobile operators that could be considered direct competitors to Dialog, namely Mobitel, TIGO, Hutch & Bharthi Airtel. The biggest competitor currently is Mobitel, with a market share of approximately 18% in comparison to Dialog’s 53% (Bartleet Mallory stockbrokers, 2008). Mobitel follows an extremely reactive strategy, where it mirrors every action undertaken by Dialog. For example, Mobitel launched 3G service soon after it was launched by Dialog.

Mobitel also follows predatory pricing techniques by constantly undercutting the prices set by Dialog in a bid to lure customers away. Bharathi Airtel, the latest player in the industry is a market giant in India, with over 100 Million subscribers and a market share of over 25% (Report Buyer, 2009). Airtel’s strategy has always been providing affordable mobile services to customers. TIGO, which was formally known as Celltel concentrates more on the Prepaid market. TIGO was the first player to provide ‘per second billing’ facilities to customers.

Hutch while being a dominant player in India is more of a fringe player in Sri Lanka that also emphasizes on the Prepaid segment. Threat Of New Entrants While barriers to entry into the market are relatively high, there are quite a few players that have either entered or are in the process of entering the market. One such player is Maxis, a Malaysian company which already has operations in India and Indonesia. Maxis also owns 44% of shares at SLT (Bartleet Mallory stockbrokers, 2008). While Maxis would Competitive Strategy 14 further erode Dialog’s market share its strategy might be less predatory in comparison to some players.

Other players with plans to enter the Sri Lankan market are Reliance Mobile and MTNL, both Indian companies. Reliance Mobile, like Airtel is also a giant in the Indian market constantly at war with the latter for the number 01 position. The Power Of Suppliers There are many suppliers of mobile infrastructure components in the industry. These suppliers supply products such as base station components, cell switching components and services such as base station assembly, tower assembly and switching optimization. Vendors include Huawei, Sun, Ericsson etc.

Dialog Telekom being an industry giant and the fact that there are numerous vendors means that the influence of the vendors is less in comparison to the power wielded by Dialog. Furthermore mobile service providers purchase products in large quantities over a long period of time. This would also include the purchase of services such as assembly and maintenance. Securing such contracts are extremely important from the supplier’s perspective. Vendors such as Dialog due to its enormous influence in the local industry will also influence the research and development process of the vendors and the type of technology that is developed.

For example, the adoption of 3G technology would have dictated the priorities of the vendors in terms of the type of technology that should be introduced to the market. Vendors in general have high fixed costs such as R and low incremental costs thus making it extremely important that they secure profitable contracts with mobile operators. Competitive Strategy 15 The Power Of Buyers In stark contrast to the vendors, the power of consumers is high. This is due to the low switching costs. A new SIM only costs approximately Rs. 00; hence customers do not have to spend a great deal if they want to switch operators. This power wielded by the consumer is only compounded by the presence of many mobile operators in the industry. The fact that these operators also include giants such as Bhrarthi Airtel only result in providing the buyers more bargaining power with their current operator. SWOT Analysis Strengths The main strengths of Dialog are threefold, one its brand name, two its vast infra structure and three the financial backing from its parent company Axiata.

According to Perera (2008) from the Asian Tribune, the company was voted the number 1 brand for two consecutive years with a brand value of Rs. 12. 324 million in 2006 and Rs. 12. 401 million in 2007. The company was also voted number 1 amongst the top ten companies in April 2008. Innovation has always been one of Dialog’s strengths; the company was the first to launch SMS, MMS, Song catcher, mobile commerce, mobile e mail, information on demand etc in the region. Dialog was presented ‘the most innovative brand of the year’ award in recognition of this fact at the SLIM brand excellence awards.

Competitive Strategy 16 In terms of infra structure and reach Dialog Telekom has over 1200 base stations spanning all provinces and has over 100 customer service centers, which is more than any other company in the country. Dialog operates 2. 5G and 3G networks. It is also linked to over 200 global destinations via international roaming (Dialog, 2009). Axiata group Berhad is the emerging leader in Asian mobile communications. It has controlling interest in Dialog Telekom along with many other subsidiaries in the South East Asian region.

The continuous financial support provided by Axiata for Dialog Telekom is one of its key strengths and has had a great impact on the development and expansion of the company. Dialog in return has been a significant contributor of profits for Axiata. Weaknesses One of the key weaknesses of Dialog Telekom is its increasingly high costs. A feature of many conglomerates that experience rapid growth is the inefficiencies that ‘silently creep in’. Total costs increased by 40% as at December 2008, with costs of finance increasing by 233% and depreciation by 81% (Dialog, 2009).

