WHY STRATEGY STILL MATTERS

Tariffs for mobile telephony are still quite high – a direct result of limited competition. So where does this leave Cosmote?

Bucharest (2006) – Strategy often gets little attention in today’s must-do environment, in which the focus is on how to do things rather than on what things to do. Increasingly demanding financial markets, shareholders and corporate boards place enormous pressure on CEOs. Everyone wants immediate results. Execution is king.

Yet the fundamental rule of business success hasn’t changed: sustainable competitive advantage drives value creation. To achieve lasting superior results, you need a superior business model and superior product differentiation. And true differentiation asks for a profound understanding of the sources of competitive advantage – and how to play them to your benefit and to the detriment of your competitors. Strategic competitors begin by viewing the market place as a dynamic system of competitors, customers, and human and financial resources. In my opinion, too few senior managers really know in their bones where they have a structural advantage over the competition, what the advantage depends on, and what will strengthen and improve their position.

An interesting strategic case is the recent launch of Cosmote in Romania. The mobile phone operators’ market is currently dominated by two companies, Orange and Vodafone/Connex. Their success very much depended on being faster than their competitors in rolling out networks and building market share. The reason Orange got the upper hand over Connex in the last two years has much to do with their initial role as runner-up (it is easier to become a market leader than to stay one) and the consistency in their marketing effort after being taken over by an international operator. Orange realised before Connex that mobile phone services are a commodity and that the real differentiation lies in customer service and the perception and strength of the brand in the mind of the consumer.

Although the Romanian mobile market is by no means saturated, it is likely that the explosive growth presently experienced will start to level out in years to come. This will inevitably lead to increasing earnings pressures and a dramatic shift in competition. Operators will need to find new ways to leverage existing customer and infrastructure bases. The evolution from voice-only to more complex offerings, combining voice and other services, will trigger the need for new skills in product development, marketing, pricing, customer service, business development, and partnership management.

Now where does this leave the newcomer, Cosmote? Before determining its competitive strategy, a company first has to analyse the industry it seeks to enter in terms of attractiveness and competitive forces. The attractiveness of the industry is clearly shown by the high growth rate and profit margins the main players have realised over the last few years, a growth that will continue over the next period, considering the still relatively low penetration and low ARPU (average revenue per user). Another promising feature is the relatively low intensity of rivalry in the industry due to the almost duopolistic division of the market, best shown in the relatively high price levels, a direct result of limited competition.

This clearly offers an opportunity for Cosmote, as the majority of Romanian consumers is still very price sensitive. On the other hand, the barriers to entry for any newcomer are considerable. The main players have achieved significant economies of scale and have extensive experience with and knowledge of the local market, resulting in absolute cost advantages in marketing, distribution and sales, and have built strong brand identities in the minds of the consumers.

In order to successfully attack the dominant positions of Orange and Connex/Vodafone, Cosmote has to fulfil three basic requirements. First of all, it needs to have a sustainable competitive advantage over the others, either in terms of costs, or in terms of differentiation. Secondly, the challenger needs to find a way to partially or fully neutralise the advantages of the leaders. Thirdly, the challenger needs to have some means to soften the retaliation measures of the leaders.

This leaves Cosmote with three non-exclusive offensive strategic options. Each of them changes the rules of competition in the industry and tries to neutralise the advantages of the leaders and to give the challenger the opportunity to achieve its own cost – or differentiation – advantages.

The first option is adaptation. The challenger innovates the way in which the activities in the value chain are executed. In the case of Cosmote this might be a better customer service process, a more transparent billing system, a drastic increase in marketing expenditure compared to the competition, a totally different positioning of its services, a new kind of sales organisation, a cheaper network infrastructure or a new distribution channel. However, the adaptation of the value chain is a creative process that is difficult to achieve in a routinely or unsurprisingly manner.

The second strategic option refers to the redefinition of the competitive scope. A challenger can focus on a specific consumer segment (corporate/final consumer), a specific service (voice/data) or a specific distribution channel (such as, for example, Germanos). In the case of Cosmote it might also follow a horizontal strategy to increase its competitive scope, by leveraging its relationship with fixed phone operator Romtelecom via their common owner OTE. However, this strategy might lead to objections from the Romanian Competition Counsel.

The last and most risky option is an attack by sheer massive investment, without adaptation or redefinition. This strategy implies buying market share, increasing turnover and brand identification by offering low prices, heavy advertising and so on. The challenger doesn’t do something better than the leaders, but simply overpowers them with company resources or a larger readiness to invest. Considering their latest shock offer (2000 minutes/3 euro), at least part of Cosmote’s strategy is based on this option. A readiness to heavily invest, in a situation where both Orange and Vodafone are harvesting, is usually an important addition to a strategy of adaptation or redefinition. It remains to be seen how Cosmote is going to differentiate itself in other areas, as a stand-alone price strategy is not going to deliver the necessary financial returns in the mid-to-long term.

Finally, a challenger can also create alliances in order to realise the necessary resources, technology, market entry or other strong points to attack the market leaders. Alliances can be a means to realise adaptation, redefinition or massive investment. There are two general types of alliances, takeovers and coalitions. An interesting option for Cosmote could be an alliance with a third player on the market, Zapp. This would give Cosmote a strong starting position in the corporate and data segment, economies of scale in marketing and distribution and excess to a new technology.

***

Author: Peter Jansen, Managing Partner of “Bucharest Consulting Group”.

Bucharest Consulting Group offers consultancy services in the field of strategy and general management to local and international medium-sized and large companies in Romania.

For more information contact:

Peter Jansen at