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DISCONTINUITIES IN THE TELECOM INDUSTRY:
STRATEGIC CHOICES FOR SINGTEL
by
LEE Siak Kwee
MBA in Singapore Programme
2008
A Management Project presented in part consideration for the degree of Master
of Business Administration
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
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EXECUTIVE SUMMARY
This report examines the corporate strategy of SingTel and show how they can be
derived from a combined analysis of its internal and external environment. An
outside-in, position-based approach using the Porter’s Five Forces (PFF) model is
used to analyse the complexities and forces shrouding the industry with the aim of
identifying the key opportunities and threats. An inside-out, resource-based approach
using the Resource Based View (RBV) is also undertaken to reveal SingTel’s key
strengths and weaknesses. Interviews were also conducted with two key management
executives within SingTel to gain a first hand understanding of the strategic issues
from an insider perspective.
Integrating the results of these two analysis and insights into a SWOT framework, a
synthesis of the key strategic factors is then performed to match those strengths that
can exploit opportunities and/or neutralize threats, and at the same time, determine
what new competence needs to be acquired by SingTel to overcome the potential of
external threats exploiting its current weaknesses. It is shown that the strategic
choices that SingTel has made as its corporate strategy are congruent and aligned with
the dynamics of its internal and external environment.
SingTel’s three-pronged corporate strategy of leading in local market; inorganic
growth through overseas investment and innovation to mitigate commoditisation, are
intricately shaped by the SWOT analysis as derived from RBV and PFF. This dual
assessment has also highlighted the need for SingTel to seriously consider an asset-
light strategy in view of mounting cost pressures and the reality that the “value” in the
value chain is progressively moving to the edges and outside of the traditional
network boundaries. On top of its innovation strategy, SingTel may need a new
corporate strategy to outsource its network and reinvent itself by focusing on building
new competences like multimedia, alliances and partnerships to tackle the emergence
of non-traditional players.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
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TABLE OF CONTENTS Page 1. INTRODUCTION…………………………………………… 5
2. BACKGROUND……………………………………………. 7
2.1 Recent History………………………………………………. 7
2.2 SingTel’s Corporate Vision & Strategy………………….…. 8
3. METHODOLOGIES………………………………………….. 12
3.1 Hierarchy of Strategy……………………………………….. 12
3.2 External Analysis- Porter’s Five Forces……………………. 13
3.3 Internal Analysis - Resource Based View………………….. 16
3.4 Other Strategy Concepts……………………………………. 18
4. STRATEGIC ANALYSIS OF THE INDUSTRY ENVIRONMENT
……………………………………………………………….. 19
4.1 Objectives……………………………………………………. 19
4.2 Porter’s Five Forces Analysis………………………………. 19
4.2.1 Industry Competitors……………………………………….. 19
4.2.2. New Entrants ……………………………………………….. 35
4.2.3 Buyers……………………………………………………….. 40
4.2.4 Suppliers…………………………………………………….. 43
4.2.5 Substitutes…………………………………………………… 48
5. STRATEGIC ANALYSIS OF THE INTERNAL
ENVIRONMENT – A RESOURCE BASED VIEW (RBV) 51
5.1 Strengths…………………………………………………….. 51
5.1.1 Strength in Numbers………………………………………… 51
5.1.2 Customer Knowledge……………………………………….. 52
5.1.3 Financial Strengths………………………………………….. 53
5.1.4 Investment Savvy…………………………………………… 54
5.1.5 Brand Equity………………………………………………… 56
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TABLE OF CONTENTS
Page
5.2 VRIN Criteria ……………………………………………...... 56
5.3 Potential Weaknesses?.............................................................. 57
5.3.1 Technical Capability – Core Competence or Core Rigidity?. 57
5.3.2 Government Linked – Boon or Bane?...................................... 60
6. SYTHESIS OF EXTERNAL AND INTERNAL ANALYSIS 62
6.1 Leveraging Strengths to Exploit Opportunities
and/or Neutralize Threats……………………………………... 65
6.2 Alleviating Weaknesses and Mitigating External Threats…….. 66
6.3 Exploiting Opportunities to Alleviate Weaknesses……….…… 69
7. SUMMARY AND CONCULSIONS…………………………... 71
REFERENCES………………………………………………………….. 74
ANNEX 1 ……………………………………………………………….. 79
ANNEX 2 ……………………………………………………………….. 80
ANNEX 3 ……………………………………………………………….. 89
ANNEX 4 ……………………………………………………………….. 98
ANNEX 5 ……………………………………………………………….. 107
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
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ACKNOWLEDGEMENT
I would like to thank Dr Rajesh Kumar for his thoughtful and stimulating guidance on
this project. His invaluable advice has been instrumental in steering me onto the right
track and helping me to put the appropriate focus on the important areas.
My sincere appreciation also goes out to the following subject matter expert from
SingTel for agreeing to my email and face to face interview and gather valuable
insights of their thoughts on this subject. They are Mark Chong, Executive Vice
President (Networks) and Chris Lane, Group Chief Strategy Officer.
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SECTION ONE: INTRODUCTION
Apple’s iPhone was all the rave in the telecommunications industry in 2007. It was
named Time’s magazine “Gadget of the Year 2007” and Telecom Asia (Dec 2007)
hailed is as “easily the biggest telecom success story of 2007”. It is perhaps not major
news to hear of Apple winning another accolade for yet another iconic product, but
what is more telling is that Apple is making waves in an industry where it is
considered a non-traditional player. Such quantum shift is an unmistakable sign of the
discontinuities shaking up the hitherto stable telecommunication industry.
Technically, the iPhone falls short of what one would consider an industry “standard”;
it does not even support the latest Third Generation (3G) mobile communication
technology. What differentiates iPhone from the dizzying array of handsets in the
market is its ultra-intuitive user interface. But for operators like SingTel, what is
undoubtedly more ominous is that Apple is imposing a new business model for the
iPhone. In the markets where iPhone has been launched, not only is Apple selling it
through just one exclusive mobile operator, it is also taking a cut of the monthly
revenue generated by the iPhone user. This is unprecedented in the mobile business or
for that matter, in the more general telecom industry. It marks the first time that a
device manufacturer can have such bargaining power as to be able to demand a slice
of the operator’s recurring revenue.
The impact of iPhone is a microcosm of the discontinuities taking place in the telecom
landscape and it illustrates how existing rules are being rewritten, not by incumbents,
but by new challengers in the value chain. Besides the advent of such unconventional
new entrants, the telecom industry is also undergoing a state of constant flux through
a confluence of external factors like regulatory changes and disruptive technologies,
among other things. Such revolutionary transformation to the whole ecosystem
portends radical rather than incremental changes. It is unchartered territory and
necessitates traditional players like SingTel to seriously reassess its strategic position
in order to stay relevant in future.
The purpose of this case study is to investigate the strategic choices that SingTel has
made in its corporate strategy and how they can be derived from a combined analysis
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
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of its internal and external environment. In the first part, a detailed analysis is carried
out to understand the strategic position of SingTel vis-à-vis its external environment.
Porter’s Five Forces (Porter, 1979) model is used as it provides an elegant yet
systematic framework to analyse the underlying competitive and disruptive forces at
play within the ecosystem of the industry. The output of this assessment will provide
an incisive view of the different opportunities and threats that SingTel has to contend
with at present and in future.
The second part of the report takes the Resource Based View (RBV) approach to
determine what valuable resources are at SingTel’s disposal. This is an introspective
assessment of the organisation’s capabilities focusing on those strengths that can be
leveraged and how they can be collectively configured as bases of competitive
advantage. Similarly, the weaknesses of SingTel will also be identified so that the
potential resource gaps can be identified and filled.
Apart from the two frameworks, email and face to face interviews have also been
conducted with two top management executives within SingTel to gather their
thoughts on this topic. The strategic outputs from these analysis and discussions will
be synthesised within the familiar SWOT framework and shown how they can guide
and be used to formulate courses of action or strategic choices for SingTel. This part
of the discussion will focus on how the “fit” between the internal resources and the
external opportunities and threats is manifested in SingTel’s current corporate strategy.
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SECTION TWO: BACKGROUND
2.1 Recent History
With presence in countries stretching from Australia to India, Singapore
Telecommunications (SingTel) is today widely regarded as a pan-Asian
telecommunications giant. But when the former government statutory board was
listed on the Singapore Exchange in 1993, few could have imagined such a dramatic
transformation 15 years later.
The 1990s witnessed a wave of deregulation sweeping through the telecommunication
industry all over the world. Government monopolies were being dismantled as rapidly
as markets were being liberalized with the injection of more competition. ITU (2002)
reported that from 10% in 1992, more than 60% of all the countries had some form of
competition in the telecom industry by 2000. Singapore was no exception. The first
wave of deregulation hit SingTel in April 1997 with the opening up of the mobile and
paging markets. But the “big bang” came in April 2000, when the whole Singapore
telecommunications market was opened up to unlimited competition (IDA, 2000).
Accompanying the radical changes in the regulatory landscape globally, the 1990s
also saw the advent of digital technology that would revolutionarise the way people
communicate. Voice over Internet Protocol (VOIP) and the internet blurred
geographically boundaries and decimated the highly lucrative International Direct
Dial (IDD) business that was hitherto the major cash cow of traditional telecom
carriers like SingTel. From a 45.3% share of its total revenue in 1996 (Tan, 1999),
IDD revenue today has dropped to no more than 5% of total revenue (SingTel 2008).
The drop in profit margin is even more dramatic: the average IDD call rate dropped
from S$ 2.05 per minute (Foo, 2000) to less than S$0.31 per min in 2007 (SingTel,
2007). This exemplifies how disruptive technologies can cause major discontinuities
in the industry structure.
While deregulation and new technologies caused major shakeup in its domestic
markets, it also meant new opportunities were opening up for SingTel in other
markets. The erstwhile government monopoly which derived most of its profits from
its domestic market is now a major regional player with over three quarter of its
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
EBITDA (Earnings before interest, tax, depreciation and amortization) coming from
its overseas venture (SingTel, 2007) as shown in Chart 2A. Annex 1 provides a more
detail breakdown of the associates’ contribution to SingTel’s overall bottom line.
SingTel, 24%
Optus, 31%
Others, 1%
Regional Mobile, 44%
Chart 2A: SingTel’s Proportionate EBITDA Distribution as at end Dec 2007 (Source:
SingTel)
2.2 SingTel’s Corporate Vision & Strategy
SingTel’s organization structure as shown in Chart 2B is a direct reflection of its
strategic business focus. Under the Group CEO are three other line CEOs responsible
for SingTel’s three main geographical business units namely: Singapore, Optus
Australia and International.
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Discontinuities in the Telecom Industry: Strategic Choices for SingTel
.
Chart 2B : SingTel Organisational Chart (Source: SingTel Web site: www.singtel.com)
The five elements of SingTel’s corporate strategy (SingTel, 2008) are essentially
tailored to meet its stated corporate vision which is “to be Asia Pacific’s best
communications group”:
(a) Lead in Singapore – to be the leading telecommunications operator in
Singapore with a stable and cash generative business. This is achieved
through its ability to defend its market share and margins by offering a
comprehensive package of communications services and integrated IT
services, coupled with strong brand recognition.
(b) Grow in Australia – Position the wholly-owned subsidiary Optus as
the leading challenger to the incumbent telecommunications operator.
Optus aims to maintain its track record of market share growth, expand
margins, grow profits and cashflow by delivering simple, innovative
and reliable experience for customers; ensure cost leadership in target
markets; establish leadership in attractive new markets; strengthen the
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company's "challenger" culture; and leverage the scale of the SingTel
Group as a whole.
(c) Partner across Asia - SingTel key focus is on execution and
maximising the value of existing businesses and regional partnerships.
This has included reviewing opportunities to increase shareholdings in
existing associates and consider new investments. SingTel has
commendable record of making successful acquisitions and
investments. The geographic focus will remain in Asia Pacific, with a
preference for strategic investments where SingTel can add value by
taking an active role in management, and which can be funded from
internal cash flow generation.
(d) Connect Asia – To serve the needs of multinational corporations,
SingTel has a network of 38 offices in 19 countries and territories
throughout Asia Pacific, in Europe and the USA. These offices enable
SingTel to deliver reliable and quality network solutions to its
customers, either on its own or with local partners. It also has an
extensive infrastructure made up of satellite networks and submarine
cable systems throughout Asia Pacific, providing connectivity across
the region and to the rest of the world.
(e) Innovate for the Future - Providing innovative communications
solutions to meet evolving customer needs has been core to SingTel’s
success. SingTel targets to nurture its human and intellectual capital to
achieve organisational excellence in order to enhance its position as an
integrated provider of wireline and wireless services for businesses and
consumers.
Going forward, with the dynamic environment undergoing more sea-change, are these
strategies still relevant for SingTel to maintain its growth? The Singapore market,
especially in the major business areas like mobile and broadband services, is
increasingly being commoditised with market penetration at saturation point.
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Regionally, SingTel has also seen opportunities for acquisition becoming more
restrictive and even financially prohibitive with premium valuations demanded by
potential sellers. And the example of iPhone clearly illustrates the sort of
unconventional competitor that SingTel will have to face-off in future.
Mark Chong, EVP(Networks) of SingTel highlighted that, “The threats to any
business are often multi-faceted. Likewise, SingTel’s business is subject to challenges
from liberalisation which brings in more competition, as well as disruptive
technologies that could potentially render obsolete, investments which had yet to yield
their necessary returns.” Is SingTel’s corporate strategy a sound one vis-à-vis the
external environment that it faces and the internal resources that it can leverage on?
Does it fully uses it competitive advantage to exploit the opportunities or neutralize
threats, both present and in future? The following sections will seek to provide the
answers to these key questions.
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SECTION THREE: METHODOLOGIES
The two basic frameworks used in the analysis of external and internal environment
are the Porter’s Five Forces (PFF) and the Resource Based View (RBV) of the firm.
