A Composite Strategy on KPN Telecom - Essay Example

a composite strategy on KPN Telecom 2006 A Composite Strategy on KPN Telecom I. Introduction Since its introduction, the art of marketing science has been growing along with the variety of customers’ needs. As the customers become more and more educated and knowledgeable about what good services are, service providers/manufacturers start paying a great attention to marketing issues and considered them as attractive, challenging, but complicated issue. Concerning the marketing concept, there are several examples of companies that successfully implement marketing strategy while others exhibit the failure of implementing marketing strategy. The situation suggests that in order to keep standing out in a market, corporations should control and monitor their operations to see whether they are in good tracks or not. In order to assess the companies’ competitiveness, they can employ various business analyses. The use of business analyses is important since any organizations especially those dealing with business environment must encounter an era where the success of their operation depends on both internal and external factors. Under such circumstances, it is useful to carry out an analysis that takes into account not only the company’s internal factors but also external factors such as activities of the company’s competitors and current industry situation as well. Currently, there are many business analysis tools such as SWOT, BCG Matrix, Porter’s Five Forces, BCG Matrix, Value Chain, and PESTLE analysis, to name a few. However, this paper only discusses two types of analysis tools; they are Porter’s Five Forces and Burton’s Five Sources model in addition to the analysis on core competencies and industry definition. The company to be analyzed is KPN Telecom, a Dutch-based telecommunication company (telco) or a carrier that offers a total solution for network and bandwidth requirements of corporate customers. Its vast networks of KPN Telecom, currently, reach 20 countries in the Europe and 180 countries worldwide, in total. II. Porter’s Five Forces Analysis: Case of KPN Telecom Porter’s five forces model composes of five elements in the analysis; they are threat of new entrants, power of buyers, power of suppliers, rivalry among existing competitors, and the threat of substitute products (Porter, 1998). In descriptive form, the five elements can be described as following: Figure 1 Diagram of Porter’s Five Forces Source: Porter, Michael. 1998, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press II.1. Rivalry in Telecommunication Industry Rivalry in the telecommunication industry in the Netherlands is highly concentrated. This is because a small number of large firms hold large parts of the market. Therefore, the telecommunication industry in the Netherlands is less competitive since the industry is closed to a monopoly. However, in recent years, the rivalry between carriers (telecommunication companies) gets more intense since the industry has reached economy of scale that brings down the price of customer premise equipments (CPEs). This situation favours customers that can freely choose service providers that match their needs. Basically, the customers’ needs for telecommunication services compose of three things: attractive services such as mobile internet, reliable products, and low costs. Currently, KPN provides several services that fall into five main business categories; they are fixed telecommunication, mobile telecommunication, data communication (IP/data) and internet, call centre, and media services (ICM). In order to strengthen KPN existence in telecommunication industry, KPN conducts several strategic alliances and joint venture with other telecommunication companies (Eppink, 2004). In 1991, KPN decided to carry out alliance with Sweden-based Telia (previously Televerket). The combined company named Unisource aims at offering worldwide network and advanced fax service to multinational companies. Later in 1998, Unisource decided to concentrate on selling services to small and medium enterprises (Eppink, 2004). In addition, in 1998, KPN also conducted joint venture with the U.S.-based Qwest to form KPNQwest to serve the growing market in data communication. In 2001, the combined company recorded unbelievable performances when it became one of the largest business ISPs (Internet Service Providers) in Europe with footprints in 15 countries. Unfortunately, this victorious performance ended in May 31, 2002 when KPNQwest filed for bankruptcy (Eppink, 2004). Concerning the growing market of mobile telecommunication, KPN obviously faces fierce challenge from another multinational company such as Hutchinson that provides €18.2 billion to roll out its worldwide 3G networks. Fortunately, KPN made agreement with NTT DoCoMO, as successful mobile carrier in Japan, to acquire 15% of KPN Mobile while developing 3G services in Netherlands and other countries where KPN Mobile and its subsidiaries exist (Eppink, 2004). II.2 New Entrants The threat of new entrants rises as the barrier to entry reduces in a marketplace. This is because when more corporations enter a market, it will increase the competition in the market that causes profitability to fall (theoretically) to the level where there is no incentive for new firms to enter the industry. One of common crucial barriers to enter a new market is brand loyalty or in terms of multinational business, the main barrier could be the nationalism (Porter, 1998). This is similar to an analogy that people in UK that are used to buy Marks and Spencer products are hardly to buy those from other companies. In KPN case, it is obvious that the carrier faces many new entrants that have great influence to the telecom industry not only in the Europe but also worldwide since the companies including Vodafone, France Telecom, British Telecom, and Deutsche Telecom have experienced in serving million of customers worldwide. II.3 Products Substitution The force of product substitution is most damaging impact on a product although corporations often overlook it. Porter (1998) says that a product’s elasticity of price is influenced by the existence of substitute product. If the customers are easily turned to substitute products, than the price is inelastic, which makes it harder for producer to raise price without loosing market share. The existence of smaller but focused telecommunication carriers such as such as internet or VoIP (Voice over IP) providers are threatening KPN since customers might think the company has strong specialization and experience in the services (Eppink, 2004). II.4 Buyer Power According to Michael Porter (1998), there are some factors affecting buyer power as following: a) Size of buyer. This factor suggests that larger buyers will have more power over suppliers. In Dutch telecommunication industry, there are three general types of customers; they are private individuals, small