ABSTRACT
The mobile telephony sector in Kenya has seen an unprecedented growth since its liberalization in 1998. Although there has been a huge growth in the mobile subscriber base, the sector has experienced a fierce competition whereby the mobile phone players have engaged in a price war which intensified from the year 2008 to date, following the entry of two new players YU and Telkom Orange. The decline in conventional voice service tariffs has gradually reduced average revenue per user (ARPU), thus decreasing the service providers’ profits. In the wake of changing industry markets, telecom operators are looking at Mobile Value-Added Services (MVAS) such as mobile internet and money transfers to survive and succeed in the market. To create competitive and enhance the performance of MVAS, the firms are adopting competitive strategies. This study therefore sought to investigate the effect of the competitive strategies on the performance of the MVAS in the mobile industry in Kenya. The overall objective of this study was to determine the effect of competitive strategies on the performance of MVAS. Cross-sectional survey was adopted and a census study method was used since the number of firms was small. The research utilized both primary and secondary data. Questionnaires were used to collect the data. The target population of the study was the four mobile operators in Kenya. The respondents were the senior managers drawn from the marketing, planning and finance departments. Twelve managers from the firms were targeted for the interviews. Three managers from each firm were interviewed. The data obtained was summarized using descriptive statistics such as mean and standard deviation. Pearson’s correlation was used to determine the relationship between the variables, and multiple regression was used to determine the effect of the competitive strategies on the performance of MVAS. To determine whether the competitive strategies vary with the type of MVAS, t-test was used. The study found out majority of the firms had adopted low cost leadership strategies, differentiation strategies as well as focus strategies to a great extent. The study concluded that the strategies adopted by the telecommunication companies had a positive effect on the performance of the MVAS in terms of growth of sales and market share. The study recommends that the firms should adopt competitive strategies to achieve competitive advantage and enhance their performance.
CHAPTER ONE
INTRODUCTION
Background of the Study
In today’s highly competitive environment, business organizations need to act fast in order to secure their financial situations and their market positions. Firms are continuously striving for ways to attain a sustainable competitive advantage. They need to count more on their internal distinguished strengths to provide more added customer value, strong differentiation and extendibility; in other words count more on their core competences (Prahalad, 1994). Winning business strategies are grounded in sustainable competitive advantage. A company has competitive advantage whenever it has an edge over rivals in attracting customers and defending against competitive forces. Competitive strategy refers to a way to the way a firm competes in a particular business and gains competitive advantage by deliberately choosing a distinctive set of activities. Competitive strategy is taking offensive or defensive actions to create a defendable position in an industry to yield a superior return on investment for the firm (Porter, 1980).
The advances in the mobile technology have substantially increased the number of people using mobile services (Tang, 2008). The growing number of mobile users and the decline in conventional voice service tariffs have gradually reduced average revenue per user (ARPU), thus decreasing the service providers profits (Kuo and Yen, 2009). Gazis et al. (2001) claim that in a 3G market, the major revenue source for telecommunications operators will originate from packet-based value-added services provided by independent value-added service providers, rather than traditional voice telephony. Mobile Value-Added Services (VAS) such as; mobile internet, money transfers/banking, video conferencing etc., is the new frontier for expanding customer base and revenues for mobile phone operators. The drastic price cuts on voice based services has caused a decline on ARPU, therefore competitive strategies are directed towards the increase in the uptake of the VAS. There are many sources of competitive advantage: having the best made product on the market, delivering superior customer service, achieving lower costs than rivals, being in a more convenient geographic location, proprietary technology, features and styling with more buyer appeal, shorter lead times in developing and testing new products, a well known brand name and reputation and providing buyers more value for their money (a good combination of good quality, good service, and acceptable price). To succeed in building a competitive advantage, a company’s strategy must aim at providing buyers with what they perceive as superior value, a good product at a lower price or a better product that is worth to pay more for (Thompson & Strickland, 1996). Porter (1996) claims that a company could only outperform its rivals if it could establish a difference that it could preserve – by delivering greater value to its customers or by creating comparable value at a lower cost, or by doing both.
Competitive Strategies
A competitive strategy is defined as a long term plan that is devised to help a company gain a competitive advantage over its rivals. A firm positions itself by leveraging its strengths. Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. Porter’s framework proposes that firms that pursue any of these competitive strategies would develop a competitive advantage that would enable them to outperform competitors in their industry; however a company seeking competitive advantage must choose the type and the scope within which it will attain it.
