Introduction to Business: Vodafone Group Plc - Essay Example

Introduction to Business: The corporation chosen for this essay is Vodafone Group Plc. Vodafone has been a leading player in the telecommunications industry in the United Kingdom presently and looking to expand operations across the globe. Its success here had prompted plans for expansion across the globe. So Vodafone is in an important stage of its evolution as a multinational company. The decisions that the Vodafone management takes in any independent unit can have implications for the organization as a whole. Though the company had tasted success on a consistent basis in the past, any corporation’s sustained success goes beyond its past performances. In other words, the past successes may not indicate future positive results. Hence, its prospects as an investment option are not quite straight forward. While the company still retains many of its unique selling propositions and brand image, recent results have shown some existing technical glitches within the organization. The rest of this essay will dissect the facts and figures to arrive at a forecast of its performance. In 2000, Vodafone led the industry’s biggest takeover of another company with its acquisition Mannesmann (the German electronics company) for 112 billion pounds. But, since its glory days then, it had reached a trough last month, when it posted losses of nearly 15 billion pounds, which by the way is a record in the British corporate history. This is an important piece of information for potential investors as “the announcement followed a period of bad news for Vodafone, with rumours of a board-level rift, the departure of life president and former chief executive Sir Christopher Gent and the ousting of chief marketing officer Peter Bamford” (Business Week Online, 2007). But, there are concerns surrounding Vodafone regarding its performances in the near future. For example, while Vodafone has been concentrating on restructuring its business, its competitors have been moving ahead with “the job of developing their offer”. T-Mobile has lately run a very expensive advertisement campaign for its Flext tariff and has also initiated measures to revamp its stores. Orange’s parent company France Telecom, in the mean time, has adopted the mobile operators name as an umbrella brand for many of its subsidiaries, “including fixed-line and ISP services” (Foroohar, 2004). In addition to that, it is presently looking to expand beyond its core competencies and is working on venturing into Television and video-on-demand businesses as part of its broadband services. The other competitor in the horizon, O2, which had not been treated as a threat to Vodafone’s market share till recently has now refreshed its brand and is running an aggressive 10million pound ad campaign. Hence, investors need to consider all these factors before deciding to invest in Vodafone (Information Week, 2007). Formulation of business strategies depend on the Chief Executive’s assessment of future trends in the industry. If the top leadership’s reading of the opportunities and competition is not up to mark, the result may be disastrous. When these assumptions flounder, the company’s investments in these initiatives will go down the drain. Vodafone is fortunate in having Arun Sarin as its Chief Executive Officer since the December of 2002. Sarin took over the reigns when the company was in crossroads. It is to his credit that the company has seen healthy consolidation and expansion over the last few years. In this regard, the top management is well experienced and well qualified to steer Vodafone through any crisis in the near future. This fact should encourage investments in the company (Gillespie, 2007). Vodafone’s success in finding the right business strategy more often than not is attributable to its management’s understanding of such general considerations as its “competitive situation, the latent needs of customers, capital markets, the regulatory environment, and new technology, the structure of its industry, and the strengths and weaknesses of its rivals” (Foroohar, 2004). Yet this is only the first step. The organization’s ability to execute the strategy is of equal import too. Where Vodafone outclasses most of its competitors is 1. in its emphasis on the execution aspect of strategies and 2. seeing all decisions in the context of broader goals and objectives. A careful study of Vodafone’s decision making pattern reveals that a "second-best" strategy that they can execute well has always superseded an ideal strategy that may demand capabilities beyond their reach. Vodafone strategy was to acquire greater market-share saw them “target bigger, high profile clients while retaining and recruiting a quality workforce. Its challenge was to communicate a profound transformation in strategic direction throughout the organization in a manner that would elicit the support of the entire workforce” (Veitch, 2006) On the flip side, there are some genuine reasons for concern over its future prospects, due mainly to problems with brand image. For instance, Vodafone is an important and established player in the mobile sector “but, as a brand, it is simply not connecting with prospective customers. Consumers see Vodafone as the grandmother of the UK mobile industry. It has been around forever, everyone knows the brand and feels it can be relied upon. But thats about it - and its not enough”. In the words of a noted commentator, what Vodafone lacks “is a compelling and coherent brand proposition” (Veitch, 2006). In the past, there have been instances of brief spurts of innovation, a prime example of which would be the introduction of Vodafone Live. But, in the final analysis, the lack of a consistent brand strategy has undermined the company’s efforts to grow further. But, a few adjustments to the organization’s approach to management can improve its growth prospects. These include, 1. Rediscovering the brand values and delivering on them in every communication. 