UK Market Entry Strategy for a Mobile Phone Operator

UK Market Entry Strategy for a Mobile Phone Operator The introduction of mobile telephone service in the United Kingdom was launched in 1985 (BBC News, 2005), however the beginnings of this technology can be traced to its use by the Swedish police in 1946 when they tested a radiophone (Free-Definition, 2005). In terms of modern technology, Bell Labs, a division of ATT, pioneered cellular technology in 1947 and exited the market in 1984 as the company believed the market would not develop to the point of being viable (Wharton School of Business, 2000). Interestingly, ATT ten years later would pay McCaw Cellular Communications $12.6 billion to acquire a cellular phone operator (USD) (Wharton School of Business, 2000). The words ‘mobile phone’ represents a term that encompasses cellular, satellite as well as any type of phone that provides mobility on a wide range scale (Free-Definition, 2005). It must be remembered that today’s cellular technology is based upon radio wave transmission that successively was pioneered by (epanorama, 2005): James Clark Maxwell in 1864 with his electromagnetic radiation theory called ‘Maxwell Equations’. Alexander Graham Bell in 1876 when he invented the telephone. Heinrich Hertz in 1887 with his discovery of ‘hertzian waves’ that are today called ‘radio waves’. Guglielmo Marconi in 1896 who conducted the first radio transmission. Radio frequencies predominated the mobile telephone industry through the 1960’s until the unavailability of these frequencies resulted in the development of cell-based networks to solve the frequency congestion problem in the 1970’s. And while the first modern mobile telephone call is created to Motorola on 3/04/1973 when Martin Cooper placed the first call on the streets of New York to Bell Labs. The first cellular phone network was actually developed in 1981 by ‘Nordisk Mobil Telefon’ (NMT) which was based on analog technology (Free-Definition, 2005). The preceding is acknowledged as the beginning of the cellular telephone industry and the subsequent boom that exceeded all expectations. The cellular industry in the United Kingdom is currently dominated by the following four major companies (BBC News, 2005): Vodafone Orange T-Mobile, and 02 In the face of the preceding, British consumers have been lodging complaints about overcharging, coverage areas and dropped calls which has prompted easyGroup’s Stelios Haji-Ioannou, (easyMobile, 2005), Fresh and Virgin Atlantic’s Sir Richard Branson, among others to announce that they are entering the fray to better serve consumers. This new round of developments in Britain’s cellular industry is an outgrowth of inquiries by the United Kingdom’s Office of Telecommunications (Oftel) that announced that British cellular phone companies four largest operators were overcharging callers by as much as 15% (McDonough, 2003). The preceding has opened the door for new and smaller companies to respond to consumer complaints and the corresponding marketing platform to gain a foothold through new services. The growth of cellular telephone communications in terms of technology, services, companies, handsets and market penetration has increased in the short period of 20 years to the point where 85% of all United Kingdom households have mobile phones (Mobile Operators Association, 2005) which translates into 9 out of every 10 British consumers using a mobile telephone (BBC News, 2005). The convenience offered by cellular services has seen consumers increase their utilization rates to the point where the total number of minutes consumers made on cellular calls almost doubled during the period 2000 to 2004, from 34 million minutes to 62 billion minutes (Mobile Operators Association, 2005). The most important development is that in 2004 the revenues of mobile voice and data companies at  £12.3 billion exceeded fixed-line revenues for the first time in U.K. history (Mobile Operators Association, 2005). The preceding information is important in understanding the far reaching impact, importan ce and inculcation of the mobile telephone in today’s lifestyles, both in personal as well as business use. However, this unprecedented growth is not without its problems. Sir Richard Branson the charismatic owner and founder of the Virgin Group has stated that the mobile phone industry in the United Kingdom is â€Å"†¦rip-off Britain at work again†¦Ã¢â‚¬  (Pearse, 1999) and that â€Å"†¦ hardly anyone is getting a good deal†¦Ã¢â‚¬  (Pearse, 1999). His statements have been supported by such events as: 2001 â€Å"Regulators launch unannounced inspections in price-fixing investigation† (Broersma, 2001) 2001 â€Å"Mobile phone companies slammed for targeting children† (Wearden, 2001) As well as customer service, insurance costs, coverage, dropped calls, highly monthly rates, high per minute rates, roaming charges, 12 month contracts and billing practices. The free for all at the top of the cellular food chain has created customer dissatisfaction with the ‘big four’ and they are seeking alternative solutions to what was once a novelty. And therein lies one of the biggest shifts in consumer viewpoints, and thus the industry as a whole. Once reserved for business individuals and upper income demographics, the cellular phone is no longer looked upon as a luxury or business item. Consumers see it as a necessity. Cellular telephone market penetration in the United Kingdom has reached the point where cellular phone ownership exceeds 100% of the country’s total population (cellular news, 2004). The industry’s biggest complaint is high per minute and monthly service charge rates. The per rate calling cost tariffs for ‘anytime minutes, mont hly call allotment and pay as you go plans’ differ widely, thus the plan programs tend to be misleading and costly. Table 1 – Monthly Calling rates in the United Kingdom * (Vodafone, 2005) ** (Orange, 2005) *** (One2One, 