With the dramatic changes that are occurring in every sector of the telecommunications industry, analysts and investors on Wall Street and elsewhere are re-evaluating the industry, its sectors and its participants. Their conclusions will determine the capital available to your company. Exactly how will these individuals evaluate your industry and your company?
During the last 12 to 18 months, telecommunications analysts and investors have begun to appreciate the implications of the phenomenal growth and dramatically increasing competition that characterize the industry’s future. Misconceptions that previously attributed future success to technology choices or to having an established market presence, have given way to the more rational expectation that the companies that position themselves properly and meet the challenge of competition aggressively and intelligently, will prosper.
How, then, do you prepare for competition? The impending introduction of PCS has cellular operators struggling to determine how and when to react. Paging operators must determine how to compete with the growing number of digital SMR operators, wireless data companies and narrowband PCS licensees. Local and long-distance service providers alike are scrambling to develop strategies to compete with each other and with new market entrants in response to the apparent certainty of deregulation. Analysts and investors will be watching closely to see how specific companies and their competitors respond to these challenges.
A company executive’s first question should be “What does increasing competition mean to my company and my industry?” More than anything else, increasing competition represents a shift in the balance of power from the operator to the customer.
Historically, power has rested with service providers. Local telephony has enjoyed legislated monopolies. Similarly, cellular operators have enjoyed protected duopolies. Consolidation in the paging and long-distance industries has reduced the number of viable competitors. As a result, customers have had few or no options and, therefore, were forced to accept what was offered to them by the service providers.
The typical telecommunications company looked much like a utility. Its prices were set to derive the maximum revenue from the customers that required the service, i.e., those that had the lowest price elasticity of demand. Customer service and quality control were treated either as low priorities or as necessary evils.
This model is no longer viable. To survive in an increasingly competitive environment, telecommunications companies-both new and old-must embrace a new set of strategic imperatives. Analysts and investors will be watching to see how well telecom companies do the following:
1) Maximize the efficiency of operations.
2) Optimize the network to meet customers’ needs.
3) Develop and foster a strategic planning process.
4) Understand the needs of the marketplace.
In a competitive environment, customers have choices. The company that best meets customers’ needs will win their business. Clearly, businesses cannot offer a customer the most attractive package without understanding what is important to him or her.
Is price more important than sound quality? Is sound quality more important than blocking probability? Are access fees more important than per-minute charges? Is reliability more important than advanced features? Is name recognition more important than price? The possibilities are nearly infinite. This may seem obvious but how many companies actively, formally and effectively analyze the marketplace to determine their customers’ needs and preferences?
How well companies understand and respond to the needs of the marketplace will directly impact their ability to acquire and retain customers. Therefore, any good analyst or sophisticated investor will want to know the process by which companies assess the needs of the market and how those findings are integrated into decision making.
The key word above is “process.” Too often, companies claim to have their fingers on the pulse of the market because “we closely track our sales so we know what people are buying” or “our people are in the field every day talking to customers.” The obvious flaw in the logic of the first argument is that tracking sales only tells you how many people want what you are selling. It does not tell you what people want. The second argument is more insidious. It is true that such contact is an extremely valuable source of information and an important means of helping to ensure that customers are satisfied. However, in 99 cases out of 100, this is purely lip service. Only rarely does this information cross the chasm between a company’s sales and product development functions.
Even when it does, it rarely is analyzed and employed in the company’s decision-making process.
Make no mistake, this is a critical area from a competitive perspective as well as from a perceptual perspective. Companies that are able to continually and effectively assess the needs of the market and respond to those needs with appropriate products and services will dominate those that do not.
Therefore, we recommend that our clients formalize this process. Do not trust that it will happen just because employees are told it is important. Businesses must establish systems and procedures to ensure that this is a continuing and productive activity.
Maximize efficiency
In an environment with little or no competition, operational inefficiencies can be tolerated. For example, suppose a local telephone company’s organizational structure is bloated to the extent that it is carrying an extra $2.5 million in personnel expenses. So what? It can maintain its prices at a sufficient level to cover the inefficiency because there is no one to undercut it in the marketplace.
Suppose the needs of the marketplace change. Historically, there has been little or no cost associated with reacting slowly to such changes or even to not recognizing the changes at all. If there is no meaningful danger of a competitor responding first, there is no incentive to respond quickly.
