Strategic Management Process: Airtel

Industry: Telecom

The Indian telecommunications industry is one of the fastest growing in the world, with about 19 million additions a month. The industry has witnessed consistent growth during the last year on the back of rollout of newer circles by operators, successful auction of third-generation (3G) and broadband wireless access (BWA) spectrum, network rollout in semi-rural areas and increased focus on the value added services (VAS) market.

there have been several new entrants in the markets lately. This has led to ever lowering tariffs and a decrease in the revenue of existing players. Fresh acquisition of customers is no longer a guarantee to increase in revenue. Consequently, in addition to the lower calling rates, the operators have been forced to provide a host of value added and auxiliary services. To retain its leadership position, Airtel is already leading the way in areas of mobile commerce, banking etc.

As the Indian telecom industry enters its third phase, growth in the markets is bound to mirror the growth in the economy. This provides valuable pointers to the next driver of growth – the rural India – where mobile penetration levels still remain an abysmal 15%. Airtel has been looking to expand and learn in the rural/low income market segment. Airtel has already ventured into providing mobile financial services, mobile money transfers to customers in rural areas, further leveraging its existing base of cellular subscribers.

Vision and Mission

Vision

“By 2015, Airtel will be the most loved brand, enriching the lives of millions.”

Mission

We will meet the mobile communication needs of our customer through error-free service delivery

Innovative Product and Service

Cost efficiency

Unified messaging solution

Objectives/Goals

To undertake transformational projects that have a positive impact on society and contribute to the nation building process

To diversify into new businesses in agriculture, financial services and retail business with world class partners

To lay the foundation for building a conglomerate for future.

Environment Analysis

SWOT: Internal and External Perspective

Porter’s Five Forces (Cellular Services)

1. Threat of new entrants-MEDIUM

TRAI has been following a “liberal regulatory regime” to encourage greater competition with better quality and affordable prices”

The government presently allows FDI of 76% in the sector, encouraging foreign players to enter the Indian market.

Heavy capex requirements and strict licensing policy hinders entry

2. Bargaining Power of buyers- VERY HIGH

Lack of product differentiation- There are short term gains that one player may have from innovation/ first mover advantage into a new value added service

Extremely low switching costs in moving from 1 service provider to another

Multiple service providers- very wide variety of choice for the customers.

Competitive landscape implies consistently better offers and deals for customers.

3. Bargaining power of suppliers-VERY LOW

Airtel outsources most of its operations. Since contracts are allocated to the highest bidder, Airtel only looks at getting the best deal. This mechanism provides Airtel with a high degree of flexibility. For eg. Network outsourcing/maintenance partners: Ericsson(15 circles), Siemens(7 circles), Huawei., IT system partner: IBM, Tower maintenance and other infrastructure: Bharti Infratel and Indus towers.

4. Pressure from substitutes-HIGH

The communications space is very dynamic with new technology (3G and 4G) and products flooding the market. Mobile services are competing with products such as, Wired-lines ,CDMA, Video telephony, Tata/ Reliance- Walky phones, Internet telephony- Skype, google, fring etc, VSAT phones.Additionally, data services on cellular phones have become an essential product feature. On this front, mobile services face a significant threat from local ISPs, broadband service, leased lines, Blackberry and iPad.

5. Current Rivalry- MEDIUM-HIGH

Airtel is the current market leader in the mobile service (GSM) sector with 31% market share. Vodafone, BSNL, Idea are its major competitors.

Competitive Advantage

Airtel has the following competitive advantages:

Strategic alliances: Acquisitions and JVs

Airtel has been entering into various JVs and acquisitions to increase its footprint as well as global presence. The firm has stake in JT mobiles, Sky Cell etc. With the acquisition of Zain and other players, Airtel has used this strategy effectively to become a global player

Outsourcing:

Airtel has a clear outsourcing strategy. It outsources all its functions except marketing, sales and finance; this has helped the firm focus on its core competencies. Further due to its market leadership position and volume of its operations, there are multiple bidders; which has ensured high quality service/products for Airtel

Supplier Relationships

Airtel has strong relationships with its suppliers. It relies on Bharti Infratel for towers, IBM for IT systems etc. It is able to sustain its innovative business model ,by focusing on relationship management with vendors

International Presence

Airtel’s global presence and deep pockets are a source of competitive advantage for the firm.

