Mobile Phone Industry PESTEL and SWOT

1. INTRODUCTION
This report will critically analyse the external environment of the mobile phone operators industry with the application of appropriate strategy tools including PESTEL and Michael Porter’s five forces models. An immediate result of this would be the identification of opportunities and threats that may arise from change in environmental factors and assessment of the attractiveness of the industry respectively.
The report will also analyse critically, the strategic capability of Vodafone, also applying appropriate strategy tools resulting in the identification of key strengths and weaknesses of the firm. The aim here will be to identify and discuss the core competences the firm possesses.
To aid the analysis, the report will draw on information from various sources such as:
The Vodafone case study on page 557 in the main textbook by Johnson, Scholes and Whittington, Exploring Strategy 9th Edition, Prentice Hall, 2011.
Other sources include Keynotes, Mintel and Magazines.
2. QUESTION ONE: PESTEL, KEY DRIVERS AND MICHAEL PORTER’S 5 FORCES
2.1 PESTEL
The PESTEL framework is used for the analysis and according to Johnson, Scholes and Whittington (2011), “it provides a comprehensive list of influences on the possible success or failure of particular strategies”. Discussed below are a few issues of PESTEL, please see appendix for other issues.
(P)olitical/Legal factors
Government’s privatisation(through Ofcom) of the national telephone company, BT, compelling it to allow access to its network (via Openreach) for voice and broadband. This has helped to break down BT’s monopoly thereby creating an opportunity for mobile operators to operate and at competitive rates.(case study p.558)
(E)conomic factors

The UK economy has still not fully recovered from the financial crisis of 2008, recovering even slower than other countries amidst huge government resuscitation efforts and even consumer spending is expected to decline by 0.6 per capita in 2011(the Telegraph, May 2011).This is a threat to the industry as, the slower the economic recovery, the slower the market growth for the mobile operators industry.
Though the case study(p.558) says that personal disposal income growth as experienced between 2002 and 2007 was forecasted to resume in the future, recent developments suggest otherwise. Now the future is here, reports say household incomes are falling(NewStatesman, May ­­­­­­­­­­­2011 and Mail Online, May 2011 ). This is a threat to the mobile industry as it means less income at the disposal of households, hence less subscribers to its services.

(S)ocial factors

Consumer need for converged services, such as mobile telephony, fixed line telephony, television and broadband internet, was increasing(case study p.558). This means an opportunity for mobile operators to expand their market as more people are coming on board with this convergence need which could be a result of the plunge in disposable income so people want all services in one and pay a lower lump sum for all in a bid to ration their income.
A decline in UK fixed line telephone market as households were becoming “mobile-only” users. This is an opportunity for mobile operators to capture the market share of fixed line telephone operators in a bid to expand theirs.
Consumer perceived prestige that comes with owning smartphones is an industry opportunity. For example, everyone wants to have an IPhone, HTC or Blackberry because they are ‘cool’ or for other reasons, so operators in the industry can capitalize on this and increase their market share by offering cheap deals.
Consumer ‘hype’ for new and modern technologies as everyone wants to have the latest ‘thing’ in technology. This would create an opportunity for the industry to capitalize on and expand their market share.

(T)echnological factors

Development of new technologies, IP(Internet Protocol) for voice, data and video transmission(case study p.557). The dynamic nature of technology is posing a threat as operators may be stuck with obsolete technology thereby facing a challenge to be pro-active in order to retain market share and keep churn rates at bay.
Continued upgrading of speeds over mobile networks poses a threat as operators have to keep up with the upgrading of speeds because they might loose customers to service providers who can offer better speeds.

(E)nvironmental factors
As a result of advancement in telecommunications technology, mobile operators have to replace network equipments and hazardous wastes(masts, cables, construction waste etc)frequently. Mobile operators are then faced with the challenge of finding energy efficient ways of recycling which may also be capital intensive, altogether posing a threat.
(L)egal factors

Ofcom’s issuance of licences for additional mobile network operators will pose a threat to incumbent operators( as their market share is threatened) and be an opportunity to potential operators as this will lower entry barriers for them.
Elaborate legal contracts can also be a threat to the industry as lots of legal obligations have to be satisfied prior to and after entry. Drawing up different phone contracts for different mobile packages can prove challenging for the operators.

