1

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AA SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT CCAASSEE SSTTUUDDYY BBEETTWWEEEENN

VVOODDAACCOOMM AANNDD MMTTNN

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Submitted in partial fulfillment of the requirements for the degree of Masters in

Business Administration MBA Unit, Nelson Mandela Metropolitan University in the

Faculty of Business Administration with the University of Wales, Cardiff.

Supervisor: Dr Gillian Marcelle

April 2009

2

DECLARATION

This work has not been previously accepted in substance for any degree and is not

being concurrently submitted in any candidature for any degree

Signed…………………………

Date……………………………

STATEMENT 1

This dissertation is being submitted in partial fulfillment of the requirements for the

degree of Masters in Business Administration

Signed……………………………….

Date………………………………….

STATEMENT 2

This dissertation is the result of my own independent work/investigation, except

where otherwise stated.

Other sources are acknowledged by footnotes giving explicit references. A

bibliography is appended.

Signed……………………………

Date………………………………

3

PREFACE AND ACKNOWLEDGEMENTS

The original title for this research was ‗The Scramble for the African Subscriber‘ and

came from reading articles by, as well as discussions with, Marina Bidoli, of the

Financial Mail, in late May 2003. The competitive rivalry between Vodacom and

MTN had its roots in South Africa, but Nigeria was the epic battle ground where it

finally culminated in 2003-2004. This research is a case study that will demonstrate

how competitive advantage is a systematic process that develops as rival firms, like

Vodacom and MTN, target each other in the material and interpretational domains. In

this case study competitive advantage resulted from both actions taken by Vodacom

and those taken by MTN in response.

My thanks to the following MTN staff people who were untiring in their efforts to

answer endless questions: the then CEO MTN Nigeria, Adrian Wood, (replaced by

the MTN Group COO and would also be the CEO MTN Nigeria, Sifiso Dabengwa)

Brian Goldie, Business Operations Executive, MTN Nigeria; Afam Edozie, Chief

Strategy and Marketing Officer MTN Nigeria, Yolisa Siqebengu from the MTN

Innovation Center in Johannesburg. David Clark and David Black in Nigeria, who

narrated how it all started in Nigeria and the challenges the organisation faced in those

early years. Efforts to get information from the Vodacom Group were unsuccessful.

The boardroom drama at Vodacom SA in early June 2004, illustrated how volatile,

sensitive as well as pivotal the role of Nigeria in the geographical diversification

strategies of both operators

My eternal gratitude to the following individuals, in particular my supervisor, Dr

Gillian Marcelle who challenged me and encouraged me script after script to not only

work harder, but also developed in me the love for research; Sydney Seakamela;

Nthatisi Bulane who proof read my final draft; Dr Annalie Pretorious who was a

source of encouragement and guidance and enabled this document to be successfully

and timeously completed, Last but most certainly not least, to Rainbow, you

challenged me to be the best I could ever be, just to let you know that I am greatly

indebted to you, without your confidence in me I would not have embarked on this

MBA

4

TABLE OF CONTENTS

DECLARATION ....................................................................................................................... 2

STATEMENT 1 ........................................................................................................................ 2

STATEMENT 2 ........................................................................................................................ 2

PREFACE AND ACKNOWLEDGEMENTS .......................................................................... 3

TABLE OF CONTENTS .......................................................................................................... 4

TABLE OF FIGURES .............................................................................................................. 7

LIST OF TABLES .................................................................................................................... 7

Chapter 1 ................................................................................................................................... 8

1. INTRODUCTION AND PROBLEM STATEMENT ........................................................... 9

1.1 Background of the research ................................................................................................. 9

1.2 Drivers of Growth ............................................................................................................... 9

1.2.1 Competing by Connectivity and Functionality................................................ 9

1.2.2 Competing Under New Rules, New Technology and New Demand ............................. 10

1.2.2.1 Liberalisation and Privatisation ..................................................................... 10

1.2.2.2 International Reciprocity ............................................................................... 11

1.2.2.3 Technological Development .......................................................................... 11

1.2.2.4 Growth of SA Multinationals and Multilateral competition ......................... 12

1.3 Statement of problem ........................................................................................................ 12

1.4 Objectives .......................................................................................................................... 13

1.5 Significance of the research ............................................................................................... 13

1.6 Research methodology ...................................................................................................... 14

1.6.1 Selection of Suitable Research Methodologies .............................................................. 14

1.6.2 Literature review ............................................................................................................ 14

1.6.3 Theoretical Delimitation ................................................................................................. 14

1.6.4 Key assumptions ............................................................................................................. 15

1.7 Delimitation of the research .............................................................................................. 15

1.8 Geographical demarcation ................................................................................................. 15

1.9 Layout of the study ............................................................................................................ 15

Chapter 2 ................................................................................................................................. 16

Literature Review .................................................................................................................... 16

2.1 Introduction ....................................................................................................................... 17

2.2Globalizing Telecommunications Services: The Strategic Alliance Approach.................. 17

2.2.1 Strategic Patterns: Competition through Alliances ........................................................ 18

2.2.1.1 Strategic Pattern I: Focus ............................................................................................. 19

2.2.1.2 Strategic Pattern II: Best Product-Differentiation ....................................................... 20

2.2.1.3 Strategic Pattern III: Customer-Solutions Orientation ................................................ 20

2.2.1.4 Strategic Pattern IV: Lock-in Strategy ........................................................................ 23

2.2.1.5 Strategic Pattern V: Strategic Alliances for Scale, Speed, and Scope ......................... 24

2.2.1.6 Non-Structural Alliances ............................................................................................. 24

2.2.1.7 Structural Alliances ..................................................................................................... 25

2.3 Geographic and Product Diversification ........................................................................... 25

2.3.1 Relatedness and Complementary Resource Alignment .................................................. 28

2.4 Competitive Advantage ..................................................................................................... 30

2.4.1 Micro-culture .................................................................................................................. 33

2.4.2 Macro-cultures ................................................................................................................ 34

2.4.3 Process of Competitive Advantage ................................................................................ 35

2.4.4 How firms build competitive Advantage........................................................................ 35

2.4.4.1 Strategic Investments................................................................................................... 36

2.4.4.2 Strategic projections .................................................................................................... 37

2.4.4.3 Strategic Plot ............................................................................................................... 38

2.4.5.1 Resource Allocations ................................................................................................... 40

2.4.5.2 Definitions of success .................................................................................................. 41

2.4.5.3 Industry paradigms ...................................................................................................... 43

5

2.5 Competitive advantage as a systematic outcome .............................................................. 44

2.6 Conclusion ......................................................................................................................... 46

Chapter 3 ................................................................................................................................. 48

3.1 Introduction ....................................................................................................................... 49

3.1.1 Research Process ............................................................................................................ 49

3.1.1.1 Elite interviews ............................................................................................................ 49

3.2 Qualitative research methods ............................................................................................ 51

3.3 Case Study Research Approach ......................................................................................... 51

3.3.1 Brief Historical Overview .............................................................................................. 51

3.3.2 Definition of a case study ............................................................................................... 52

3.3.3 Data Collection ............................................................................................................... 52

3.3.4 Data Analysis ................................................................................................................. 53

3.4. Writing the Study Report.................................................................................................. 55

3.5 Conclusion: ........................................................................................................................ 55

Chapter 4 ................................................................................................................................. 56

4. Introduction ......................................................................................................................... 57

4.1 Background to the rivalry .................................................................................................. 57

4.1.2 Telecom reform 1992-2002 ............................................................................................ 58

4.1.3 The Telecommunications Act 1996 ................................................................................ 59

4.2 Policy and Regulatory Institutional Framework ................................................................ 60

4.2.1 Managed Liberalisation .................................................................................................. 61

4.2.2 Policy not conducive to growth and competition ........................................................... 62

4.3. Growth of mobile phone penetration 1992-2001 ............................................................. 63

4.4 VODACOM GROUP (PTY) LTD .................................................................................... 67

4.4.1 Vodacom Group‘s ownership structure .......................................................................... 67

4.4.1.2 Vodacom‘s First Mover Advantage ............................................................................ 68

4.4.1.3 Vodacom Creating Value for Shareholders ................................................................. 72

4.4.2 Vodacom‘s Strategic Plot ............................................................................................... 73

4.4.3 Vodacom‘s market share ................................................................................................ 74

4.4.4 Revenue Growth Driven by Subscriber Growth ............................................................. 78

4.4.5 Vodacom‘s strategic investments ................................................................................... 80

4.5.1 Home market strategy..................................................................................................... 81

4.5.2 Geographical expansion curtailed .................................................................................. 81

4.6 MOBILE TELEPHONE NETWORKS (MTN) (PTY) LTD ............................................ 83

4.6.1 MTN‘s ownership structure ............................................................................................ 83

4.6.1.1 Strategy and management ............................................................................................ 85

4.6.2 MTN‘s Subscriber Growth ............................................................................................. 85

4.6.3 MTN‘s market share ....................................................................................................... 86

4.6.4 MTN‘s strategic plot....................................................................................................... 87

4.6.4.1 Home market strategy.................................................................................................. 87

4.6.4.2 Geographical expansion not curtailed ......................................................................... 89

4.6.5 MTN‘s Strategic Investments ......................................................................................... 90

4.6.5.1 Orbicom ....................................................................................................................... 90

4.6.5.2 MTN Nigeria ............................................................................................................... 91

4.7 Conclusion ......................................................................................................................... 91

Chapter 5 ................................................................................................................................. 92

Geographical expansion into Nigeria ...................................................................................... 92

5.1 Introduction ....................................................................................................................... 93

5.1.1 Nigeria and its telecommunications sector in 2000 ........................................................ 93

5.1.2 Structure of Nigeria‘s telecommunications sector .......................................................... 94

5.1.3 World‘s First Spectrum Auction Successful! ................................................................. 96

5.2 The growth of the telecommunications market ................................................................. 96

5.2.1 The players in the Nigerian telecommunications ........................................................... 99

5.2.1.1 MTN Nigeria – First Mover Advantage Implications ................................................ 99

5.2.2 Ownership Structure ..................................................................................................... 100

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5.2.3 Expanding Footprint ..................................................................................................... 100

5.2.4 MTNN‘s Strategic Plot ................................................................................................. 101

5.3 MTN‘s market share ........................................................................................................ 102

5.3.1 Revenue Driven by subscriber growth ......................................................................... 103

5.3.2 MTN Nigeria cash cow ................................................................................................ 105

5.3.3 Strategic Investments in Nigeria .................................................................................. 106

5.3.4 MTN more profitable than Vodacom- March 2004 .................................................... 107

5.4 Vodacom‘s cautious strategic plot ................................................................................... 108

5.4.1 Challenging rival MTN ................................................................................................ 109

5.4.1.1 Vodacom‘s Strategy in Nigeria ................................................................................. 110

5.4.1.2 Shareholders uncomfortable with Nigerian Investment ............................................ 111

5.4.1.3 Late entrant into Nigerian market .............................................................................. 112

5.4.2 Vodacom‘s unsuccessful bid for Econet Wireless Nigeria........................................... 113

5.4.2.1 Other suitors for Econet Wireless Nigeria ................................................................. 114

5.4.2.2. EWN board accepts Vodacom‘s offer, ..................................................................... 116

5.4.2.3 Vodacom terminates agreement with VEE Networks ............................................... 117

5.4.2.4 Management shake-up at Vodacom .......................................................................... 117

5.4.2.5 Econet Wireless International suing Vodacom ......................................................... 119

5.4.2.6 Vodacome Vodago .................................................................................................... 119

5.4.2.7 Belated lift of ban ...................................................................................................... 120

5.5 Conclusion ....................................................................................................................... 121

Chapter 6 ............................................................................................................................... 122

Comparative Analysis ........................................................................................................... 122

6.1 Introduction ..................................................................................................................... 123

Sources of competitive advantage ......................................................................................... 123

SWOT analysis of Vodacom and MTN (1993-2001) ........................................................... 124

6.2 Comparative Analysis ..................................................................................................... 132

6.2.1 Shareholding and Strategy ............................................................................................ 132

6.2.2 Entrepreneurial and enterprising management ............................................................. 137

6.2.3. Micro-culture ............................................................................................................... 140

6.2.4 Organising for geographical expansion ........................................................................ 141

6.3 CONCLUSION ............................................................................................................... 144

6.3.1 Measuring International Diversification ....................................................................... 146

