Vodafone Business Environment - Case Study Example

Vodafone: Out of Many, One 0 Introduction The case of Vodafone can be cited as an example of a company that thrived in a radically changing business environment. The company took astute business decisions and achieved tremendous growth by acquiring other organizations in the telecommunication sector. The companies that Vodafone merged with had the potency to provide synergies when combined with Vodafone’s own organizational capabilities. From 1999 through 2006, Vodafone invested $ 270 billion and expanded its empire in 26 countries. It had a controlling stake in 16 countries and a non controlling stake in cell phone operations in 10 countries. Vodafone reached this enviable position through a series of alliances, joint ventures and acquisitions. Section 2 of this paper analyzes Vodafone’s value chain and elucidates its capabilities and core competencies. The Porter’s generic strategies have been discussed and an explanation of which type of strategy Vodafone pursued has been detailed in Section 3 of the paper. Section 4 of the paper discusses in depth the acquisition strategies of Vodafone. An in-depth analysis of pre-acquisition rationale and steps involved therein like analysis of strategic fit, valuation methods and due diligence has been done. The post integration efforts have also been detailed in this section. An attempt has been made to apply the Haspeslagh and Jemison Framework in the post integration efforts. The discussion in this section extends to gauging the overall effectiveness of the acquisition strategy. Any organization with a global footprint can pursue a global strategy, a multi-domestic strategy or a transnational strategy. Vodafone’s choice of International strategy has been discussed in Section 5 of this paper. 2.0 Value Chain An organization is able to compete successfully in the marketplace if it can deliver superior value to its customer vis-à-vis the rival firms. The creation of this value entails a series of activities which have been referred to as the value chain by Michael Porter. The arrangement and completion of various activities and their linkages determine whether the firm will be able to manufacture a product for which the customer is willing to pay a price that is higher than the cost of producing the product. The activities in the value chain are divided into two broad categories namely primary activities and support activities (Grant, 2010, Pg 111) . 2.1 Primary Activities The primary activities enable the manufacturing of the product that the organization intends to sell in the market. This offering may be goods (tangible products) like furniture, soaps etc. or services (intangible products) like telecom services. The primary activities also enable the distribution of the offering to the target consumers. The gamut of primary activities also includes sales service. The five primary activities as per the Michael Porter’s value chain framework are; inbound logistics, operations, outbound logistics, marketing and sales, and service (Grant, 2010, Pg 213). Simply put, the primary activities invariably are the line activities of the organization. 2.1.1 Inbound Logistics Vodafone operates in the services sector. By nature, services are intangible; i.e. there is no physical product involved in the domain of services. The raw material like components, spare parts etc. are therefore conspicuous by their absence in the realm of services. As such the inbound logistics like material handling and warehousing do not apply to Vodafone. 2.1.2 Operations Under the ‘One Vodafone’ program, the company integrated its business architecture. The company introduced one billing system for 28 million customers, a commendable job by any standards (Banzhaf and Som, 2009).Efforts were also made to integrate the various divisions like networks, IT, service platforms, roaming, customer service, and handset portfolio that enabled the transformation of inputs into the final product. 2.1.3 Outbound Logistics Vodafone was pretty nimble when it came to order processing and distribution. Vodafone had a large network of company-owned and franchised stores that catered to the distribution and served as an important customer touch point. 2.1.4 Marketing and Sales Vodafone embarked on a global communication campaign in 2001 to increase its brand awareness. The main objective of this campaign was to create a global brand identity. Vodafone sponsored the Manchester United Football Club and the Ferrari One Formula team. These sponsorships enabled Vodafone gain massive awareness on a worldwide scale(Banzhaf and Som, 2009). In terms of pricing, Vodafone never believed in low prices. However, it did react to price changes made by the competitors. Given its financial muscle, Vodafone was in a position to decrease the price in response to a competitors’ initiation of price reduction. This move ensured that Vodafone did not lose any market share only because the competitor’s offering was of a low price. 2.1.5 Service The Vodafone brand epitomized great value and great service. The company always tried to innovate and create more value for the customer. The customers rewarded the exemplary services provided by the company as the brand preference and the market share of the company increased. 