2005) **** (BT,2005) The above Table indicates the variance between companies for the same basic monthly plans and how longer term contracts result in lower monthly cost per call. The complexity arises when one attempts to calculate the calling time per minute within these plans and the variables attached. As a point of reference the following is a comparison of rate plans on a pay as you go basis: Table 2 – Pay As You Go in the United Kingdom * (Vodafone, 2005) ** (Orange, 2005) *** (One2One, 2005) **** (easymobile, 2005) The advantage of the ‘pay-as-you-go’ plans is that there is the lack of a contractual commitment for a monthly charge, thus depending upon which company you select the rates are slightly more per call. EasyMobile’s promise to slash rates seems to offer British consumers with a viable choice to the a 15p across the board rate that is the calling rate for the monthly plans. While the Virgin Mobile web site for the United Kingdom is not finished, information was obtained that indicates that the proposed ‘pay-as-you-go’ rates should wind up being 15p for the first 5 minutes of calls on a daily basis, and then rolling down to 5p thereafter for all calls made to standard United Kingdom locations as well as other Virgin phones. Calling other mobile networks will cost 35p (Wikipedia, 2005). In the instance of both the monthly plans and the Pay-As-You-Go plans, customers are required to purchase their phone at a cost ranging from  £50 on up. There are also the free phone offers that carry contract minimums of varied prices. The British mobile phone market is highly competitive as well as being a mature market. According to Porter’s (1998) generic strategies, firms fall into two broad categories: firms that utilize an advantage in cost, and firms that use differentiation as a means to establish a difference between themselves and their competitors. The mature and established nature of the British mobile phone market sees companies such as easyMobile, Virgin Mobile and Fresh committed to stealing market share from the big four, Vodafone, Orange, One2One and BT through the utilization of slashing costs to achieve gains in market share. The four major UK mobile phone companies also offer a broad array of services and phone types along with the varied plans to go with them. These services, such as video calling, Internet access, text messaging, along with phones that provide camera and streaming capabilities plus a host of features are designed to reap higher profit margins. The determining factor is price and the big four companies while cognizant of this aspect (price) are focusing on promoting the service and phone features as their major marketing push, along with the advantages of inter-service calling (same network). These services appeal to young adults, professionals and companies where the monthly costs or image fit their lifestyles. But, there are segments of the market where the costs of mobile phones has become a budgetary concern along with those whose credit does not qualify for monthly rates. These groups represent a sizeable share of the market and this is where the low cost providers are seeking to wrest market share away as well as take advantage of the tremendous growth potential in this segment of the market. Prepaid Market Segment The UK cellular phone market, much like those in other countries, has penetration limits in garnering consumers as there are segments of the population whose credit ratings did not and do not qualify them for the service contracts. This reality was recognized by cellular providers and the prepaid segment has been the number one driving force in the growth of the United Kingdom cellular market over the past 5 years. In 1998 Vodafone gained 300,000 new subscribers of which 127,000 joined using the Pay-As-You-Talk plan, or 42% (silicon, 2003). Similarly, Cellnet garnered 80,000 new customers for its Easylife pre-pay plan (silicon, 2003). And while the pay-as-you-go customer represents the least profitable base for cellular phone companies, their numbers and the marketing opportunities they represent in service trade up as well as increased usage makes them important as a group. The four major UK mobile phone providers have recently indicated their willingness to forgo utilizing low price leaders such as pay-as-you-go plans to attract new subscribers. The maturing of the cellular phone market has caused companies to look at profitability and to switch marketing emphasis on profitability per subscriber (BBC News, 2001). This was prompted by a study that showed a high percentage of pay-as-you-go customers were not regularly using their phones. The companies indicated that the marketing and sign up costs for this customer category was consuming a high budgetary percentage, thus the reason for the decreased emphasis (BBC News, 2001). The average prepaid customer brings in just one fourth of the revenue the monthly subscribers generate ((BBC News, 2001) thus the shift from attracting more prepaid customers to retention and upgrade as these customers are already a part of the marketing data base and the cost to increase revenues from this classification is far les s. The following will offer and analysis of the prepaid cellular segment: Age An Accenture survey conducted in 2002 found that fully 73% of children from 10 to 17 used mobile phones. It is interesting to note that the majority of these respondents believed that ‘gaming’ represented a major phone function with 91% describing the games as either poor or just average. Thus, age does represent a significant aspect as these children grow into teenagers and young adults. Cultivation of this market is deemed as being able to yield more benefits in terms of future subscribers familiar with cellular use and thus higher revenues per subscriber than the general prepaid profile. Other Not all prepaid customers are either young or in the upper age brackets. There are