Value Chain Analysis

The traditional mobile industry value chain basically involved the mobile operator, service provider, device manufacturer and the customer. However the mobile services industry is rapidly evolving with value added services, data services etc. gaining significance. These are a very profitable revenue stream for the service provider.

For example in the value added services segment, the network operator keeps about 60% of revenue, the technology/software developer retains about 25%, while the content provider gets about 20% of the revenue from value added services (Source: IMRB Research).

With M-Commerce contents becoming increasingly important in the value chain, it is seen that the operator share in the value chain has been declining. Airtel has been tying up with entertainment providers, FMCGs, insurance companies to maintain a share in the value chain. From a strategy perspective, this should be one of the focus areas for Airtel.

Business Level Strategy

Airtel cellular service follows a cost leadership strategy. The market focus is broad- with the firm catering to 137 million customers as of FY10. Further, since differentiation is very short lived and immediately imitated by competitors; firms attempt to maintain a cost advantage over their competitors. Airtel has maintained its cost leadership by reducing its operational costs and its unique business model- which outsources all major functions except, sales, marketing and finance. Differentiation is also attempted with the help of value added services. While there are several player in the market, including the new entrants, Bharti-Airtel, Rcom and BSNL are the only players to gain a differential advantage on the account of existing infrastructural capability.

Differentiation

Focused differentiation

Cost leadership- AIRTEL CELLULAR

Focused Cost

Integrated

Competitive Scope

Narrow

Broad

Source of competitive advantage

Differentiation

Cost

Corporate Level Strategy

Bharti Airtel has been divided into distinct business units, as follows:

The Mobile Services division is probably the most valuable division of Bharti Airtel. Airtel offers GSM mobile services in all the 23-telecom circles of India and is the largest mobile service provider in the country, based on the number of customers. It provides numerous value added services such as mobile apps, hello tunes, m-commerce, wireless internet etc.

The Airtel Telemedia Services division provides high speed broadband internet and related services. It also provides landline service in 93 cities across India. It also launched its DTH services in 2008 and is present in more than 150 cities now.

The Enterprise Services division provides a diverse portfolio of services to large Enterprise and Carrier customers. This division is further divided into two unite: Carrier business unit and Corporate business unit.

The Corporate Business Unit provides end to end telecom solutions to India’s large corporate. It specializes in providing customized solutions to address the unique requirements of different industry verticals.

The Carrier Business Unit provides long distance wholesale voice and data services to carrier customers as well as to other business units of Airtel. It is present in significant capacity in the International arena as well.

Differentiation

Focused differentiation

Cost leadership- AIRTEL CELLULAR

Focused Cost

Integrated

Competitive Scope

Narrow

Broad

Source of competitive advantage

Differentiation

Cost

The Digital TV Services provides customers with a unique TV viewing experience with a wide variety of channels and programmes and with the on-demand content on Airtel Live.

The international business group deals with all of Airtel’s operations outside India and South Asia.

Bharti Airtel has comparatively low levels of diversification, and it follows a Dominant Business strategy. The second quarter financials of Airtel show that its mobile services division had a gross revenue of Rs. 8099 crore, which is roughly 82% of its total revenue of Rs. 9846 crore.

Thus its mobile services division is its dominant business.

The reasons for Airtel to diversify are purely based on value creation. As all its divisions focus mainly on telecommunication and related technologies, the transfer of core competencies becomes much easier and much more useful. Moreover sharing activities and resources, especially technological knowledge, is very helpful and creates a positive synergy for Airtel. It also gives Airtel to increase its market power by engaging in multipoint competition with competitors such as Tata. Further it provides efficient internal capital allocation opportunities to airtel, as the retained earnings from its hugely profitable Mobile services can be put to good use in other divisions.

Value creation through diversification

Airtel seeks to create value through diversification by moving across businesses that share both operational and corporate relatedness. With this approach, it expects to achieve high resource sharing and consequently, significant cost reduction.

It looks at operational relatedness since a number of its businesses operate across similar technologies and thus the platform for a given product can be used directly for extending the service from a completely new product. As an example, the cables for a telephone connection provided by Airtel can be used to provide broadband service to the customer without any significant change in infrastructure. The skills required from the technicians are also not very different and thus economies of scale are quite possible. The same logic can be extended to exploring the corporate relatedness. All the diversified businesses require similar managerial and technical expertise as can be seen in the example provided above.