6.3.2 Measuring Performance ................................................................................................ 148

6.3.2.1 MTN‘s Critical Success Factors ................................................................................ 149

6.3.2.1.1 Organizational Integration ...................................................................................... 150

6.3.2.1.2 Leadership .............................................................................................................. 152

6.3.2.1.3 Managing strategic change ..................................................................................... 153

6.3.2.1.4 Cultural change ....................................................................................................... 153

6.3.2.1.5 Learning organisation- TCB and Innovation .......................................................... 154

6.3.3 Lessons for corporate strategy and decision making .................................................... 157

References ..........................................................................................................................160

Annexture: Comparative Financials ...................................................................................179

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LIST OF TABLES

Table 1 Total number of Mobile subscribers ............................................................... 65

Table 2 Operators ARUP ............................................................................................ 66

Table 3 Cumulative Capex in SA and Africa ............................................................. 67

Table 4 Operators Market Share ................................................................................. 75

Table 5 Revenue, Subscriber and EBITDA Growth .................................................. 78

Table 6 Mobile data revenues ..................................................................................... 79

Table 7 Vodacom‘s revenue and EBITDA ................................................................. 79

Table 8 MTN‘s subscriber growth .............................................................................. 86

Table 9 Africa‘s tele-density comparison 1999 .......................................................... 93

Table 10 The growth of mobile in Nigeria ................................................................. 97

Table 11 Swot Analysis of Vodacom and MTN ....................................................... 126

Table 12 Comparative Summary of Key Financial Indicators 2001-2004 ............... 128

Table 13 Summary Analysis of Key Factors ............................................................ 133

Table 14 Vodacom and MTN subscriber growth Sept 08 ........................................ 134

Table 15 Selected mobile operator presence in Africa 2005/12/31 .......................... 135

Table 16 MTN vision ................................................................................................. 142

Table 17 Proportionate Subscribers ........................................................................... 148

Table 18 MTN‘s Growth .......................................................................................... 149

Table 19 MTN‘s Critical Success Factors ................................................................ 150

TABLE OF FIGURES

Figure 1 Analytical framework influencing diversification ....................................... 29

Figure 2 Sources of competitive advantage ............................................................... 31

Figure 3 How firms build competitive advantage ...................................................... 32

Figure 4 How constituents affect a company‘s competitive advantage ..................... 33

Figure 5 A systematic model of competitive advantage ............................................ 45

Figure 6 South Africa's Telecommunications Structure ............................................ 60

Figure 7 Growth of the SA Telecommunications Industry ........................................ 64

Figure 8 Mobile Teledensity in SA ........................................................................... 65

Figure 9 Vodacom‘s Organisational Structure ......................................................... 69

Figure 10 First mover advantages .............................................................................. 71

Figure 11 Operators Market Share 1999-2003 ........................................................... 77

Figure 12 Vodacom‘s market strategy ........................................................................ 82

Figure 13: MTN Group Structure ............................................................................... 84

Figure 14 MTN‘s market strategy ............................................................................... 88

Figure 16 Market Share in Nigerian Telecoms ......................................................... 104

Figure 17 Entering a Competitors Cell ..................................................................... 112

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Chapter 1

9

1. INTRODUCTION AND PROBLEM STATEMENT

1.1 Background of the research

This case study is a research project that traces the evolution rivalry between

Vodacom and MTN in the South African market from 1993 to 2001 and then traces it

to the Nigerian telecommunication market in 2003-2004 when Vodacom made an

attempt to enter that market; it also assesses the business factors and environmental

variables that influenced the strategic directions of the two competing firms.

Specifically, this paper investigates the internal and external strategic choices that the

two SA telecommunications firms made to adapt to changes and to respond to quickly

in order to create or sustain competitive advantage, in a telecommunications industry

where they faced important challenges from new technology, liberalization and the

convergence of markets.

1.2 Drivers of Growth

Chan-Olmsted and Jamison (2001:318) have asserted that the drivers of growth for

the telecommunications industry are the expansions both of its products and

geography. Once a geographically-bound voice transmission service provided over

specialized wire based networks, telecommunications was now part of a worldwide,

integrated communications system in which voice, data, and video were transmitted

and transformed over integrated wire and wireless networks connected by network

and customer devices. That integration has redefined markets and products and

changed how rival companies, like MTN and Vodacom in this case study, compete.

1.2.1 Competing by Connectivity and Functionality

Chan-Olmsted and Jamison (2001:318) have further asserted that convergence has

dramatically changed the role of competing telecommunications companies such as

Vodacom and MTN. Instead of being geographically based and hardwired for voice

service like Telkom, they now competed on the basis of coverage and functionality.

Thus, the degree and quality of access and the variety and differentiation of features

have become the strategic focus. Coverage and functionality were interrelated because

of network effects, network providers became more attractive to customers when they

were able to deliver a critical mass of connected customers and content

10

providers/packagers, and vice versa. The critical mass, in turn, allowed the network

providers to exploit scale economies and develop and market viable features that

made the network more valuable for these customers.

While connectivity and functionality were becoming the basis of competition, Chan-

Olmsted and Jamison (2001:319) assert that the means of transmitting and switching

communications were becoming increasingly substitutable, creating pressure for price

competition. Sappington and Weisman (1996) and Huber et al. (1993) describe how

cable television networks, satellites, fiber optics, copper wires, cellular and PCS

mobile radio, and numerous other networks were substitutable for some services.

Broadcast, circuit switching, and various cell-based technologies, such as packet

switching, were also substitutable for some services. As the mobile industry grew in

South Africa during the 1993-2001 periods as well as in Nigeria from 2001, the

number of mobile telephones exceeded the number of wire-line telephones and also as

voice over the Internet grew in popularity; customers were substituting e-mail and

voice over the Internet for voice telephone calls over traditional networks.

1.2.2 Competing Under New Rules, New Technology and New Demand

An industry can be defined as global if there is some competitive advantage to

integrating activities on a worldwide base. Liberalization, privatization, and a series of

international reciprocal agreements have unleashed industries which had been held to

traditional boundaries that were nearly 100 years old, and initiated new rules that have

created a favorable environment for globalization. Technological development,

customer demand, and multilateral competition (Jamison, 1999a) in the new

converging market are pushing further the strategic importance of globalization.

1.2.2.1 Liberalisation and Privatisation

While the controlled liberalisation of the South African market in 1994 meant new

business opportunities for Vodacom and MTN, it also translated to greater

competition and possibly (in South Africa‘s case) higher profits for the incumbent

telecom service provider, Telkom, through its 50 % share holding in Vodacom (Oh,

1996). Liberalization and privatization in the early 1990s created new strategic

11

challenges for traditional telecommunication companies from developed countries and

developing countries. Many of the new market opportunities were in developing

countries, like South Africa and later Nigeria; the latter was viewed as belonging to

that group of countries that lacked strong, stable legal and regulatory institutions and

had business practices unfamiliar in most developed countries.

As a result, companies from developed countries, Vodafone in this case study,

adopted an entry strategy into the South African market, which allowed them to

acquire local expertise and that decreased the probability and cost of expropriation of

investment. Such strategies included selecting projects with fast payback, selecting

well-connected local partners, and entering markets through alliances rather than

through direct investment (Levy and Spiller, 1996; Oh, 1996; Whalley and Williams,

2000; Henisz, 2000). But the operative word for Vodafone, hence Vodacom‘s as well,

in the developing markets was ‗caution‘ as was the case in Nigeria.

1.2.2.2 International Reciprocity

The impact of liberalization and privatization of many telecom services in the global

market was enhanced further by the recent reciprocity agreement in this industry

(Guy, 1997; Flanigan, 1997). The implementation of the World Trade Organization

(WTO) Basic Agreement on Telecommunications and the 1997 FCC Benchmarks

Order substantially reduced the settlement fees that US carriers pay foreign

companies to complete calls from the US. (These fees had been set under an

international settlement system to compensate countries for handling each other‘s

traffic and for any imbalance in the volume). Before the Benchmarks Order and the

WTO Agreement in 1996, the average price of an international long distance call

originating from the United States was 74 cents per minute. By 1999, it fell 25 per

cent to 55 cents per minute (FCC, 2000). In some parts of the world, fees already have

plunged as much as 80 per cent (Reinhardt et al., 1999).

1.2.2.3 Technological Development

Technology change also drives the globalization of telecommunications. Chan-

Olmsted and Jamison (2001:321) believe it has altered not only the types of

telecommunications services available but also the Industry‘s operation/production

12

cost structure, demands from its clients, degree of product substitution, and ability in

attracting capital investment. Technology change often lowers prices and creates

higher demand for both consumer and business services, thus facilitating the growth

of the telecommunications industry in the domestic as well as global market.

Furthermore, technology is enabling the dismissal of time and distance and re-

orienting telecom pricing toward a volume or bandwidth principle. For example,

distance means nothing for Internet communications and is losing its meaning in

mobile communications. Vodacom‘s and MTN‘s expansion has been driven by

technological partnerships and this will be examined in depth in chapters 4 and 5.

1.2.2.4 Growth of SA Multinationals and Multilateral competition

As the environment of the telecom market continued to change, the nature of demand

for telecom services changed as well. Multinational Corporations demanded better

communication services to connect their expanding local branches. In fact,

telecommunications companies were destined to operate globally as they responded to

the continuous growth of multinational corporations, which increasingly commanded

worldwide, integrated, and seamless communications networks. According to

Gillward (2007) South African telecommunications investment across the African

continent, from 1999, must be the most significant investment by any single country

in Africa. Finally, the increasingly blurred industry boundaries signaled a trend

toward multilateral rivalry and collaboration as competition in one industry or in one

area spilled over into another (Greenstein and Khanna, 1997; Jamison, 1999a).

Research has shown that multilateral competition in related product markets globally

was related positively to firm performance (Geringer et al., 1989). It was suggested

that an international diversification strategy, like the one MTN chose to pursue,

outperformed that of product diversification alone, Vodacom‘s chosen strategy.

(Sambharya and Hand, 1990). Kashlak and Joshi (1994) have specifically observed

the emerging trend of telecom companies venturing into both product and

international diversification

1.3 Statement of problem

Competing firms face a challenge of growth either by product or geographical

expansion. This study analyses the rivalry in the growth of two large South African

telecommunications companies and the effectiveness of their geographical expansion

13

as evidenced by the company performance in Nigeria; the comparative analysis

provides lessons for corporate strategy and decision making.

1.4 Objectives

This research has three goals:

Firstly it seeks to examine rise to the evolution of rivalry between Vodacom

and MTN in the period 1993 to 2001

Secondly it will examine effectiveness of Vodacom and MTN in executing a

geographical expansion as illustrated by the reference to Nigeria

Lastly it will look at the lessons this expansion provides for corporate strategy

and decision making

Carrying out the comparative analysis of the performance of Vodacom and MTN

examined the following issues in a systematic way:

Structure of diversification

Shareholding and strategy

Management

Micro environment

1.5 Significance of the research

This study will investigate the internal and external strategic choices that Vodacom

and MTN made to adapt to changes and to respond to quickly in order to create or

sustain their competitive advantage. In particular they faced important challenges

from new technologies, liberalization and the convergence of markets. Initially they

focused on the new market in South Africa and new businesses emphasizing their

plans to become major players in the South African market. However after 2001, with

the entry of Cell C into the market, they refocused and restructured their businesses in

order to increase their value and improve their competitiveness as evidenced by their

entry into the Nigerian market, arguably the largest telecoms market in Africa. This

research will provide a changed insight into the specific strategic projections, strategic

plots, as well as strategic investments that MTN and Vodacom undertook to maintain,

sustain and/or create new sources of competitive advantage.

14

1.6 Research methodology

In this section, the case study methodology to be followed in the research project is

described. The following procedures will be adopted in conducting this research

1.6.1 Selection of Suitable Research Methodologies

It is essential to find suitable research methodologies for data collection and data

analysis. According to Leedey (1993:121), methodology is the operational framework

within which the facts are placed so that their meaning may be seen more clearly.

When selecting a methodology, the data to be collected should be considered, because

data and methodology are inextricably interdependent and the research methodology

adopted for a particular problem must always recognize the nature of the data

amassed in the resolution of that problem. It is therefore necessary to investigate the

data to be collected, as the nature of the data and the research problem dictate the

research methodology. Given the multifaceted nature of this research project, the case

study methodology was selected.