In addition, interviews have also been conducted with two key top management
executives in SingTel to gather their view on this subject. Mark Chong, the Executive
Vice President of SingTel’s Networks Group, gave general feedback through an email
interview on the strategic issues facing SingTel today and for the engineering aspect
in particular. A face to face interview was also conducted with the strategy guru in
SingTel, Chris Lane, who is the Group Chief Strategy Officer. Many of their insights
have been incorporated into the discussions throughout the paper and where
appropriate, quoted for emphasis sake. But before delving into the mechanics of the
methodologies, it is important to clearly define the scope of the “strategy” that this
report is intending to research.
There is no common definition of strategy and Mintzberg (1987), for example,
provided five different definitions although it is widely accepted that the fundamental
purpose of a business is to earn a profit over and above the cost of capital employed.
Hence strategy is basically the means to manage and direct a business in its
environment towards a competitive advantage in the market place (Porter, 1996).
3.1 Hierarchy of Strategy
Johnson & Scholes (1999) defined strategy in 3 different levels based on a descending
hierarchy:
(a) Corporate Strategy - concerned with the overall purpose and scope of
the organisation
(b) Business Unit Strategy – focus on how to compete successfully in a
particular market
(c) Operational Strategies – deals with how the components part of the
organization in terms of resources, processes, people and their skills
effectively deliver the corporate and business level strategic direction.
Porter (1987), on the other hand, simply defines strategy in two levels: corporate and
business (or competitive) unit. It also alluded to corporate strategy as been an
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essential attribute of a diversified company and defines it as one concerning “what
businesses the corporation should be in and how the corporate office should manage
the array of business units”.
This case analysis primarily targets the corporate level strategy of SingTel and this is
typically embodied in the context of the company’s vision i.e. what the company does
and what it is intended to become. It is not concerned with how the different
individual line of business should compete in order to succeed in their respective
market place but more with what businesses and markets that SingTel should aspire to
compete in. In an era of convergence in the IT, telecom and the internet/media,
between the fixed and mobile industry, and where services (e.g. “triple pay” of
broadband, mobile and pay-TV) are sold in a bundle, the concept of business level
strategy cannot be easily segregated. The organisation structure of SingTel into
geographical and customer facing units also serve to further reinforce this
phenomenon. Correspondingly, it is more relevant for the PFF and RBV analysis to
focus on those factors accruing to and affecting the corporate level strategy. Wheelen
& Hunger (2000) concisely sums up the definition of corporate strategy that this
report is focusing on:
(a) The firm’s overall orientation towards growth or stability
(b) The industries or markets in which the firm competes
(c) The manner in which management coordinates activities/resources and
cultivates capabilities among product lines and business units.
3.2 External Analysis- Porter’s Five Forces
The external analysis approach is based on the idea of “strategic positioning”, and it
has in Michael E. Porter its main protagonist. Industry structure and positioning
within the industry are the two broad thrusts on which Porter’s Five Forces (PFF)
model is based on and it is used as the main concept to analyse the outside forces
surrounding SingTel.
PFF postulates that the industry that a firm competes in and its strategic position
within that industry are the two key determinants of profitability. A firm has to
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
understand the nature of its competitive environment if it is to be successful in
formulating the correct strategies. If an organization fully appreciates the competitive
forces underpinning the industry, it will be in an informed position to counteract
against any threats and will also be able influence the forces with the appropriate
strategies. Like most technology industry, the telecom industry is extremely fluid and
this means that the nature and relative power of the forces will be constantly changing
over time. Hence, the analysis will concurrently look at what the environmental
ecosystem is today and also seek to predict how they will evolve in future. Diagram
3A captures the five industry forces underlying Porter’s model as well as macro-
environmental factors that can also exert a direct influence on the industry dynamics.
New Entrants
Substitutes
BuyersSuppliers
Industry Competitors
Intensity of Rivals
Political Economical
Social
Technological
Diagram 3A: Porter’s Five Forces Model (Source: Porter, 1979)
As its name implies, this model breaks the industry structure into five competitive
elements: industry competitors, threat of new entrants, power of suppliers, power of
buyers and threat of substitute products. These five forces are what is called the
“near” environment i.e. the industry specific factors. Encompassing them is the “far”
environment i.e. the macro environment in which the industry operates in. These
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macro-environmental issues comprising of political, economical, social and
technological factors will also be concurrently incorporated in the appraisal so that
their respective impact on the five forces can be properly accounted for.
The PFF is specifically chosen because the telecom industry is intricately intertwined
and profoundly impacted by forces in its external environment e.g. competition,
technology, regulatory policies etc. Having a sophisticated understanding of the
different competitive elements in the industry will allow a firm to devise the correct
strategy to counter, influence and/or change the current rules of the game. Porter
(1979) stated that “The strategist, wanting to position his company to cope best with
its industry environment or to influence that environment in the company’s favour,
must learn what makes the environment tick”. This is the core logic of adopting the
PFF model for this study i.e. it is an excellent framework as it elegantly addresses the
key competitive thrust and underlying causes encircling SingTel within the telecom
industry.
By eliciting the source of competitive forces at play in the telecom industry, the PFF
will not only identify the threats but more critically, the potential opportunities that
can be strategically exploited. However, implicit in Porter’s model is a generalisation
that firms competing within the industry have access to those resources that is
instrumental to the strategy that they pursue. Barney (1991), has argued that such
simplification “effectively eliminate firm resource heterogeneity and immobility as
possible source of competitive advantage”. Indeed, a strategy designed to capitalize
on the opportunities based on just a one-sided understanding of the industry dynamics
is unlikely to be successful if it cannot be executed due to a mismatch with the firm’s
resources and capabilities.
By introducing the value chain concept to facilitate identifying sources of firm’s
strengths and weaknesses, Porter (1985) seemed to also acknowledge that looking at
external factor alone is incomplete in formulating a strategy. Cool & Schendel (1988)
have also shown that significant performance differences exist among firms having
similar “positioning” within the same industry while others (Rumelt, 1991, Hansen &
Wernfelt, 1989) have shown that variance in firm performance between industries is
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substantially less than that within industries. This substantiates the contention that
corporate strategy based on industry positioning alone is inadequate and superior
performance must be the result of some other complementary factors.
An internal assessment of the firm is thus necessary to identify its valuable resources
as the ability of the firm to outperform its rivals depends on both the industry
attractiveness as well as its ability to establish competitive advantage (Grant, 1991).
By “valuable” resources, it means those resources that can generate economic rent for
SingTel within the context of the external environment i.e. a source of competitive
advantage. For this purpose, the RBV approach is examined in conjunction with the
Porterian framework so that both an outside-in (PFF) and inside-out (RBV)
perspective are captured, and the right “strategic fit” between its capabilities and the
environment can be matched.
3.3 Internal Analysis - Resource Based View
The RBV view of the firm considers that every organisation has a different collection
of physical and intangible assets, and suggests that these resources are the primary
determinants of the firm’s performance. No two companies are alike because they will
invariably be different in terms of experience, culture, management etc. Barney
(1991), Collis & Montgomery (1995) and Daft (1983) posited that these resources
enable the firm to conceive of and implement strategies that improve its efficiency
and effectiveness. These are the so-called resource portfolio and an in-depth
understanding of the possibilities presented by these resources are critical as they
form the basis on which a firm can formulate a strategy that makes the most effective
use of these resources. Such resources can be in physical form like financial resources,
intellectual rights or more intangible ones like brand name, production/technical
know-how, organisation culture etc. Technically, RBV is more of a theory than a
framework per se, although there are attempts like Grant (1991) to propose a more
formalised and structured model.
Barney (1991) and Collis & Montgomery (1995) suggested that in order to identify
the sources of sustained competitive advantage in a firm, the focus must be placed on
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resources that are heterogeneous and immobile. Specifically, Barney stated that
resources must pass the following market test of its value:
(a) Valuable (V)- enables a firm to employ a value-creating strategy, by
either improving efficiency or effectiveness
(b) Rare (R)– resource is limited and not easily acquired by competitors
(c) Imperfectly inimitable (I)– resource cannot be duplicated
(d) Non-substitutable (N)– no equivalent or similar resources that can
replace or act as replacement
Closer examination will reveal that conditions (a) and (b) generally produce
competitive advantage while conditions (c) and (d) can result in sustainability. In
short, these four VRIN attributes determine the degree of heterogeneity and
immobility of the resources, and consequently how useful they are in helping a firm
gain sustainable competitive advantage. The more a resource meets the VRIN
conditions, the more pivotal a role it plays in shaping the strategy of a firm. Naturally,
if all firms in the industry possess homogenous resources or is capable of gaining
access to such resources (i.e. resources are mobile), then it is hard to imagine how any
firm can possibly have a competitive advantage over the competitors in a sustained
manner since everyone is capable of eventually implementing the same strategies and
effectively nullifying each other.
In this study, RBV is used interchangeably to the concept of core competences
(Hamel & Pralahad, 1990). In general, resources are a more basic unit of analysis
while core competences is about how these resources are combined, mixed and
integrated or “the collective learning in the organization, especially how to
coordinate diverse production skills and integrate multiple streams of technologies.”
(Hamel & Pralahad, 1990).
It should be noted that the RBV of a firm is not centered around the existing resources
alone; it is equally concerned about the firm’s weaknesses especially those that can be
exploited by external threats. Consequently, the analysis will also identify the current
resource “gap” and what needs to be done to fill this gap.
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Combining both the PFF and RBV concepts will facilitate a more holistic approach to
the strategy formulation process and result in a hybrid resource and industry
positioning strategy. Simply put, PFF states where a firm wants to be, while RBV
provides the how of getting there.
3.4 Other Strategy Concepts
Apart from the choice of a “fit” concept as the basis of strategic management, the
other possible and popular concept is that of “stretch”. Notion of “Strategic Intent”
(Hamel & Pralahad, 1989) generally focuses on stretching the limited resources of the
organization by forcing it to be more innovative in order to compete against a much
bigger competitor. Strategic Intent identifies the firm’s ideal state and is associated
with a mind-set that the firm seeks to imbue in the organization. Although this notion
of strategy as “stretch” gives both the internal and external view of the firm, it
essentially creates “an extreme misfit between resources and ambitions” rather than
focusing on “the degree of fit between existing resources and current opportunities”
(Hamal & Pralahad, 1989).
It is felt that such an approach to strategy development is more relevant for nascent
firms with limited resources and targeting to beat a much bigger incumbent. In fact, in
Hamel & Pralahad (1989), examples of Komatsu and Canon were used as case studies
to demonstrate how fledgling companies outfox their more established competitor by
having a clear strategic intent. Hamel & Pralahad indeed also stated that “to achieve a
strategic intent, a company must usually take on a larger, better financed competitor”.
Clearly, being an incumbent and market leader, SingTel does not fit into this category
especially in the context of Singapore and even amongst its regional
telecommunication peers. It is extremely well endowed with resources, as subsequent
sections will reveal, and its main challenge is in deciding how to deploy these
resources rather than having to stretch them.
In summary, “stretch” concepts like Strategic Intent are less appropriate in this
context and Porter’s Five Forces and RBV are used as the key methodologies to
analyse the strategic choices for SingTel.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
SECTION FOUR: STRATEGIC ANALYSIS OF THE INDUSTRY
ENVIRONMENT
4.1 Objectives
The stability and dynamism of the environment are critical considerations in the
strategy of any firm. The more volatile these parameters are, the greater the
uncertainty and the more complex the analysis becomes. The telecommunication
industry is one that is heavily influenced by its external environment, both industry-
specific as well as those pertaining to the broader macro environment. Not least of
which are for example, the regulatory regime in which it operates in, the economic
prospect, disruptive technologies etc.
The key objectives of this section are to size up the external environment for the
purpose of gaining a strategic understanding of the key threats and opportunities
facing SingTel. To this end, Porter’s Five Forces (PFF) (1979) model is used as the
broad framework on which the main analysis is developed. The output will provide a
clear perspective of the industry dynamics and collective forces that SingTel is up
against and what it can do to re-orientate itself for the future. Specifically, it looks at
the prevailing forces at play in the industry today and also attempts to extrapolate the
developments that can shape the industry in future. The diagram below outlines the
key steps in this analysis:
Assess nature & dynamics of the environment
Understand main competitive
forces & position
Identify key opportunities &
threats
4.2 Porter’s Five Forces Analysis
4.2.1 Industry Competitors
This section drills down into the rivalry that exists among the competitors in the
telecom industry. It looks at the various determinants that shape the competitive
forces and hence factors like strength/diversity of competitors, attractiveness of
market, state of market maturity, exit barriers etc will be evaluated.
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4.2.1.1 Strength of Competitors
In Singapore
(a) Market Position
Although the Singapore telecommunications market has been fully liberalized since
2000 (IDA, 2000), most of the new entrants are typically niche players focusing on
targeted segments like IDD, international leased lines etc. Indeed, although a total of
29 facilities based operators (FBOs) and 535 service based operators (SBOs) were
licensed to provide telecommunications services, the International
Telecommunications Union (ITU, 2001) reported that “Although many new operators
have been licensed following the introduction of full competition, Singapore’s
telecommunications market remains dominated by SingTel, StarHub, M1 and
SCV,…...” In fact, StarHub acquired SCV (the only pay-TV operator in Singapore at
that time) in 2002 (StarHub, 2002), effectively reducing the telecom market to three
major players: SingTel, StarHub and M1.
It is only in the two key business of mobile and fixed broadband that competition can
be classified as intense. Even then, SingTel only faces two competitors in the mobile
market viz. StarHub and M1. In the fixed broadband market, the heavy capital
investment itself is a deterrent which limits the market to basically a two horse race
between SingTel and StarHub.
StarHub and M1 are both backed by experienced global telecom operators as well as
strong local partners. This has invariably contributed to their formidable presence and
success in the market. StarHub’s major local shareholders are Singapore Technologies
Telemedia (49.36% share) which is a government-owned company with interest in
wide-ranging infocomm businesses and Mediacorp (7.6%), the monopoly TV/radio
broadcaster. Its foreign partners are NTT Communications of Japan and British
Telecom (BT), although BT has since sold off its entire stake in 2004 when StarHub
was publicly listed.