In pursuing this strategy, Airtel will have to be conscious of the fact that it can lead to diseconomies of scope. This can arise primarily from the very factor which Airtel is banking on – similarity across its businesses. A wrong move in any one of the businesses can spill over to its other business and cause repercussions even in the short term. This is the very reason that the organization cannot afford to ‘go easy’ on any of its domains and needs to keep up to speed in all its businesses.

International Strategy

Today Bharti Airtel operates in 19 countries throughout the world. Apart from being the largest cellular service provider in India, it is the fifth largest telecom operator in the world. It has about 207.8 million subscribers worldwide – 152.5 million in India, 50.3 million are in Africa. This has helped Airtel to increase its global market share and revenues significantly.

International Business Level Strategy

We will view this in further detail using Porter’s Determinants of National Advantage model:

It is worth noticing here that after the Indian subcontinent, Airtel’s main region of operation is Africa. It is possible that the company found it attractive to enter Africa because due to its economic conditions, countries there would be lacking in necessary factors of production. Domestic companies in Africa would be lacking in technological resources, human resources, and capital necessary in the telecommunications sector. On the other hand, there is no lack of such resources in India. This is one of the major reasons why Airtel chose to expand there.

Although the demand for services provided by Airtel is increasing at a rapid pace in India, there is still a lot of competition and the demand is smoothing out slowly. To further increase its revenues and market share Airtel has to expand to other nations as well. Due to the lack of existence of bare minimum infrastructure in Africa and the slow but steady increase in its economic well being, the demand conditions over there should be very high.

The related and supporting industries are also very competitive and there are a lot of players in the telecommunication sector, like Vodafone, BSNL and Reliance.

International Corporate Level Strategy

The business of Airtel has been divided into two units based on geography.

Need for cost responsivenessThere are three basic international corporate level strategies availaible to any firm:

Need for local responsiveness

Airtel has always made it a point to focus on the needs of customers and provide solutions to customers according to their requirements. For example, the mobile services that they offer vary even among the different states of India according to customers’ preferences. Similarly, the kind of services, offers, plans and value addition that they offer in India is very different than what they offer in other nations. For Airtel, need to address local responsiveness has always been of the utmost importance.

On the other hand, the need for global integration is not very high. The two business groups, as shown above, are distinct from each other. Due to the lack of proximity of the locations where Airtel operates, and other strategic factors, it is best for Airtel to have low levels of global integration.

Keeping the above points in mind, it is clear that Airtel follows a multidomestic strategy.

Organizational Structure

Bharti Airtel follows an integrated structure responsible for all aspects of its telecom business in India. Significant reorganization took place in October 2006 in line with the vision of making Airtel, the most admired brand in India by 2010.

As quoted by their president, it is their endeavor to build an integrated business, leading to higher synergies & efficiencies and creating an organization that has a truly national character in every aspect of business operations. The present structure marks the transition of Airtel towards a customer focused organization while building sustainability & scalability to seamlessly manage 100 million customers and beyond. The new organization has been designed to enable strong corporate governance whilst ensuring operational freedom, through functional & matrix reporting relationships.

Actual Structure

Bharti Airtel is structured into four strategic business units – Mobile services, Broadband & Telephone (B&T) services, Enterprise services and DTH services. The mobile business provides mobile & fixed wireless services using GSM technology across 23 telecom circles. The B&T business provides broadband & telephone services in 94 cities. The Enterprise services provide end-to-end telecom solutions to corporate customers and national and international long distance services to carriers. All these services are provided under the Airtel brand. The top level management of Airtel across its four divisions is as shown in the following figure.

In the case of Airtel, a matrix organization structure introduces, or at least recognizes, the real life complexity of a business environment. Geography, function, technology, business unit and technology (among others) are the important factors that are recognized in the matrix organizations structure.

However, the above mentioned structure also introduces a higher level of internal complexity and some additional people management challenges, so there must be significant advantages that are seen by the organization that outweigh the matrix people management challenges.

Matrix organization structures were initially introduced in complex projects such as the airspace industry to cope with complex projects. Since then a number of organizations, often prompted by large strategy consultancies, have adopted or altered the matrix organization structure to help deal with internal and external complexity.