2.2 KEY DRIVERS FOR CHANGE
Socio-cultural issue:
Consumer need for converged services: Consumer needs(which has led Virgin Media to provide multiple services such as the ‘quad play and others providing the triple play) change from time to time and even some firms will try to create the needs for the consumers thereby pushing the industry towards finding ways to satisfy these needs as the market expands. This is one of the major drivers of change for the industry.
Technological issue:
Development of new Technologies: The dynamic nature of technology will keep operators findings ways to stay ahead of competitors by developing new technologies such as the IP, digitising high-speed distribution of voice, data and video over multiple networks.
2.3 MICHAEL PORTER’S 5 FORCES ANALYSIS
a.Threat of entry: (low)
The barrier of initial capital cost of entry may be daunting but the regulatory changes in the UK communications industry by Ofcom saw the issuance of licences to more mobile operators and also allowing MVNOs to lease network capacity without the capital cost of building their own hence reducing barriers to entry. This has also led to increase in the number of competitors.

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b. Threat of substitutes: (low/moderate)
Considering the advantages of mobile connections (make calls, sending messages/data, music etc), substitutes would be the fixed line connections, skype(or VOIP) on broadband, radio airwaves, phone booths or simply go without. With the fixed line connections, Ofcom reported that the number of lines dropped from 34.9million in 2003 to 33million in 2009. Call minutes had also decreased by 15% from 167billion to 138billion over the same period with mobile minutes expected to exceed fixed line minutes in 2010(Case study p.558). A report on Broadband news also says that mobile broadband will overtake fixed line connections in 2011.(Broadband Choices 2009). It is likely that the trend will continue in this way, considering the convenience offered by mobile connections, of being able to make a call on the move.
c. Competitive rivalry: (high)
One of the aims of Ofcom is to ensure healthy competition among operators which saw a rapid growth in the number of competitors. The major competitors in the industry are Vodafone, Telefonica O2, Orange, 3 UK and Tmobile plus lots of MVNO’s. According to the case study, wireless operator margins in the UK were up because of strong competition(p.559).
d. Buyer power: (moderate)
The main buyers from the industry are households(individuals) and businesses. According to case study(p.559), average churn(customer switching) rates in the market was 20% annually due to the introduction of number portability in 2007 and competitive tactics such as subsidising handsets for subscribers. Customers would switch operators for better offers or added value for their money. To counter this churn rate, most operators have found a way to switch post-paid customers to longer contracts of 18months or even 24months as at 2009. A recent 2011 report (Sim-only deals, 2011) highlights other reasons for low switching rates including provider’s loyalty programme and value for money SIM only deals which altogether gives them the power to make customers stay.
e. Supplier power: (moderate)
The main suppliers to the industry would be the handset makers and Ofcom. Major handset suppliers such as Nokia with 40% of UK handset market and Samsung,21%, supply handsets to the industry under global contracts(case study p.559). There are more suppliers today including Apple, which is another fast growing supplier as their phones
are deemed trendy and a must-have because of its innovative features. Sony-Ericsson, Samsung are among the loads of others. The case study p.559 says mobile handset sales had experienced a decline in 2009 as UK wireless operators started to offer sim-only plans which allow consumers to retain their current handset and pay lower monthly tariffs. Ofcom on the other hand is the sole provider of spectrum.
ATTRACTIVENESS: Based on the evidences from the five forces, the report concludes that the industry is attractive. This being that, though rivalry is high, but other threats and powers are low. Essentially incumbents or new operators can then focus only on competition and worry less about powers and other threats.
3 QUESTION TWO: STRATEGIC CAPABILITIES OF VODAFONE
According to Johnson et al.(2011), Strategic capabilities are capabilities of an organization that contribute to its long-term survival or competitive advantage made up of two components: Resources, which are assets the company has or can call upon and Competenceswhich are ways in which those assets are used or deployed effectively.
3.1 RESOURCES AND COMPETENCES
Human Resources
Vodafone has had a history of experienced CEOs including Arun Sarin(resource), who was skilled in achieving growth in developing markets(competence/strength). Also, Gary Laurence(resource), head of Vodafone UK, appointed CEO in September 2008 was known for his ability to identify strategic options(competence/strength) and the current CEO, Vittorio Colao(resource) who succeeded Arun in 2008 is known for strong reputation as cost cutter.(competence/strength). (Case study page 563)
Vodafone’s partnership with BT(resource) hosting BT’s MVNO, allowed it to provide services to corporations.(competence/strength). It started a joint venture with O2(resources) which enabled it to extend its fixed-line network.(competence/strength).
Vodafone, in its target of business travelers with passport services(resources), was able to offer home country voice rates while roaming in Europe and mobile data services for £10 a day(competence/strength).(case study page 563)
Financial Resources
Financial Performance of Vodafone:
(a) ROCE(Return on Capital Employed): measures the returns made from all forms of resources or capital employed in the business. Vodafone’s resources are the capital
employed and its competence is shown in the amount of returns generated from utilization these capital. Vodafone’s ROCE plunged by 3.73% to give a ROCE in 2010 of 19.85. This may be slightly better than industry average but it shows a weakness to efficiently utilise resources to yield maximum profits.