2.2 Support Activities The support activities, as the name suggests, are responsible for providing the requisites assistance so that the primary activities can be carried out smoothly. The four support activities are firm infrastructure, human resource management, technology development and procurement (Grant, 2010, Pg 113). These activities ensure that there are no stumbling blocks in the path of primary activities. 2.2.1 Procurement Vodafone used its clout to persuade and force suppliers to sell tailor made branded products to the company. The company’s economies of scale and scope enable it to bargain hard on the negotiating table especially when it came to procurement of material. 2.2.2 Technology Development Telecommunications is essentially a technology driven industry. There always remains a scope for product and process development for a telecom player. As a part of its restructuring initiative, Vodafone set up a new unit; Group Technology & Business Integration. The task of this group was to implement a standardized architecture for the company’s business processes. This group was also responsible for overseeing the roll out of 3G networks and development of Vodafone live! (Banzhaf and Som, 2009). 2.2.3 Human Resource Management Vodafone invested time and money resources when it came to human resource management. When the company was in pursuit of its ‘One Vodafone’ mission, it involved all employees by clearly communicating the message on the internet as well as intranet. The company held training programs for employees and also rolled out a magazine named ‘Vodafone Life!’ for its employees across the globe. Vodafone’s selection process was good enough to ensure that only the right kind of people joined the company. The company also worked hard to inculcate the right kind of skills in its employees. The customer service culture swept through the organization and the company ensured that the best practices are shared across national boundaries. In order to ensure that the promotion, appraisal and rewards system was in place, the HR department initiated the Global Leadership Program (GLP) which aimed to put managers with high potential on a fast-track career path(Banzhaf and Som, 2009). Under the said program, these managers were assigned different assignments across business functions and that too in different countries in which Vodafone had operations. 2.2.4 Firm Infrastructure It is a misleading notion that the firm infrastructure is a physical resource. The gamut of a firm’s infrastructure includes the organization’s strategic intent, culture values and general management. 2.2.4.1 Strategic Intent Vodafone’s strategic intent was crystal clear. The company intended to become a global behemoth in the telecom industry. In order to achieve this objective, the company pursued international expansion and provided its customers high quality services. This endeavor was undertaken with an aim to increase revenue growth and improve profitability at the same time. Vodafone followed a three pronged growth strategy(Banzhaf and Som, 2009); Increase revenue (voice and data) by focusing on top tier of the customer base. Reap the benefits of economies of scale and economies of scope. The company extended its reach by acquiring equity stakes as well as by inking partner network agreements. To compete in the market on the plank of differentiation and not on price. Vodafone never hesitated to acquire an organization or divest any business if it made strategic and commercial sense. 2.2.4.2 Vision At the heart of any initiative, action or decision taken by Vodafone was the company’s vision. The organization ensured that its employees adhere to the set of values that govern the entire organization. Vodafone relentlessly pursued its vision of becoming the world leader in mobile telecommunications. The company sought to enrich the lives of individuals, businesses and communities by enabling them connect better in a world that was increasingly getting mobile. As a part of its vision, Vodafone intended to provide superior customer experience. The company also sought leadership position in ensuring that, world over, mobile telephony becomes the primary means of communication. 2.2.4.3 Values Vodafone’s values hinge on four dimensions namely; passion for customers, passion for people, passion for results, and passion for the world(Banzhaf and Som, 2009). 2.2.4.3 (a) Passion For The Customers Vodafone recognized the fact that satisfying customers was a sine qua non for survival in the competitive marketplace. Vodafone was appreciative of the fact that the customers had reposed trust and faith in the company. It therefore strived to anticipate, understand and fulfill customer needs as a means to, not only satisfying them, but delighting them. Vodafone treated each of its customers as important and therefore responded to them in an appropriate and timely manner. 2.2.4.3 (b) Passion For The People An organization is as good as its people. Vodafone sought to identify, attract, develop, and retain outstanding individuals. Scores of talented people working at Vodafone thus made the company exceedingly successful. Vodafone reciprocated the commitment shown by employees through empowerment and job enrichment. The company nurtured team spirit and made everyday work enjoyable. 