a number of valid potential future revenue generating customers within this segment who are either on current prepaid plans as well as those who have not yet taken on a mobile phone. In many instances a change of circumstances would represent a different usage pattern (analysis.com, 2002), : Budget Consumer This classification can take in many differing profiles. From those consumers who either see the mobile phone as a convenience, rather than as a daily phone tool, as well as consumers who just do not utilize the phone for personal or other calls. The budget conscious look to actively limit or manage their mobile phone usage to keep the cost of ownership in a defined pre-set budget range. Fixed Income Individuals on disability, unemployment or in retirement represent subscribers on limited incomes. In some instances, such as retired or some fixed income, the circumstances will not change. However, eliminating potential subscribers on the basis of theoretical potentials in such a highly competitive market could overlook the radiation power these people represent in terms of word of mouth possibilities. Low Income Individuals occupying the lower demographic profiles do not have the income to spend on either a mobile phone or excessive usage. The limitations of income keep this group in the low revenue classification. Changes in circumstances, the economy or other reasons could affect income and thus a change in usage patterns. Bargain Shoppers The demographics of this group spans basically all income classifications in varied percentages. They represent bargain shoppers who look for the best rates and their usage patterns can varying widely Limited Use The groups within this category can range from the average UK citizen in any demographic profile to individuals with multiple residences, or people who regularly travel between the United Kingdom and another country. The preceding summary illustrates that although the prepaid market has been classified by the major four mobile companies as a low revenue generator, there are significant revenue potentials within this group that can not be qualified, yet are there. Chapter 4 – Market Entry Strategies The preceding analysis of the British mobile phone market, along with a review of the four major companies within that field has uncovered the reasons as well as rationales for the existence of the huge pre-paid market within their subscriber base. And while the opportunities for further penetration of the market are limited, the opportunities within the mobile industry sector are definitely there. In addition to the continued entry into the market of teenagers coming of age, the existing cellular and non-cellular prepaid market offers definitive growth and profit opportunities for a firm that grasps the subtle nuances in the market and crafts approaches, pricing plans and marketing efforts to reap the rewards. In order to equate entry into this market, an examination of the management and related methodologies will precede the marketing campaign strategies. 2.1 Management and Strategic Methodologies Porter’s (1998) generic strategies indicates that firms fall into two categories, the ones that have an advantage in cost and the ones that use the principle of differentiation. Adherence to this understanding means that a firm will thereby recognize its strength and thus concentrate efforts to maximizing this effect. The opportunities in the prepaid cellular market’s lies in ‘cost leadership’ as the driving marketing foundation. David (2004) concurs with Porter’s (1998) assessment in advising companies to â€Å"’Establish Company Direction’ David (2004) indicates that this be accomplished through the development of a company vision, the setting of objectives to be achieved and attained. In addition he mentions crafting a strategy that seeks the opportunities inherent within a market and then devising consumer driven rationales to formulate a strategy to achieve these goals. Arnold’s (2003) â€Å"modes of Market Entry’ delves further into the theories raised by Porter (1998) and David (2004) and states that â€Å"The central managerial trade-off between the alternative modes of market entry†¦Ã¢â‚¬  winds up being â€Å"†¦risk and control†. He goes on to add that when one minimizes risk that company is seeking a â€Å"†¦ low intensity†¦Ã¢â‚¬  David (2004) mode of entry. This means that the company will select the safer courses of action which also do not require the depth of commitment by management to map out the detailed corresponding course of action to maximum success. The deeper a company delves into the nuances of the market and competitive approaches, the more skills on the part of the company are required to be worked into the system to handle these demands. These are the places or segments that the major firms are either ignoring, divesting themselves of or have deemed unprofitable. In reality these are the segments of the market that require more attention to detail and closer monitoring to exact opportunities as they present themselves, or via cultivation whereby the consumer is reached with compelling reasons to increase their expenditure. As illustrated by the varied classifications of prepaid subscribers as well as non-subscribers the opportunities exist to wrest profits in the exercise of Wal-Mart like efficient operations and economy of scale modes. Wal-Mart’s retailing example paved the way for a low cost market position to be the road to high market share and thus the resulting economies of scale. By minimizing costs a firm can generate profits from a low margin via operations and systems that cater to and serve consumer needs. The preceding is at the core of David’s (2004) market entry concepts. A firm must equate the degree of risk, and competence it brings to a particular market opportunity in recognition of the capabilities and resourc es of competitive firms, and thus craft a strategy that takes advantage