M1 also has a very strong local partner in Keppel Telecom and SPH, both well
established government-related conglomerates and its foreign partner is Sunshare, a
subsidiary of Telekom Malaysia.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Chart 4A & B below show the market share of SingTel versus the competitors in
mobile and fixed broadband respectively:
0%5%
10%15%20%25%30%35%40%45%
2004 2005 2006 2007
End Year
Mar
ket S
hare
(Mob
ile)
SingTel StarHubM1
Chart 4A: Mobile Market Share in Singapore (Source: M1, StarHub and SingTel
Annual Reports FY2004-2007)
0%
10%
20%
30%
40%
50%
60%
2004 2005 2006 2007
End Year
Mar
ket S
hare
(Fix
ed B
raod
band
)
SingTel StarHub
Chart 4B: Broadband Market Share in Singapore (Source: Infocomm Development
Authority of Singapore (IDA) Web Site: www.ida.gov.sg)
SingTel has over the past four years managed to maintain its average market share of
40% and 55% for mobile and fixed broadband respectively. The key takeaway from
MBA Management Project 21 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
these charts is that SingTel is still the clear market leader. M1 is gradually losing
ground and the main reason is that being a pure mobile-only player, it has severely
limited its ability to compete with SingTel and StarHub both of whom are able to
bundle their mobile offerings with their fixed broadband as well as their pay-TV
services.
Market share from a revenue perspective also establishes SingTel as the market leader,
as depicted in Chart 4C. Taking mobile revenue as an indicator, SingTel’s revenue
share of the mobile market is in fact higher than its subscriber market share (44%
versus 41%), implying that it has higher ARPU (average revenue per user) and hence
a more valuable customer base than StarHub and especially M1. This can be
attributed to the fact that it still retains a reputation of being a trusted and high quality
company. As such, many valuable corporate businesses are prepared to pay a
premium to stay with SingTel.
0%5%
10%15%20%25%30%35%40%45%50%
2004 2005 2006 2007
End Financial Year
Mar
ket S
hare
(Mob
ile R
even
ue)
SingTelStarhubM1
Chart 4C: Mobile Revenue Share (Source: CIMB Telecommunication Sector Analyst
Report, 26 Nov 2007)
(b) Financials
Financially, SingTel is the largest company by market capitalization on the Singapore
Exchange. The following analyses the relative strength of the three telcos over the
past 3 years with respect to some key financial ratios. The detailed financial
statements of each company are provided in Annex 2 to 4 while the definition of each
of the ratios is provided in Annex 5. It should be noted that the financial year of
MBA Management Project 22 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
SingTel is from 01 Apr to end March while M1 and StarHub follows the calendar
year.
-2.0%0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%
2005 2006 2007
Year
Rev
enue
Gro
wth
SingTelStarHubM1
Chart 4D: Revenue growth for past 3 years for SingTel, M1 and StarHub. (Source:
SingTel, M1 and StarHub)
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2005 2006 2007
Year
EBI
TDA
Gro
wth
SingTelStarHubM1
Chart 4E: EBITDA growth for past 3 years for SingTel, M1 and StarHub
(Source: SingTel, M1 and StarHub)
EBITDA & REVENUE Growth: Chart 4D & E compares the Revenue and EBIDTA
growth of the three telcos for the past three financial years. StarHub is by far the best
performer with an enviable double digit growth in both revenue and EBITDA. This is
in sharp contrast to the flat top line growth and slight erosion of EBITDA for both M1
and SingTel. This shows that not only is StarHub growing and snatching revenue
MBA Management Project 23 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
market share at the expense of both operators, it is also doing this at a much lower
cost as shown in its relatively higher EBITDA.
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2005 2006 2007
Year End
EBIT
DA
Mar
gin
SingTelStarHubM1
Chart 4F: EBITDA Margin for past 3 years for SingTel, M1 and StarHub
(Source: SingTel, M1 and StarHub)
EBITDA Margin: Although SingTel still shows the highest absolute EBITDA or
operating margin as illustrated in Chart 4F, a worrying sign is that it is trending
downwards, implying that its expenses is growing at a faster rate than its revenue.
Comparatively, StarHub has been impressively improving on its margin and still
growing its top and bottom line at the same time. Its margin is lower than M1
because it is dragged down by its pay-TV business which is generally a high capital
investment and low margin business.
MBA Management Project 24 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
0200400600800
1,0001,2001,4001,6001,8002,000
SingTel StarHub M1
Operator
Free
Cas
h Fl
ow in
S$
mils
200520062007
Chart 4G: Free Cash Flow for the past 3 years for SingTel, M1 and StarHub (Source:
SingTel, M1 and StarHub)
Free Cash Flow/Dividend : Looking at Chart 4G, SingTel’s free cash flow stands
heads and shoulders above the rest and this cash holding gives it tremendous
flexibility to take advantage of any investment opportunity both in Singapore and
overseas. On the other hand, M1 and StarHub have no regional ambition and have
consistently chosen to return surplus cash to its shareholders instead. Table 4H below
shows the declared dividend policy of the three telcos:
SingTel Pay 50% of underlying net profit after tax as ordinary dividends. (SingTel
15th AGM, 2007)
StarHub 18cts per share or about 90% of net profit after tax (StarHub, 2008)
M1 For FY2007, aim to make a total cash distribution to shareholders
equivalent to at least 80% of full-year net profit after tax. (M1, 2008)
Table 4H: Dividend Policies of SingTel, StarHub & M1 (Source: SingTel, StarHub &
M1)
This high dividend payout ratio of M1 and StarHub is also reflected in their respective
dividend yield and in absolute terms, both operators actually pay out more dividends
per share than SingTel despite their relatively smaller size. But the implication is that
they are considered as dividend yield stocks in the market and their share price may
take a direct hit, at least in the short term, if they decide to divert some of these cash
MBA Management Project 25 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 26 Lee Siak Kwee
to a new venture. SingTel, on the other hand, has much more scope to deploy its cash
on hand.
Leverage: From a debt/equity ratio basis, SingTel’s capital structure is still quite
conservative compared to M1 and StarHub. This is shown in the Table 4I:
SingTel StarHub M1 2005 2006 2007 2005 2006 2007 2005 2006 2007 Interest Cover 15.00 17.0 21.3 38.7 40.0 24.5 32.4 32.3 33.9 Debt/Equity 0.26 0.19 0.22 0.01 0.40 0.77 0.2 0.2 1.3 Table 4I: Interest Cover & Debt/Equity comparison of the three telcos (source: SingTel,
M1 and StarHub)
Its gearing is the lowest and with its interest cover still a very healthy 21.3 times of
EBITDA, SingTel can still afford to leverage upwards without affecting its credit
ratings (Currently at S& P A+ and Moody’s Aa2). This means that it still has great
financial flexibility to add more debts to finance any attractive investment or new
technology, while still using its operating cash flow to maintain its dividend payout
policy.
4.2.1.2 Product Differentiation
Being the only other full service provider, StarHub undoubtedly poses the greatest
competitive threat to SingTel. It is the only player that is able to offer a full-suite of
telecom services like SingTel and has proven since its inception in 2000 that it is a
formidable competitor. In fact, with its monopoly in cable TV between 2002 to 2007,
StarHub had an additional edge which SingTel was unable to match until it launched a
similar pay-TV product in mid-2007 called Mio TV.
With pay-TV in its portfolio, StarHub was able to position itself as a “triple-play”
operator offering an integrate bundle of mobile, broadband and cable TV services.
StarHub’s bundling strategy, branded as “hubbing”, became synonymous with value-
for-money since subscribers were able to enjoy substantial discount if they bought all
three services from StarHub. By offering these services as a package, not only did
customers benefit from lower total cost of usage, but it also benefited StarHub as it
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 27 Lee Siak Kwee
saved on marketing/distributing the products individually. Technically, StarHub’s
newer cable infrastructure is also more superior to SingTel’s legacy copper lines; it is
already able to offer 100Mbps download speed compared to SingTel’s 10Mbps.
This wildly successful strategy propelled StarHub from zero market share at its
inception in 2000 to almost 33% today (versus SingTel’s 40%). In the process, it also
overtook M1, even though M1 had entered the market 3 years earlier in 1997. Without
an equivalent pay-TV offering, SingTel was not able to counter this key
differentiation until its Mio TV premiered in 2007. Even then, being first in the pay
TV market has allowed StarHub to lock-in key TV programs on long term contracts.
Staple like the English Premier League (EPL) soccer telecast is a “must-have” for the
majority of viewers in Singapore and it was reported that StarHub paid S$250 mil in
2007 to acquire the rights to broadcast EPL for the next 3 years (Siew, 2007). This
was 4 times higher than what it paid for the existing rights and it highlights both the
intensity of the rivalry as well as how critical such popular content is to the pay-TV
business.
Traditionally, SingTel has been heavily dependent on voice services, especially IDD
as its main revenue stream. But technology like Voice over IP has all but destroyed
that lucrative business model and IDD has been relegated to commodity status today.
Similarly, mobile services risk following down this slippery path if it still continues to
be driven by voice traffic. Even data traffic generated by the strong take up of
broadband internet service is also being commoditised with operators offering fixed
subscription for unlimited access. This state of affairs has all but reduced operators
like SingTel into “bit-pipe” carriers.
4.2.1.3 Industry Attractiveness
The Table 4J and 4K below show the latest IDA statistics on the mobile and
broadband services market in Singapore respectively:
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2004200520062007
End Year
Num
ber o
f Mob
ile
Sub
scri
bers
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
Pene
tratio
n R
ate
MobileMobile Penetration
Table 4J: Number of Mobile Subscribers and Market Penetration in Singapore (Source:
IDA Statistics on Telecom Services 2004-2007 (www.ida.gov.sg))
-100,000200,000300,000400,000500,000600,000700,000800,000900,000
1,000,000
2004 2005 2006 2007
End Year
Num
ber
of R
esid
entia
l Br
oadb
and
Con
nect
ions
0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
Hous
ehol
d P
enet
raio
n R
ate
Broadband
BroadbandHouseholdPenetration
Table 4K: Number of Residential Broadband Connections and Household Penetration
Rate in Singapore (Source: IDA Statistics of Telecom Services 2004 -2007
(ww.ida.gov.sg))
With mobile penetration already exceeding more than 100% of population and
broadband connecting over 77% of the households, the telecom market in Singapore
can be considered a highly mature one. Although the market still grew from 2006 to
2007 with the mobile and broadband penetration rate by about 20 and 10 percentage
points respectively, the revenue growth rate tells a slightly different story.
MBA Management Project 28 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 29 Lee Siak Kwee
In financial year 2007, the best performer StarHub achieved only 11.6% growth while
the other two were mostly flat. Even though the absolute number of subscribers has
grown, revenue growth has not followed proportionately, signifying that the new
subscribers are of much lower value. This is a tell-tale sign that the market is reaching
the lower tiers where the customers are usually extremely price sensitive. Such
developments entail that going forward, the emphasis for SingTel will be in
maintaining efficiency and a low cost structure in order to protect the margins.
Realistically, the market is likely to be capped by the rate of the population growth.
Statistics Singapore (2007) showed that the total population of Singapore grew by
4.3% to 4.59mil in 2007 as illustrated in Table 4L below.
2004 2005 2006 2007
Total Population ('000) 4,167 4,266 4,401 4,589
% Growth 2.4% 3.2% 4.3%
Residential ('000) 3,413 3,468 3,526 3,583
% Growth 1.6% 1.7% 1.6%
Non-Residential ('000) 753 798 876 1,006
% Growth 5.9% 9.7% 14.8%
Table 4L: Singapore’s Population Growth Source: Statistics Singapore (2007)
But closer analysis shows that only 1.6 % is due to growth in resident population (i.e.
Singapore citizen and permanent residents) and the rest, a stunning 14.8%, is due to
non-residents like foreign workers.
In all, Singapore had a non-resident population of roughly 1 million at end 2007. Key
implication for the telecom industry is that this market segment is highly dependent
on the economic well-being of Singapore to be sustained. Any prolonged economic
downturn will result in a sudden and drastic drop in this substantial group of
customers with detrimental impact to every player in the market.
Even if the subscriber growth can keep pace with the resident population growth, the
industry is also plagued with the trend of services being priced at a flat, “all-you-can-
eat” rate rather than based on traffic. This is a consequence of the intensity of the
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 30 Lee Siak Kwee
competition in a mature market and a further testament that traditional telco services
like broadband and mobile are already behaving like commodities.
With flat rate pricing, there is very little upside for the telcos but instead, more
resources must be put in place to bear the additional cost of carrying the traffic e.g.
through network expansion. Video-type services which are bandwidth guzzler (like
the popular YouTube), has generated tremendous amount of internet traffic, but
unfortunately for the telcos, it has not translated into a new revenue stream.
Despite the apparent gloomy picture that has been painted for the telecom industry,
there is yet some silver lining. The ubiquitous accessibility to broadband mobile
coupled with user-friendly multimedia handheld devices is a potential catalyst to
make the internet go “mobile”. iPhone for example, has been claimed by Renee
Obermann (CEO of Deutsche Telekom) to drive mobile internet data usage by 30
times more than other phones (Unstrung, 2008). This “anywhere, anytime”
connectivity paradigm will be the next driver of traffic for the mobile operators. Of
course, traffic alone will not make the industry any more attractive than it is today but
such pervasive mobile usage will facilitate operators to offer more on-line (and
chargeable) services and more dramatically, opens up the possibility for operators to
emulate the advertisement-funded business model of the internet. This is a distinct
possibility as operators can leverage on their knowledge of e.g. the location of the
subscribers to sell such information to advertisers. With user generated content, social
networking, blogging and other similar Web 2.0 type services becoming the rage,
such “contextual” information will become extremely relevant.
In a nutshell, the Singapore telecom industry has reached a maturity stage in the life
cycle of the market and market share can either be gained by stealing current higher
value customers from other competitors or cutting prices to entice a new segment of
price sensitive subscribers. Even though growth rate has tapered off and competition
is rife, it is unlikely to decline as the telecom services are used on a recurring basis
and subscribers are usually charged monthly subscription or usage fee. In addition, the
trend towards mobile internet presents an attractive proposition that can be exploited.