2.2.4.3 (c) Passion For The Results In whatever it did, Vodafone never let go of the ultimate aim; the aspiration to be the best. All the employees, irrespective of hierarchy or function, were passionate about giving in their hundred percent and thus played their part in accomplishing the desired results. The company trained its employees in a manner so that they could help the company achieve speed and flexibility in its day-to-day business operations. 2.2.4.3 (d) Passion For The World Vodafone enriched the lives of the people not only through its telecom services, but also through community services. The company intended to have a positive impact on the world. It contributed significantly for the betterment of the communities in which it was operating. 2.3 Core Competencies Vodafone possessed many capabilities like sustained cash flow generation, customer acquisition, and the ability to integrate an organization post acquisition. However, some of its capabilities spanned all its divisions and actually contributed positively to the value chain. These capabilities that became the company’s core competencies have been discussed below. 2.3.1 People’ Management Vodafone undertook a massive campaign to integrate and standardize its efforts across business locations. This mammoth effort was possible as people’s management was one of the core competencies of the company. Similar set of values and ethics were inculcated in employees across the board. Processes, procedures and rules were also standardized by the company. At the same time, the differences in local markets were recognized and therefore Vodafone gave certain amount of authority and autonomy to the managers so that they could fine-tune the strategy and base it on the local requirements. 2.3.2 Brand Building Vodafone had on its hand the onerous task of creating an identity and building a strong brand in diverse markets. The company had made numerous acquisitions in different countries and therefore the differences in company culture and strengths of the brand in different locations were pretty pronounced. Vodafone did a commendable job by adopting different models in different countries depending on the market requirements. Vodafone acquired BellSouth in New Zealand and Telecel in Portugal. These companies were rebranded as Vodafone New Zealand and Vodafone Portugal almost instantaneously. On the other hand, the company moved cautiously when it came to branding the newly acquired Omnitel in Italy. Vodafone took more than two years to rebrand Omnitel as Omintel Vodafone (Banzhaf and Som, 2009). All in all, it can be said that the core competence of brand building enabled it to brand most of its subsidiaries under the Vodafone umbrella and make it a single global brand. 2.3.3 Cost Advantages Vodafone reaped massive advantages in terms cost as it operated on a massive global scale. The company benefitted from economies of scale and scope and was thus in a position to keep its cost of operations low. 2.4 Barney’s Criterion of a Competitive Advantage Barney has given four criteria to gauge whether a capability is a core competence or not. These four aspects on which a capability has be evaluated are; valuable, rare, difficult or costly to imitate and non-substitutable. 2.4.1 Valuable If the customers are willing to pay a higher price because of the company’s capability, the capability can said to be valuable. Vodafone took good care of its employees by numerous means. In fact, ‘passion for people’ is one of the values of Vodafone. A motivated set of employees has the ability to deliver top-notch customer services and delight the customer. Having a committed, motivated and skilled workforce is indeed valuable. Likewise, ability to create a strong brand image is a valuable capability. A strong, well recognized brand has the potency to command a price premium. 2.4.2 Rare Capabilities like people’s management and brand building are indeed rare. A company may spend millions of dollars on advertising and other marketing activities but may still not be able to create the desired brand awareness. 2.4.3 Difficult or Costly to Imitate Having worldwide operations and achieving economies of scale in the telecom sector entails massive investments. While the cost of maintenance is pretty low, the initial heavy outlays act as a deterrent for new players to enter the industry or for the existing players to pursue massive expansions. To this extent, the cost advantages that Vodafone was able to generate are difficult and costly to imitate. 2.4.4 Non-Substitutable Each of the capabilities; people, branding and cost advantages is non substitutable. It is the people who lend efficiency and effectiveness to any functional area. There is no point in having a good product unless the consumer is aware of it.Likewise, there is nothing like being able to produce goods at a low price. In the ultimate analysis, a competent workfoce is extremely critical. Thus all theh three core competencies of Vodafone pass this test. 3.0 Generic Competitive Strategy Choice Porter states that a company can adopt one of the following two strategies; cost leadership or differentiation (Grant, 2010, Pg 206). 