Cost leadership is reducing the economic costs (such as production, distribution and marketing costs) below all of the competitors (Barney, 2007). Thus, the firm is able to gain more profit margins, or could provide a competitive price to attract more customers for high sales (Jobber, 2004). In order to adopt cost leadership strategy without forgoing profit, a firm should have the internal strengths, such as: Differential access to factors of production, technological software advantage independent of scale (Barney, 2007), sustained access to inexpensive capital, products designed for efficient manufacturing, efficient distribution channels. Cost leadership requires aggressive construction of efficient- scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, sales force, advertising (Porter, 1980).
Differentiation strategy is used for a firm to be unique in its market, and aims to obtain a price premium by its differentiation, which is not easily copied by its rivals (Porter, 1985; Jobber, 2004). It is often associated with a premium price, and higher than average cost for the industry as the extra value to customers often raises costs (Jobber, 2004). If a firm has the following internal strengths, it will be more appropriate to adopt this strategy, corporate reputation for quality and innovation, excellent customer service and management skills ,an efficient dealer network and other unique dimensions.
Focus strategy could be divided into cost focus strategy and differentiation focus strategy. This strategy is quite different from the others because it rests on the choice of a narrow competitive scope within an industry (Porter, 1985). Cost focus strategy is used by a firm to seek a cost advantage with one or a small number of target market segments. Differentiation focus strategy is used to seek differentiation advantage with one or a small number of target market segments (Jobber, 2004).
Organizational Performance
Performance is a continuous and flexible process that involves managers and those whom they manage acting as partners within a framework that sets out how they can best work together to achieve the required results (Armstrong, 2006). Performance is the end result of activities; it includes the actual outcomes of the strategic management process. The practice of strategic management is justified in terms of its ability to improve the organization’s performance (Wheelen & Hunger, 2010). Organizational performance comprises the actual output or results of an organization as measured against its intended outputs (or goals and objectives). According to Richard et al. (2009), organizational performance encompasses three specific areas of firm outcomes: financial performance (profits, return on assets, return on investment) product market performance (sales, market share) and shareholder return (total shareholder return, economic value added). Specialists in many fields are concerned with organizational performance including strategic planners, operations, finance, legal, and organizational development. In recent years, many organizations have attempted to manage organizational performance using the balanced scorecard methodology where performance is tracked and measured in multiple dimensions such as: financial performance (e.g. shareholder return),customer service, social responsibility (e.g. corporate citizenship, community outreach), employee stewardship.
Telecommunications industry in Kenya
Telecommunication is one of the most dynamic business sectors worldwide. Mobile telephony has evolved from first generation technology (1G) in early 80s to now third generation (3G). In the last 10 years the sector in Kenya has seen an unprecedented growth in mobile phone ownership and usage. The Kenyan telecommunication sector was liberalized in 1998, following the enactment of the Kenya Communications Act, 1998, the government launched the Telecommunications sector reform and introduced competition in the cellular mobile industry, while at the same time Disbanding KP&TC (CCK, 2001). There are four major players in the Telecommunications industry in Kenya. These are: Safaricom Limited, Airtel Kenya, Telkom Kenya which operates under the Orange Brand and Essar Telecom Kenya which operates under the Brand name Yu Mobile. The Telecommunication industry is very competitive and fast changing.
Safaricom Ltd is a leading mobile network operator in Kenya. It was formed in 1997 as a fully owned subsidiary of Telkom Kenya. In May 2000, Vodafone group Plc of the United Kingdom, the world's largest telecommunication company, acquired a 40% stake and management responsibility for the company. With a subscriber base of over 14 million and about 2,000 base stations across the country, Safaricom is Kenya’s leading total telecommunications services provider with a huge investment and market leadership in both voice and data services.
Formed at the turn of the decade as a joint venture between Vodafone and Telkom Kenya, the firm has built a solid reputation as a hot-house for innovation. Five years ago, it pioneered M- PESA, the first mobile money transfer service, anywhere in the world. Safaricom is a leading provider of converged communication solutions, operating on a single business driver that has a peerless understanding of voice, video and data requirements. Safaricom boasts to be a one stop shop for integrated and converged data and voice communication solutions. Safaricom with its countrywide network was the first network to provide broadband high-speed data to its customers through its 3G network, Wimax and fibre.