The telecom industry is without doubt still an attractive industry that provides strong
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 31 Lee Siak Kwee
recurring cash flow, relatively healthy profit margins, and potential for an internet-
based business model in future.
4.2.1.4 Capacity/Fixed Cost
High fixed cost is a natural trait of the telecom industry. Infrastructure cost typically
run into 10s and even 100s of millions of dollars even for a small country like
Singapore. Although the Singapore market is fairly mature, investment is still
constantly needed to upgrade the network e.g. to support the latest mobile technology
like 3G, upgrade from ADSL to ADSL+ to support higher broadband access, etc.
Each of the three mobile operators paid S$100mil for their respective 3G license, and
this was just for the rights to use the frequency. It excludes the cost of the
infrastructure as well any operating cost necessary to get the network up and running.
Such is the magnitude of investment required in the telecom industry. Obviously, with
such high upfront capital expenditure, having the minimum economy of scale is
critical to at least cover the running cost and hopefully, get a decent return on the
initial investment in the long run. This is a reason why it is common to see operators
subsidizing handsets, modems etc, and locking in customers with long term contract
in order to ramp up to the desired subscriber scale. Although the incumbent operators
are all saddled with high operating and network upgrade cost, they do not face any
more such pressure to gain customers quickly since they have all attained a sufficient
size to be highly profitable while controlling their cost/margins. However, the danger
is that this does not preclude a new operator coming into the market e.g. with a new
disruptive and cheaper technology, and shake the market with a low cost strategy to
obtain the turnover required.
4.2.1.5 Acquisition
A shakeout in the telecom industry in Singapore is an unlikely scenario with all the
three incumbents having sufficiently large market share to remain sufficiently
profitable. Mergers and acquisition activities between the big three is also not a
probable event as first, the regulator will not be keen to see a duopoly develop.
Moreover, the current telecommunications code has very stringent guidelines
regarding any consolidation that eliminates direct competitors resulting in what IDA
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 32 Lee Siak Kwee
would call “significant market power”. Secondly, there is also very little incentive for
the incumbents to merge or acquire each other since the market is already flattening
out and there is little to gain strategically from such a move.
Foreign acquisition, however, is a more probable scenario. Foreign players taking a
strategic stake have already happened with M1, with the investment by Telekom
Malaysia’s subsidiary Sunshare in 2005. Such an acquisition could result in new
players with “very different personalities” (Porter, 1979) entering and attempting to
re-write the rules of the market. Although so far, Sunshare has proven to be a
relatively quiet partner, the fact that there is now no regulatory restriction on foreign
ownership means that in future, SingTel may be faced with fighting a truly global
operator in its own backyards. Likewise, new technologies may create the window of
opportunity for foreign players to acquire a stake in one of the operators so as to gain
immediate access to the existing subscriber base, distribution channels and brand
name.
4.2.1.6 Regionally
SingTel early forays into the regional market were helped by two key developments:
the Asian financial crisis in 1997 and the dot.com bust of 2001. In the fallout of the
1997 crisis, cash-rich SingTel took advantage of the opportunity to buy out distressed
assets and AIS in Thailand was one of these companies that SingTel invested to help
pay off its massive US$ denominated debts.
During the short lived euphoria of the dot.com era, many European operators bought
into the madness and bid an estimated US$100 bil for new 3rd generation (3G) mobile
licenses throughout Western Europe. When the bubble burst in 2001, all these
operators were left holding on to massive debts and on business models that can no
longer justify the astronomical price tag. Consequently, many operators had to off-
load their stake in their ventures around the world in order to pay off their debts.
SingTel was on hand to capitalize. In 2001, it paid US$602 mil for a 22.3% stake in
Telkomsel in Indonesia from KPN (the Dutch mobile operator) (Clark, 2001) and in
the same year, it bought wholesale from Cable & Wireless a 53% stake in Optus in
Australia.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 33 Lee Siak Kwee
7 years later however, many of these global telcos have got rid of these excesses and
are making their forays into the Asia Pacific region again. These competitors that
SingTel face in the regional arena are telcos with similar profile: cash-rich former
government monopoly faced with a saturated home market. These are the likes of
Vodafone, NTT Docomo of Japan, etc. However, in terms of size, these competitors
dwarf SingTel considerably. Vodafone for example, has a market capitalization of
£99 bil (as at end Dec 07) and a subscriber base in excess of 252 mil spread over a
global footprint covering USA, Europe, Middle East, Africa and Asia Pacific
(Vodafone, 2008).
Naturally, SingTel faces an up hill task competing against these global giants
especially if they are prepared to pay over the top premium to buy stakes in other
companies. Group CEO of SingTel, Ms Chua Sock Koong, admitted as much in reply
to question in a recent press interview: “More overseas companies are targeting Asia
for acquisitions…….for SingTel, ``the challenge is not lack of capital…” (Bloomberg,
2008).
Notwithstanding the tough competition that SingTel faces for new acquisition, its
focus on the Asia Pacific region and on mobile business in particular positions it in a
market that still has enormous potential for growth. Chart 4M illustrates how mobile
has overtaken fixed line as a main form of telecommunication in the Asia Pacific
region and this is not surprising considering that in big countries like China and India,
going wireless is a much faster and cheaper route. The attractiveness of the Asia
Pacific market is underscored by the relatively low mobile penetration rates compared
to developed regions like America and Europe in Chart 4N. This augurs well for
every player in this highly attractive industry in Asia Pacific which is also SingTel’s
main battle ground.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Chart 4M: Mobile Overtaking Fixed As Main Telecommunication Service in Asia
Pacific (Source: International Telecom Union)
2005 2006 2007 2008 2009 2010
North America 67.3 72.9 77.5 81.1 83.9 86.1
Japan 74.3 77.6 80.6 83.6 86.4 88.9
Western Europe 100.5 105.5 108.9 110.8 112.2 113.1
Transition economies 82.7 92.8 97.0 99.7 101.6 103.6
Asia & Australasia (excl Japan)
20.4 23.2 25.9 28.0 29.5 30.8
Latin America 47.9 54.7 59.5 62.9 65.2 64.5
Middle East & Africa 28.0 35.9 41.6 45.8 48.8 52.2
World 39.0 43.3 46.7 49.3 51.1 52.7
Chart 4N: Comparison of Mobile Penetration Rates and Forecast (Source: Economic
Intelligence Unit, Nov 2006)
Globalisation has also been a boon to SingTel’s regional ambitions. With an extensive
network of 38 offices all over the key business centres in Asia Pacific, Europe and the
USA, SingTel is well positioned to ride on the coat tails of MNCs expanding overseas.
Moreover, with the trend of outsourcing, SingTel is well positioned to go beyond its
traditional international leased line service and into managed services e.g. providing
MBA Management Project 34 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
end to end service from hosting of servers, to network security and round the clock
maintenance. But of course, the global market place is also the playground of the likes
of big boys like AT&T, Deutsche Telekom and Verizon, and hence competition will
be extremely intense.
Summary of Industry Rivalry
Key Opportunities:
• Ubiquitous access facilitated by fixed and mobile broadband, together with
demand for internet based services creates new revenue opportunity for
SingTel to reduce its dependence on carriage services and move vertically into
new space in the value chain.
• Regional telecom markets are lowly penetrated and offers SingTel many
investment opportunities especially in the mobile market
Key Threats:
• StarHub , as the only other full service provider with strong partner, healthy
financial position and superior broadband network, poses the greatest threat to
SingTel’s number one position in the market
• The local market is reaching a mature stage in the industry life cycle. This is
exacerbated by intense competition, little product differentiation and eroding
margins due to prevalence of flat pricing.
• Big global operators are competing with SingTel for investment opportunities
in the region
4.2.2 New Entrants
The threat of new players in the industry is very much a factor of whether there are
barriers of entry and five major sources are discussed:
4.2.2.1 Capital Requirements & Economies of Scale
With the market penetration in excess of 120% for mobile and over 77% for
broadband, SingTel and the other two incumbent operators are enjoying high level of
economies of scale. This also implies that they will have significant cost advantage
MBA Management Project 35 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 36 Lee Siak Kwee
over any new players coming into the market. SingTel’s well established
infrastructure has taken it years to build and this creates an extremely high entry
barrier. Its fixed line local loop reaches into virtually every household and
commercial buildings in Singapore and its mobile network has also the whole of
Singapore well blanketed. Any new entrants intending to match the breadth and depth
of SingTel’s network would naturally be discouraged by both the high capital
investment and long gestation period, not to mention that the need to undercut the
incumbents in terms of pricing to gain any significant foothold in the market place.
It is primarily due to this entry barrier that most of the newcomers do not focus on
being facility-based operator (FBO) that requires high capital investment but rather
service-based operators owning minimal asset, and unrestricted by regulatory license
quota. These are usually boutique outfit that buys wholesale capacity from the FBOs
(e.g. SingTel) and target specific market segments (e.g. lucrative corporate customers)
and value added service like IDD services, ringtone download etc.
4.2.2.2 Brand Equity
The success of StarHub and M1 has proven that brand equity is not a high barrier to
entry. Within 3 months of its launch in April 2000, StarHub had gained 79,000 mobile
subscribers and 60% of the incremental market share, 260,000 dial-up subscribers (or
a whopping 24% of the TOTAL market share) and a more modest 5% of the IDD
market share (StarHub, 2000). These numbers bear testimony that brand equity can be
overcome if a new competitor can create highly differentiated value propositions
which StarHub has done with its innovative “per-second” billing and “free incoming
call” offerings.
Call tariff in Singapore had long been charged on a 6-seconds charging block basis
and users were also charged for incoming calls. Both these charging schemes were
“legacy” used by SingTel for all its time-based services like fixed line, IDD and
mobile. When M1 entered the market in 1997, it also saw no reason to upset this
cushy arrangement and instead depended on its status as the first challenger to
SingTel to capture market share. So when StarHub stormed the industry with such
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 37 Lee Siak Kwee
revolutionary ideas, it quickly established itself as a value-for-money player and
gained market share quickly.
With such intense competition and commoditisation, brand equity has only limited
effect, perhaps only to more quality conscious corporate customers. But to the mass
market consumers, even a household name like SingTel count for little if an
alternative service provider is perceived to offer a more attractive value proposition.
4.2.2.3 Access to Distribution Channels
With Singapore being such a small and densely built-up country, access to
distribution channels is not a major source of barriers to entry. Again, the success of
StarHub demonstrates that even a new operator with sufficient resources can penetrate
into the market relatively quickly.
Access to physical distribution channels may not even be a factor as a barrier to entry
in the internet era. MobTV, an internet based pay-TV services offered by the local
broadcaster, MediaCorp, behaves like any internet based service provider or so called
“e-tailer”; it does not need any brick and mortar distribution channel to sell its
services. Users can just use any existing internet connection to access the services,
effectively diminishing the role played by broadband provider like SingTel to that of a
bit pipe. With cost per bandwidth of internet access trending ever lower, these
internet-based content providers are effectively getting a cheap ride.
4.2.2.4 Cost Disadvantages Independent of Size
Although new players may potentially face cost disadvantages pertaining to
experience, lack of market/operating knowledge, access to favourable location (e.g. to
build base station for mobile coverage) etc, this barrier to entry is not a potential
show-stopper as shown by M1 and StarHub.
Both used the same strategy to overcome this source of barrier to entry when they
entered the competitive fray. While they have the local knowledge of the Singapore
market, they lack the technology competence to operate a telecom network. This was
easily overcome by roping in experienced foreign telcos as their technology partner
and this enabled them to shorten their learning curve as well as time to market.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 38 Lee Siak Kwee
4.2.2.5 Government Policy
The telecom market is fully liberalised since 2000 but for markets like mobile
services, the threat of new entrant is low as the three incumbent operators including
SingTel have exclusive rights for the next 15 years for 3G (and 8 years for 2G). But
for other services like IDD, call back, international leased circuit, content services etc,
it is a completely open field and SingTel faces a myriad of both small and global
operators competing for the same market.
Hamel & Pralahad (1989) stated that “assessing the current tactical advantages of
known competitors will not help you understand the resolution, stamina and
inventiveness of potential competitors”. Indeed, SingTel’s greatest challenge going
forward is not against these known competitors but against non-traditional
competitors bent on shaking up the existing value chain and with a strategic intent of
redrawing the industry rules. With an open market and borderless internet world, such
competitors can literally come from anywhere.
The astounding success of Apple’s iPhone is a preview of things to come for the
telecom industry. Although on face value it is a partnership, iPhone’s business model
of taking a share of subscriber’s monthly revenue and working with only one operator
in each market makes it as real a competitor as anyone else in the market. In fact, it is
even more surreptitious as it feeds on the operator’s subscriber without needing to
expense any direct acquisition cost.
Similarly, the example of StarHub paying premium price for exclusive rights to the
English Premier League shows the type of leverage content owner has over the
success of pay TV business. It exemplifies why ownership of content is becoming a
vital competitive differentiator and more worryingly, the dependency of telcos on
such content owners for their fortunes. Hence, the threat of media players and content
owners developing into mainstream competitors and dominating the value chain is a
very strong possibility.
The award by IDA in Oct 2006 of three licenses to implement nationwide Wifi
services (IDA, Oct 2006) shows that a regulatory regime that is welcoming of new
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 39 Lee Siak Kwee
technology can also open doors to new entrants to the market. Although SingTel is
one of the three winners, the more noteworthy points are:
• the other 2 winners, Qmax and iCell are “greenfield” new comers into
the wireless broadband market. Incumbents StarHub and M1 both bid
but were not selected.
• The rollout is heavily funded by the government. In fact, not only is
the network subsidised, licensees are also required to provide basic
public Wifi free of charge for at least 2 years.
At the moment, IDA has also embarked on a highly ambitious plan called “The Next
Generation National Broadband Network” to be put in place by 2012 (IDA, Sept
2006). This new network is capable of delivering broadband speeds up to 1 Gbps
(compared to the highest 100Mbps offered today), and aims to offer pervasive
connectivity and fibre-to-the-home for every household in Singapore.