1.6.2 Literature review

An in-depth literature study will be conducted in order to identify the keys factors

regarding the main problem. Information will be gathered from confidential company

documents, data from resources, industry experts, libraries, the internet, newspaper

articles, journals, magazines and knowledgeable people in companies as well as from

the Link Centre at the Wits Business School in Parktown, Johannesburg.

1.6.3 Theoretical Delimitation

This research cannot attempt to cover all aspects of the problem, as the topic is

subjective and prone to broad interpretation. It assesses the business factors and

environmental variables that influenced the strategic directions of the firms.

Specifically, this research investigates the sources of competitive advantage of rival

firms and how firms respond to a competitive challenge.

15

1.6.4 Key assumptions

This section of the research sets out key assumptions made by the researcher during

the investigation. The research is focused on competitive rivalry between, Vodacom

and MTN, and also explores those aspects concerned with competitive advantage, in

South Africa, as well as how this subsequently played itself out in Nigeria.

1.7 Delimitation of the research

This research is not necessarily applicable to all industries. It is limited to the ways in

which two emerging multinational South African telecoms companies used the

competencies they acquired while competing locally to create competitive advantage

in emerging markets. Delimitation of the research serves the purpose of making the

research topic manageable from a research point of view. The omission of certain

topics and areas does not imply that there is no need to research them. The study was

confined to MTN and Vodacom.

1.8 Geographical demarcation

This case study has been restricted to South Africa as well as Nigeria. References are

made to other countries only in respect of the investments that MTN and Vodacom

have made in those countries.

1.9 Layout of the study

The dissertation has been divided into the following chapters:

Chapter 1: Introduction

Chapter 2: Literature Review

Chapter 3: Research Methodology

Chapter 4: Background to MTN & Vodacom; the evolution of corporate

rivalry & expansion strategy

Chapter 5: The geographical expansion into Nigeria

. Chapter 6: Comparative Analysis and Conclusion

16

Chapter 2

Literature Review

17

2.1 Introduction

This study examines the state of the South African telecommunications market and

assesses the business factors and environmental variables that influenced the strategic

directions of Vodacom and MTN two rival South African firms competing in the

converging global telecommunications market. Specifically, this paper investigates

the forces that have contributed to the globalization of telecommunications services,

the major telecommunications strategies that the two rivals pursued and the factors

that might have contributed to the outcome of these strategies. The nature of

competition today in the global telecommunications industry seems to center around

market activities that aim at gaining competitive advantages through strategic

combinations of resources and presence in multiple products and geographical areas.

Integration of competing technologies and the development of standardization that

facilitate interoperability between these systems, along with the alignment of goals,

information, services, and operations between firms in alliances are the keys to

competitive advantages in this technology-driven industry.

2.2Globalizing Telecommunications Services: The Strategic Alliance Approach

A telecom company has two distinct choices to pursue growth in the global market. It

can either enter directly by building the product/service offerings with its own

resources in the target country, or it can collaborate with other firms (Joshi et al.,

1998). The ‗new entrant‘ globalization strategy gives the telecommunications firm the

freedom of choice in markets and technologies. However, it is a slower and more

costly process, inevitably lacks initial brand name recognition, lacks local political

and business expertise, and increases risk of expropriation of investment. This

approach is especially undesirable where time and speed are critical and where

resource commitments in a particular market, segment, or technology might be too

risky a pursuit for a company by itself, as in the case of the global telecom market

(Joshi et al., 1998). A telecommunications company may also enter a target market

through a strategic alliance relationship with other firms. The phrase ‗strategic

18

alliance‘ has been used very frequently in the news reports of today‘s

telecommunications industry. A strategic alliance is a business relationship in which

two or more companies, working to achieve a collective advantage, attempt to

integrate operational functions, share risks, and align corporate cultures. The degree

of strategic alliances may range from a simple licensing agreement, to joint marketing

effort, to establishing a consortium, to combining resources for joint ventures, to the

ultimate form of mergers and acquisitions. Companies may be interested in alliances

to capitalize on different expertise, build strategic synergies, mitigate risks, speed up a

venture with combined resources, and develop scope economies (Chan-Olmsted,

1998)

2.2.1 Strategic Patterns: Competition through Alliances

To explore the strategic patterns of the major telecommunications companies in the

global market, this study will subscribe to the generic strategic taxonomy for

analyzing industries and competitors proposed by Porter management framework that

is especially appropriate for studying firms‘ competitive behavior in a complex,

uncertain market environment, as in the case of the converging global telecom

industry (Hax and Wilde, 1999). Porter suggested that most competitive actions fall

into one of the three generic strategies: cost leadership, differentiation, and focus

(Porter, 1980). By achieving the lowest cost structure in the industry, a company can

either reduce its prices or keep the increased profits to invest in research to develop

new and better product and/or to market their products more vigorously. The

development of scale economies often contributes to a company‘s ability to

materialize low cost operations.

The second strategic approach, differentiation, involves making a product/service

appear different in a certain aspect (e.g., design, reliability, and service) in the mind of

the consumer through mostly a marketing/branding process. A focus strategy is when

a company concentrates on a market area, a market segment, or a product. The

strength of a focus strategy is derived from knowing the customer and the product

category very well so as to establish a ‗franchise‘ in the marketplace (Porter, 1980).

Hax and Wilde (1999), while recognizing the influential strategic framework

espoused by Porter, argued that the generic strategies do not describe all the ways

19

companies compete in the current environment. Based on the research of more than

100 companies, they proposed a new business model, the ‗triangle‘ strategic options

for firms that compete in the current economy. These potential options include ‗best

product,‘ ‗customer solutions,‘ and ‗system lock-in.‘ The best product approach is

similar to Porter‘s cost leadership or differentiation strategy with a focus on ‗product

or service.‘ That is, a company may choose to develop the ‗best‘ product by

aggressively pursuing economies of scale, product and process simplification, and

significant product market share that allow it to exploit experience and learning

effects. A company may also try to develop the ‗best‘ product in the consumer‘s mind

by differentiating itself through technology, brand image, additional features, or

special services. The customer solutions strategic option focuses on ‗customers‘ by

anticipating, studying, and offering a bundle of products or services that are

customized to satisfy most if not all needs of a specific target group. Finally, the lock-

in strategic option emphasizes ‗market collaborators‘ instead of the product or the

customer. In this case, the company actually concentrates on nurturing, attracting, and

retaining complementors (e.g., cell phone manufacturers and mobile networks),

providers of products and services that add economic value to its products or services

(Hax and Wilde, 1999). The three alternatives have different scope and scale

emphases. At the extreme end of the best-product position, scope may be trimmed to a

minimum to develop scale economies and thus enable low cost. As a company moves

to differentiate or bundle products, its scope is necessarily expanded. When a

company reaches the stage of including complementors, it would have moved from a

scale to a scope emphasis.

2.2.1.1 Strategic Pattern I: Focus

According to Chan-Olmsted and Jamison (2001) there appears to be two segments of

telecom companies that have approached the market with more of a ‗focus‘ strategy.

The first group involves public telecom operators such as NTT and China Telecom.

Either because of the recency of restructuring or the regional uniqueness, these major

Public Telecoms Operators (PTOs) center their growth activities in the Asian region

(i.e., a ‗geographical focus‘ strategy), unlike their European counterparts such as

Deutsche Telekom and Telefonica, which have sought expansion opportunities not

only in EU but also in other high-demand areas such as the US and the Americas. The

20

other group that has focused on a particular market segment is the mobile cellular

operators. While many traditional wireline service providers are expanding the scope

of their services to include wireless communications networks, mobile

communications companies such as Vodafone AirTouch and Mannesmann have

stayed in this particular product segment. AT&T is attempting to develop focus by

breaking itself into a family of four companies — AT&T Wireless, AT&T

Broadband, AT&T Business, and AT&T Consumer (Rosenbush, 2001).

2.2.1.2 Strategic Pattern II: Best Product-Differentiation

Many telecom service providers have attempted to develop brand assets and

marketing programs that would differentiate them in this converging global market

according to Chan-Olmsted and Jamison (2001). Because of the integration of

services and geographical markets, the new generation of telecom companies needs to

establish a market position that is associated with a growing market area and steers

clear of a regional utility label. In other words, the new telecommunications

multinationals are avoiding being linked with brands that highlight a service (e.g.

telephone) combined with a geographic component (e.g., British). A move from

British Telecom to BT is to limit potential constraints on its ‗brand elasticity‘

(Samzelius and Camman, 1996). Many of the key players continue to distant

themselves from the old economy image and begin to build differentiated brand

images that stress leadership in high growth areas, especially in mobile

communication and the Internet. For example, France Telecom implemented a major

branding campaign that promoted a new logo and visual identity for its worldwide

communications and branded the international carrier as an innovative, customer-

oriented Net company, delivering services focused on wireline, wireless and

availability of multimode connections (e.g., telephone, cable, and mobile connections)

for a seamless telecom network to customers, mostly through alliances, has also

become a differentiated point for companies like MCI WorldCom and AT&T Internet

convergence (France Telecom, 2000).

2.2.1.3 Strategic Pattern III: Customer-Solutions Orientation

21

Many of the global telecom companies have adopted a customer-solution strategy,

attempting to provide the connectivity/coverage and features that are attractive to the

customers, Chan-Olmsted and Jamison (2001) further assert. There are basically three

types of customers whose needs are driving multinational investments by

telecommunications companies. Large multinational customers often want a single

network to provide them with end-to-end telecommunications across multiple

countries (Kramer and NiShuilleabhain, 1997; Antonelli, 1997; Jamison, 1998). These

needs for smooth end-to-end networking drive telecommunications companies to

pursue local-to-global-to-local network strategies or local-to-regional-to-local

strategies. In fact, the emphasis on end-to-end coverage has pushed some

telecommunications companies to establish their own local networks where their

customers have business locations and connect these networks via their global or

regional network. Qwest and KPN in 1999 formed a joint venture to create a pan-

European IP-based fiber optic network linked to Qwest‘s infrastructure in North

America for data, voice, and video.

MCI WorldCom has invested extensively in building pan-European networks to

provide service. To stay competitive in the region, Telmex has made investments in

operators throughout the region including Guatemala (Telgua) and Puerto Rico

(Cellular Communications). A local-to-global-to-local network with facilities in

different regions will reduce a telecom company‘s reliance on incumbent phone

monopolies, enable it to deliver greater value and better quality of service control to

its customers, and improve the profitability of pricing and capacity decisions. The

importance of building such a seamless network often becomes an incentive for

alliances. For example, Concert, which includes BT and AT&T, is an alliance formed

to pursue a local-to-global- to-local strategy. In addition to the demand of end-to-end

network, customers no longer view wireline telephone, wireless telephone, and

Internet as separate products. As a result, some telecommunications companies are

bundling the products into a single price, or giving customers discounts for buying

more than one (William and Willow, 1997). For example, BellSouth offers a single

bill for wireless, Internet, and wireline products. The focus here is on the customer‘s

economics, rather than the product‘s economics. And telecom services bundling

would likely bring positive impacts on the customer economics either by lowering the

customer‘s internal costs or by allowing the customers to have higher revenue. It was

22

estimated that as the Internet continues to drive the growth of the global

telecommunications industry, so-called ‗data‘ would constitute 80 per cent of traffic

and voice the remaining 20 per cent of the total by the year 2010 (Raphael, 1998).

Following the consumer demand, many telecom players have ventured into this high

growth area. MCI WorldCom has various online joint ventures, including one with

Yahoo in Internet access service (Warner, 1998). British Telecom and AT&T through

the alliance of Concert, the joint venture that provides telecom services to

multinational companies, is investing $2 billion over three years on the development

of e-commerce services (British Telecom, 2000). Deutsche Telekom has just agreed

to purchase Debis System, a leading e-commerce and corporate communications

software company (Deutsche Telekom, 1999). And Telefonica has invested heavily in

content development, aiming to become a key player in the creation and distribution

of content across markets and systems (e.g., via its Internet service provider, Terra

Networks SA; TV services; and its cell-phone unit, Telefonica Moviles, in addition to

the traditional wire network) (Telefonica Telecom, 2000). A customer-solutions

strategic option calls for the development of partnerships and alliances, linking

various firms‘ ability to complement a customer offering.

