Telecommunication Industry Competitiveness

This paper will discuss and analyze the Telecommunication industry and its competitiveness in Saudi Arabia to help new firm in the decision about entering this industry?

Industry Overview

Each business operates among a group of companies that produces different products or services. The term industry does not refer to a single company or specific firms in general; “industry can be defined as a group of companies that produce similar products or services that are close substitutes for each other, that is, products or services that satisfy the same customer needs.” (Charles & Gareth,2009, p.40).

This paper will discuss the telecommunication market in Saudi Arabia. The large population, low penetration rate and good growing economy make this market more attractive and competitive. The telecom market was controlled by one player (monopoly) and later on 2004 the market was opened by offering different licenses in Mobile and fixed lines. This is considered an evolution for the telecom market which provides different products and services, change customer experience and heavily impact the prices.

Telecommunication Market Structure

Regulatory Environment :The Saudi Telecommunication market is govern by a state entity known as the Communications and Information Technology Commission (CITC). The CITC is responsible for the issuing of licenses to private sector operators, and the implementation of rules regulating telephone, internet and other multimedia service providers.

Liberalization: The CITC allow competition into the Saudi telecommunication market by issuing new mobile and fixed licenses.

Accession to WTO: In 2005 Saudi Arabia became the 149th member to join the WTO. The country made specific commitments towards opening up the Saudi telecommunication market to foreign investors.

Telecommunication Market Size

Saudi Arabia has the largest and fastest growing market for telecommunication products and services in the Middle East. The total number of subscribers in the market is reaching over 40 million. The market has three main players.

Industry Analysis

What is industry competitiveness and what are its characteristics, what is high competitive industry, what happens when facing high competitive industry

“The firm’s proximate environment is its industry environment; hence the focus of our environmental analysis will be industry analysis.” (Grant, 2010, p. 67).

Grant (2010) relates industry analysis to both corporate and business strategies. Corporate strategy to decide which industry the firm to operate and allocate it resources accordingly that needs deep study for the industry profitability measure that itself depends on the completive intensity.

Business strategy is to work to achieve completive advantages by studying the customers’ specification and find the best way to satisfy their needs.

The environment of the firm contains all external factors that have impact on its strategy. As per Pestle analysis, environmental influences are grouped into political, economical, social, technological, legal and environmental forces. The main purpose of the external environmental analysis is to determine the most related forces that influence the firm to be considered effectively during the strategy decision. The contribution of external environment analysis is to help the company to generate profit and to do so the firm should understand its customers, suppliers and the completion intensity.

“The core of the firm’s business environment is formed by its relationships with three sets of players: customers, suppliers, and competitors. This is its industry environment.” (Grant, 2010, p.68). Industry analysis starts with the decision about the product or service and the markets, capabilities and companies exists within the industry. Industry analysis will have a major impact on the competitive where each industry has its own characteristics that have the main contribution on the firms to enter/exit or continue in the business. Two main areas need to be considered for industry analysis; organization’s external environment (macro-environment) and organization’s internal environment (micro-environment).

Successful strategy for industry analysis should start from a predefined long term objectives that can understand the environment factors along with the available skills and resources followed by effective implementation. As a general strategy, the firm should align its characteristics and be consistent with the external environment.

The aim of this part is to go through some details of strategic analysis tools that will help the firm to assist the new industry and the best area for each tool to be used.

In past, the economic system was organized around the company whereas nowadays, the economic system is organized around the market. It is required for any firm to use some strategic analysis tools to study the industry and its market. Examples for these tools are SWOT analysis, PEST analysis, Porter’s five forces analysis, four corner’s analysis, resource based view and value chain analysis.

The SWOT analysis is one of the famous tools to study and analyze the internal organization’s strengths and weaknesses, and the external opportunities and threats. It belongs to the design strategy school.

Pest analysis concentrate on four factors; political, economic, social and technological. This helps the firm to understand the forces in macro environment and the opportunities and threats they will confront. The PEST analysis is recommended to be done before SWOT analysis if both will be used noting the fact that PEST is used likely for market analysis.

Porter’s five forces tools is one of the most famous tools for competitive position analysis. It analyze the micro environment forces from outside-in the business using five competitive forces. “Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time “, (Porter, 2008, P. 80). It is to be mentioned that Porter’s five forces tool belongs to positioning school which concentrates on the industry analysis as a key success for the firm.

Tools1: Porter Five forces:

Porter (2008) argues that whatever the industry is the structure of the forces that affect the firm are five forces; threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products and rivalry with competitors. These forces will affect the firm position and the decide its profitability level, “Industry structure drives competition and profitability”. (Porter, 2008, p. 80). The profitability will decrease if the competition is high.

It is important to understand the main force that affecting the firm to plan course of action to confront its power to enter the business, continue and sustain the required position.

The following sections will discuss the five forces on the telecom industry in Saudi Arabia and how they will affect the firm decision:

Threat of new entrant

How it will affect the existing market? What are the barriers for new entrants to be considered?

Two issues to be considered when analyzing the threat of new entrant. The first one is the impact on market: “When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors”. (Porter, 2008, p. 81). The second issue is the barriers that new entrant has to face and his strategy will be formed accordingly. “If entry barriers are low and newcomers expect little retaliation from the entrenched competitors, the threat of entry is high and industry profitability is moderated”. ( Porter, 2008, p.81).

The main entry barriers in Saudi telecom market are the following:

High License Fees,

High infrastructure setup cost,

Rapid technology change,

Customer switching cost is very low, and

Easy access to the distribution channels.

The bargaining power of buyers

The power of the buyers is one of the Porter’s five forces model to analyze the competitive advantages and it represents how much this power is influencing the firm by asking for lower prices, enhancing the services and improving the product quality.