3.1.1 Cost Leadership Cost leadership strategies are typically adopted when the product/service is standardized. The producer achieves economies of scale due to mass production. The company attempts to configure its value chain activities in a manner that yields maximum cost advantage. Economies of scale, product design, input costs, capacity utilization and production management techniques contribute towards attaining cost leadership. Vodafone was in an enviable position as it generated massive cost advantage by cashing in on its global scale. 3.1.2 Differentiation An organization can compete in the market by differentiating its product/service from that of the rival. A unique feature or attribute offered by the organization enables it to charge a higher price from the customer and thus earn higher profits. It is important to note that a company following the differentiation strategy cannot ignore its costs. Such an organization will not be in a position to continuously raise the price and expect the customer to pay the ever increasing price. It will not be able to charge for any activity that is not contributing towards differentiation. 3.1.3 Vodafone’s Strategy Given its core competence of cost advantage, Vodafone could have easily become the cost leader. The company was pretty powerful to negotiate favorable terms with the suppliers. It could easily pass on this low cost as an advantage to the customer by charging a low price. In any given country, an operator could survive only if there were three or four telecom service providers. Growth was directly proportional to how much a player could penetrate. This aspect too suggested that Vodafone could become the cost leader and attract larger set of customers. However, Vodafone opted to follow the generic strategy of differentiation. It banked upon its superior service and offered value added services to the customers. 3.1.3.1 Strategy of Differentiation Vodafone did use the cost strategy in conjunction with the strategy of differentiation. It is noteworthy to mention that the company did not into a situation termed as ‘stuck-in-the-middle’. The tool of lowering the price was deliberately done and was followed as a counter attack to a competitor’s initiation of lowering the price. Vodafone had the cost advantage to sustain on the resultant low price. Backed by sound financial health, Vodafone could also easily compete on the price plank, in case need be. 3.1.4 Fitment of Core Competencies with the Differentiation Strategy Vodafone’s core competencies enabled it to follow the generic strategy of differentiation. The company could embark upon product and process innovation given its adept and skilful staff. The company had the cost advantage which meant that the cost of all activities were comparable, rather less, than the cost of the competitor. This meant that Vodafone could charge a high price for the differentiated service without bothering that the overall price would become too high. 4.0 Vodafone’s Acquisition Strategy There are two ways in which an organization can grow; the organic route to growth and the inorganic route to growth. Vodafone adopted the latter which means that the company grew through acquisition. 4.1 The Pre-Acquisition Rationale The rules of the game in the dynamic telecom industry had necessitated the need for consolidation. Players were on the lookout to gobble up small companies and thus increase their market presence. Growth through the inorganic route tends to be faster and therefore a takeover and acquisition strategy made sense for Vodafone as it was keen on capitalizing on the resultant economies of scale and scope. The pre-acquisition planning consists of three steps;  4.1.1 Analysis of Strategic Fit At this stage, the potential acquirer gauges whether the synergies would result from the acquisition. Vodafone was adept at pre-acquisition planning. In fact, the company had a definite set of principles when it came to acquisitions. The company never tried to acquire a state owned telecom monopoly simply because it did not want to get into any kind bureaucratic tangles. It is for this reason that Vodafone refrained from acquiring T-Mobile, the mobile division of Deutsche Telekom. Likewise, Orange, the business unit of France Telecom was also left alone by Vodafone(Banzhaf and Som, 2009). While such bureaucratic organizations were on the negative list, Vodafone actively sought to acquire the nimble footed, flexible market leader or the player on the second number slot in any national market. The acquisition of Mannesmann’s D2 is a case in point. By acquiring such players which were tagged as “challenger companies”, Vodafone got the potency to challenge the incumbents in the market that it sought to enter. Thus, Vodafone Germany became a challenger to Deutsch Telecom in the country. In fact, Mannesmann turned out to be Vodafone’s most profitable venture and largest subsidiary in 2003(Banzhaf and Som, 2009). In case a particular company did not fit into the scheme of things, Vodafone chose the to sell it off. The company struggled in Japan ever since it commenced operations in the country. It never really caught up with the other players; NTT Docomo and KDDI, which were operating in Japan. Vodafone exited the Japanese market and returned $10.5 billion to the shareholders from the $15.4 billion that it got from selling its stake to Softbank. Vodafone always remained a wireless company. It used innovations to offer new services to the customers but remained in the domain of mobile telecommunications. 