MCI WorldCom is an example of expanding horizontally across a range of related

services for the targeted customer segment, or bundling. Chan-Olmsted and Jamison

assert (2001) that through a series of acquisitions such as Uunet Technologies, MFS

Communications, Brooks Fiber Communications, and GridNet, it is able to bundle

services such as local, long-distance, Internet, and advanced services together to

reduce complexity for the customer. To develop a pan-European network, BT has

purchased 26 per cent of Cegetel in France, entered a joint venture, Viag, in Germany,

and participated in joint ventures with Telfort in The Netherlands, Albacom in Taly,

Airtel in Spain, Ocean in Ireland, Telenordia in Sweden, and Sunrise Communications

in Switzerland (Valletti and Cave, 1998; British Telecom, 2000). Also, instead of

setting up a Spanish portal internally, Telmex entered a joint venture with Microsoft

to develop a region-wide Spanish-language portal, counting on Microsoft‘s extensive

software applications, portal applications and strong branding and its own regional

expertise and extensive access network (Hoover, 2000). To match customers‘

communications needs, scale also becomes essential for the telecom multinationals.

23

Scale involves both customer base and geographic reach. Customer base is the

number, size, and type of customers that connect directly with the company‘s

network. Customer base is important because it determines a network‘s value or

strength for making markets and interconnecting with other networks (Kramer and

NiShuilleabhain, 1997; Yoffie, 1997) For example, Frontier Communications began

as a local exchange company in New York and leveraged its local customer base to

succeed in long distance. In 1997, Frontier provided local service in combination with

long distance service, Internet, wireless, or calling card services to 40 per cent of its

local telephone customers (Frontier Corporation, 1998). Incumbent local exchange

companies in Finland had similar success when they began competing in long

distance. Southern New England Telephone in the US had a similar experience when

it entered the long distance market (Jamison, 1999a).

2.2.1.4 Strategic Pattern IV: Lock-in Strategy

Because the epitome of this strategy is achieving the de facto proprietary standard, it

appears to fall short for the telecom market. In this industry, system lockin is difficult

to achieve because of open standards (e.g., TSP/IP, Java, RJ11 jacks), network

interconnection requirements as mandated in the 1996 Act and by the EU (e.g., per

EU, Vodafone has to allow open access to its network for 3 years), competitor

propensity to compensate for lock-in (e.g., subsidization of mobile handsets in the

US), and rapid technological change (e.g., innovation destroyed dBase‘s lock-in).

Positive feedback is important in some systems (e.g., Instant messenger) and may

create a tipping effect (e.g., Acrobat), but has only minor effects in other systems

(e.g., mobile phones). However, mergers and alliances allow companies to internalize

positive feedback and so profit from integrating across markets. Also, creating open

standards in all components of the system (e.g., IBM‘s open PC), except your own

(e.g., Windows), allows the proprietary component provider to extract monopoly

profits from a large market if the system achieves market dominance.

24

2.2.1.5 Strategic Pattern V: Strategic Alliances for Scale (Cost Leadership),

Speed, and Scope

The strategies presented so far are not mutually exclusive and may be combined

depending on a company‘s particular circumstances according to Chan-Olmsted and

Jamison (2001). Note that one central theme runs through all options presented so far.

It is the strategy of forming alliances to achieve size, speed, and/or scope in the

market. Why and how do telecoms multinationals embrace globalization with such an

alliance emphasis? Oh (1996) suggested that the strategic objectives of global

alliances in this market are: (1) to reduce risks and entry costs into new markets,

especially in regional trade blocks, through joint production and marketing efforts, (2)

to improve global competitiveness with cost-effective procurement of critical

commodities or components and produce economies of scale through global alliances,

(3) to co-develop and co-produce high-tech products more efficiently and effectively,

and (4 benefit from the advantages of pooling limited resources. Joshi et al. (1998)

also found that most strategic alliances occurred between telecom firms that have

broad product lines and focus on product innovation and new market development.

They also discovered that most of the alliances which took place outside the US were

within industry, while most alliances that occurred in the U.S. were inter-industry.

Such developments may reflect the domestic deregulation in the US on cross-market

competition and trends toward international privatization and deregulation of national

telecom industries. We will now discuss the different alliance approaches in gaining

scale, speed, and/or scope advantages.

2.2.1.6 Non-Structural Alliances

The telecommunications industry has seen the development and collapse of many

major alliances such as Global One and World Partners/Unisource. Such alliances are

easier to set up and undo than a merger, and are often established to create strategic

synergies, pool resources, gain access to technology, procure critical

components/production /marketing assets/ relationship, and mitigate risk. Through a

non-structural alliance, partnerships in the forms of marketing agreements, licensing,

joint ventures, and partial equity often involve major global telecommunications

players and shape the direction of competition in the market. Oh (1996) has stressed

25

that telecom multinationals select the type of alliance depending on their relative

positions with respect to size, profitability, capital structure, and R&D capability. He

argued that the more profitable, heavily invested in R&D a firm is, the more self-

sufficient it is and thus more likely for it to rely on non-structural alliances. Size and

capital structure also influence a firm‘s alliance options and flexibility.

2.2.1.7 Structural Alliances

Acquisition occurs when one company acquires the operating assets of another in

exchange for cash, securities, or a combination of both. Typically the acquired

company continues to exist, while a merger is a combination of two corporations in

which only one corporation survives. In a merger, the acquiring company assumes the

assets and liabilities of the merged company. A merger differs from a consolidation,

which is a business combination whereby two or more companies join to form an

entirely new company. Theoretically, consolidation is a friendlier, cooperative deal

than either a merger or acquisition because it provides equal footing in the new firm

for each corporation. Strategic alliances through mergers and acquisitions present an

especially attractive avenue for the telecommunications industry since the

multinationals will be able to integrate different communications segments quickly,

capture a developed customer base, consolidate smaller niches, remove a rival and

prevent competition from doing so, and accelerate the implementation of new

technologies with combined resources. In sum, such integration a preferred method of

growth when speed and scale economies are the key to success, as it is in today‘s

information marketplace. To quickly establish a presence and leadership in the

converging telecommunications market is another important incentive for many

companies pursuing Merger and Acquisitions activities. For example, attempting to

establish an instant presence in the European wireless market, France Telecom

proposed to acquire E-Plus, one of the remaining large mobile communications

companies in the region (Young, 2000). To enter the growing US telecom market,

Deutsche Telekom has tried unsuccessfully to acquire both Qwest Communications

and US West (Shinal, 2000).

2.3 Geographic and Product Diversification

26

Diversification has had a rich tradition as a topic of research since the late 1950s

(Ansoff, 1958; Chandler, 1962; Gort, 1962). Booz, Allen, and Hamilton (1985)

defined diversification as a means of spreading the base of a business to achieve

improved growth and/or reduce overall risk that may take the form of investments that

address new products, services, customer segments, or geographic markets. Salter and

Weinhold (1979) proposed three general but related models in the discussion of

corporate diversification strategies. The product/market-portfolio model emphasizes

the attractiveness of the target market in terms of attributes such as market size,

growth rate, and profitability. The strategy model stresses the interrelationship

between the core-business market and the target market, which is the emphasis of this

study. The third approach, risk/return model, derives mainly from financial theories

and reflects the concern and interest of investors. Studies of diversification have

generally focused on one or more of the three aspects of diversification: (a) the

―extent‖ (i.e., less or more diversification), (b) the ―directions‖ (i.e., related or

unrelated diversification), and/or (c) the ―mode‖ (i.e., diversification via internal

expansion/ mergers and acquisitions or choices of mergers and acquisitions [M&A]

strategy) of diversification (Qian, 1997; Sambharya, 1995).

Diversification strategy may be studied from either the ―product‖ or ―geographic‖

perspective. More recent studies in product diversification often investigate the

directions of diversification as related or unrelated (Qian, 1997; Rumelt, 1984). Some

have argued that related diversification might exploit economies of scope, product

knowledge, and other relevant experience, thus reducing transaction costs and

improving performance (Grant, 1988; Williamson, 1981). Others have found no

differences or the opposite (Grant & Jammine, 1988; Michel & Shaked, 1984). In

general, the resource-based view of strategic management strongly argues for

strategic relatedness within a conglomerate when it comes to diversification strategy

(Chatterjee & Wernerfelt, 1991).

International market or geographic market diversification may be defined as when a

firm is horizontally and vertically integrated across different national submarkets

(Hisey & Caves, 1985). The benefits of diversifying internationally originate from

two sources—greater opportunities for higher returns and lower correlations of assets

across countries (Cavaglia, Melas, & Tsouderos, 2000). Research has shown that

27

international diversification provides firms with significant advantages, including

better firm performance (Hitt, Hoskisson, & Ireland, 1994; Tallman&Li, 1996). Some

studies, on the other hand, concluded that performance declines are associated with

increased international diversification, especially when the multinational firms‘

expansion is in developing countries (Collins, 1990). The inconclusive results may be

due to the notion that the relationship between international diversification and firm

performance was curvilinear, as increased complexity of international operations and

exposures to uncertainties, coupled with risk in consumer tastes, regulations, or access

to distribution, may lead to performance declines (Geringer, Beamish, & da Costa,

1989; Hitt, Hoskisson, & Ireland, 1994; Mitchell, Shaver, & Yeung, 1992).

As for the interrelationship between international and product diversification, some

research has shown that both diversifications individually have no effect on firm

performance, but their interaction leads to a substantial increase in firm performance

(Sambharya, 1995). Hitt, Hoskisson, and Ireland (1994) found that geographical

diversification improves performance in firms that are highly diversified in terms of

product markets. In fact, Kim, Hwang, and Burgers (1989) concluded that the

performance of related and unrelated product diversification strategies depends on the

degree of international diversification. In terms of the directions of diversification,

some have advocated that relatedness is especially important, as the utilization of core

skills, know-how, and management resources is necessary in reducing uncertainties in

the process of internationalization (Qian, 1997). Many have stressed that

organizational learning can be used to counter cultural barriers when diversifying

internationally, and firms that diversify internationally can exploit economies of scale

and scope, resource sharing, and core competencies across related business units (Hitt,

Hoskisson,&Ireland, 1994; Shambharya, 1995). Nevertheless, studies have also

indicated an inverse relationship between product and international diversification

(Buhner, 1987; Madura&Rose, 1987).As both types of diversification involve

substantial risks, it is unlikely that a firm would take on both strategies simultaneously

(Shambharya, 1995). In sum, geographic and product diversifications interact with

one another and, individually and collectively, influence differential firm performance

(Grant, 1987; Palepu, 1985).

28

2.3.1 Relatedness and Complementary Resource Alignment

The type of diversification one would expect to result from a resource depends on its

specificity within a particular industry (Chatterjee & Wernerfelt, 1991). The products

of global media conglomerates are quite different from the typical focus of many

diversification studies, which examined mostly manufacturing and, occasionally,

service firms. The major distinction between media and non-media products rests in

the unique combination of the following media characteristics. First, media

conglomerates offer dual, complementary media products of content and distribution.

Second, media conglomerates rely on dual revenue sources from consumers and

advertisers. Third, most media content products are nonexcludable and nondepletable

public goods whose consumption by one individual does not interfere with its

availability to another but adds to the scale economies in production. Fourth, many

media content products are marketed under a windowing process in which content

such as a theatrical film is delivered to consumers via multiple outlets sequentially in

different time periods (e.g., pay per view, pay cable network, and broadcast network).

In a sense, the total potential revenue for such a content product depends on the total

number of and pricing at these distribution points. Finally, media products are highly

subjective to the cultural preferences and existing communication infrastructure of

each geographic market/country and are often subject to more regulatory control from

the host country because of their pervasive impacts on individual societies.

The listed characteristics of media products lead to a market environment in which

related product/geographic diversification as well as complementary resource

alignment are likely to be the preferred diversification strategy. For example, as the

intangible, content-based media product may be stored and presented in various

formats (e.g., print vs. electronic media), related product diversification that extends a

conglomerate‘s product lines into related content formats (e.g., owning a magazine

and an online content site) would likely benefit the conglomerate by enabling content

repurposing, marketing know-how, and sharing of production resources, thus leading

to superior performance. It is also likely for media conglomerates to seek out

distribution products that complement their content products and vice versa. Such a

resource alignment concept has been discussed extensively in many alliance

literatures, which emphasize the importance of accessing resources that a firm does

29

not already possess yet which are critical for improving its competitive position

(Barney, 1991; Das & Teng, 1998).