Dialog also has a 3500 strong workforce which has resulted in overlapping scope of work across many divisions and units. The increasing size of the company has also lead to inefficient processes and unnecessary beurocracy. As a result it would be more and more challenging for the company to make swift changes in its strategic direction. Bigger companies also have the added danger of being further distanced from the end consumer of their products and services. This danger is also a reality due to many personnel being unaware of VOC (Voice Competitive Strategy 17 f the customer), thus resulting in policies that aren’t necessarily customer centric in nature. Other weaknesses include its legacy systems. Most of its systems require upgrades or changes due to the strain imposed by the rapidly growing customer base and advances in technology over the years. However such changes cannot be made within a short timeframe and huge amount of financial resources and time are required to successfully implement changes. Opportunities Current mobile penetration in Sri Lanka is estimated to be around 50% with room for a further 20% in the short term (Lanka Business Online, 2009).

At the end of 2008 there were 11. 087 million subscribers with an annual growth rate of 39% which is a drop from 48% in 2007 and 61% in 2006. Provinces such as North West, North Central, Sabaragamuwa, East and north have a fixed line distribution of below 10% and therefore provide ample opportunity for increased mobile penetration. Threats The main threats associated with the mobile industry are the increasing number of competitors and the global economic impact on customer spending patterns. The increasing competition has lead to huge price wars which has in turn negatively affected all the players in the industry.

This trend could have a long term impact on research and development and the investment into new technologies. Therefore even though companies Competitive Strategy 18 might feel that they are able to remain competitive in the short term it could result in long term reduction in the value provided to consumers. Dialog is not immune to this problem, but rather it is has reacted to the price wars by drastically reducing the tariffs and by providing customers with packages that include 1000 minutes outgoing free call charges. Furthermore the rate of penetration is also on a reducing trend.

Market Structure & Customer Behavior The telecommunication industry in Sri Lanka consists of a few key players. As mentioned prior, the industry consists of 05 mobile operators and 04 fixed line operators. 100% of the mobile communication market share is owned by these 05 players. There are also significant barriers to entry. A firm would require very large financial resources to start operations. Existing dominant companies would also have influence over the suppliers and essential resources such as a qualified and skilled workforce, network infrastructure and dealer network.

New comers would have to negotiate terms with the same vendors who would have more leverage due to their existing contracts with the incumbent players. New entrants would also face barriers such as requiring approval and licensing from the Telecommunications Regulatory Commission for the commencement of operations. The success of any startup company in the industry would also depend on its own brand recognition (from operations in other countries), since it would have to compete with companies that have a loyal customer base with significant brand recognition locally.

The type of VAS (Value Added services) provided by the players in the industry are to a large Competitive Strategy 19 extent homogenous in nature. All these factors are indicative of an Oligopolistic market structure. The telecommunication industry is also a reducing cost industry. This is due to the fact that as the number of players in the industry increases the suppliers of network infrastructure would experience economies of scale. This would result in lower input costs for the mobile operators who also purchase items in bulk quantities.

With respect to customer behavior patterns, customers are generally price elastic; thus as a rule when prices are increased by a given percentage, usage reduces by a larger percentage. However, this behavior pattern cannot be taken for granted since there are various other factors that have an impact on the usage patterns of customers. Dialog Telekom PLC Performance Review for 2008 The customer base grew to 5. 51 Million at the end of 2008 recording a 29% growth in comparison to 2007 (Dialog, 2009) Table 3 DTL subscriber growth Table 4 DTL revenue growth Competitive Strategy 20

Figure 5 DTL revenue growth – Investor forum 2008 Average revenue per user had dropped by 23% for Prepaid and 17% for Postpaid respectively. This was due to aggressive price wars by the competitors which resulted in Dialog significantly reducing its tariffs. However, the reduction in prices did not significantly increase the amount of usage due to reduced elasticity of demand, while the 29% increase in customer share was conservative at best. Prepaid revenue contribution was 48%, while postpaid revenue contribution was 29%. VAS account for almost 10% of the total revenue (Dialog, 2009) Table 5 DTL Direct cost comparison