Besides funding this costly initiative, IDA is revolutionarising how the services are to
be provided. The new framework distinctly separates the operation of the network
from the service provider function. Traditionally, these functions are all owned by the
telcos and new service-based operator wanting to offer service has no choice but to
buy capacity from a facility-based operator e.g. SingTel. Needless to say, such a
model puts the service based operator at a serious disadvantage since SingTel is also a
competitor. With this new open-access model, the playing field is totally leveled and
ANY service provider can compete equally and on non-discriminatory terms with the
rest.
Potentially, such government policy can have dire effect on SingTel’s position in the
market as it will eradicate any competitive advantage that SingTel has build up over
the years on its legacy network.
By June 2008, Singapore will finally have a true number portability facility available
for all the mobile and fixed line subscribers. IDA has mandated this requirement so
that users switching service provider can still retain their current phone number. This
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
lowers the barrier to switching as previously, having to give up a number known to
business associates and social contacts was a high deterrent for users to switch service
provider. This regulation is expected to increase the churn rate, and SingTel, with the
largest group of customers, will naturally have the most to lose.
With the telecom market constantly evolving with new technologies, and a
progressive regulator in IDA that is determined to push for open access and more
consumer choice, it is but a foregone conclusion that liberal government policies will
continue to favour and encourage the entry of new players into the industry. Chris
Lane goes as far as saying that regulatory “poses the biggest risk, it is the most
immediate and threatens to destroy value for SingTel”.
Summary of New Entrant Coming into the Industry.
Key Opportunities:
• Nil
Key Threats:
• Brand equity and access to distribution channels are not significant barriers to
entry. In addition, the evolution towards internet-based transaction may even
negate the value of having physical retail outlets.
• Regulatory framework favours competition, open access and introduction of
new disruptive technologies.
• Non-traditional players not saddled with high cost legacy network poses a
serious threat to incumbents like SingTel.
• Differentiation in future telecom services will come from the “edge” of the
network which is currently not the expertise of SingTel e.g the handset makers
and content owners.
4.2.3 Buyers
4.2.3.1 Is Buyer Group Concentrated or Purchase in Volume?
Telecom services are purchased by both corporate business and wholesalers (e.g.
service based operators buying capacity from SingTel), but consumers still make up
MBA Management Project 40 Lee Siak Kwee
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MBA Management Project 41 Lee Siak Kwee
the majority of the buyers as well as the revenue contribution. Take for example
broadband services: there were only 71,100 corporate customers as opposed to
879,300 residential customers as at end 2007 in Singapore (IDA, 2007). Hence
consumers are considered the major buying group.
Although in absolute numbers this consumer buyer group can number to the millions
e.g. SingTel has more than 2 million mobile subscribers and over 471,000 broadband
subscribers at end 2007, they are after all individual buyers that do not buy in bulk nor
are in any way concentrated. On the other hand, with effectively only 3 mobile
operators and two broadband operators competing, the concentrated nature of industry
players also translates into weak bargaining power of the buyers. For fixed line
services like leased circuits, SingTel has even greater leverage over the buyers since
they virtually hold a monopoly position being the only operator with nationwide
network of copper and fiber links.
4.2.3.2 Are Products Standard or Undifferentiated?
Except for content oriented services like pay-TV, just about the rest of the other
telecom services are standard in nature or can achieve the same functionality using
different technology. SingTel, M1 and StarHub all use GSM and 3G standard for the
mobile services. Not only does it make little difference to the user in terms of
functionality, the same subscriber terminal (i.e. hand phone) can be used seamlessly
on any network. This lowers switching cost for the subscriber.
For broadband, StarHub has an edge as its cable technology can achieve a higher
speed than SingTel’s copper-based ADSL (Asynchronous Digital Subscriber Loop)
network. This has given StarHub a “halo” effect although in actual fact, the 10 Mbps
provided by SingTel is sufficient for most internet applications today. But going
forward, with more bandwidth hungry applications gaining traction, this factor may
become a serious competitive disadvantage to SingTel.
To alleviate the problem of commoditisation, the operators tend not to compete
directly but rather make their offerings hard to compare. For example, such “price-to-
confuse” strategy is very evident in different mobile subscription plans offered by the
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 42 Lee Siak Kwee
3 operators. Each plan can come with a mish-mash of different bundles of free air
time, SMS, value-added services, etc. But such strategy at containing buyer power is
only sustainable in areas where owning the network gives the operator power to
control access and hence price e.g mobile and broadband. Where such competitive
advantage do not exist and new and cheaper technology can easily provide a
substitute, e.g. in the area of international direct dial services, buyer power reigns.
In the earlier section, it was also highlighted that the regulator will be imposing true
number portability to allow subscribers to retain their current phone number even
after switching to a new service provider. This may not be as serious a threat as it is
standard industry practice to require customers to sign on for 2 years contract in
exchange for heavily subsidised customer equipment e.g. handset. Thus the customer
is locked-in to an operator and has to pay a substantial penalty if the contract is
terminated prematurely. This imposes a high switching cost to the customer during
the contract period but once the contract is over, the customer is again free to choose a
new service provider.
4.2.3.3 Is the Buyer Price Sensitive?
SingTel’s average revenue per user (ARPU) for all its mobile services is about S$62
per month (SingTel, Feb 2008) while StarHub’s broadband services average S$66 per
user per month (StarHub, Feb 2008). Compared to the average household income of
$6,280 of all resident households (Singapore Department of Statistics, 2008), the cost
of owning mobile and broadband services is extremely low relative to the overall
household income. Thus it can be safely concluded that for those who are already
subscribing to mobile services, these buyers are generally not price sensitive. Coupled
with being offered a myriad of handset subsidies for different models of handset, and
the “price to confuse” strategy of the operators, the buyer has also limited scope to
compare prices logically.
The same cannot be said for the majority of new subscribers being added to the
network. They are typically from the lower tier income segments of the market and
hence naturally, more price sensitive. This trend stood out starkly in SingTel’s latest
quarterly result ending Dec 2007 (SingTel, Feb 2008). Of the total increase of
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
197,000 mobile subscribers added in the quarter, a total of 163,000 were due to
prepaid users, predominantly from the blue collar foreign workers (SingTel, Feb
2008). This segment commands an ARPU of only S16 per month compared to $93 for
a postpaid subscriber. Without a doubt, in order to reach this segment of the market,
SingTel as well as the other operators have to offer a very price competitive product
with lowered margins.
Summary of Power of Buyer
.Key Opportunities:
• “Cartel-like” behaviour of operators weakens bargaining power of buyers
• Buyers are agnostic to operator since current telecom services are
predominantly standardised in nature (except pay TV); operator that can
differentiate in future with unique offerings (e.g. content) will be possible to
charge a premium.
Key Threats:
• Buyers are able to switch freely between operators due to standardized nature
of telecom services and upcoming number portability will to make it easier for
users to switch
• New segment of buyers are highly price sensitive; this will deteriorate
operating margins further
4.2.4 Suppliers
The two main suppliers to SingTel are: the infrastructure vendors that supply the
network and the terminal vendors that supply the end user equipment like handsets.
Where the infrastructure providers are still considered a specialized domain and form
some kind of quasi-partnership with the telcos, the same cannot be said of the
terminal vendors. This section will look at the relative power that these two groups
possess in the telecom industry and how the terminal vendors will increasingly tilt the
balance of the forces in their favour.
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MBA Management Project 44 Lee Siak Kwee
4.2.4.1 Is the Supplier Group Dominated by a Few Powerful Companies?
The telecom infrastructure vendor community has seen a wave of merger and
acquisition in recent years. This reflects the extreme competition of an industry that is
also heavily dependent on high R&D fund to keep up the technology development.
The merger of Alcatel and Lucent in 2006 and that between Nokia and Siemens in
2007 have reduced the telecom markets to even a more select group among the
traditional vendors like Ericsson, Alcatel Lucent, Motorola and Nokia Siemens. But
this wave of consolidation is also driven by the emergent of low cost players from
China like ZTE and Huawei. This has kept the supplier group’s power in check and
nullified any emergent dominance by any single vendor.
Even without these new vendors, the fact that the operator community is also a small
one also makes it hard for the vendor to gain dominance. In Singapore, for example,
the 6 vendors have to compete for business from only 3 major operators. With the
continuing erosion of operator’s margin, the days of fat margins are also gone for the
vendors. To offset this, vendors are aggressively offering higher margin managed
services or outsourcing to the operators. Their value proposition is that by operating
on a global scale, they are able manage the network more cost efficiently and
effectively than the operators.
On the handset supplier side, the current value chain of the industry is fairly straight
forward. Handset vendors are operator-agnostic and typically rely on the operators as
their main sales channel, primary also because of the heavy subsidy that operators are
willing to incur to acquire a subscriber. This makes the upfront acquisition cost of the
subscriber high for the operator but the handset vendor gain from the handset sold
through the telcos.
The handset market today is currently dominated by Nokia, with over 40% of the
global market share (Strategy Analytics, 2008). The nearest rival, Samsung, is a
distant second with less than 15% market share which implies that Nokia definitely
has a stranglehold over the market and the operators. This empowers Nokia to exert a
disproportionate amount of pressure on the telcos whether in commanding a higher
premium on their selling price and hence increasing the acquisition cost for the
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 45 Lee Siak Kwee
operators, or a new business model which they may pursue in future. The latter is
especially threatening to the telcos as technology have enabled handset terminals now
with processing power and screen size that are ergonomically designed to function as
a handheld multimedia device. This coupled with wireless broadband now being
offered with speeds of up to 7.2 Mbps, such PDA-type devices have all it takes to
handle bandwidth-guzzling applications like video streaming.
Nokia launched its on-line “Ovi” services in August 2007 (Nokia, 2007). Ovi, which
is Finnish for “door”, is literally what it means; a door to Nokia’s internet services
like music store, maps, games etc. Like Apple’s iPhone, it is not a free site and users
have to pay to download content. But the user experience is made much more
seamless because Nokia is able to design and customized their handset to ensure that
user can access the on-line store and make transaction with minimal hassle.
Although the telco’s role is still fundamental to the whole value chain, it risked being
marginalized and reduced to that of a basic data carrier. This is not helped by flat-rate
pricing which is accelerating the shift of value to the contents provided by the likes of
Nokia and not in the ability to provide the middle man role i.e. the telco. The carrier
role is just a means and not an end in itself as far as the subscriber value is concerned.
This strategy shows Nokia’s clear intention of moving away from its long-standing
model of just selling handset and having an indirect relationship with the customers
through the operators. Nokia is transforming itself from just a manufacturer into a
service-provider and competing with the operators in the content space. Or as Chris
Lane describes it: “targeting for the same incremental revenue”.
Besides heavyweights like Nokia, such a direct handset-to-customer relationship is
also gaining traction with the arrival of new players like Apple’s iPhone. Even before
Apple dabbled into the mobile handset market, its music download iTunes is already a
runaway success on its iPod platform. If Apple is able to replicate this model on its
iPhone, then it can ride on the cheap access provided by the telcos to sell more iTunes,
lending further credence to the mantra that “content is king”. In addition, Apple’s
model of revenue share of the recurring subscription fee is even more revolutionary as
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MBA Management Project 46 Lee Siak Kwee
it is a direct encroachment to the operator’s bread and butter revenue stream. If
Apple’s model gains sufficient momentum, it may spur the other handset vendors
especially the big ones like Nokia to go down the same path.
Besides handset vendors gradually taking greater dominance in the value chain, even
content providers may potentially get into the act. Mobile Virtual Network Operators
(MVNOs) are service provider that lease network capacity from facility-based
operators and then resell the service. Essentially, MVNO’s treat the network as a
given and focus instead on their marketing strength and to some extent, cross-selling
the mobile services together with their other core businesses.
Virgin Mobile is a fairly successful MVNO player in countries like UK, USA, India
etc. Although Virgin Mobile failed miserably in a short lived venture (lasting only 9
months) with SingTel to implement the MVNO model in Singapore in 2000, it may
be because it was well ahead of its time. While voice and SMS were predominant
services at that time, the network has now evolved to handle broadband traffic. The
recent announcement by Walt Disney to set up a MVNO in Japan with the number
three mobile carrier SoftBank that “capitalizes on Disney’s strong position in the
mobile content market” (Softbank, 2007) is worth noting. Even Google has stated its
intention to bid for a spectrum in the US to operate its own mobile network. Its
commitment to bid at least US$4.6 bil (von Fuchs, 2007) just for the rights, not even
counting the cost to rollout out a nationwide network, shows how much is at stake.
More critically, it shows how big content providers are manoeuvring to re-position
themselves in the value chain.
4.2.4.2 Is it Easy to Switch Supplier?
The high value of telecom infrastructure project typically gives SingTel high
bargaining power, but this is arguably only true during the initial procurement stage
when a tender is called. Because telecom projects typically run into millions of dollars,
the few potential vendors tend to bid aggressively. However, once a vendor is selected
and because it also takes long lead time to implement the network, SingTel is
essentially locked-in to the vendor and would have to incur high switching cost to
change-out the legacy infrastructure.
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MBA Management Project 47 Lee Siak Kwee
In recent years, however, new low cost competitors from the China like ZTE and
Huawei have progressively eaten into the market share of more established players
like Ericsson and Nokia Siemens. In particular, Huawei, who only started to sell GSM
equipment in 1997 (Huawei,1997), has already garnered 30% market share (Business
Wire, 2007) of the GSM based infrastructure market. Just in 2007, Huawei swapped
out all the 3G infrastructure of Nokia Siemens network of StarHub in Singapore
(Huawei, 2007). Considering that StarHub has been a customer of Nokia Siemens
since 2000, this is a remarkable development and firmly shows that these low price
manufacturers have now substantially lowered the switching cost for operators. It also
shows the relentless pursue of a lower cost structure by operators pressured by
shrinking margins.