4.1.2 Valuation of the Target Company The acquirer adopts various methods to decide the price to be paid for the target. Correct valuation is extremely important as the acquirer may end up paying a huge amount which the resultant gains from the acquisition may not be able to cover. In such a case, the acquisition would result in loss of value for the shareholders. Vodafone was wary of this aspect and therefore backed out of the AT&T Wireless acquisition in United States. Vodafone had offered $ 38 billion for AT&T Wireless while its US based rival Singular made a bid of $ 41 billion for AT&T. There was no dearth of financial muscle at Vodafone, however the company thought that raising the bid further would destroy shareholder wealth rather than create it. This example clearly illustrates that Vodafone attempted to do the correct evaluation of the takeover target and did not pay an amount which was unfairly high(Banzhaf and Som, 2009). Another aspect that made Vodafone different from rivals was the fact that it used shares to accomplish its acquisition objectives while its competitors used cash to fund the takeovers. The use of shares by Vodafone was, in part, helped the company to tide over the telecom crisis.  4.1.3 Due Diligence Due diligence entails taking into consideration the financials on the basis of astute accounting principles as well as bearing in mind the intangibles like the quality of human resources, cultural dimensions etc. Vodafone pursued its ambitious global growth plans primarily through acquiring companies. As a result of this buying spree Vodafone had operations in as many as 26 countries. Wherever Vodafone deemed that equity investments were not a worthwhile proposition, it inked a partner network agreement with a particular operator in that country. For instance, China, the most populous country in the world, has a huge potential market. Vodafone inked a pact with China Mobile by acquiring merely 3.27 percent stake in the latter. However, as a result of this deal, Vodafone got access to more than 150 million customers. It was clearly a case of win-win situation. Vodafone tested the Chinese waters without making a heavy investment while China Mobile benefitted from the technological and marketing expertise of Vodafone. The example shows that there was no dearth of due diligence in Vodafone’s acquisition strategy. The decision to acquire or to force a strategic alliance was decided on a case to case basis. 4.2 Post Acquisition Integration Efforts  The post-merger integration (PMI) is a difficult task to accomplish. This challenge becomes more pronounced when it is a case of cross border acquisition and there is a huge difference in the culture of the acquirer and the acquired. Vodafone always maintained that it was different from a traditional telecom company. The company urged its employees to work as entrepreneurs and gave them authority to take business decisions to ensure the smooth conduct of the organization’s activities. Vodafone adopted the matrix form of organizational structure to conduct its business and achieve the organizational objectives(Banzhaf and Som, 2009). 4.2.1 Haspeslagh and Jemison Framework The Haspeslagh and Jemison framework suggests that the senior management can choose absorption, preservation or symbiosis as one of the approaches in the post-acquisition integration stage.  Vodafone clearly followed the symbiosis approach which aims to be high on strategic interdependence as well as high on organizational autonomy. The company launched the ‘One Vodafone’ initiative which aimed to coordinate and integrate its business operations spanning 26 countries. Vodafone took its time to gauge whether a particular investment was good enough. If it thought otherwise, it looked at the disinvestment option. Thus any acquisition that did not prove to be symbiotic was discarded. For instance, Vodafone sold off its fixed line operations in Japan in 2003. The decision was taken as the fixed line telephony business was low on strategic interdependence. However, a couple of years later, the company invested money in the same country displaying its intention to increase its foothold in mobile telephony. 