In the following figure, a sample matrix organizational structure is shown. In the case of Airtel, the project manager refers to the managers of the different services provided by Airtel across its divisions. It is clear that this allows for sharing of resources across the various projects.

At its simplest the matrix organization structure just reflects this external complexity in the internal structure. Airtel is a brand that is aiming for a global presence and realizes that geography is important but so are function, customer grouping, product and technology.

Basically, a matrix organization structure is an acknowledgment of the notion that since it is improbable to specify the weightage of importance that can be attributed to these factors, there is a need to allow a structure that is flexible and permits balancing and prioritizing on a daily basis between the various divisions. Thus there is a conscious trade-off for clarity in return for more flexibility.

An important issue to consider here is that while the organization structure itself is a good fit for Airtel, a lot of emphasis needs to be laid on the successful coordination of the people and their skill sets within the organization.

Advantages

As a synopsis, the advantages reaped by Airtel as a result of its organizational structure include:

Improved resource accessibility across the old functional and geographic silos.

Effective coordination on shared technologies across the organization (extended to a global level)

Decentralization of management decisions

Improved access to a diverse range of skills and perspectives.

increased communication and coordination across the business

Flexible as per the needs of global or regional customers

Structural Issues

Dual reporting structures run a risk of initiating power struggles. Dual lines of authority in the matrix often create power struggles between the vertical and lateral forces as each tries to secure member loyalty and budget rupees.

Teams may develop ‘groupitis’, the matrix depends on team functioning, there may be an overdependence on group decision-making even where it is unnecessary. This can slow down projects and further be a point of frustration for people managers.

It is a widely acknowledged fact that the matrix structure increases administrative overhead, it also ideally suits the progressive development of new ideas into projects. However, when a slump hits, one common tendency is to discard the matrix in favor of more traditional approaches. The matrix can become a scapegoat for inefficiencies.

Decision strangulation – matrix organizational structures legitimize multiple information flows throughout the organization, creating the danger that too much information will be processed before a decision will be made. Some project managers may feel compelled to check with everyone on every project decision.

Corporate Governance

Corporate Governance is a set of mechanisms used to manage their relationship among stakeholders and to determine and control the strategic direction and performance of organisations. An organisation is owned by its shareholders but is managed by the ownership (Principal Agent Issues). Many a times the decisions taken by the management may not be in the best interests of the shareholders and thus Agency costs arise. To ensure that such a scenario does not arise it is essential for the firm to have strong corporate governance tools.

Bharti Airtel limited firmly believes in the principles of Corporate Governance and is committed to conduct its business in a manner, which will ensure sustainable, capital-efficient and long-term growth thereby maximising value for its shareholders, customers, employees and society at large. Company’s policies are in line with Corporate Governance guidelines prescribed under Listing Agreement/s with Stock Exchanges and the Company ensures that various disclosures requirements are complied in ‘letter and spirit’ for effective Corporate Governance.

As proof of the excellence of Bharti Airtel in the Corporate Governance it has been Rated ‘Level 1’ by CRISIL which is the highest Governance and Value Creation rating (GVC).

One way to ensure strong corporate governance is by having independent directors on the board of Directors. Their sole purpose is to ensure that the decisions taken by the management are in the best interests of the shareholders.

In order to ensure that this corporate governance tool is a sound check, Airtel has ensured the following:

The board has 2 executive members and 14 non executive members. 50% of the members of the board are independent directors which is a good sign of corporate governance. The board meets regularly outside the presence of management.

The chairman of the board is not the CEO or a former CEO of the firm. Else it may impair the ability and willingness of independent board members to express opinions contrary to those of management.

Independent board members have a primary or leading board member in cases where the chairman is not independent.

Board members are not closely aligned with a firm supplier, customer, share-option plan or pension advisor. This may lead to a conflict of interest scenario.

Another suitable means of aligning the interests of the shareholders with that of the management is by means of changing the structure of executive compensation. Having parameters such as stock options as part of the pay will ensure that management will take decisions that benefit both the stockholders as well as themselves indirectly. This a strategy that is used extensively at Airtel particularly as far as the top management compensation goes.

Other Corporate Governance Initiatives taken by Airtel are

Shareholders

Board of Directors

Audit Committee

Managing Director

HR/ Remuneration

Management & Operations

ESOP Compensation

Investor Grievance

Corporate Governance Mechanisms at Airtel

Audit Committee

Six members, two-third of which is independent directors.