Another distinctive feature of the telecom industry is the constant drive for
standardisation so as to achieve economy of scale and lower cost for the end user. For
example, there is the 3GPP (3rd Generation Partnership Project) established “to
produce globally applicable Technical Specifications and Technical Reports for a 3rd
Generation Mobile System….” (3GPP, 2008). On the broadband side, there is the DSL
Forum whose work “ensures that service providers are able to rollout, as well as
introduce new services quickly and effectively, using common platforms and
practices………” (DSL Forum, 2008). Such standardisation result in very little
differentiation and hence operators are not locked in to the vendor because of any
unique or proprietary features.
Content however, is a different ball game altogether. The case of StarHub paying
almost $250 mil for the exclusive content rights to the English Premier League for 3
seasons demonstrates the high switching cost should the content is lost to a competitor,
especially when the content is highly differentiated. The popularity and uniqueness of
the content makes the switching cost high but on the other hand, its exclusivity gives
it monopoly-like market power. This explains why StarHub is able to increase its
monthly subscription fee for the sports program package from $15 to $25 following
the expensive bid, a whopping 67% increase. Despite this and the initial subscriber
uproar over the price hike, its subscriber base has continued to grow unabated,
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
showing the high stickiness of the content resulting in relative price inelasticity of the
customer.
Summary of Power of Suppliers
Key Opportunities:
• Emergent of low cost vendor creates potential to reduce network cost, lower
switching cost for operator and outsourcing opportunities
• “Content is King” and gaining exclusive access to such content can create a
monopolistic market position
Key Threats:
• Handset vendors playing an increasing pivotal role in the value chain
• Criticality of unique and exclusive content e.g for Pay TV, makes switching
cost high
• Dominance of runaway market leader like Nokia and brand equity players like
Apple weakens position of operators in the market.
4.2.5 Substitutes
“Disruptive” technologies have regularly posed serious threat to traditional Telco’s
like SingTel. Porter (1979) highlighted that substitute products that are “subject to
trends improving their price-performance trade-off with the industry’s product”
deserve the most attention strategically. Skype is an excellent case in point. Users can
now bypass SingTel’s IDD facility to make cheap and even free international calls
using Voice over IP (VOIP) technology. Such internet based technology is basically
software driven and undergo similar kind of price-performance improvement as
Moore’s Law over time. Skype rides on the global shared internet infrastructure and
the cost structure is also much lower than a dedicated network operated by traditional
telcos. The ever-increasing bandwidth of both the fixed and mobile network has also
greatly enhanced the reliability and the resultant price-performance value is as good if
not better, than regular IDD.
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MBA Management Project 49 Lee Siak Kwee
Mobile services, previously a domain dictated by high spectrum fee and tightly
controlled licensee quota, is undergoing a technology-driven revolution. Anyone can
own a Wifi access point at home without needing to pay any spectrum fee since it
operates in an unlicensed band. What was once a niche product associated with only
internet geeks, is now a common fixture in most households in Singapore. With
economy of scale driven by Intel enabling its chips with native Wifi support, it is hard
to find a laptop today without Wifi capability. This has caused widespread adoption of
the technology that can allow user to surf the net, make video/VOIP call, download
files etc at a very low cost, making it a viable substitute over using the public mobile
network.
Now this free Wifi service has gone “national”, enabled by IDA’s initiative of a
nationwide free Wifi services (IDA, 2006) at high human density area like shopping
malls, cafes, parks etc. Even the handset vendor is jumping on the bandwagon with
Wifi-enabled mobile phone being launched in the market. Nokia is aggressively
pushing these “dual- mode” hand sets which facilitate users to easily make calls over
the free Wifi network instead of the mobile network, bypassing the telcos altogether.
With wireless network increasing its bandwidth exponentially, there will come a time
where it will make no difference from a user’s experience perspective whether it is 10
Mbps on the wireless or 100 Mbps on the fixed line network. This means that SingTel
fixed line network, once considered its key competitive advantage, could well be
rendered insignificant. Wireless technology allows competitors to install coverage
where the needs are quickly without incurring high expenses and a long lead time to
dig road and lay cables. Qmax is one such operator taking advantage of a new
wireless technology, called Wimax. While Wifi is used mainly for small localized
coverage, Wimax is touted as the wide-area counterpart with coverage as good if not
better than current mobile technologies.
In March 2006, Qmax commercialised home broadband services with a monthly
subscription rate starting from $22.95 – the first under-$30 subscription rate in 10
years of Singapore broadband history (Qmax, 2006). Such aggressive pricing which
severely undermines the prevailing industry price structure is an indication that
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Qmax’s business model is distinctly different, and noticeably lower than that of the
fixed line incumbents like SingTel. It has not been made known publicly the amount
that Qmax has paid for its Wimax frequency, but it should not be too far from the $2
mil coughed out by SingTel who bid for a similar chunk of spectrum in 2005.
Compare this amount to the $100mil paid by each operator for the 3G license in 2001,
it is obvious that Qmax will have a significant cost advantage to start with.
Summary of Threats of Substitute Products
Key Opportunities:
• Nil
Key Threats:
• Disruptive technologies especially in the wireless arena threaten the current
comfortable market position of the mobile operators.
• Regulator is pro-competition; constantly opening up market to more players
using different and often, cheaper technologies.
MBA Management Project 50 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
SECTION FIVE: STRATEGIC ANALYSIS OF THE INTERNAL
ENVIRONMENT – A RESOURCE BASED VIEW (RBV)
This Section looks internally into SingTel; at what kind of resources that SingTel
possesses that are valuable, rare, inimitable and non-substitutable (VRIN). In short,
resources that are bases of strengths and which can be used to exploit opportunities or
neutralize threats. It also discusses some key resources which, going forward, are
debatable if they will become a strength or a source of weaknesses for SingTel.
Assess internal resource
Identify key Strengths & Weaknesses
What are the VRIN resources? What is currently lacking that can be exploited by external threats?
5.1 Strengths
5.1.1 Strength in Numbers
As at end of Dec 2007, SingTel and it associates have an aggregated mobile
subscriber base of over 170mil as shown in Table 5A below. Aggregate Subscriber Base
(million)
SingTel’s Proportionate
Subscriber Base (million)
Dec 07 Sep 07 Dec 06 Dec 07 Sep 07 Dec 06
SingTel 2.33 2.13 1.77 2.33 2.13 1.77
Optus 7.00 6.89 6.68 7.00 6.89 6.68
Regional
associates
162.21 148.95 103.83 52.05 47.85 33.70
Total 171.54 157.97 112.28 61.38 56.87 42.14
Table 5A: SingTel’s Mobile Subscribers (Source: SingTel)
This makes SingTel the biggest operator in the Asia Pacific region outside of China, a
phenomenal achievement for an operator that has only 2.33 mil subscribers in its
home country. More importantly, this gives SingTel a regional scale unmatched by its
peers and a significant source of competitive advantage. There is a distinct possibility
for SingTel and its associates to cross sell, create unique product (e.g. handsets), make
joint procurement of content/infrastructure/handsets etc and in the process, help to
defray total cost over a wider base and lower the per unit cost. This is a significant
MBA Management Project 51 Lee Siak Kwee
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 52 Lee Siak Kwee
antly
esides strength in absolute numbers, SingTel’s subscribers are also increasingly
competitive advantage that SingTel and its associates can exploit to counter the
competition in their respective markets, especially when margins are being const
eroded.
B
using mobile for non-voice services like internet access, SMS etc. As at end 2007,
SingTel has over 31% of its revenue not coming form its more traditional source of
voice services as depicted in Chart 5B.
10%
15%
20%
25%
30%
35%
2003 2005 2007
Year
% N
on-V
oice
Ver
sus
Voic
e R
even
ue SingTelStarHubM1
Chart 5B: Non-voice revenue as percentage of revenue of SingTel, M1 and StarHub
has the highest percentage among the operators in Singapore and it is still trending
.1.2 Customer Knowledge
raw subscriber numbers, its existing billing
vantage.
(Source: SingTel, M1 and StarHub)
It
impressively upwards. This augurs well for its prospect since future usage and traffic
growth will clearly come from increasing adoption of wireless broadband and the
“mobile” internet.
5
Besides possessing the strength in
relationship with its customer is another considerable source of competitive ad
The reason is fairly simple: it provides a convenient channel for any content provider
wishing to go to market quickly to use SingTel as a bill-collecting agent.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
MBA Management Project 53 Lee Siak Kwee
Besides billing information, SingTel has other assets relating to the end user that it
can mine from the Customer Relationship Management (CRM) systems or from the
network itself. User-related information like identification, location, authorisation,
credit history etc is valuable data that others in the value chain do not possess. This
information is coveted by content owners as they can be used to create richer
customer experience. Being the only operator that provides all the commercially
available communication services i.e. fixed broadband, mobile and Wifi, SingTel is
also in the unique position of being the only operator that can claim to provide
ubiquitous multiple-platform access from almost any where in Singapore with
different technologies. Such intimate knowledge of the customer, right to the where
he is at any moment, is a strategic asset that no other in the value chain can boast of.
Combining “Location-based” information and the customer profiling capability that
SingTel possesses, very targeted promotions can be pushed directly to the user’s
mobile phone or laptop (when using Wifi) to spur impulse buying at specific shopping
outlets for example. To advertisers more used to traditional media like TV,
newspaper etc, such specific, tailored made “segment of one” (Dibb, 2001) marketing
opens up a whole new world of possibilities.
5.1.3 Financial Strength
Telecommunication being a high capital business is a boon to SingTel when it comes
to overseas operators looking for foreign investors to help fund their network. With
free cash flows of $2.8 bil generated in FY 06/07 (SingTel, 2007), SingTel possesses
a strategic asset that few of its peers in the region can match and this makes it an
attractive partner for such cash-strapped operators.
Chart 5C shows the free cash flow in the past four FYs contributed by the three main
sources: dividends paid by associates, from wholly owned subsidiary Optus and from
the SingTel operations itself.
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
1246 1171 1200 1298
1369 15361011 891
299 355
561 606
0
500
1000
1500
2000
2500
3000
3500
FY 04 FY05 FY06 FY07
Financial Year
Free
Cas
h Fl
ow (
'000
)
Associates DividendOptusSingTel
Chart 5C: SingTel’s Source of Cash (Source: SingTel)
Particularly, the Singapore operation is a cash cow providing a very consistent and
stable source of cash over a 4 year period. What is even more promising is the
continued growth in the dividends paid by associate which will help to mitigate the
more volatile contribution from Optus. So far, SingTel has been judiciously using this
regular cash flow; balancing the need to repay shareholders investment through
dividends or capital reduction, and keeping the rest as a war chest ready to pounce on
any attractive investment opportunities.
Besides drawing on its internal source of cash, SingTel can also rely on its healthy
gearing position to use debt as a source of new funds. With a low debt/equity ratio of
0.22 (SingTel, 2007) and a comfortable credit rating (A+ by S&P and Aa2 by Moody),
SingTel still has sufficient flexibility in its capital structure to take on more financial
leverage.
5.1.4 Investment Savvy
The success of SingTel’s many overseas investments is testimony of its management
acumen in conducting M&A activities. Table 5D compares the total investment that
SingTel has made to date versus the current market capitalization of its three main
associates: Bharti, Globe and AIS.
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Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Table 5D: Data of SingTel’s Key Associates (Source: SingTel)
Bharti
(India)
Globe (Philippines) AIS (Thailand)
Year of Investment 2000 1993 1999
Investment to Date S$1.55 bil S$882 mil S$870 mil
Effective Shareholding 30.45% 44.47% 21.38%
Market Capitalisation as
of 31 Dec 07 (SingTel’s
proportionate share)
S$21.05 bil S$3.23 bil S$2.95 bil
Without a doubt, SingTel has made some very astute investments, and these are only
the list of those associates that are publicly listed. Among those not listed, the
performance has been equally impressive: Telkomsel is the number one mobile
operator in Indonesia with over 47.9mil subscribers as at end December 07 and is the
largest contributor of associate’s profits to SingTel’s bottom line with S$687mil in FY
06/07 (SingTel, 2007).
A number of SingTel’s overseas investments would not have materialised if not for
the fortitude and far-sightedness of its management as a few of these were made
during times when the market conditions were uncertain and the perceived risk
heightened. AIS was bought at the tail-end of the Asian financial crisis in 1999. Optus
and Telkomsel were both purchased just after the internet bubble burst in 2000. On
hindsight, it is apparent that if SingTel had not gone in during those distressed times,
it may not have such opportunity in future as the incumbents would be reluctant to
sell and SingTel would also be resistant to pay over-the-top premium.
Besides these investments which have done remarkably well, SingTel has also proven
its investment mettle by not overpaying just to close a deal. In an interview (CFO
Asia, 2006), the then CEO (International) of SingTel commented, “We’ve been very
disciplined in our approach to new investments. If there are deals where we’re not
comfortable, we won’t overpay. I think you’ve seen this with the Pakistan Telecom
privatization. We put in a price that we felt was appropriate but which turned out to
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MBA Management Project 56 Lee Siak Kwee
be the lowest. We lost the deal, but we weren’t unhappy. We felt we should only bid
to a level where we know that if we won we would be creating value for shareholders.
We are not deal-junkies.”
5.1.5 Brand Equity
Regionally, it is arguable if the brand equity of SingTel has made it more attractive to
buy into the many foreign markets that it operates in today. But certainly, having a
reputation as a well managed company with experience operating and competing
successfully in highly competitive environments, it has at least facilitated its entry as a
strategic partner. Winning Awards like “Asia Mobile Operator of the Year” (Asian
Mobile News) and “Service Provider of the Year” (Frost & Sullivan) for three
consecutive years can only increase its brand equity and value proposition to its
partners. For sure, SingTel’s strong brand equity and track records are critical success
factors when competing against other big global operators for a slice of the
international corporate business, where network quality and reliability are often key
considerations.
This is perhaps why SingTel has strategically bid for and won the Title Sponsor for
the inaugural Formula One night race in Singapore in September 2008. SingTel
Group CEO admitted as much, “The world is watching, and this is a great event upon
which to position the SingTel brand on an international level….” (SingTel Press
Release, 2007)
5.2 VRIN Criteria
Does the collection of strength meet the VRIN Criteria? Table 5C summarises how
the five strengths identified compare against the VRIN criteria:
Criteria How do they meet the conditions?