Figure 1 Analytical framework influencing diversification

Source: Chan-Olmsted and Chung (2003)

The symbiotic relationship between media content and distribution products presents

a classic case of resource alignment. The fact that an existing product may be

redistributed to and reused in different outlets via a windowing process reinforces the

advantage of diversifying into multiple related distribution sectors in various

international markets to increase the revenue potential for such a product. The dual-

revenue source mechanism would likely lead to related and complementary

diversification, as the larger aggregated number of subscribers/audience enhances a

conglomerate‘s ability to offer multinational corporations promotional outlets more

efficiently. The nature of public goods, on the other hand, encourages the geographic

diversification of content products, as the incremental costs are minimal for such

expansions. Finally, because of the importance of cultural sensitivity and

understanding of the regulatory environment, global media conglomerates are more

30

inclined to diversify into related product/geographic markets to take advantage of the

acquired local knowledge and relationships. The dependency on local

communication/media infrastructure may also lead to a diversification strategy that is

geographically related, as regionally clustered countries are often at similar stages of

infrastructure development, and clusters of media systems may lead to cost/resource-

sharing benefits.

2.4 Competitive Advantage

Following on from Chan-Olmsted and Chung‘s (2003) analytical framework

influencing diversification model above, this section will now examine how, as

Rindova and Fombrun (1999; 691) have asserted, competitive advantage develops as

firms like Vodacom and MTN and constituents strategically target each other in the

material and interpretational domains. Competitive advantage, they go on to add,

results both from actions initiated by firms and those taken by constituents in

response. Rindova and Fombrun (1999) see these actions as multidimensional in that

they affect outcomes in all four domains; they are also interconnected in that they

form multiple cycles of activities through which the four domains are continuously

constructed and reproduced. They therefore conclude that for these reasons,

competitive advantage is a systemic outcome, rather than an outcome of isolated

activities (Porter, 1985).

Competitive advantage, as Rindova and Fombrun (1999;693) further assert, derives

from activities that span the four domains of action described in Figure 2.2 These four

domains of the competitive terrain derive from two dimensions. The first dimension

distinguishes the material and interpretational domains. It contrasts the emphasis by

traditional strategy research on the role of material resources with the burgeoning

literature that highlights how individual, group, and industry-level interpretational

processes affect strategic interactions (Porac, Thomas, and Baden- Fuller, 1989;

Walsh, 1995). Cognitive simplification (Schwenk, 1984), competitive blindspots

(Zajac and Bazerman, 1991), competitive categorization (Porac and Thomas, 1990;

Reger and Huff, 1993; Lant and Baum, 1995), industry recipes (Spender, 1989),

industry mindsets (Phillips, 1994) are known to bias, constrain, channel, and

otherwise influence how managers perceive their environments and make strategic

choices

31

Figure 2 Sources of competitive advantage

(Source Rindova and Fombrun 1999)

In this view, the competitive terrain is defined (South Africa in Chapter 4 and Nigeria

in Chapter 5), not only by the resource conditions in various markets and potential

rents associated with them (Scherer and Ross, 1990; Barney, 1986b), but also by the

knowledge, expectations, and sensemaking of firms‘ managers and of constituents

that interact with firms in an industry. Sensemaking (Weick, 1995) (a term that MTN

and Vodacom interpreted differently as will be outlined in Chapter 6) in industries

comprises comprehending, understanding, explaining, attributing, extrapolating,

predicting (Starbuck and Milliken, 1988: 51) and—ultimately— deciding to engage in

exchanges and to allocate resources.

According to Rindova and Fombrun (1999) the second dimension divides the

competitive terrain into domains of action that fall either outside or inside a focal

firm. Resource-based theories, for instance, emphasize the importance of the internal

domain—firm-specific capabilities, knowledge, and assets—in creating competitive

advantage (Penrose, 1959) as was the case with Vodacom in South Africa and MTN

in Nigeria. Industrial economists point to external factors predominantly in a firm‘s

product market, such as product differentiation or market concentration (Scherer and

Ross, 1990). The external domain includes all constituents, who engage in exchanges

32

in product, factor, labour, and capital markets. It also includes institutional

intermediaries that transmit and magnify information about firms and constituents.

Competitors, like Vodacom and MTN in this case study, affect the construction of

competitive advantage by taking actions in the four domains and creating strategic

options for their shareholders.

Thus the rivalry between Vodacom and MTN manifested itself in the variety strategic

of options made available to them. The strategic choices that Vodacom and MTN

made among competitive offerings available to them, measure the relative success of

each of their strategies and the degree to which each has gained advantage. Insofar as

Vodacom and MTN interacted with the same constituents and vied for their attention,

approval, and resources, they were each other‘s competitors (Freeman and Hannan,

1983). Thus, the boundaries of an industry and a market are determined not only by

how Vodacom and MTN have defined their businesses (Abell, 1980) but also by how

constituents understand and choose among these businesses.

Figure 3 How firms build competitive advantage

(Source Rindova and Fombrun 1999)

Therefore, the external domains is better described not as an industry but as an

organizational field consisting of actors, like Vodacom and MTN, who interact

33

repeatedly, exchange information, form coalitions, and are aware of each other

(DiMaggio and Powell, 1984).

The two dimensions describe four domains of action in which Vodacom and MTN

and constituents interacted. The external–material domain consists of various

markets—principally the product, labour, factor, and capital markets—in which

Vodacom and MTN as well as constituents exchanged resources. In the internal–

material domain, Vodacom’s and MTN’s resources were deployed in the production

of goods and services. In the internal interpretational domain knowledge, values, and

beliefs moulded both Vodacom‘s and MTN‘s micro-culture. In the external–

interpretational domain expectations, performance standards, and evaluations of

Vodacom and MTN evolved and formed the industry‘s macro-culture.

Figure 4 How constituents affect a company’s competitive advantage

(Source Rindova and Fombrun 1999)

2.4.1 Micro-culture

In contrast to market and resource models that advance an economic rationale for the

existence of competitive advantage, cognitive research in this case study will

emphasizes the importance of Vodacom‘s as well as MTN‘s strategic decision-

34

makers and their interpretations of economic conditions (Daft and Weick, 1984; Porac

and Thomas, 1990; Zajac and Bazerman, 1991). Vodacom‘s and MTN‘s managers‘

interpretations were deductions from the world legitimated within the organization‘

(Weick, 1979a: 42), whether from their culture (Schein, 1985), knowledge base

(Spender, 1989), or identity (Albert and Whetten, 1985; Fiol, 1991). The term

‗micro-culture‘ to refers to the knowledge, values, and identity beliefs in Vodacom

and MTN that were consistent with a broad definition of culture as ‗the pattern of

shared beliefs and values that give the members of an institution meaning and provide

them with rules for behavior ‘ (Davis, 1984: 1).

Vodacom‘s and MTN‘s knowledge, values, and beliefs were resources that created

sustainable competitive advantage, in SA and in Nigeria (respectively), insofar as they

were valuable, rare, and difficult to imitate (Spender, 1993; Barney, 1986a; Fiol,

1991). In addition, knowledge, values, and beliefs created an advantage for Vodacom

in South Africa and MTN in Nigeria, through their influence on information

processing and behaviour (Ginsberg, 1994). As cognitive structures unique to both

Vodacom and MTN (Weick, 1979a), they enabled their strategists to make superior

evaluations of the rent-earning potential of their respective firm‘s resources relative to

each other (Penrose, 1959; Barney, 1986b). They also guided the actions of all

members of Vodacom and MTN and enabled them to enact a systematic strategic

direction (Meyer, 1982; Reger et al., 1994).

2.4.2 Macro-cultures

Researchers have also called attention to the importance of interpretations external to

a firm—to the ‗macro-culture‘ of its industry and the transactional network from

which it derives (Huff, 1982; Spender, 1989; Abrahamson and Fombrun, 1992, 1994).

A macro-culture arises from the interactions between firms and their constituents,

mediated by institutional intermediaries, such as the media, political, social and

economic environments and various specialized organizations like the regulatory

bodies, like ICASA in South Africa and the NCC in Nigeria (Hill and Jones, 1992;

Fombrun, 1996). As Vodacom and MTN interacted and exchanged information, they

constructed a web of interpretations characterized by: (1) a widespread exchange of

information and interpretations among themselves; (2) varying degrees of knowledge

35

and understanding about the industry and the their role inside it; (3) a multiplicity of

interpretations, many of which are of a persuasive, self-serving nature; (4) some

degree of agreement about standards of performance in the telecoms industry; and (5)

evaluations of both relative to these standards and each other that gave content to

their reputations. Insofar as the interpretations of constituents create preferences for

some firms (and their products, stocks, and the like) over others, favourable

interpretations are a source of advantage. The structure of the telecommunications

market in SA and Nigeria will be discussed in Chapters 4 and 5 respectively.

2.4.3 Process of Competitive Advantage

Rindova and Fombrun (1999) assert that each of the four domains described in the

previous section is associated with a more or less developed body of research.

However, observing and researching Vodacom‘s and MTN‘s activities in any single

domain is not sufficient to explain how a firm, like Vodacom, gained its competitive

advantage in South Africa and subsequently lost it on the African continent. As Astley

and Van de Ven, (1983: 267) have argued that, ‗To say that A causes B and B causes

A may be predictive, but intellectually sterile until one can explain the processes by

which the reciprocal relationship unfolds over time.‘ This research contends that

competitive advantage is a systemic outcome of six processes that connect these

domains. Furthermore, through these connecting processes the four domains

constitute and mutually produce each

other. For analytic purposes, each process will be examined separately; in the

subsequent sections to show their dynamic interconnectedness.

2.4.4 How firms build competitive Advantage

Rindova and Fombrun (1999) assert that firms, like Vodacom and MTN, construct

their distinctive strategic positions through three generic processes: (1) they pick

strategic investments, (2) they make strategic projections, and (3) they develop a

strategic plot. These processes will be described from the perspective of each of the

two firms in chapters 4 and 5. However, Vodacom and MTN represent the strategic

behaviour of all competing firms in an industry. To what degree and in what form

they have engaged in any of them is an empirical question. The similarity of the

36

competitors‘ actions in an industry varies with the degree of imitability (Lippman and

Rumelt, 1982) and isomorphism (DiMaggio and Powell, 1984). In turn, the conditions

of imitability and isomorphism are created through processes that are initiated by

constituents, and which we elaborate later in the paper. Figure 2.2 shows how the

processes initiated by firms span markets, firms‘ resources and micro-cultures, and

industry macro-cultures.

2.4.4.1 Strategic Investments

A firm‘s strategic investments create value for shareholders by providing them with

options that satisfy their interests. Shareholders exchange resources with firms whose

options they perceive to be of superior value. A given firm regularly makes

investments to build competitive advantage, whether by developing new products,

augmenting its distribution channels, or enhancing its production capability. The

fundamental purpose of strategic investments, that Vodacom and MTN have made,

was to create and exploit opportunities for positive economic rents (Rumelt, Schendel,

and Teece, 1991). Through investments competing firms, like Vodacom and MTN,

secure more favorable configurations of industry factors (Porter, 1980) and protect

those favorable positions from rivals (Caves and Porter, 1977; Bogner, Mahoney, and

Thomas, 1994). What drives strategic investments are the resources available to the

firm and the productive uses its top managers envision for them (Penrose, 1959).

Thus, strategic investments originate simultaneously in a firm‘s resource base and in

its culture. Traditional approaches to competitive advantage emphasize how resources

are used to gain positions better than those of competitors (Porter, 1980). In this

study, that author contends that investments build competitive advantage when they

create value for specific resource-holders. Kim and Mauborgne (1997), for example,

found that high growth companies did not focus on competitors but on customer

needs—an approach they termed ‗the logic of value innovation.‘ By not focusing on

competitors, value-innovators better distinguish the factors that deliver value from the

factors the industry competes on. They concentrate resources on investments that have

the highest impact on customer evaluations. They do so by eliminating product

features that the industry takes for granted or adding features that the industry has

ignored.