Table 6 DTL Operational cost comparison Competitive Strategy 21 As captioned there was a 48% increase in direct costs and a 36% increase in operational costs YoY (year on year). This was due to an increase in International telecommunication levy & frequency fees, increased telco depreciation, an increase in network costs (driven by increased energy costs) and an increase in customer related costs. Increases in operational costs were due to increased operations (increased number of base stations), increased maintenance costs and inflationary pressure. Figure 6 DTL Quarterly revenue growth

Figure 7 DTL Subscriber growth Competitive Strategy 22 There was a noticeable reduction in the subscriber and revenue growth between the second and fourth quarters of 2008. However, quarterly growth was 10. 7% as at Q4 which the highest since Q2 2006. Table 7 DTL Financial performance snap shot Profit after tax was a negative Rs. 1. 5 Billion. This was due to many factors such as: – Rising energy and transport costs – Local and global Macro economic downturn – Reduced elasticity levels – Inflation – Predatory price wars and marketing tactics of competitors Competitive Strategy 23

Macro Economic Analysis Figure 8 Business cycle Peak Peak Trough Recession Expansion One business cycle time The global economic crisis which started in mid 2007 and worsened in 2008 inevitably had an impact on the Sri Lankan economy which also had to contend with a civil war for the last three decades. The global economy is currently facing a recession, largely due to mishandling of debts in the U. S which eventually had an impact on the global economy. Some analysts are hopeful that the ‘worst is over’ and that the real GDP has passed the ‘trough’ stage and that the economy might be on the rebound.

The 30 year long war has lead to immense war related spending by the government with less attention given to development. In a bid to retrieve the money government taxes Competitive Strategy 24 have been regularly increased, thus having a negative impact on customer’s disposable income and resulting spending patterns. The global economic crisis only added ‘fuel to the fire’ with millions of workers losing their jobs worldwide. This in turn had a ripple effect on the country’s expatriates who are a great source of foreign income.

Foreign remittances are used to take care of 70% of the country’s trade deficit (Pushparanjan, 2008). These expatriates were amongst the first to be retrenched and forced to return to Sri Lanka. This situation was compounded by reduced demand for goods and services produced locally, thus resulting in widening balance of payments and closure of companies that rely on exports. Garment companies for example account for 3 Million dollars in foreign income annually, of which 50% is reinvested in fabrics and machinery (Samath, 2009).

The resulting loss of jobs for thousands of people in the local industry has a direct impact on their overall spending on goods and services. This domino effect has indirectly resulted in low mobile usage and adoption of new services resulting in a reduction of net profits. However, the end to the military conflict in Sri Lanka after 26 years has resulted in a positive outlook for the country’s economy. The all share price index rose to a 7 month high and the central bank of Sri Lanka has shifted its forecast from 2. 5% growth to 4. 5 to 5% growth by the end of the year (Shiyin, 2009).

The government has already laid out plans for massive development initiatives in the North of the country. This augurs well for the economy as a whole and the mobile industry in particular since it would result in increased Competitive Strategy 25 employment opportunities which would in turn hopefully translate to increased mobile usage. Economic Forecast The rate of inflation is expected to be around 7% in 2010 and an average of 6. 5% in 2009. GDP growth rate is expected to improve from 2. 5% to 4. 5 – 5% by end 2009 due to the end of military operations ( Figure 9 Sri Lanka GDP analysis

As shown the projected trade deficit for Sri Lanka is 9% of GDP for 2009. The trade deficit has been increasing YoY (Colombo Page, 2009) Competitive Strategy 26 Figure 10 Sri Lanka inflation trend Projected inflation rates are single digit figures; i. e. approximately 9%. This is a reduction from 14% in the previous year. To support growth, Sri Lanka in December unveiled a 16 billion rupees ($140 million) stimulus package and reduced the interest rates to 16. 5% from 17% (Thomas, 2009). Taxes imposed on mobile users in 2007 were 7. % Mobile Subscriber Levy and a ‘usage insensitive’ 5o rupee tax on subscriptions. The 50 rupee tax was later dropped and the MSL was increased to 10% in 2009. VAT was reduced to 12% in 2009 from 15% in the previous year Competitive Strategy 27 Figure 11 Sri Lanka mobile taxes This amended levy of 10% is beneficial to consumers who spend less than Rs. 2000 per month. However, overall this tax will have a negative impact on total consumer usage (Samarajiva, 2007) Driving Forces Driving Forces in the Local Industry Changes In Long Term Industry Growth Rate As at end 2008 there were 11. 87mn mobile subscribers in the market, a penetration rate of 54%, and annual growth of 39%. However, this rate of increase is slower than in previous years -48% in 2007 and 61% in 2006 (Sri Lanka communications report, 2008). With increased competition and predatory tactics it would become harder for any given company to experience substantial growth in the coming years. Competitive Strategy 28 Entry Of Major Multinational Firms With the entry of firms such as Bharthi Airtel and Reliance mobile in the pipeline existing firms would have to become more and more competitive in order to survive.