Valuable Subscriber Numbers: enable it to lower the unit cost of developing
new products or acquire content.
Financial Strength, M&A Expertise & Brand Equity: proven
success that SingTel can leverage on against other global operators
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especially in the Asia Pacific region
Customer Knowledge: it is an asset that allow SingTel to
customize and differentiate against new competitors like the media
players or phone manufacturers who has no existing relationship
Rare Subscriber Numbers & Customer Knowledge, M&A expertise:
unmatched by any operator in the Asia Pacific region outside
China.
Financial Strength: is rare in the context of specific
operator/country that SingTel is operating in
Inimitable Subscriber Numbers, M&A Expertise, Financial Strength : such
unique resource cannot be easily replicated by competitor
Customer Knowledge: intimate knowledge of SingTel’s customer
is an accumulated asset and cannot be acquired by competitor
partly because of path dependency
Non-
substitutable
Subscriber Numbers, Financial Strength, M&A Expertise,
Customer Knowledge & Brand Equity: all five are highly specific
resources that cannot be easily substituted by another resource.
Table 5C: Strengths Versus VRIN Criteria
It must be stressed that although individually the resource may fulfill the VRIN by
itself, that alone may not be sufficient to create any sustained competitive advantage.
For example, having the financial strength alone will not be sufficient without the
M&A expertise or vice versa. In the context of making an overseas investment, both
have to go hand in hand. Collectively or in combinations, the portfolio of strengths as
described above can give SingTel the sustained competitive advantage on which to
build its corporate strategies.
5.3 Potential Weaknesses?
5.3.1 Technical Capability – Core Competence or Core Rigidity?
In 2009, SingTel will be celebrating its 130th birthday. Over the years, it has
established itself as a technically competent company that is on the forefront of new
technology. Whether it is digital mobile technology like 3G or fixed line ADSL or
IPTV, SingTel has always led the technology curve not only in Singapore but also in
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MBA Management Project 58 Lee Siak Kwee
the Asia pacific region. And it is on this strength that SingTel is able to “export” its
expertise to the various overseas ventures that it has bought into.
SingTel’s value position to its associates companies in developing countries like
Philippines, Thailand, India and Indonesia is that of a technology partner.
SingTel offers technical expertise that it has accumulated in its home country while
the local partner focuses on country specific domain like sales and marketing. But
technically, traditional telecommunication is evolving towards internet technology.
The future evolution of the current 3G technology is about an all-IP architecture from
the handset to network and to the internet. Ditto for the fixed line world where
monolithic, proprietary telephone switches are replaced by standards-based computer
servers. Can SingTel with its almost 130 years of experience in traditional technology
be able to transform itself to take on the converged world of IP and
telecommunication?
Although SingTel is the only telco that can boast of a nationwide hybrid copper/fibre
network in Singapore, it is debatable if this in itself actually constitutes a valuable
resource. The aging copper network is one which entails a huge running cost to
maintain, and as it is today, has a considerable speed disadvantage compared to
StarHub’s cable network. Upgrading it to be all-fibre will incur equally prohibitive
capital investment cost relative to the potential return in a flat-rate pricing
environment. With new technology like broadband wireless being introduced into the
market by new players, such legacy network can prove to be a huge albatross for
SingTel.
In the era of 3G technology, there has been an emerging trend of operators co-sharing
infrastructure in a bid to lower their overall cost structure. SingTel’s wholly-owned
subsidiary in Australia, Optus, entered into a 3G network sharing arrangement for
over 2000 base stations with its competitor Vodafone (Optus, 2004). Granted that
such co-share arrangement poses unique operational, administrative and logistical
challenges, but the financial implication is significant enough to make it a compelling
option. Optus estimates its capital expenditure will be reduced by A$100 million in
the first three years, compared to a go-it-alone approach. Operating expenditure for
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maintenance, operations and site leases will be reduced by approximately A$10
million per year.
Another key indicator of the decreasing perceived value of the network is the trend of
outsourcing and managed capacity (i.e. pay vendor based on actual capacity used
rather than purchase and install capacity upfront in anticipation of demand). SingTel’s
associate company in India, Bharti Airtel, is an excellent example of a relatively new
company not hampered by legacy network and being able to outsource all its
engineering function from day one of operation. This is not just limited to the network
but also to non-core functions like call centre and IT.
This development is worrying for SingTel, as it shows that industry players recognise
that in the converged world, the network is just another channel to access information
and not a strategic asset. Its competitive value is being gradually evaporated as the
real differentiation lies in what the user wants rather than how to access it. SingTel is
in a precarious dilemma as it is beset with these legacy networks and the
corresponding manpower to support it. Even if it is objectively and financial viable to
relinquish control of the network, the emotional attachment that SingTel has over its
traditional asset may prove to be a higher hurdle to overcome.
The regulator in Singapore is also playing its part to neutralize any remaining
advantage in network ownership, at least in the fixed network. In the earlier section, it
was highlighted that in the tender for the “The Next Generation National Broadband
Network”, IDA has put in place a new framework delineating the operation of the
network from the service provider function. This normalises the network cost
structure for everyone, essentially pushing the value out of the network so that players
are now forced to compete on products and services rather than network quality.
Going forward, there is every likelihood that such technological competence either in
owning the network or having the technical skills will in fact become a core rigidity
(Leonard-Barton, 1992). Indeed, what was once a competitive advantage for SingTel
may become much less valuable in the fast changing structure of the telecom industry.
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SingTel, by all indications, has to reinvent itself to be a new generation multimedia
telco.
5.3.2 Government Linked – Boon or Bane?
Having Temasek Holdings (the Singapore government’s investment arm) as a
substantial 56% majority shareholder has time and again resulted in SingTel being
perceived as not just a government-linked but a government-controlled organisation.
SingTel is currently embroiled in a legal tussle with Indonesia’s anti-monopoly
watchdog, KPPU. KPPU has alleged that Temasek has breached Indonesian
competition rules by holding stakes, albeit indirectly, in Telkomsel and Indosat.
SingTel has 35% stake in Telkomsel while ST Telemedia, another Temasek
subsidiary, holds a 45% stake in Indosat. KPPU charged that Temasek has been able
to overcharge consumers due to its control of these two firms and has imposed a fine
of 25 bil Rp each on Temasek, SingTel and ST Telemedia (Danarkesa Research
Institute, 2007). This was despite the fact that when SingTel acquired a stake in
Telkomsel in 2001, it sought and obtained all the regulatory approvals from the
relevant Indonesian authorities. In addition, PT Telkom, which is majority owned by
the Government of Indonesia, in fact controls the joint venture by virtue of its 65-per
cent shareholding.
Such nationalistic backlash is not uncommon to SingTel as it faced such issues when
it purchased Optus in 2002 and when former Thai Prime Minister Thaksin was ousted
in a coup in 2007, the new Thai leader also raised concern over SingTel’s investment
in AIS (Devan, 2007). In 2000, SingTel was widely believed to have been thwarted in
its bid to buy into Time Engineering and HK Telecom because of its perceived
government connections. Till today, the Hong Kong and Malaysia are the two key
Asian markets that remained elusive to SingTel.
SingTel’s link to Temasek and being in a business that is always considered a national
security asset, makes it a convenient scapegoat. Recently, the increasing awareness of
the power and intent of so called “Sovereign Wealth Funds” (SWF) will continue to
be a distraction even as SingTel searches for more overseas opportunities. Its former
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CEO, Lee Hsien Yang has stated unequivocally that, “We look at al our transactions
on a purely commercial basis and we have always said that we will do transactions
only if they create value for our shareholders” (Meyer, Mar, Richter and Williamson,
2005). Despite such a public declaration, SingTel has to recognize that in some
situation, perception may be harder to change than reality.
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SECTION SIX: SYTHESIS OF EXTERNAL AND INTERNAL ANALYSIS
Based on the PFF analysis of the external forces, it is obvious that a single factor can
straddle across a few of the five forces being analysed. For example, a pro-
competition regulatory environment will favour new entrants into the industry, new
technologies and ultimately result in substitute products i.e. affecting three of the five
forces. Parsing through the array of opportunities and threats summarized in the
earlier sections will allow us to consolidate the encompassing factors listed in Table
6A. Similarly, SingTel’s key Strengths and Weaknesses have also been extracted
through the RBV analysis. The combination of the two frameworks generates the
familiar Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis of
SingTel.
Strengths:
- strong financial position measured in
terms of cash flow and low gearing
ratio
- huge and growing subscriber base can
help to drive down average unit cost
- well-established billing relationship
with subscribers
- knowledge of customer e.g. location,
buying habits, expenditure etc
- management with proven M&A
pedigree
- Strong brand equity in the region
Opportunities:
- deregulation opening up new markets
- low penetration rate especially for
the mobile market in SingTel’s
theatre of operation i.e. Asia Pacific
- rapid adoption of broadband access
technology opens up new source of
revenue
- telecom market marked by
standardization which means
operators that can differentiate will
prosper
- opportunity to reduce cost structure
through low cost supplier,
outsourcing and/or network sharing
Weaknesses:
- evolution of telecom towards internet
based technology may render
traditional telecom skill irrelevant or
incur high cost and lead time to re-
skill
Threats:
- commoditisation is eroding margin
and makes switching cost low
- mature industry in Singapore marked
by slowing growth, intense
competition and lower margin
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- higher cost structure due to legacy
network; costly to maintain and
upgrade;
- value not in carrying traffic in future
- perceived government linkage could
hinder future M&A activities
- no culture of innovation
subscribers
- StarHub establishing itself as the
second full-fledge service provider
with superior broadband network
- regulatory body favours more
competition and level playing field
- non-traditional players entering the
value chain e.g. internet/media,
handset vendors, content provider
- constant threat of disruptive
technologies like VOIP
- regional M&A getting more
competitive with more mega
operators entering the fray
Table 6A: SWOT Summary Based on Porter’s Five Forces & Resourced Based View
This synthesis facilitates the identification of the strategic “fit” between the internal
and external environment. This is depicted pictorially in Diagram 6B below, where
the areas of overlap represent the “fit” from which strategic choices can be drawn out.
Fundamentally, the strategic choices emanate from a combination of:
• Strategies that leverage the appropriate strengths to exploit
opportunities and/or nullify threats; and
• Strategies that mitigate the potential of weaknesses being exploited by
external threats.
• Strategies that alleviate weaknesses by exploiting opportunities in the
industry
Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Strategies to mitigate
Weaknesses that can be exploited
by Threats
Weaknesses
Strengths
Opportunities Threats
Strategies to Neutralise Threats
with Strengths
Strategies to Exploit
Opportunities with Strengths
Strategies to mitigate
Weaknesses by exploiting
opportunities
Diagram 6B: SWOT Analysis and Strategic Choices For SingTel
To recap, SingTel’s stated corporate strategy as described in Section 2 is outlined
below:
(a) To lead in Singapore
(b) Grow in Australia
(c) Partner in Asia
(d) Connect Asia
(e) Innovate for the Future
Strategy (a) is obviously a local strategy to maintain leadership position in a saturated
market, while (b) to (d) are regional strategies emphasising on growth through
geographical diversification. Strategy (e) is a generic strategy stressing on
differentiation that is applicable in both the local and overseas context, and across the
entire telecom services market in general. In a nutshell, SingTel’s corporate strategy is
relatively straightforward: “act local, grow regional, be different”. How does these
strategies map into the SWOT that is derived from the PFF and RBV analysis?
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MBA Management Project 65 Lee Siak Kwee
6.1 Leveraging Strengths to Exploit Opportunities and/or Neutralize Threats
To Lead in Singapore
Strategically, SingTel’s leadership position in its home market gave it the “moral
standing” and credibility to play the role of technology and business partner with its
regional associates. Therefore it is no coincident that “To lead in Singapore” is a
cornerstone of SingTel’s corporate strategy. But to continue to lead in the Singapore
market, SingTel has to capitalize on the emerging trend of non-voice services (e.g.
content services by consumers, managed services by corporate business etc) while
neutralising the threats posed by non-traditional players (e.g. media/IT, handset
vendors etc).
The ability to offer unique content or services is critical to overcome the
commoditization quagmire and will also facilitate SingTel to offer integrated products.
Enabled by ubiquitous access through fixed and mobile technologies, such “service
convergence” will become prevalent as user can assess the same content (e.g. watch
the same video) either through home PC or a mobile device. This will create a
seamless product/service experience for the customer and more strategically, increase
stickiness. Conversely, SingTel will not be able to differentiate itself if it continues to
focus on predominantly selling voice minutes or bandwidth. To overcome this
deficiency, SingTel needs to diversify through vertical integration up the value chain.
SingTel can either acquire or strike alliances with content owners or other service
providers through equity ownership or non-equity exclusive tie-ups. Instead of facing
non-traditional players as competitors, SingTel could possibly “win without fighting”
(Hamel & Pralahad, 1989) by collaborating with them. Or in the words of Chris Lane,
“it will be win-win if both promote rather than compete against each other”. In short,
SingTel should adopt a pragmatic as opposed to a paranoid approach towards these
non-traditional players.
SingTel can strategically leverage on its scale, relationship and intimate knowledge of
its existing subscribers as value proposition to any potential ally. Besides this, having
a huge cash hoard would also come in handy in any equity investment. Its network of
corporate customers all over the region also makes it an attractive partner for joint
collaboration to ride on the trend of outsourcing e.g. providing managed services by
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MBA Management Project 66 Lee Siak Kwee
partnering Cisco to deliver end to end IT services from Singapore to Australia. Such
value-added services which SingTel can add on to its traditional telecom carrier role
is the competitive advantage that differentiates SingTel from the crowd and help it to
lead in the Singapore market.