37

Similarly, a focus on suppliers‘ value may require strategic investments in developing

cooperative relationships, in contrast to a competitor focus that may require bidding

down suppliers‘ prices to outperform rivals on costs of inputs, like MTN‘s

cooperation with Erickson in the development of products. Kim and Mauborgne

(1997: 106) observed that ironically, value innovators do not set out to build

advantages over the competition, but they end up achieving the greatest advantages.‘

Strategic investments create value for constituents both by satisfying needs and by

creating needs. Otherwise, firms tend to over invest in existing customers (like

Vodacom and its investment in its network in SA see chap 4) and to ignore customers

in emergent markets (Christensen and Bower, 1996). By making investment choices

about customer groups, product functions, and the resources and technologies

necessary to serve them, a firm satisfies its constituents, as well as defines its business

and its competitors (Abell, 1980).

Thus, a firm‘s targeted investments to particular resource-holders also affect the

competitive conditions of its rivals; Vodacom‘s investment in SA influenced rival

MTN‘s choice of strategic investments. MTN, in turn, made strategic investments to

protect its position and relationships with resource-holders, through innovations,

acquisitions, or other strategic actions. Strategic investments can undermine the

competitive advantage of a firm when they are insufficient, misdirected, or their value

is not understood by shareholders. Inadequate investments not only fail to attract

resources in the material domain but also raise doubts about the strategic direction of

the firm and taint its overall reputation in the interpretational domain, as was the case

with Vodacom in Nigeria as will be examined in Chap 5.

2.4.4.2 Strategic projections

Even well-targeted investments may not contribute to competitive advantage if their

value is not apparent to constituents. To stimulate and enhance favourable

interpretations of their investments firms engage in strategic projections. Rindova and

Fombrun (1999) have defined strategic projections as controlled images projected in

social interaction through communication to secure favourable evaluations by others.

As such, they resemble the impression management tactics of individuals (Goffman,

38

1959; Tedeschi, 1981). Whereas strategic investments also may serve as signals and

indirectly convey information about a firm (Shapiro, 1983), strategic projections are

explicit communications about characteristics of the firm. They appear in a wide

range of forms including advertising, logo development, financial reports, and press

releases (Salancik and Meindl, 1984).

In general, through strategic projections competing firms, like Vodacom and MTN:

(1) provide more information about their strategic investments—information which

shareholders may use in making their decisions; (2) offer to shareholders ready-made

interpretations of their investments; and (3) impress desirable symbols in

shareholders‘ minds. In addition to influencing interpretations, strategic projections

contribute to the formation of firm-related schemata, such as corporate reputations,

‗cautions Vodacom‘ and ‗entrepreneurial MTN‘ (Formbrun, 1996; Rindova, 1997).

Specific interpretations and reputational schemata affect how constituents evaluate a

firm and how they choose to allocate the resources they control. Strategic projections,

therefore, affect both the interpretational domain and the material domain.

Like inadequate strategic investments, inadequate strategic projections may

undermine a firm‘s competitive advantage. This aspect will be explored further in

Chapter 5 with regards to Vodacom. Strategic projections that misrepresent a firm‘s

investments may have legal consequences (in Vodacom‘s case they faced a legal

challenge from an irate Econet Wireless International over Econet Wireless Nigeria)

or may destroy a firm‘s credibility and trustworthiness (in Nigeria, Vodacom‘s exit

was the butt of many jokes in the local media, with one newspaper making fun of it‘s

prepaid offering; ―Vodacome Vodago‖ (Fombrun, 1996). Further, because strategic

projections come in a variety of forms, they can easily convey disparate images of a

firm. The more consistent strategic projections are with one another and with a firm‘s

strategic investments, the more useful they are to constituents in making

interpretations and the more they contribute to the construction of competitive

advantage.

2.4.4.3 Strategic Plot

39

The process that accounts for the consistency between a firm‘s material resources and

its micro-culture, as well as between its strategic investments and projections, is the

formation of a strategic plot, according to Rindova and Fombrun (1999). A firm‘s

strategic plot reflects some continuity in its activities. It contributes to competitive

advantage by providing a long-term context, within which constituents can attribute

meaning to specific investments and projections. It reflects the firm‘s intended

strategy—its business definition (Abell, 1980) and generic type (Porter, 1980; Miles

and Snow, 1978), as well as emergent strategy—resulting from the co-evolution of

material resources and organizational culture. On one hand, the development of

strategic plots depends on managers‘ understandings of the resources the firm controls

and the potential combinations of these resources in productive services (Penrose,

1959). A belief system, such as a firm‘s ‗dominant logic‘ (Prahalad and Bettis, 1986),

guides a firm‘s strategic choices, and through them, the resources it seeks to acquire

and combine. On the other hand, the dominant logic of a firm grows out of managerial

experience with existing resources and reflects them (Mahoney and Pandian, 1992).

Micro-cultural elements develop to support current uses of resources. Leonard-Barton

(1992) found that high-tech organizations are culturally biased toward their

engineering staff and often give them privilege in decision-making.

Both a firm‘s micro-culture and its resource commitments determine the strategic plot

from which its investments and projections originate. Consistency among the three

processes initiated by a firm enhances its competitive advantage; inconsistencies can

cause one of the domains (either resources or culture) to lag behind and misfire, as

was the case with Vodacom and its abortive attempt to enter Nigeria. Strategic

projections not supported by investments can lead to loss of credibility; investments

not supported by strategic projections may fall short of realizing their value-creating

potential; and if both processes are not supported by the strategic plot of the firm, they

will lack the continuity to feed into a virtuous cycle that constructs competitive

advantage, this was what the Deputy CEO and Head of Vodacom International,

Andrew Mthembu came to know, albeit late, when he was fired from Vodacom in

2004. However, the processes initiated by a firm are only one side of the coin:

Vodacom‘s actions in SA where one side of the coin as outlined in Chapter 4. The

construction of competitive advantage also depends on how rival MTN in the

organizational field responded to and revised competitive conditions; MTN‘s

40

response to Vodacom‘s competitive advantage in SA will be examined in greater

detail in Chapter 5, as it sought to revise, redefine and shift the competitive arena

from South Africa to the African Continent and beyond.

2.4.5 How the actions of Vodacom influenced MTN’s competitive Advantage in

Nigeria

Shareholders alter competitive conditions and contribute to the construction of

competitive advantage through three processes: (1) resource allocations among firms;

(2) definitions of success; and (3) development of industry paradigms shared

understandings among constituents about how firms in an industry create value.

Figure 2.3 depicts these processes and shows how they interrelate the four domains of

action.

2.4.5.1 Resource Allocations

Rindova and Fombrun (1999) assert that shareholders, engage in interactions with

firms to further their own objectives: They allocate the resources that they control by

making buying and selling decisions, investment decisions, and employment

decisions. Each decision shifts resources to alternative uses and contributes to

determining which of their firms enjoy competitive advantage. Assessments of ‗better

value‘ depend partly on shareholders‘ own objectives, and partly on the strategic

investments and strategic projections that competing firms have made, this was the

case with Vodacom and MTN in South Africa and Nigeria respectively. Assessing the

value that firms offer is a complex task performed with incomplete information.

Cognitive limitations in perception and interpretation prevent shareholders from

making accurate assessments (Schwenk, 1984). Given limitations in evaluating firms

and industries, shareholders routinely rely on ready made interpretations in the

ambient macro-culture of the industry (Abrahamson and Fombrun, 1992, 1994).

Just as the strategic investments of firms originate both in their resource bases and

their micro-cultures, so are the resource allocations of constituents informed by the

macro-culture of the organizational field. Macro-cultures facilitate constituents‘

sensemaking. They do so by providing shareholders with industry paradigms and by

41

supplying them with definitions of success. For example, reputational ratings are an

element of a company‘s macro-culture that help reduce uncertainty about firms‘ likely

behaviours or future levels of performance (Weigelt and Camerer, 1988; Rao, 1994;

Formbrun, 1996), which was a very important consideration for both MTN and

Vodacom in Nigeria. Much as individual schemata encourage automatic information

processing and foster schema-consistent behaviour (Fiske and Taylor, 1990; Gioia,

1986), so do reputational schemata encourage shareholders to make resource

allocations and to sustain their allocations in reputation-consistent directions

(Wartick, 1992), Vodacom‘s reputation has since been associated with ‗caution‘ in

exploring ‗the dark continent‘, whereas MTN‘s has built a reputation of being

entrepreneurial as well as enterprising in emerging markets.

By individually channeling resources to favoured firms, shareholders create in

aggregate the various markets for firms‘ products and services. As shareholders shift

their resource allocations, they change market conditions and, through them, the

resources a firm has access to. Shareholders‘ choices gradually build the resource and

structural conditions of an industry. These choices support some firms and reject

others, convert some products and stocks into fads and fashions, and render others

obsolete. From the choices of shareholders, a restructured industry, and the relative

competitive positions of firms in the industry, emerges; this factor will be examined in

chapter 6.

2.4.5.2 Definitions of success

Shareholders express their judgments of firms, not only through their resource

allocations, but also through direct statements about the relative success of firms in

meeting their expectations. Rindova and Fombrun (1999) have also asserted that

definitions of success contribute to a firm‘s competitive advantage by affecting the

firm‘s overall position in the interpretational domain that surrounds an industry.

Vodacom‘s and MTN‘s shareholders, in this study, observed, interpreted, and made

sense of their firms and their actions; they also exchanged information, organized, and

even took collective action to influence their firms (Hill and Jones, 1992).

Shareholders compare their direct evaluations of firms against institutionally

transmitted information emanating from other shareholders and the media (Hill and

42

Jones, 1992; Fombrun and Shanley, 1990), and use this information to categorize

firms and judge their ability to deliver value.

Categorizing rivaling firms, like Vodacom and MTN, into strategic groups, rank-

ordering them in reputational rankings and featuring them as exemplars are common

ways through which shareholders provide firms with direct definitions of success.

Cognitive strategic groups result when observers perceive competing firms, like

Vodacom and MTN, to be more or less similar on important strategic dimensions

(Porac and Thomas, 1990; Lant and Baum, 1995; Reger and Huff, 1993). Cognitive

simplification and elaboration lead shareholders to develop categories to which they

assign firms; interaction and exchange of information among shareholders lead them

to share categorizations of firms (Reger and Huff, 1993).

Differential perceptions about firms act as mobility barriers that surround strategic

groups (Formbrun and Zajac, 1987; Reger and Huff, 1993). Category membership

itself is graded: Some firms come to represent the industry more than others and some

firms are more stable members of a group (Porac and Thomas, 1990). Over time, the

prototypical firm is equated with success and becomes the benchmark against which

all others are evaluated.

Reputational rankings are another manifestation of shareholders‘ differential

perceptions of firms that affect competitive advantage, Rindova and Fombrun (1999)

further assert. Whereas competitive categorizations reflect the map of the industry that

shareholders have constructed, reputational rankings reflect an ordering, a status

hierarchy with implications about the superiority and inferiority of its members.

Reputational rankings assess firms‘ performances on different criteria and directly

compare firms with one another. Reputational rankings incorporate the demands of

resource-holders, which may differ significantly and, as such, may generate

contradictory rankings. For instance, some companies top the lists of ‗best places to

work;‘ others are ranked ‗most environmentally responsible;‘ and others yet are

ranked as ‗most admired companies‘ overall. These lists regularly constructed by

institutional intermediaries define multiple success measures in an industry.

43

By placing firms at different levels in reputational rankings, shareholders not only

create exemplars and role models for competing firms, like Vodacom and MTN to

follow, but also collectively define the success criteria that firms seek to include in

their micro cultures (Formbrun, 1996). Business school deans report that these

competing firms ‗live and die‘ by the highly popular rankings of business schools

published by Business Week and U.S. News and World Report (Martins, 1998: 295).

Hall (1992) reported that the managers he surveyed considered company reputation

and product reputation to be the two most important intangible assets contributing to

their firms‘ success. Although research on the effects of reputational rankings on

firms‘ cultural practices is limited, social identity theory suggests that the definitions

of success used by external constituents influence a firm‘s identity.

Reputational rankings act like institutional mirrors: As competing firms like Vodacom

and MTN, observe their reflections in those institutional mirrors, they adjust their

micro-cultures and material resources to conform better to the definitions of success

set by constituents (Dutton and Dukerich, 1991). These mirrors, however, often

reflect the cumulative interpretations of observers rather than the current state of the

firm. This position of the firm in the interpretational domain serves as a confirmation

of its strategies and did not urge a company-wide overhaul of its micro-culture and

resources.