2. Finding out who the brands customers are and make marketing more relevant to them. 3. Giving marketers the freedom and support to do great work. 4. Learning lessons from brands that stand out due to their customer focus. Initiatives such as Oranges two-for-one cinema nights give consumers reasons to want to belong beyond product and price. The customer also seems to have been lost, in spite of a colossal marketing spend, somewhere between heavy infrastructure investment and the inner workings of a lumbering and fractious bureaucracy. So much so that the networks re-branding of a minority of its stores for local appeal is now considered big marketing news. Throughout its existence, Vodafone executives were confronted with conflicting choices. For example, there was always pressure to adhere to regulatory and industry norms from the government. On the other side, there was pressure from stock-holders to gain greater competitive advantage. Growing existing market bases or venturing into potential emerging markets. These were some of the choices that Vodafone has had to deal with. The sustained growth of Vodafone’s net asset value over the last seven years suggests that their choices have been correct. For example, Vodafone AirTouch’s division collaborated with Cisco Systems, Hyundai Electronics and TELOS Technology during trial implementations of a new Internet Protocol for a wireless communications network. Some of the partners in this venture were Vodafone’s direct competitors. Yet, the leadership took the prudent decision in laying the foundation for the technology of the future even at the potential cost of losing revenues in the immediate future (The Economist, 2007). Any business organization, when it expands and innovates, its alliances too expand. And the choice of an alliance partner can be very crucial. The Maidique & Patch topology is a useful framework of guidance in arriving at a decision. Statistical information from a pool of 110 large-sized corporations indicate that “first movers may focus on home government relationships but do not rely on foreign government ones” (The Economist, 2007). Moreover, most alliances happen between organizations that are structurally similar and whose strategic focus is convergent. We see a clear manifestation of this phenomenon in Vodafone’s overseas collaborations. For example, Vodafone has been looking for sometime now, to gain a foothold in the Indian telecommunications market. The management was confronted with a strategic choice. It could expand its own operations to this region, or, it can acquire a similarly structured regional corporation. Vodafone chose the latter option. This led to the acquisition of Hutch Essar India quite recently. It would be premature to comment on the success of this development. But, given the empirical data on Vodafone’s strategic choices and the validity of Maidique & Patch topology, this is likely to be another right decision. Hence, investors can look at this move as a positive one. The profit before tax for the year 2006 was 14.9 billion pounds in the negative. While this apparently looks like bad news for investors and other stakeholders, there is more to the story that what is obvious. According to a financial analyst, “While, u14.9bn sounds like a big number, Vodafones loss is due to a one-off write-down, and the underlying business made a profit of u8.8bn - hardly a disastrous result, and one that saw its share price rise 2% on the day these figures were announced. Vodafone is doing many of the right things to keep the City happy - pulling out of markets in which it is struggling, such as Japan and Sweden, and instead concentrating its efforts on emerging markets, including India, where growth is that much easier” (The Economist, 2006). Hence, the real challenges for Vodafone lie in achieving growth in mature markets – the UK being the core region. When compared to many of its competitors, Vodafones revenues are “highly reliant on mobile voice - a sector in which the cost of calls is going down, not up”. Another area that needs some thought and effort put into is “innovation” (The Economist, 2006). Clearly, Vodafone is not as innovative as it once was. It is difficult to identify Vodafone of today with the company that launched ‘Pay As You Talk’ feature in the UK, which really revolutionized the market. Another problem confronting Vodafone is some of its futile investments, say, like in technologies that have not taken off yet, not least 3G. Hence, there are some negative factors as well, to go along with many strong points that favour Vodafone. Investors need to consider all these factors before opting to invest in Vodafone. There has been some dissent shown by individual and institutional investors and other stakeholders over the direction in which Vodafone is moving. For example many institutional shareholders have expressed unhappiness about the telecom giant’s direction. Since 2004, “Vodafones share price has underperformed the FTSE 100, Londons leading stock market index, in marked contrast to the shares of O2, a far smaller mobile operator that has just been taken over by Telefonica of Spain” (Lakshman, 2007). In this scenario, there have been demands from investors for Vodafone to dispose of its 45% stake in Verizon Wireless, an important American telecom company, which is estimated to be around 25 billion pounds sterling worth. In addition to this, investors are also apprehensive about the company’s continuing problems at facilities in Japan. Yet, the company has marched ahead with policies in favour of expansion, making numerous acquisitions during 2005, the most high-profile of those acquisitions