of nuances as well as quarks within the market that have either been missed or deemed unprofitable. Johnson et al (2001) indicates that putting the firm’s strategy into action requires a company to organize itself for success. Exactly the points made by David’s (2004) market entry topics. Every industry leader has devised systems, administrative functions and overall operations to be sensitive to all developments, consumer trends, market opportunities and unexploited areas to dominate their industry group. Microsoft, Mercedes Benz, Wal-Mart, Dyson and others have done this, paid attention to the smallest of details and then exploited them in the marketplace. Marketing Campaign Strategies Given the cellular phone penetration rate in the United Kingdom, whereby 9 out of 10 people use the services of a mobile phone (BBC News, 2005), a wholesale attack on the market taking on established as well as known companies represents a frontal attack on fortified ground. A glorious charge, but prone to the cost of either failure or dismal results. Well-entrenched competitors also have ground to defend within their fiefdoms and attrition can occur by seeking out the disenfranchised as well as defectors and cast offs. The major four mobile companies have indicated their focus on profitable subscriber segments thus devoting fewer resources to the attraction of prepaid subscribers. This opens the door to cultivate new market entrants from the teenage classification as they mature each year, as well as the: Budget Consumer Fixed Income Low Income Bargain Shoppers Limited Use, segments which represent low profit generation groups, but in meaningful enough numbers whereby economies of scale can be employed. This so called ‘discount’ side of the market is not without its difficulties in that lower margin generating subscribers still expect first class service. And this all has to be accomplished using rates that compete with and beat those of easyMobile, Virgin Mobile and other firms concentrating on the prepaid market segment as a means to either growth or opportunity. Market Entry Strategies With the internal administrative functions and systems in place, or planned the company can execute is strategies for market entry. The following maps out the steps in sequencing of accomplishment of the foregoing: Planning Internal Implementation External Linkages Marketing Strategies Service The applications and areas of concentration with respect to the preceding, are as follows: Planning Arnold (2003) , Johnson et al (2001) and David (2004) all illustrated the importance of focusing on the goals and objectives and then planning out the steps leading to market entry. This entails management examining, questioning and devising systems and functions that will be needed to respond to the demands of the business being taken on. In the case of the entry into the British mobile market the state of market maturity and saturation along with established operators in a cost competitive market, the only viable market segments open are the marginal profit base profiles. The major mobile companies did not plan for or implement their operations to handle this type of business from the onset, thus their operational models are not profitable at that end. The utilization as well as concentration on subscriber profitability through new and added services as well as more features in handsets represents their commitment to trade up marketing for growth in a saturated market. As a result the lower profitability subscribers are offered basic services at a higher rate. Through planning to wrest profits from this group via a Wal-Mart type of approach from the onset, builds an organization to fit the marketing realities. Internal Implementation Once the planning concerning systems and functions has been completed and tested it needs to be implemented internally as a working environment. Incentives based upon identifying and lowering internal operational costs while maintaining high service levels are management tools to solicit the cooperation and commitment of managers and employees. External Linkages Outside services and equipment needs such as network costs need to be put in place. The most important aspect of this segment are utilization contracts where when certain numbers are achieved, costs are reduced. This provides built in profit incentives that management as well as the organization must set as goals, thus driving growth. Marketing Strategies Low cost market leader! Porter’s (1998) generic strategies identified this as a prime component along with differentiation. This is the opportunity that exists in the prepaid segment of the UK market which stands in excess of 50% of all subscribers. This market segment has driven subscription rates over the past five years and will continue to do so as consumers modify their cellular phone costs as well as enter the market from non-user categories such as teenagers. While the profitability quotient is lower there are rewards that exist after establishment of quality service at these rates. Much of what consumer seek entails the level of quality received per monetary outlay. As the retail price of computer hardware spiraled downward, Dell managed to garner huge market share through cost cutting direct delivery systems that enabled them to reduce stocking and return costs as well as implement higher levels of just in time delivery to reduce internal operating costs. This low pri ce quality service and product approach became the operative model for an industry faced with saturation, lower retail costs and internal margins. The comparative costs in the prepaid market indicate that the average industry rate hovers in the 15p range. Table 2 – Pay As You Go in the United Kingdom Company Rate Phone Answer Minimum Charge Landlines Other Networks Vodafone* 10p 10p 30p 35p to 40p Orange** 10p 5p 20p 40p One2One*** Offers Flat Rate Based on Calling Card Up to  £10