4.3 Success of Acquisition Strategy There is no denying the fact that the acquisition strategy of Vodafone has reaped rich rewards. Vodafone was the largest player in the telecom industry and was present in 26 of the 200 countries of the world. The company did not intend to stop any time soon. Vodafone announced that it would make inroads in Russia and other Eastern European countries and has set aside a budget of $18 billion for this purpose(Banzhaf and Som, 2009). There was still tremendous scope for further expansion. Vodafone did not have any presence in Latin America and many of the African countries. The Middle East market was also, at best, largely untapped. India, a booming economy and Arun Sarin’s native country, was a mouth watering opportunity that Vodafone had not yet latched on. All in all, the acquisition strategy enabled Vodafone climb from the position of the third largest operator in the United Kingdom in 1995 to the biggest mobile telecommunication player in the world by 2005. At the same time the Vodafone managed to reduce its dependence on the home market. In 1995, the company generated 80 percent of its business in UK. The proposition slid tremendously in the following decade and was merely 10 percent in 2005. The acquisition strategy thus helped Vodafone become a truly global company. 5.0 International Strategy An organization can choose from one of the following three international strategies; global strategy, multi focal strategy or multi domestic strategy. Some companies may choose to remain only trading companies (Grant, 2010, Pg 310) . The international strategies take into consideration two important dimensions with regard to international business; the pressure for global integration and the pressure for local responsiveness. If only the pressure for global integration is high, the company adopts a global strategy. However, if the pressure for local responsiveness is high, the company adopts a multi domestic strategy. Finally an organization can choose a hybrid strategy which follows the dictum ‘think global act local’. This strategy has also been referred to as glocal strategy, transnational strategy or multifocal strategy. Bartlett and Ghoshal posit that in reality an international company has to simultaneously build global efficiencies, respond to diverse country specific needs and create and transfer knowledge in all its business territories. This entails that a successful global player should seriously consider adopting the multifocal strategy. 5.1 Vodafone’s International Strategy The discussion that follows clearly establishes that Vodafone followed a multifocal strategy as it consolidated its position in the international market. There are elements of multi domestic strategy and global strategy in Vodafone’s case which indicate that the company actually used the hybrid model and pursued the multifocal strategy. The company realized that important differences existed in different countries. These differences could be huge or there could be subtle nuances which the organization had to be aware of. The customer expectations or attitudes might vary from one place to the other warranting a different strategy at both places. Almost half (48 percent) of the customer base in Germany had long-term contracts with the service provider. In other words, they were post paid subscribers and paid their monthly bills. On the other hand, majority (92 percent) of the mobile telephone subscribers in Italy were pre-paid customers. These customers did not want to have any kind of commitment with the telephone service provider. An example which demonstrates that Vodafone, in a way, adopted the multi-domestic strategy is that of the German market. Vodafone did not divest Arcor (till 2005 at least) and used it to compete with Deutsche Telekom’s land line business. In all other markets, Vodafone focused only on mobile telephony. Vodafone started a massive integration and standardization exercise under the ‘One Vodafone’ campaign. All the subsidiaries were brought under the Vodafone umbrella. In case the situation demanded, the local acquired brand was kept alive for some time. Thereafter, slowly but surely the national brand gave way to the Vodafone branding. At the same time, it allowed certain autonomy to its various subsidiaries to cater to the local differences in various countries. Vodafone embarked upon a change in its organizational structure and introduced two new central functions namely group marketing, and group technology and business integration. The primary logic behind setting up these two divisions was to ensure grater coordination between various subsidiaries and to share the best practices among all the business units. Alan Harper, who was heading Vodafone’s group strategy department since the year 2000 was also assigned a new role. In his new assignment he was the director of the Group Strategy and Business Integration. In addition to this, a high level Integration and Operations committee, comprising of the various member s of the executive board was instituted. This committee, which was chaired by Arun Sarin, was entrusted with the task of setting up operational plans, deciding budgetary allocations, conceptualizing service development and managing shared resources across business locations. Vodafone maintained that it did not develop technology; rather it was only a user of technology. As a part of its global integration process, it provided the terminal and platform technologies uniformly across its business locations. References Grant, R. (2010) Contemporary Strategy Analysis, 7th edition, London: John Wiley & Sons Banzhaf, J. and Som, A. (2009) Vodafone: Out of Many, One (Extracted from Hitt et al, Case 22, pg.263) Read More