2.4.5.3 Industry paradigms

In order to allocate resources among firms in an industry, shareholders of competing

firms like Vodacom and MTN, try to understand the products, prospects, and

dynamics of the industry. They rely not only on information about firms‘ actions, but

also on interpretative frameworks that explain what those actions mean (Weick,

1995). Dosi (1982) suggests that industry members develop ‗technological paradigms‘

that guide the problems they work on and the kinds of solutions they propose to

address those problems. In similar ways, Vodacom‘s and MTN‘s shareholders, in an

organizational field develop shared understandings about such critical assessments as

what constitutes efficient allocation of resources in the industry; which products are

better; and how to assess risk/return trade-offs in the industry. These shared

understandings, along with the preferences of constituents they guide and the

44

advantageous positions of firms they confer constitute key elements of industry

paradigms.

Shared understandings arise both from the strategic projections of firms and from the

interpretations provided by institutional intermediaries, such as ‗buy–sell‘

recommendations of financial analysts or product evaluations by consumer

organizations. Key shareholders, of MTN and Vodacom, as well as institutional

intermediaries affect the development of the industry paradigm through their own

interpretations and resource allocations. As they interpret industry conditions,

investors, bankers, and analysts, for instance, confirm an industry paradigm by

authorizing flows of financial capital to perceived ‗winners‘ and denying funds to

perceived ‗losers.‘ In similar ways, customers affect the development of the industry

paradigm by purchasing the products of winners and ignoring those of losers. Their

resource allocations broadcast signals about the relative success of competing firms.

2.5 Competitive advantage as a systematic outcome

Having discussed debated the issues above, Rindova and Fombrun (1999) come to the

conclusion that competitive advantage develops as firms, such as Vodacom and MTN,

and constituents strategically target each other in the material and interpretational

domains. In this case study, competitive advantage resulted both from actions initiated

by Vodacom and those taken by MTN in response. These actions were

multidimensional in that they affected outcomes in all four domains; they are also

interconnected in that they form multiple cycles of activities through which the four

domains were continuously constructed and reproduced. For these reasons,

competitive advantage is a systemic outcome, rather than an outcome of isolated

activities (Porter, 1985). Figure 2.5 diagrams the interrelatedness of the six processes

of which competitive advantage is a systemic outcome.

Although the competitive interactions were divided into material and interpretational

domains for analytical purposes, these levels reciprocally determine each other:

Material cues originate in resource exchanges and affect interpretations;

interpretations in turn affect choice and execution of material activities (Porac et al.,

1989.) For example, constituents‘ definitions of success provide firms with an

45

interpretational context for understanding the resource allocations of constituents

across firms, as well as with input for adjusting their micro-cultural world-views. In

addition, they directly construct the material domain by guiding exchange—related

choices. As Porac et al. (1989: 399–400) observed:

material and cognitive aspects of business rivalry are thickly interwoven. Technical

transactions along the value chain provide an ongoing stream of cues that must be noticed

and interpreted by organizational decision-makers. Transactions are themselves partially

determined by the cognitive constructions of organizational decision makers. Beliefs about the

identity of competitors, suppliers, and customers focus the limited attentional resources of

decision-makers on some transactional partners to the exclusion of others

Although material and interpretational conditions produce each other, the

development of competitive advantage is not an automatic process. Competing firms

like Vodacom and MTN selectively invested and allocated resources, projected and

reflected images. Weick (1995: 81) describes the processes of selective perception

and action as enactment and extraction of cues:

Cues are enacted in the sense that each competitor( both MTN and Vodacom) made strategic

choices on the basis of its beliefs, and these choices put things out there that constrain the

information that the firms got back. What the firm got back (in Nigeria in particular) affected

the next round of choices.

In the model presented in Figure 2.5, Vodacom ‗put out there‘ technologies, products,

investments, and communications. MTN used the cues provided by Vodacom in their

own enactment cycle of resource allocations and communications. They ‗extracted‘

cues

in the sense that others see these enacted changes and extract them as cues of larger trends.

Thus, others (MTN) come to use the same cues for their strategic choices, as does the firm

(Vodacom) that first enacted those cues and made them available for extraction.

Figure 5 A systematic model of competitive advantage

46

(Source Rindova and Fombrun 1999)

In turn, firms read into constituents‘ allocations and definitions of success signals

about market trends that guide their subsequent investments and projections. Industry

features, such as dominant designs, industry concentration, mobility barriers, isolation

mechanisms, reputational orderings, exemplars, winners and losers, emerge and

crystallize from these processes. Thus, Vodacom and MTN externalized their strategic

choices in the material and interpretational domains through the processes of

investments, projections, allocations of resources, and definitions of success. They

also objectified and internalized the resulting pattern of interactions by forming

strategic plots and industry paradigms through which they adjusted beliefs and

behaviours in ways that reflected their objectified reality. Along the way, therefore,

Vodacom and MTN, as rival and competing firms, jointly constructed the competitive

reality that they came to inhabit

2.6 Conclusion

This section of the research has outlined the theoretical models that will be used for

analyzing how effective were the two protagonists locked up in a rival competitive

struggle to dominate the telecommunications market in South Africa and beyond. In

particular, it has demonstrated that competing firms have different strategic offerings

that their stakeholders can choose from in order to grow their businesses. The chapter

47

also demonstrated that geographical expansion improved the performance of an

organisation and that organisational integration improved the organisation‘s strategic

response and effectiveness to a competitive challenge. Thus competitive advantage

develops as firms and constituents strategically target each other in the material and

interpretational domains and gain competitive advantage by embarking on a

geographical expansion. Thus in this study MTN competitive advantage resulted both

from actions initiated by Vodacom and those taken by MTN in response. These

actions are multidimensional in that they affect outcomes in all four domains; they are

also interconnected in that they form multiple cycles of activities through which the

four domains are continuously constructed and reproduced. For these reasons,

competitive advantage is a systemic outcome, rather than an outcome of isolated

activities.

48

Chapter 3

Research Methodology

49

3.1 Introduction

This chapter will outline how this multi-disciplinary study required a range of

research data in order to gain a holistic perspective on the issues by using qualitative

data analysis. This research will then demonstrate how using the case study approach;

it sought to examine a number of factors in order to provide a holistic framework of

the key drivers and trends in the evolution of rivalry between Vodacom and MTN.

3.1.1 Research Process

Defining the problem is the first step in any research project and is also the most

important. Problem definition involves stating the research problem and identifying

its specific components (Malhotra, 1996:35). The tasks involved in formulating this

research problem included discussions with the key decision makers, interviews with

industry experts and other knowledgeable individuals, analysis of secondary data, and

qualitative research. These tasks helped the researcher understand the background to

the problem by analyzing the environmental context of the problem.

Problem formulation then resulted in a set of objectives and research questions. The

research objectives consist of the research question, the hypotheses, and the scope of

the research. Research questions are refined statements of the specific components of

the problem and, essentially, include questions such as What? Why? When? Where?

How? While hypotheses are possible answers to the research question, the scope of

the research defines the boundaries (Ali, 2003:295). It is only when the research

problem or opportunity has been identified clearly that the research may be designed

and conducted properly.

3.1.1.1 Elite interviews

To triangulate and add rigour to the research process, key individuals at MTN Nigeria

were interviewed by the author in 2003-4 in Nigeria using semi structured interviews

as well as key players in the telecoms industry, to incorporate the user experiences

from a number of perspectives. The process involved interviewing organizational

elites at MTN Nigeria that included, the members of staff that had been involved in

the start up of the operations in Nigeria, the Chief Marketing and Strategy Officer, the

Sales and Distribution Executive, the Regional Sales Executives in Port Harcourt,

50

Lagos and Abuja, the then CEO in 2003-4 as well as the new CEO who was also

MTN Group COO from 2004 and had been the MTN SA MD, as well as officials

from the Nigerian Communications Commission. The author also had access to the

MTN Innovation Center in Johannesburg and was also privy to confidential company

documentation

However Delaney (2007) points out the elite technique also presents the dilemma of

access and the researcher could not have access to Vodacom given that at the time he

was a contract employee of MTN International. Thus the researcher had no direct

access and had to rely on secondary data, subsequent requests to Vodacom‘s Chief

Information Officer for information and interviews not successful and the researcher

was referred to the Vodacom website. Delaney (2007) goes on to point out that these

problems were mitigated and turned into an advantage leading to better quality

interview data. Interviewing MTN elites in this case study added an important

dimension to a topic as it allowed a more thorough understanding of the strategic

plots, strategic investments and strategic projections as well as motivations, interests

and perceptions of those with significant power and influence in the organization

particularly at the time that Vodacom was attempting to enter Nigeria which was just

about the same time that a robust looking Globacom was also challenging MTN.

Telecoms are often considered to be a key strategic advantage by most businesses. As

a result interviewees, particularly from Vodacom, were reluctant to divulge

commercially sensitive information. Exploring topics like the Nigerian venture, ideas

and engaging in conversation about Vodacom‘s strategy were more likely to reveal

information without threatening the interviewee. Aspects that were delved into with

the MTN team included understanding the importance of telecoms to businesses, their

strategy in South Africa, Nigeria and beyond, their relationship with the NCC, range

of services purchased and quality-of-service issues. In reporting the results of these

interviews, the respondents‘ names, will not be disclosed because of confidentiality

concerns.

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3.2 Qualitative research methods

The fundamental characteristic of qualitative research attempts to view events,

actions, norms and values from the perspective of the people who are being studied.

This approach also entails a capacity to penetrate and understand the frame of

reference within which the research is being undertaken. Qualitative research is

assumed to generate concepts that are then able to form the building blocks of theory

(Bryman and Burgess, 1994:219). There is still significant debate about the extent of

the generalisability of the theory created as well as the degree to which theory is being

generated, however. (Glaser and Strauss, 1967:220) Qualitative research is situated

within a holistic context, so that the meanings ascribed are set within a context of

values, practices, underlying structures and multiple perceptions. Therefore, the

methodology involved multiple methods by which information was drawn from

various sources using different methods. The research incorporated a range of

methodologies, similar to the approach adopted by Krairit (2001).

3.3 Case Study Research Approach

3.3.1 Brief Historical Overview

Case study research is a long established methodology. Edwards (1990) stated that in

the past, it was considered somewhat unscientific. An inappropriate focus on a

quantitative nomothetic methodology modeled on physics pulled the psychology

profession away from ecological, naturalistic research approaches and also from

intensive study of single cases. However, the criticism that was directed at the

approach has become less regular in recent years. The reason for this has partly been

due to a greater requirement of all types of research to be practically applicable

(Foster, Gomm, & Hammersley, 2000). Researchers began to recognize the

importance of the case study approach and single case investigations for the

development of a knowledge base that is unobtainable through traditional group

designs in research (Edwards). A case study approach allowed this researcher to

conduct an in depth comparative analysis between two organizations, Vodacom and

MTN, which yielded relevant insight and results while looking at the individual or

organization in its entirety.

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3.3.2 Definition of a case study

According to Yin (1994), a technical definition began with the scope of a case study

as set out in chapter 1 sec 1.3 which stipulated that this researcher would make use of

the case study method because they deliberately wanted to cover contextual

conditions that would be relevant to the case study. This involved studying an existing

phenomenon, of rivalry, within its real life context. An experiment, however, would

separate a phenomenon from its environment so the attention was focused on selected

variables. However, because phenomena and contexts are not always completely

distinguishable from each other, it was necessary to include other technical

characteristics within a definition, such as data collection (chaps 4 & 5) and data

analysis techniques (chapter 6).

Mitchell (1983) places an emphasis on the development of theory (outlined in chap 2)

and defines case study as a detailed examination of an event, in this case study it is the

rivalry between Vodacom and MTN, which the researcher believed exhibited the

operation of some identified theoretical principle, competitive advantage. Both these

definitions encompass different aspects of case studies and the combination of the

technical along with the theoretical components is the basis of this particular study.

3.3.3 Data Collection

The research approach combined data-gathering activities into qualitative methods

which included interviews, policy analysis and company annual reports and records

with data analysis which examined industry data like market shares, connectivity,

revenues, profitability and strategy in order to draw conclusions about the current

levels of competition and the structure of the market. The triangulated data-gathering

approach was used and includes primary and secondary sources such as policy-

makers, investors, service providers and users. This method was utilised to ensure that

a holistic picture of the South African market was analyzed. Throughout the data-

gathering process, the analysis framework outlined in chapter 2 was used to guide the

relevant issues and supporting data.