Applying this force on Saudi telecom market, the following points are to be considered:

Lack of differentiation among services or products,

Low switching costs especially after introducing the concept of mobile number portability, and

Buyer has full information.

From the above, it is obvious the bargaining power is relatively high.

The bargaining power of suppliers

This force analyzes the suppliers’ power on the industry that the firm is operating. It can affect the industry by increasing the prices and reduce the quality of services or products. As this power increases the profitability of the firm is affected. In Telecom market in general and in Saudi market, this power is low. This because of the following factors:

Availability of many telecom suppliers,

The industry is important factor for the supplier (less diversity),

Lack of differentiation among suppliers,

Standardization which prevents forward integration, and

Low switching cost.

The threat of substitute products

One of the important powers that is forgotten a lot of companies where most of the focus on competition and the other forces and competitors that produce similar products or provide the same services. This is the treat of substitute products where the substitute provides the same function as alternative for the original product.

The following factors will determine the level of this threat:

The quality provided by a substitute,

The customer’s willingness to change,

The prices for the substitute, and

The switching cost.

The quality provided by VOIP (Voice Over Internet Protocol) services is not guaranteed compared to the quality provided by telecommunication devices eventhough the prices are higher still the customers prefer to get connected far from the VOIP. The new On the other side, new ways of telecommunication such as new ways of chatting over BB messenger are accomadated and emerged by the provider in their offering so Saudi culture still continue with the highcommunication tool Considering the not quranteed quality by VOIP as substitute product and comparing the quality provided to the mobile communication tools and

The impact of this force on Saudi telecom industry is low.

Rivalry among existing competitors

Different industruries, have different competition levels

Critical Analysis of Five Forces

The model is treating the market structure as static while the competitive environment is not and it is not considering the dynamic in today’s industry where the development and innovations are very high (Kippenberger, 1998; Haberberg and Rieple, 2001).

Moreover, the model is design on the concept of competition. It presumes that the firm wants to achieve ccompetitive advantages over other companies in the market, as well as over suppliers or buyers ignoring some importing strategies such as “strategic alliances” or other (Inkpen, 1998). Are suppliers or buyers threats to a company?

In addition, the model equates buyers with the sellers. Aren’t customers more important and marketing is moving toward service and relationship marketing.

One major limitation is the fact that the model is not considering the human resources and their skills and competencies as a key success factors for any company.

Finally, the model misses 3 new forces: deregulation, digitalization and internationalization.

SWOT Analysis Tool

Introduction

SWOT method is a tool used in strategic and industry analysis to examine business units, new products or an investment opportunity. It helps the organization on decision making to assist the entry of new industry or market by analyzing the firm’s internal environment and the internal environment where the firm will operate (Smith, 2006).

The idea of SWOT analysis is to figure out the appropriate factors that will affect the performance of the company to achieve its target. These factors are internal; Strengths and Weaknesses and external; Opportunities and Threats.

SWOT model

The model is a simple tool that involves creating a set of checklist which contains strengths, weaknesses, opportunities and threats that help the firm to take decision about the targeted industry or market.

Strengths concentrate on those factors of the industry or the market that helps the company to achieve its objectives and sustain to make profits. Weaknesses can be defined as those components that put the firm at risk now or in the long term. Opportunities are those changes on the external environment which can give advantages over other players in the market such as change in the technology. Threats can include any situation or change on the surrounding environment that might affect the achievements of its objectives and target such as new law or regulations. In summary, “strengths on which to build, weaknesses to rectify, opportunities to consider and threats to address”, (Dibb, Simkin, Pride & Ferrell, 2006, p. 45).

The popularity of SWOT analysis might be referred to the fact that it is considering both the environment and the company. It is important to apply SWOT analysis correctly by selecting the right inputs and asks the appropriate questions. The beauty of SWOT analysis that it can be used in many areas and during different phases starting from the initial decision, setting the objectives and define the strategies up to the result review. It is important to understand that when using SWOT analysis it is difficult sometime to categorize some factors that might fall under the four categories.

Since the aim of this analysis to assist the telecom industry in Saudi Arabia to support the firm in his decision about entering this market, SWOT analysis can answer this question effectively. The following sections will try to identify the factors for telecom industry in Saudi Arabia under each category.

Strengths:

As per CITC, the fixed line growth was three times greater than the growth in the total population during 1990 to 2010 period.

As per CITC, in 2010, the total fixed lines reached more than 4.2 million with households subscribers were 70% and business 30%.

Huge construction and infrastructure plan for the incoming 5 years as announced by government will continue the demand on fixed lines for both households and business.

The declining family size will increase the demand for Mobile phones.

The growth in Mobile phone is fast and most subscribers own more than one SIMs (different operators).

Weakness:

Oligopolistic conditions prevails, the sector is dependent on STC’s ADSL’ network with little choice of alternatives.

The number of active subscribers is higher than the number of total population which increases the competition for market share.

Price war is high which affect the profitability and reduce the revenue growth for operators.

The telecom industry is depending mainly on expatiate labor and this increase the expenses.

Opportunities:

Offering new Mobile and Fixed line licenses will provide more growth.

The 3G market is improving especially after the new services such providing very high mobility internet (Broadband).

Regulatory allows foreign investors in mobiles Phone Company to own up to 70% of its equity.

There is no limit for satellite licenses.

The price reduction of ISPs (internet service provider) will increase the growth in internet market.

Threats:

The high growth of Mobile phone market is affecting the growth in fixed line.

Unemployment increase on the young population can affect the growth of mobile services market.

Price war is a major threat for new cumbers in the mobile market.