Innovative Business Models Many of the firms are developing innovative business models in the foreign markets. Companies have yet to implement extremely innovative models in the local industry. However Bharthi Airtel has initiated this trend with its ‘simple plans’ theory, where unlike the rest of the players in the market it has distanced itself from the concept of multiple rates during different hours to different networks (off peak, peak, weekend etc) Exponential Growth In Network Bandwith The bandwith provided by broadband internet providers has significantly increased over the years.

In the past 512 kbps was considered ‘fast’ and was the norm, now however, most operators provide speeds of over 2GB. This has changed the usage patterns and reasons for use by consumers. Regulatory Changes Certain players such as Bharthi Airtel were vying for the implementation of ‘number portability’, but this was not implemented by the government citing security concerns. The government also recently requested all mobile operators to ensure that both postpaid and prepaid customers are registered with their rightful owners. This has had a negative impact on the sale of prepaid connections.

Competitive Strategy 29 Reduced Consumer Spending Consumer spending has significantly reduced and has had an impact on the bottom line of most players in the market. Elasticity levels which were around 1 – 1. 5 in 2006, reduced to 0. 7 in 2008 (Dialog, 2009). This has forced companies to drastically reduce spending and in certain instances even retrench employees to reduce costs. The cost cutting measures will have an impact on training and development and R, which in turn would have an impact on the long term. Unemployment The unemployment rate which was steadily reducing over the years (6% in 2007, 5. % in 2008) is bound to face a reversal in 2009, due to the global recession. The central bank of Sri Lanka has requested the government firms to put recruitment on hold (Lanka Business Online) till the economy improves. This would have a direct impact on plans for expansion any organization. Increased Taxes Government taxes on mobile users has been in a constant state of flux and a reason for much concern amongst the mobile operators and consumers alike. This volatility of the government’s policies with regard to taxes will have a negative impact on the growth of the industry. Competitive Strategy 0 Driving Forces In The Global Industry The Internet And Digitization Of Content Internet usage in the country is still in its early stages. However one of the threats the internet poses with the increased bandwith provided by ISPs is the widespread adoption of VOIP, since this service would be provided FOC. This could become a direct threat to the telecommunication industry in the future. Strategic Plan For Dialog Mobile Short Term Enhanced Cost Management Cost optimization is crucial for an organization to remain competitive. As companies expand inefficiencies result as a byproduct.

Dialog is no exception, a bullish strategy for expansion resulted in reduced retained profits and a ‘bloated middle management’. A loss of Rs. 2. 88 Billion in 2008, compared to a profit of Rs. 8. 91 billion in 2007 is ample reason for rigorous attention to the prevention of revenue leakage and prudent investments with an eye on the long term. Competitive Strategy 31 Increased Focus On Customer Retention Often companies can get swept away by ‘concepts’, especially ones that give you a false sense of safety such as Customer Relationship Management, Customer Experience Management, Customer Lifecycle Management etc.

Most companies pay ‘lip service’ to these practices and they often believe that they ‘do’ practice it. However there is often a huge gap between actual customer satisfaction levels and the satisfaction levels perceived by the company. Rather than romanticizing these concepts, companies should actually practice it religiously. In the case of Dialog, it would mean ensuring that all customer facing staff have the right qualities for the job. Skills can be taught, but attitude is harder to change.

The true essence of customer service should be instilled and practiced constantly. This should be backed by the right policies and coordination amongst all stakeholder divisions in order to ensure that the customer’s needs are continuously met beyond expectation. Process Optimization To Support Customer Centric Objectives All processes as far as possible would have to be tailored with the customer in mind. However, most business processes tend to be ‘inward looking’, There is a constant ‘tug of war’ between various stakeholders who seldom work in synergy.

This is due to conflicting interests and lack of ‘customer visibility’. For example Finance and Credit departments create their processes with the sole aim of managing finances and credit collection, which tends to focus on the short term profit, rather than long term customer retention. The challenge then is for the process management team to ensure that all cross functional customer related processes are driven by customer centric objectives. This would also Competitive Strategy 32 include the removal of all non value adding processes and continuous review

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