In a competitive environment, however, operational inefficiencies will not be tolerated. Without the bloated margins and protected territories that have characterized so many segments of the telecommunications industry, every aspect of an organization, from its management structure to its marketing strategies, must become a source of competitive advantage. Knowing this, most analysts and investors will examine a company’s operations. Is the company’s organization designed to help it succeed in the marketplace?
Most cellular operators have employed essentially the same sales approach since their inception in the early 1980s-an internal sales force to pursue large accounts and a small retail presence to serve the consumer market. The result has been an average acquisition cost of $300 to $400 per subscriber. In a competitive marketplace, this model will not be viable. Cellular operators must find ways to increase the efficiency of their sales efforts with techniques such as telemarketing, catalog sales and an increased use of resellers and other indirect sales channels, i.e., the design of this aspect of their operations must be revisited.
Optimize the network
In a competitive environment, quality is critical. Customers will not accept services that disconnect calls or distort voice communications. Industry analysts and investors appreciate how important this is. Nextel Communications Inc.’s stock plummeted after repeated quality problems suggested that it could not become the viable cellular alternative it had claimed.
PCS poses a significant threat for some cellular operators, based on differences in their network designs. When most cellular systems were constructed, it was expected that mobile units would be the standard communications device. Therefore, cell sites were spaced to enable the signal from a 3-w
att mobile unit to reach a cell site. Because the marketplace has chosen the handheld unit as the standard device, some cellular networks do not function effectively. In many rural markets and along highways, capacity issues have not warranted cell splitting. The signal from a 0.7-watt handheld unit often can not reach the nearest cell site. As a result, the customer experiences a “dead spot.”
PCS licensees will design and construct their networks to accommodate the market’s demand for handheld devices. From a competitive perspective, unless cellular operators convert to microcell networks, PCS will enjoy an important competitive advantage. With so much at stake, analysts and investors will look at the ability of a company’s network to satisfy customers’ needs.
In addition to serving the needs of existing or initially targeted customers, the extent to which a network is capable of serving the needs of the “market” will be important. A cellular operator, a PCS operator or a paging operator can say that its network adequately meets the needs of its customers. However, if the needs of its existing customers are more narrow than the needs of the market as a whole, the network has effectively placed a cap on the upside potential of the company.
Most analysts and investors will weigh future potential as well as current and short term expected performance in evaluating a company.
A strategic planning process
Prepare for the future or prepare to be blind-sided. In a competitive environment, there is no time to play catch-up. A missed opportunity can be deadly. Imagine a second tier long-distance carrier, one of four companies that control that market. Now, suppose that firm’s three main competitors recognize that the overwhelming majority of customers will prefer a single provider for both their local and long-distance service and that offering a combined service will create greater efficiencies for them. If they implement a new strategy and take action before the first company is aware of what is occurring, that company may lose significant market share before it can react. By then, it may be too late.
Telecommunications companies must institute systems for developing and evaluating strategies. Continuing with a certain approach because “it is the way we have always done things” is an invitation to disaster, as is waiting to see what the competition does.
Cable television companies offer a timely example. Protected by their monopoly positions, many of these companies have ignored customer service so completely that the deregulation they have sought may well destroy them. As their markets open to competition, their low customer satisfaction levels will result in lost market share. Already this is apparent in the success of DirectTV and the inability of cable operators-even via Primestar, their answer to DirectTV-to compete effectively.
This represents a grim preview of what may happen to them on a far larger scale when telephone companies begin offering television programming.
Analysts and investors will want to know that a company has a mechanism for refining its vision of the industry’s future and for developing effective strategies.
The telecommunications industry is entering a dynamic, exciting time. Industry participants as well as analysts and investors recognize the tremendous opportunities that exist. However, far too many companies have interpreted the expected prosperity of their industry as a guarantee of their company’s success. In doing so, these companies have overlooked the fundamental strategic imperatives that now define the telecommunications industry. Unless these companies respond quickly, their continued existence is unlikely.
Jonathan D. Foxman is the director of Strategic and Business Planning for BIA Consulting Inc. BIA provides strategic planning, financial modeling and analysis, business planning, valuation and appraisal services, investment banking and various wireless industry reference books and newsletters.