At least four times a year. (Max time gap – 4 months)

The Committee Chairman shall attend the Annual General Meeting.

To ensure that the financial statements are true and accurate and provide sufficient information.

Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of their audit fees.

Human Resource (HR)/ Remuneration Committee

Six non-executive directors, out of which four members including the chairman are independent directors.

Attraction and Retention strategies for employees.

Employees Development Strategies.

Compensation

All Human Resources related issue.

ESOP Compensation Committee

Constituted in accordance with SEBI Guidelines, 1999.

Six members of whom four are independent and all are non-executive

Formulate ESOP plans and decide on future grants.

Formulate terms and conditions Employee Stock Option Schemes of the Company

Investor Grievance Committee

Constituted in accordance with Clause 49 of the Listing Agreement.

Four members of whom three members including the Chairman, are non-executive directors

Ensure speedy disposal of various requests received from shareholders

from time to time (within 7-10 days from the date of receipt of

complaint).

Redressal of shareholders and investor complaints/ grievances.

Monthly meeting

The above detailed initiatives clearly point towards the importance that Airtel gives to Corporate Governance and this is further reaffirmed by Level 1 rating for GVC by CRISIL again in 2006.

Organizational Controls

They guide the use of strategy, indicate how to compare actual results with expected results and suggest corrective measures when the difference is unacceptable. It is an important part of the organisational structure and its key to a firms plans to exploit its core competencies.

The organisational controls can be broadly classified as

Strategic control: It is used to determine the fit between what a firm might possibly do on the basis of opportunities in the environment and what it can do on the basis of its core competencies and competitive advantages. In other words, the process of evaluating strategy, is practiced both after the strategy is formulated and after it is implemented

Financial controls: They are used to measure the performance of the firm against set thresholds and analyse the reasons for being unable to meet them if the case by. Such controls generally include measures like Return on Investment (RoI), Return on Assets (RoA).

Management control: It focuses on the accomplishment of the objectives of the various sub strategies comprising the master strategy and the accomplishment of the objectives of the intermediate plans.

Operational control: It is concerned individual and group performance as compared with the individual and group role prescriptions required by organizational plans.

Each of these types of control is not a separate and distinct entity and, in fact, may be indistinguishable from others. Moreover, similar measurement techniques may be used for each type of control.

While both Financial and strategic controls are important the extent of importance accorded to each is determined by the firm strategy. Airtel which is following a cost leadership strategy focuses more on financial controls more than strategic ones.

However a firm should not get too carried away along just one set of controls as that would hurt the long term sustainability. So if a firm focuses just on strategic controls while giving a cold shoulder to financial ones, it may soon face a scenario wherein it will run out of cash.

The organizational control to a very large extent is determined by the Organisation Structure.

Recommendations

Considering the heavy fragmentation of the Indian mobile market, we propose the following recommendations so as to ensure that Airtel continues to be the market leader in this domain.

As the above figure suggests, there has been a heavy influx of new players in this arena of late which has seen the market share of Airtel fall from above 50 % to about 30 % in half a decade. This means that Airtel should look at hereto untapped markets specially in developing countries with low penetration. Thus following the Multi Domestic strategy more aggressively is crucial to continued success

Moreover the ARPU (Average Revenue per User) in India is pretty low. Thus more acquisitions like that of Zain telecom (ARPU of $55 vs Bharti ARPU $7) makes sense. There is no point in proliferating the number of subscribers if Airtel cannot charge them at competitive prices

Since the competition in India has intensified, most players are engaging a price war which can be deleterious to the company’s short term prospects. Herein Airtel should leverage its’ strong network and brand equity and not engage in a price war and try in move towards an integrated cost leadership/differentiation strategy.

The urban market penetration is about 95 % and hence the only way of expanding revenues from this stream is by introducing quality VAS (Value Added Services). These give high margin services and are going to be in much greater demand as the smart phone market swells. Entry and quality innovations into this niche domain (presently) would give it a big first mover’s advantage.

Forging strategic alliances with mobile phone manufacturers specially those of high end handsets will be a great way to tap the premium segment. This segment often has very high usage and contributes significantly to the revenue stream. By locking them in with Airtel at the point of purchase itself, Airtel guarantees itself a long customer lifetime value. Also given the economic spurt, many such players have expressed their keen interest to enter the Indian markets.