Regional Growth Strategies
With an almost saturated local market in Singapore, SingTel has to look outside of its
home to fuel its growth. Its corporate strategy of growth through investing in regional
mobile businesses and extending its international reach through its network
connectivity is a logical one. Mark Chong commented that, “SingTel’s strengths are
in recognizing that its strengths are in Asia; we know the culture, the peoples and we
know the telecommunication business.” This is especially pertinent within the context
of rapid deregulation and low penetration rate of the mobile telecom markets in the
Asia Pacific region, as well as the trend of globalisation creating the need for cross
border connectivity. This proffers great opportunities for SingTel whether in
exploring new investments, increasing its shareholding in the current associates or
providing end to end IT/telecom services for MNCs.
With a constant source of cash flow from its Singapore and Australia operations, and
growing dividends paid by its associates, SingTel will have funds that can be easily
drawn on for investment purpose. Combined with a shrewd management that
possesses an enviable track record of past M&A activities, SingTel’s ambition is
evenly matched by its human and financial resources. Besides its financial asset,
SingTel also brings with it a strong, regional brand equity to the partnership. Scale is
another value proposition that SingTel can offer to entice any potential associates as it
will be able to value-add to the partnership by helping to reduce cost through
activities like joint procurement for infrastructure/handset/content, joint development
of products, etc.
6.2 Alleviating Weaknesses and Mitigating External Threats.
Innovation
Differentiation, or rather the lack of it, emerges as the key strategic threat facing
SingTel today either in Singapore or regionally as the phenomenon is industry wide.
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This recurring theme has resulted in commoditisation, low switching cost and new
competitors with differentiated contents stealing a march on SingTel. In the Singapore
market, this is exacerbated by a maturing industry with intense competition. What
strategy can SingTel adopt to neutralise these threats? Innovation. This is a new
resource that SingTel has to develop to overcome its current weakness and generate a
new core competence that can be used to differentiate.
Through innovation, SingTel will be able to elaborate on its core business (Mintzberg
et al, 2003) either through internally developed product and services, or collaboration
with third party. Being able to innovate will not only benefit SingTel in Singapore but
this can also be transferred to its regional associates. As the Singapore market is at a
much mature stage of the industry life cycle, it can be used as a test bed and
incubation ground for innovative and creative ideas. It is thus not surprising that
innovation is chosen as one of the key pillars of SingTel’s corporate strategies.
Dr John Kao, author of “Innovation Nation” which was chosen by Business Week
magazine as one of the top 10 best books in 2007, stated that innovation enables
people to “adapt to the waves of disruptive changes, including new business models,
demographic…… and new and emerging technologies.” (Oon, 2008).
But internal innovation is easier said than done. Indeed, it is said that the pace of
innovation is inversely proportional to the size of the organisation. With a staff
strength of 10,000 and vestiges as a former government monopoly still evident,
SingTel has to create an “innovation culture” within the large organisation. Risk
taking, “try a lot of stuff and keep what works” (Collins & Porras, 1994) etc, is the
kind of ethos that SingTel needs to imbue throughout the organisation in order to
create an innovation culture. With SingTel being more familiar with a top-down
driven and hierarchical culture, Chris Lane is cognizant of the immense task facing
SingTel in this aspect as he feels that SingTel is “not innovation- friendly” and it will
take a Herculean effort of “turning the organisation pyramid upside down” in order to
succeed. Alternatively, SingTel can accelerate the process by choosing to work with
others who have already a tradition of innovation by collaborating on joint
development/research, strategic alliance etc.
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Another dimension of innovation that SingTel has to put in place is the need to re-
skill the competencies of the organization from one that is telecom centric to one that
is more internet- or “multimedia”-oriented .With the convergence of Telecom, IT and
intern/media, and increasing prevalence of broadband/TV content, SingTel is
becoming more like a multimedia rather than a plain old telephone carrier providing
basic voice services. Current competencies in traditional telecom skills will certainly
limit its ability to innovate and will have to be expanded for SingTel to stay ahead of
the curve. Concurring on this, Mark Chong stated that, “We have in recent years
started to diversify into the media and content businesses. These businesses are
natural extensions of our core telecommunication businesses and represent another
chapter in way SingTel adapts to the ever changing business landscape. Carrying
advertisements on our mobile and IPTV platforms are natural extensions of our
carriage businesses. To develop our competencies for these new businesses, we will
need people who are able to understand the dynamics and opportunities in these new
areas and be able to execute and deliver in these new arenas. It doesn't mean we don't
need the current telecom skilled people though. The telecom businesses continue to be
very good profitable businesses”. Chris Lane also shared the same sentiments and
added that as SingTel moves into the unchartered “digital content” field, it has to
acquire new skills like knowing how to buy content, understanding the value of the
content so that you don’t overpay etc.
Lind (2004) argued that if the industry boundaries are being redefined by
technological changes (e.g. convergence), then the firms need to re-configure their
capabilities to stay competitive and successful. This is the significant resource “gap”
that SingTel needs to fill in order to re-position itself as an innovative service provider
and not merely a bit-pipe carrier.
Regional Growth Strategies
Given that the regional diversification is so critical to its growth strategy, SingTel has
to overcome the perception of it being a company still controlled and influenced in its
strategic operations by the Singapore government. Although for obvious reason this is
not overtly stated as a corporate strategy, SingTel has to consciously ensure that that it
is an independent and purely commercially driven entity. To this end, its track record
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in the management of its current associates is an important and visible avenue for it to
prove to outside world that it is not operationally beholden to Temasek Holdings. In
addition, its appointment of non-Singaporean and non-Government related
independent Directors to its Board is an apt move. Since August 2003, it has even
gone further by appointing a Thai national, Chumpol NaLamlieng as the Chairman of
the SingTel Group. Mr. Chumpong is the former President of Siam Cement, one of
the largest conglomerate in Thailand. Such key holders appointment and multi-
national makeup of the Board have to be maintained, not least to send the right signal
to the outside world.
6.3 Exploiting Opportunities to Alleviate Weaknesses
It is doubtful whether ownership of and expertise in the infrastructure will be
considered a core competence for a Telco company in future. Is it as strategic an asset
as it was in the good old days when voice was the predominant traffic? Value is
increasingly being shifted to the edge of the network both downstream and upstream
of the value chain, and unfortunately, not in the network itself. Telecom network by
definition is characterised by industry standardization, literally implying that
differentiation is intentionally avoided.
New players unencumbered by legacy network could take advantage of disruptive
technologies to seize the initiative from SingTel. It also does not help that the
regulator clearly intends to make sure that network owners do not possess competitive
advantage over non-network service providers.
In view of this, an asset-light strategy in the form of outsourcing, managed services
etc is a sensible option that SingTel should consider seriously. The emergent of low
cost vendor could potentially make this proposition even more tantalizing.
Outsourcing to the vendor makes a lot of sense as they can offer an operational scale
on a global level and can run a network more efficiently and cost effectively than an
operator on its own. With constant pressure on margins, it will be a never-ending
struggle for SingTel to reduce its cost structure as there is only so much more that the
network can be further optimized especially for a mature one like SingTel’s.
Vodafone, one of the biggest operators in the world, is also taking active steps to
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reduce its cost structure and go asset-light with outsourcing (at least in the IT and
maintenance activities) as one of its key strategies (3G, 2006). Such an asset-light
strategy can free up management time and financial resources on increasingly non-
core network/engineering activities and orientate on new areas where differentiation
can really be made and sustained i.e. value-creating activities like building
alliances/partnerships and new product innovation, or building new competences in
multimedia.
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SECTION SEVEN: SUMMARY AND CONCLUSIONS
The focus of this study is on SingTel’s corporate level strategy and how coherent
these strategies are vis-à-vis the external industry forces as well as SingTel’s internal
resources, particularly those valuable core competences that constitute a source of
competitive advantage.
This study has used the PFF and RBV as the two main models in order to firstly,
identify the key factors at play in the industry and within the firm, and secondly, how
these factors are used to find the strategic “fit” between SingTel’s competitive
advantage and the dynamic structure of the external environment. It is about how to
achieve competitive advantage for the organization through careful configuration of
its portfolio of resources in the midst of a fluid and fast-changing industry landscape.
Interviews were also conducted with two SingTel’s top management to gather their
views on the strategic issues facing the firm.
The Five Forces championed by Porter are discussed in detail and the analysis has
shown how different factors within each force can exert a direct albeit varying degree
of impact on the competitive drivers in the external environment. Key opportunities in
the industry identified are: new markets opening up due to deregulation; low
penetration rate in regional countries; potential for new non-voice revenue enabled by
broadband technology; industry standardisation which means operators that can
differentiate will prosper; industry trend of outsourcing, network sharing and low-cost
supplier unlocking possibility to lower cost structure.
Major threats that surfaced are: commoditisation eroding margin and lower switching
cost; mature and competitive Singapore market limiting growth and facing declining
margins; StarHub is a serious competitor with a superior fixed broadband network;
regulatory body favouring more competition and level playing field; non-traditional
players entering the value chain; threat of disruptive technologies; regional M&A
getting more competitive.
From the RBV perspective, the analysis has revealed that SingTel’s strong and stable
cash flow, huge subscriber base, well established billing relationship with subscribers,
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knowledge of customer, the management’s proven M&A capabilities and brand
equity, are strengths that when melded together meet the market test on the VRIN
conditions. On the other hand, SingTel’s traditional core competence in technology,
both in physical assets as well as knowledge, may not be relevant as a source of
competitive advantage in a converged telecom/IT scenario. In the worse case, it may
become a source of core rigidity. SingTel’s linked to the Singapore government,
whether perceived or real, need to be managed delicately especially when it still
harbours ambition of regional expansion.
The SWOT analysis sums up the key internal and external elements and identifies the
areas of strategic “fit” i.e. the strategic choices on which SingTel’s corporate
strategies can be formulated. These are:
• Strategies that leverage the appropriate strengths to exploit
opportunities and/or nullify threats; and
• Strategies that mitigate the potential of weaknesses being exploited by
external threats.
• Strategies that alleviate weaknesses by exploiting opportunities in the
industry
It is concluded that SingTel’ three pronged corporate strategy of: leading in local
market; inorganic expansion through overseas investment and acquisition and
innovation to mitigate commoditisation in traditional carriage business, are very much
in tandem with and shaped by the SWOT analysis as derived from RBV and PFF. In
addition, it is also suggested that SingTel should seriously consider if ownership of
the network is still relevant as a source of competitive advantage especially when
viewed with the need to ensure a competitive cost structure. Considering that
innovation and differentiation are predominantly due to content services or user
device, SingTel may need a new asset-light corporate strategy to train its management
and financial resources so that it can reinvent itself by building new competences like
multimedia, alliances and partnerships that are outside of the traditional network
boundaries, and less on building physical networks.
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SingTel stands at the cusp of an industry revolution that will bring about greater
collective competitive forces and threats from non-traditional sources.
Commoditisation is real and threatens to make competition more cut throat then it
already is. This is further exacerbated by a regulatory environment that is determined
to lower the barrier for new entrant and encourages the use of disruptive technologies.
Non-traditional competitors are also entering the fray to create further discontinuities
to the prevailing value chain. But amidst these seismic shifts in the industry structure,
opportunities abound and SingTel possesses a set of VRIN resources that it can
capitalise on to gain an edge over other players in the industry. The study has shown
that the strategic choices that SingTel has adopted are geared towards meeting these
discontinuities in the industry head on. Indeed, its corporate strategies will enable it to
lead and shape the market, and accelerate SingTel towards achieving its vision “to be
Asia Pacific’s best communications group”.
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Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Annex 1 Contribution of Overseas Associates to SingTel’s Net Profit (as at end Dec 2007)
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Annex 2-1a SingTel’s Consolidated Income FY 2007
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Annex 2-1b SingTel’s Balance Sheets FY 2007
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Annex 2-1c SingTel Consolidated Cash Flow FY 2007
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Annex 2-2a SingTel’s Consolidated Income FY 2006
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Annex 2-2b SingTel’s Balance Sheets FY 2006
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Annex 2-2c SingTel’s Consolidated Cash Flow FY 2006
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Annex 2-3a SingTel’s Consolidated Income FY 2005
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Annex 2-3b SingTel’s Balance Sheets FY 2005
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Annex 2-3c SingTel’s Consolidated Cash Flow FY 2005
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Discontinuities in the Telecom Industry: Strategic Choices for SingTel
Annex 3-1a M1’s Consolidated P&L FY 2007
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Annex 3-1b M1’s Balance Sheets FY 2007
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Annex 3-1c M1’s Consolidated Cash Flow FY 2007
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Annex 3-2a M1’s Consolidated P&L FY 2006
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Annex 3-2b M1’s Balance Sheets FY 2006
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Annex 3-2c M1’s Consolidated Cash Flow FY 2006
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Annex 3-3a M1’s Consolidated P&L FY 2005
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Annex 3-3b M1’s Balance Sheets FY 2005
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Annex 3-3c M1’s Consolidated Cash Flow FY 2005
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Annex 4-1a StarHub’s P&L FY 2007
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Annex 4-1b StarHub’s Balance Sheets FY 2007
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Annex 4-1c StarHub’s Consolidated Cash Flow FY 2007
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Annex 4-2a StarHub’s P&L FY 2006
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Annex 4-2b StarHub’s Balance Sheets FY 2006
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Annex 4-2c StarHub’s Consolidated Cash Flow FY 2006
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Annex 4-3a StarHub’s P&L FY 2005
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Annex 4-3b StarHub’s Balance Sheets FY 2005
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Annex 4-3c StarHub’s Consolidated Cash Flow FY 2005
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Annex 5: Formula for Financial Ratios & Its Meaning
Ratio Formula What it Shows
EBITDA Margin (Profit before Interest, Tax, Depreciation & Amortisation) / Revenue
Firm’s profitability from regular operations
Cash Flow Operating Cash less Cash Capital Expenditure
How much free cash available
Debt / Equity Total Debt/ Total Shareholders Equity
Borrowed funds versus funds provided by shareholders
Interest Cover EBITDA / Net Interest Expense Firm’s ability to meet all interest payment
Dividend Payout Annual Dividends / After Tax Earnings
Indication of dividends paid out as percentage of net profits