Vodafone

2010

2009

Industry

ROCE

19.85

20.59

19.48

Source. Morning Star Stock Report.
(b) Current ratio:  measures a company’s efficiency at meeting its short term obligations. A good ratio would be for current liabilities to be covered at least once but Vodafone’s current assets(resources) can barely cover 50% of its liabilities in 2010 though it improved from previous year. On the whole, this is a weakness as the company is low on liquidity and incurring too much liabilities in terms of its short term borrowings.

Vodafone Plc

2010

2009

Industry

Current Ratio

0.50:1

0.47:1

 

Source: Morning Star Stock Report.
(c) Net Gearing: shows the proportion of debt within a company’s overall capital. The table below shows that Vodafone’s net gearing has declined from 40.67% in 2009 to 37.76% in 2010. Overall for the industry borrowing is about 40% of total capital. The reduction therefore for Vodafone is good as its means a reduction in finance costs too.

Vodafone

2010

2009

Industry

Net Gearing ratio

37.76%

40.67%

39.40%

Source: Morning Star Stock Report.
(d) Interest cover: explains Vodafone’s ability to service its debt. From the table below, it appears Vodafone makes enough profits to service it finance costs as it has been able to increase its interest cover to 7.51times in 2010 from 7.03times in 2009. This may not be a core competence but it is a strength for Vodafone.