being the purchase of Telsim for 2.6 billion pounds. Vodafone has persisted with its “unique approach of being a mobile-only operator with unrivalled global scale” (The Guardian, 2007). But, now that such approaches are deemed inappropriate in the present global business circumstances, investors need to exercise caution before investing in Vodafone. In a similar vein, John Karidis, a financial analyst associated with for Man Securities complains thus: "Vodafone has consistently over-promised and under-delivered on its bigger is better strategy. Vodafone has long insisted that its size provides huge economies of scale when buying handsets, network equipment and software. But while nearly all of Vodafones regional operations use the same technology, called GSM, there are two big exceptions: its American and Japanese units. Verizon Wireless uses a different, incompatible wireless technology called CDMA, so there is little scope for economies of scale” (Lakshman, 2007). Similarly, Vodafone’s decision to acquire Tele2’s business units in Italy and Spain has proved to be a challenging operation so far. The decision to acquire was made in October of 2007, so it is early days yet. But if industry analysts’ predictions come true the balance sheet at the end of this financial quarter will show negative results. The reason for this probable glitch in Vodafone’s impressive management record is this: “Though senior managers were in favour, those directly affected by the acquisition are suspicious and unlikely to give wholehearted support. What the acquisition was to achieve was never made explicit, so what had to be done was unclear. The two divisions operated in completely different ways; a sharper cultural contrast could hardly be found, with each division having different values and ways of working. It is now believed that no propitious factors could help to overcome this daunting combination” (Krebs, 535). Nor can the company exploit its brand in America as a junior partner. And Vodafones trial-runs to use the same mobile phone handsets across the world was a stupendous failure in Japan, a key market that is a few years ahead of the West in terms of telecommunication technology. Only when Vodafone finally gave up on the idea and launched its new product range of handsets specifically made for the Japanese market, was there an end to investor scepticism. But in doing so, the company had undermined its principle of benefiting from economies of scale. More importantly, with main rivals in the Japanese market set to launch similar services quite soon, the far-eastern market place is going to be far more competitive (The Guardian, 2007). Another reason for Vodafone’s phenomenal success so far has been its “mobile-only approach”. But, across the globe, telecommunication service providers are beginning to merge all their fixed and mobile communication networks, offering reduced pricing deals for consumers who purchase both services combined. Also, many competitors are readying themselves to offer "quadruple play bundles of fixed and mobile telephony, broadband and television services” (Capell, 2007). If these new offerings become popular, Vodafones “mobile-only approach” will prove very costly indeed. Further, in the words of Cyrus Mewawalla, an industry analyst, “Its voice revenues could also be undermined as cheap voice-over-internet technologies, such as Skype, spread from fixed to mobile networks. Vodafone continues to reiterate its mobile-only strategy when internet standards are rapidly blurring any distinction between fixed and mobile pipes”. It seems then, that Vodafone management has no strategy for convergence in the near future. All stakeholders need to be aware of this fact, as the financial success of Vodafone in the coming years could impinge on it. But amid scepticism from some corners, Arun Sarin, Vodafones chief executive, is exuding optimism. In his own words, "There is an advantage to scale, and we are happy with occupying the mobility space." But he also admits that he is willing to be "flexible and pragmatic" about Vodafones strategy for the immediate future. As a matter of fact there are already some indications of palpable change, which must encourage all of the stakeholders. Mr. Sarin further notes that “Is there more scale and scope in Europe versus non-Europe? Of course there is. If you go global, especially if you are on different technology, then economies of scale exist, but to a lesser extent. What we have to do is keep these assets in the fold until there is clear visibility of value that we can take home to our shareholders" (Capell, 2007) As to the company’s investments in developing countries, where GSM technology is employed, Mr. Sarin believes that Vodafone can gradually retrench to more prospective markets of Europe and Africa while exiting from the highly competitive American and Japanese markets. This looks a good concept in paper, but its practicality is something that remains to be seen. In the final analysis, Mr. Sarin asserts, “Vodafone will be able to see how much demand there is for such services. It may be that only a small fraction of customers want them, in which case Vodafone will collaborate with fixed-line operators where appropriate. The company is also keeping a close eye on voice-over-internet technologies” (The Evening Standard, 2007). It must come as good news for all the stakeholders that the Chief Executive has not ruled out change altogether. But how far the company can retain its successful strategies of the past as opposed to adopting a radically new one is something the stakeholders will know in the near future. In the meanwhile, Vodafones reputation in terms of product innovation and financial performance will hold it in good stead in markets across the globe. 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