Airtel was launched in Kenya in 2000 as Kencell and rebranded to Zain in 2008 and finally Airtel in 2010. Initially it was a joint venture between Vivendi of France and Sameer Investments of Kenya, which has offloaded most of its shareholding. Between 2000 and 2003, Kencell grew faster than Safaricom due to its high quality voice and data networks. When in 2005, Vivendi of France sold its 40 per cent stake in Kencell to Celtel international; the firm adopted a pan-African marketing strategy. This strategy and the per minute billing on the Company’s tariffs saw the customers shift to the Competitor Safaricom Limited which had positioned itself as a “cheap” network and billed its customers on seconds rather than per minute. Safaricom also gained advantage over the localized advertisements that helped draw in millions of customers to its network.
Airtel Kenya is the second largest operator after its main competitor Safaricom and it commands 15% of the total market share according to a recent media report. Airtel has had a bias for the high end individuals and corporate segments, which has been saturated. Airtel is known for its flat rate pricing strategy in which it charges the same rates across networks. The stiff competition has seen Airtel reduce their tariffs further. Telkom is the third largest operator in the market currently at 4 percent of the total market share. Orange became the commercial brand for Telkom Kenya on 17 September 2008, the country's historical operator, following France Telecom's acquisition of 51% of its capital in December 2007. Telkom Kenya therefore joined a worldwide community of 115 million Orange customers and became the first integrated operator in the country, proposing fixed and mobile telephony alongside Internet services. The launch of the new GSM network, alongside new mobile and broadband Internet offers under the Orange brand constitutes a decisive step in Telkom Kenya's development.
The historical operator now offers the Kenyan population convergent services in mobile, fixed and Internet telecommunications. Telkom Kenya like the rest availed it’s broadband internet and mobile services in Nairobi and Mombasa but have now expanded and rolled out to the other major towns in the country. Additionally, with the arrival of undersea cables and a pricing policy adapted to the country, Telkom Kenya is setting itself up to adopt a leadership position in broadband Internet. It has been seen to develop its activities and according to a media report, Telkom has invested more than €58 million since 2008 on their network infrastructure. It’s ambition according to the report is to increase the customer base through high quality services and the strength of the Orange brand (www.researchandmarkets.com, 2010).
Econet Wireless Kenya launched operations as the country’s fourth mobile operator at the beginning of December 2008, marking the end of long and twisting journey for the South Africa-based telecoms operator, which was initially issued the licence in 2004. It had been suggested that Econet in its own right could not finance the rollout of the network, and was rescued early 2008 by Indian mobile telecoms company Essar Communication, a subsidiary of Essar Global, which acquired a 49 per cent stake in the Kenyan licensee.
Essar acquired the stake from Econet Wireless International, which held a 70 per cent controlling stake in the licensee, and had been reported to be scouting for a suitable financier since the Communications Commission of Kenya confirmed the award of the licence in September 2007. When Essar acquired its stake in Econet Wireless Kenya, it was reported that the Indian operator would invest as much as US$500 million on the rollout of the GSM network.
Essar Communications has a joint venture with the Vodafone Group, called Vodafone Essar, which is one of India’s largest cellular service providers, with over 55 million subscribers. Essar owns ‘The MobileStore’, India's largest national retail chain of mobile phone stores. It has a major presence in the telecom infrastructure space with one of the largest investments in telecom towers. Essar operates India’s second largest outsourcing services business operating under the Aegis brand, with 31 centres in the Philippines, Costa Rica, USA and India. The Kenyan operation is branded ‘Yu’, and represents the first expansion outside of India for Essar in the communications sector.
Since the beginning of the liberalization of the telecommunications sector, Kenya has seen fast internet growth and even faster mobile phone growth. Encouraged by this development, the government has plans to turn Kenya into East Africa's leader in Information and Communications Technology (ICT). Since 1999, Kenya has experienced radical changes as the liberalization process of the telecommunications sector began. Of vital importance to the process was the establishment of the Communications Commission of Kenya in February of that same year through the Kenya Communications Act, 1978. CCK's role is to license and regulate telecommunications, radio communication and postal services in Kenya. Since then a visible boost has gripped the industry. The fast-growing mobile sector is characterized by competition between the operators. The companies have made considerable growth and profits since their inception but still there is enormous potential remaining in the mobile phone sector which is fast changing.
Kenyan market is generally price sensitive and as competition increases in the sector price wars are pushing prices down and affecting ARPUs. With the drastic cuts in call rates the Telecom operators are confronted with sluggish user growth rate and a fall in the average revenue per user (www.researchandmarkets.com, 2010). This rivalry has now prompted operators to stake Mobile value-added services (VAS) such as money transfers, video conferencing, Caller Ring Back Tone (CRBT) and Mobile Banking to remain afloat (Ombok, 2009).
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Item Type: Kenyan Topic | Size: 64 pages | Chapters: 1-5
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