Vodafone

2010

2009

Interest cover

7.51 times

7.03 times

Source: Morning Star Stock Report.
Physical Resources
Vodafone makes heavy investments in the marketing of its Product brands (competence/strength) which includes, landline solutions and mobile telephony, mobile broadband and secure employee remote access(resources), making them well known.(Vodafone website). It invests also in the marketing (competence/strength) of 3G
dongles or cards(resources) for internet connection giving it the largest share of 3G subscribers. Vodafone used wholesale services to distribute its fixed voice and broadband
(resources) but its prices were too high giving it only a few customers(weakness). Another of its products is the Vodafone-at-home(resources), with which it competed with fixed line providers by offering fixed line prices when customers call from within or near their home(competence/strength).
Core Competences
For the sake of this report, the core competences identified are Vodafone’s CEO’s. They have been exceptional with what they bring to the table and how their expertise has been able to transform the company. Vodafone UK CEO, Gary Laurence has been formidable in terms of identifying strategic options available to the company such as successful alliances and joint venture with likes of BT and O2. Heavy investment in the marketing of its products giving it largest share of 3G subscribers is another core competence.
3.2 VODAFONE VALUE CHAIN
Primary Activities
Inbound logistics: Vodafone possesses its own network equipments, backbones and infrastructure to provide various communication services, and purchasing of handsets (Annual Reports 2010, p.21). Now, its in a network sharing agreement (sharing masts, sites and towers) with O2 covering the UK and 4 European countries,.(case study page 559, Guardian March 2009)., Another inbound logistic is the ownership of spectrum. Spectrum is of particular importance to the mobile phone and mobile broadband industry, which relies on it to carry information between customers’ handsets and mobile masts. Vodafone spectrum is 1800MHz. (Ofcom report, Feb 2011).
Operations: All Vodafone operations are based on in-house infrastructure. Vodafone’s operations is dependent on its people, infrastructure and financial resources. Its logistics operations (which provides a variety of value-added services), evolves from a single, purpose built site in West Midlands.(Unipartlogistics.com)
Out-bound logistics: Vodafone has consumer on-line purchasing systems in place that allow customers to purchase its services directly(Vodafone website). It also has its own billing system.
Marketing and Sales: Vodafone has several own branded and other retail chains that it uses in distribution. According to the case  study(page 563), Vodafone invests a lot in marketing in all markets whilst promoting its brand and also sponsors Formula 1 and England cricket sports.
Services: Its all encompassing website enables customer online ordering and feedback monitoring.(source).Vodafone has customer services helpline that offer after sales services and it also offers services to MVNO’s such as Lebara mobile, Asda mobile, Talk mobile(Carphone Warehouse) and BT mobile(http://ukmobilecoverage.co.uk/),
Support Activities
Infrastructure: Vodafone’s mode of expansion was the formation of a joint venture with O2(case study p.559) to manage its mobile network and share network covering 4 European countries and the UK. It also leases BT’s fixed line services and hosts BT’s MVNO.(case study p.562)
Human Resource Management: Vodafone depends on its employees for the quality of its services to customers. It ensures an inclusive working environment and encourages innovation, ambition and pro-activeness. Vodafone encourages enthusiasm, talent and commitment in its employees in order to build and maintain its success and stay competitive.(Vodafone, Our people).
Technology and Development: Vodafone owns internet portals which enables on-line ordering. Also, continuous R&D helps the company to incubate and deliver innovation to the business. (Annual Report, 2010. p.20)
Procurement: Vodafone, like other networks, purchases branded handsets from suppliers. Vodafone holds several training courses for its procurement team for efficient management of supplier performance.
CONCLUSION
SWOT MATRIX

STRENGTHS
1. Experienced CEO’s(UK CEO, Gary Laurence).
2. Partnership with BT and O2.
3.Offering home country voice rates abroad.
4.Heavy investment in marketing.
5.Vodafone at home
6. Good Interest Cover
7. Reduced borrowing

WEAKNESSES
1.Low level of liquidity
2.Inability to increase ROCE
3.High prices and inefficient channel of distribution for fixed voice and broadband.

OPPORTUNITIES
1. Government’s privatization of Ofcom.
2. Consumer need for converged services.
3. Decline in Fixed line telephone market
4. 2012 Olympics
5. Consumer demand for smart phones
6. Consumer hype for modern technology
7. Ofcom issuance of entry license

THREATS
1.Slow economic recovery from recession
2.Decline in disposable income
3.Immigration cap
4.Health issues in areas of mobile masts.
5.Customer switching rates.
6.Development of new technologies
7.Capital intensive recycling
8.Ofcom’s issuance of entry license
9.Elaborate legal contarcts

From all facts assessed in the report and also information from the case study and Vodafone accounts, it is indeed evident that Vodafone is struggling to develop a total communications strategy to enable it to secure leadership  in the rapidly growing market for high speed internet services in its UK home market due to the fact that it actually cannot improve its core activities in order to gain competitive advantage.