business, and big companies that might contribute tens of millions of euros per annum. The latter group is small in the number but, as Pareto theory suggests, the big companies contribute about 80% of KPN revenues. b) Number of buyers. This element shows that large number of buyers have power to force telecommunication carriers to provide specific services. For instances, the development of mobile technology has driven buyers to rigorously ask their service provider (carrier) to provide the mobile technology such as the coming of third generation mobile communication (UMTS). In KPN case, the carrier is driven to buy the UMTS license that costs millions of dollar and drains the KPN’s cash flow (Eppink, 2004). c) Purchase quantity. In telecommunication, it is also common that customers have more power over suppliers (telecommunication carriers) when they buy more products. For example, customers of KPN data services might have lower rate when they buy 2 Mbps leased line than 32 circuits of 64 Kbps. Therefore, pricing is an important issue for telecom companies since it predicts and determines the destiny of their services whether it is saleable like a glass of coke in the summer or slump like ice corn in the winter. No wonder if the companies decide to cut the price at the slowing down period or in terms of telecom jargon it refers to “off-peak” hours and “peak” hours. Pricing objectives or goals give direction to the whole pricing process. Determining the objectives is the first step in pricing. Some of the more common pricing objectives are: maximize long-run profit increase sales volume (quantity) increase market share maintain price leadership discourage new entrants into the industry The basic idea in pricing is how various customers have different offers based on their buying characteristics. This is such mass-customization approach instead of mass production. The difference is mass customization specifically designs a product based on customers’ request at a higher cost. The price adjustment is a common thing in almost all industries, but it is more interesting to figure out exactly when the demand for telecom services would tail off in every region of the country and to calculate the exact date when the cost of delivering telecommunication services outstripped the profits made from it. For this reason, it is found that telecommunication anywhere have special pricing plan for the voice communication by charging different rates for calls during the day, in the evening, and at nights or weekends. Sometime, they charge flat rate for call made during the weekend. In the case of telecommunication industry, there is clear evidence the fierce competition favours the buyers’ power since they can choose the cheapest products. This situation suggests that buyer’s power in telecommunication industry is relatively strong. II.5 Supplier Power Like buyer power, in telecommunication industry, supplier power is relatively high since telecommunication carriers have many network, equipments, and product suppliers in addition to government that has rights to assign frequency allocation to a telecommunication carrier. Moreover, telecommunication carriers also has limited bandwidth resources that usually appointed by a country’s regulator. For example, in 1990s, KPN faced challenging situation when the Dutch government decided to deregulate telecommunication sectors in which International Call services, which were previously carried out on the basis of bilateral agreement. In this new scheme, carriers should actively find cheaper routes to make their services feasible or else their competitors will do so and cannibalize the KPN international call services (Eppink, 2004). In addition, the emerging UMTS (3G mobile telecommunication) also drains KPN fund resource just to but licenses. In Germany alone, KPN paid €8.7 billion, equals to 150% of KPN revenues in 2000, to Deutsche Government for 3G license for its German subsidiaries, E-Plus. This shows how powerful a supplier is, especially a country government in setting bid price for obtaining 3G license (Eppink, 2004). Another supplier in telecommunication industry is vendors like Siemens, Alcatel, Nokia, and ZTE, to name a few. They are companies that back up telecommunication carriers’ networks, transmission systems, and customer premise equipments like mobile handsets. This kind of supplies also have strong influence to carriers like KPN when in terms of mobile services, usually they launch many types of 3G-enabled handsets although KPN and other carriers have not launched the 3G services yet. This is done so to ‘invite’ customers to force the carriers to launch 3G services quickly. III. Burton Model on KPN Basically, Burton model deals with the forming of collaborative strategies. In this model, Porter tells there are five potential sources to building collaboration in an industry. In case of KPN, it is found that the carrier conducts CBA (Collaborative Business Arrangements) as following: Type 1. This is a horizontal CBA’s with other carriers that operate somewhat similar groups of closely- related products. The driving factor is to reach economies of scale in order to bring down the costs of product delivery. In case of KPN, the carriers also conduct this type 1 CBA such as strategic alliances with Sweden-based Telia to form Unisource that strengthen KNP business in delivering worldwide network and advanced fax services. Type 2. This type of CBA is driven by economies of downstream (quasi) integration in which a company carries out agreement with suppliers of components or services to the firm. In case study of KPN, it is not found that KPN has carried out such CBA although it is usual in some cases that a carrier conduct partnership with its supplier like Nokia and Alcatel to deliver low-cost mobile handsets to customers. Type 3. In this type of CBA, a company will selectively carry out partnering arrangements with specific channels or customers as a form of purely transactional relationships. In case study, it is not found that KPN has conducted this type of CBA as well. Type 4. In this type, a company will conduct diversification alliances with producers of both complements and substitutes. KPN also carries out this type of CBA when in 1998, the carrier and Qwest formed KPNQwest that deliver IP-based data communication services by extending its network coverage into 15 countries in the Europe. Type 5. A company might also conduct prospecting diversification alliances with firms based in previously unrelated sectors. In case of KPN, the carrier is likely to conduct partnership only with other telecommunication carriers (mobile or fixed carriers) . Bibliography Arthur A. Thompson Jr. 1998, Strategic Management: Concepts and Cases, University of Alabama Eppink, D. Jan. 2004. KPN – surviving the crisis in the telecommunications industry. Porter, Michael. 1998, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press Read More