Quantitative data collection consisted of a process of collecting already available

secondary data that was published by reliable sources. The use of secondary research

53

sources was chosen as the sources below were believed to provide the most accurate

data available. It would have been impossible to conduct primary data collection

within this study, from Vodacom in particular, given the time and resource

constraints, as well as the commercial sensitivity of the information. The key data

sources for the quantitative aspect of the study were:

SA technology market research reports from BMI Technologies, Media

Africa, SAtoZ, Stats SA, Company Annual Reports, Nedlac, Analyst Reports,

Link Center, The Edge;

Policy and regulatory information from government gazettes, NCC Icasa,

media reports;

Technology market research company reports, i.e. International Data

Corporation,

Pyramid Research (Economist Intelligence Unit), Media Africa, BMI

Technologies, etc;

International data indicators from the ITU, OECD, World Bank, IMF;

Website market indicators from international regulators; and

Proprietary research to which the researcher had access.

The data set mainly contains information published by Telkom, Vodafone, Vodacom

and MTN, particularly annual reports, press releases, and information from additional

resources such as newspapers, and specialised journals which reported on business

events.

3.3.4 Data Analysis

Data analysis was done in conjunction with the literature review. Key issues arising

from the literature review were highlighted, e.g. key indicators of competition, policy

and regulatory structures, market structure, technology choices, strategy etc, and used

as the benchmark against which to compare the two rivals. The authors for the

literature review were chosen because they are generally regarded as leaders in

telecoms growth, telecoms rivalry, and telecoms policy and market liberalization as

well as on competitive advantage. In some cases, these justified the reasons for

departure from international experience in view of the unique South African

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condition. In others, they highlighted problem areas, like policy and regulation and

potential future problems, like the growth of the African telecoms market and the

increasing interest in the sector from non-African operators.

Data gathered from the interviews and company records and annual reports was used

to summarize the perspectives of the various stakeholders, particularly in attempting

to characterize and understand the South African market. The data was then analyzed

in terms of key competition indicators such cumulative market share, subscriber

growth, profitability, geographic coverage, investment, technology used, execution of

strategy, network reliability, regulatory and impact on business. In the analysis, the

researcher tried to prioritize and rank some of the key issues of concern raised namely

(1) shareholding and strategy (2) entrepreneurial and enterprising management (3)

micro-culture and (4) organizational structuring for geographical expansion as well as

draw out common views and threads emerging from the various phases of analysis.

The analysis not only based on key competition indicators but also conducted a

comparative analysis that adhered to the following principles:

1. The analysis made use of all of the relevant evidence; that was done in chapter

6, a comparative analysis of Chapters 4 ( the factors that gave Vodacom

Competitive advantage in South Africa) and 5 (The factors that gave MTN

competitive advantage in Nigeria)

2. The analysis considered all of the major rival interpretations, and

explored each of them in turn (The analysis drew on the relevant factors in

both chapters 4 & 5)

3. The comparative analysis addressed the most significant aspect of the study as

detailed below:

(1) Shareholding and strategy

(2) Management

(3) Micro-culture

(4) Organising for geographical expansion

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The comparative analysis drew on the researcher‘s prior expert knowledge in the area

of the case study, but in an unbiased and objective manner.

3.4. Writing the Study Report

Writing this study report was a daunting task, because at this point the researcher

needed to discriminate between what was to be included and the wealth of evidence

that would not appear in the report, but stay in the case study database. Effective

analysis of the results assisted in providing a structure. The task of writing this

dissertation appeared less overwhelming as the researcher observed the advice to all

researchers which was to write up as the research proceeded. Drafts of literature

review and methodology sections were written in parallel with data collection. A key

factor in determining the coverage and presentation of the case study report was the

intended audience. This particular study was undertaken as part of the fulfillment of

the conditions for the Master of Business Administration Degree with the University

of Wales, Cardiff, UK. Thus for this dissertation, mastery of methodology, and an

understanding of the way that the research made a contribution to existing knowledge

were important considerations, in particular how effective were these two protagonists

in executing a geographical expansion and what lessons the experiences of Vodacom

and MTN have provided for corporate strategy and decision making

3.5 Conclusion:

The aims of this chapter were to give a brief outline of the theoretical bias of the

research process as well as to discuss the practical details of how the research was

conducted. The practical process and some of the problems encountered were

highlighted, particularly the issue of the element of bias as a result of the non-

responses from, Vodacom. As outlined secondary sources were used to corroborate

the data collected, namely the company annual reports, from Vodafone, Telkom as

well as MTN, NCC, Pyramid Research, Financial Mail the Link Centre at the

University of Wits in Johannesburg, and thus the element of bias was minimized. The

next two chapters will deal with the results of the survey, after analyzing as well as

interpreting them. The practical development of the case study

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Chapter 4

The Evolution of Rivalry

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4. Introduction

This chapter will trace the evolution of rivalry between Vodacom and MTN. It will

review the internal and external strategic choices influenced by their respective

shareholders who made decisions about geographical expansion. It will also trace how

Vodacom created and to sustained its competitive advantage in South Africa. The

chapter will also examine how MTN organized itself to challenge Vodacom‘s

competitive by choosing a different growth strategy that enabled it to acquire skills as

an emerging market player.

4.1 Background to the rivalry

Despite its political isolation, as far back as the late 1980s, Gillwald and Esselaar

(2004) believe that the technological and economic drivers of digitalization and

liberalization compelled the South African state to acknowledge that the monopoly

telecom utility, Telkom, was not meeting the needs of a modern economy. The late

1980s, South African Postal and Telecommunication Services (SAPTS) had been

beset by a number of problems common to many Public Telecommunications

Providers (PTP). The most notable being its enormous debt, which made expansion

impossible. A confluence of international and domestic pressures, including the trend

towards asymmetrical deregulation abroad and the pressure of the anti-apartheid

struggle at home resulted in the Department‘s commercialization in 1991. It would

have required significant levels of investment in the network that the state could no

longer provide to keep it afloat. Besides servicing less than 10% of the population,

despite waiting lists going back years, uneven and inefficient internal investments –

even after corporatisation in 1991 – had produced a gold-plated public operator. South

Africa began to pry open its market in the early 1990s, in line with global trends at the

time; towards the introduction of facilities-based competition aimed at shifting the

financial demands on the state for the provision of telecommunications on to the

private sector indebted network.

However, beyond structural changes affecting financial operations and corporate

governance, the locus of power and the mechanics of the monopoly remained

completely unchanged. The monopoly provider, Telkom SA Ltd fell to the control of

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the Postmaster- General and the Minister who continued to determine tariffs and fees.

Telkom retained the power to prohibit others from offering any service without its

explicit authorization preserving a direct link through the Minister, between

government and the licensee. As The Sunday Times editorial aptly characterized it at

the time, "Whatever similarity exists between [Telkom‘s] stranglehold on telephonic

communications and private enterprise is in the imagination only of the government

which foisted it on the public".

Cohen (2002) believed that the second phase of liberalization and the opening up of

its fixed line market to competition took place in 1994. The democratically elected

government was facing the challenge of economic and social development created by

the ravages of apartheid, and thus required detailed government policy in every sector.

Telecommunications was no exception. Cohen further believed that, since the

promulgation of the 1996 Telecommunications Act, developmental objectives,

particularly universal service, the advancement of small and medium enterprises

(SMMEs) and the empowerment of historically disadvantaged individuals rivaled

more pedestrian sectoral reform goals often prioritized in other countries, such as the

promotion of innovation and competition.

4.1.2 Telecom reform 1992-2002

In 1994, the ANC government inherited a Telco that had largely failed to resolve its

legacy dilemmas, inefficiency and debts. Little had changed, except that the delivery

of telephone services to redress past inequality was now a stated government priority

linked to the broader developmental goals that had buttressed the ANC‘s election

platform. According to Cohen (2002) thus begun an historic consultation process,

somewhat distinctive in its inclusiveness where all sectoral stakeholders participated

in the development of a White Paper on telecoms policy which was ultimately to

become the blueprint for legislation and a future beacon for assessing how the

consultative policy product had been finally realized and, where appropriate, deviated

from. The White Paper articulated a commitment to the ideal that telecommunications

was not simply an aspect of development, but rather a precondition for its success.

Thus, under the oversight of an independent regulator, competition would be

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gradually phased in while allowing a limited exclusivity for Telkom to concentrate on

the roll-out of service to the previously disadvantaged.

4.1.3 The Telecommunications Act 1996

The Telecommunications Act of 1996 laid out the process for developing policies and

regulations for the sector and envisioned detailed processes of consultation for

effecting major and minor changes in the policy and regulatory landscape. Horwitz

and Currie (2007) believe that the 1996 Telecommunications Act vested in the

Minister several of the powers the White Paper had reserved for the Regulator and

eliminated the White Paper‘s painstakingly achieved liberalization timetable in favor

of ministerial discretion regarding when and if various segments of the sector would

be opened to competition (Republic of South Africa 1996b). The changes not only

delayed the liberalization of the sector but created jurisdictional conflicts that were

easily exploited by an opportunistic incumbent network operator, resulting in the

effective doubling of the exclusivity period. Like most incumbent operators, Telkom,

managed by its savvy and almost congenitally litigious SBC equity partner, was bent

on maintaining its sectoral dominance and thwarting potential competitors to its

service offerings and profitability.

In assessing the South African Telecommunications reform, Melody (1999) noted that

countries with monopoly telcos must make a commitment to empowering regulators

to implement policies. Using SA as an example, he notes that ICASA – the

Independent Communications Authority of South Africa – is not truly independent,

nor does it have any real authority to impose its will. The over-riding challenge for

Africa, he says, is ―to create regulation that leads, rather than lags, technological and

market developments, providing a catalyst for investment and growth in e-

economies.‖ In this regard he strongly recommends the separation of telecoms

facilities and services, comparing this with what happened in the computer industry.

Since software was unbundled from hardware, the software market has grown very

much faster and now dwarfs the hardware market. Thus efforts to induce investment

through facilities-based competition were all-but scuttled by the lack of administrative

capacity, convoluted licensing process and accusations of political interference.

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4.2 Policy and Regulatory Institutional Framework

The key stakeholders in the policy and regulatory debate included, as outlined in the

Telecommunications Act of 1996:

Cabinet and the Minister for Communications.

Parliamentary Select Committee on Communications.

Department of Communications.

The Independent Communications Authority of South Africa (ICASA), the

regulatory body established in 2000 to replace the South African

Telecommunications Regulatory Authority (SATRA) and the Independent

Broadcasting Authority (IBA) established by means of the ICASA Act dated

May 2000.

Figure 6 South Africa's Telecommunications Structure

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Marcelle (2001) noted that the government had both a majority shareholding role in

Telkom SA and by default a shareholding in Vodacom and as well as a major role in

the development of the policy and regulatory framework. The Minister of Public

Enterprises had the responsibility for the restructuring state assets, while the Minister

of Communications was tasked with the responsibility for development of

telecommunications policy. Marcelle (2001) also noted that in addition to the above

mentioned arms of the legislative and executive arms of government, there were also

a number of other key decision making and lobbying bodies that influenced the

development of policy objectives for the sector, including:

Representatives of organised labour (part of the Consultative Forum).

South African Value Added Network Services (VANS) Association.

The African Telecommunications Forum recently renamed the South African

Telecommunications Forum.

The above section looked at the early period of reform in the SA telecoms industry,

the next section will deal with some of the consequences of the reforms that were

implemented by the newly elected ANC government.

4.2.1 Managed Liberalisation

The new government‘s chosen policy was one of managed liberalisation, which

followed a three stage process:

Partial Privatisation of Telkom in 1997 through the sale of 30% state to

Thintana Communications consisting of the US conglomerate South Western

Bell Company and Telekom Malaysia

The maximisation of state assets where the state‘s preoccupation shifted from

the initial private offering (IPO) to creating conditions that would maximise

Telkom‘s share price.

After the listing of Telkom on both the Johannesburg and New York Stork

Exchanges in 2003, Thintana Communications then sold its 30% stake in

2004.

However Horwitz and Currie (2007) believe that SBC strategy in this whole saga was

to maximise the value of Thintana Communications‘ investment during Telkom‘s 5

year exclusivity period and then exit quickly. After all, SBC had helped draft the

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Telecommunications Act of 1996 and made sure that it comported to the company‘s

requirements. SBC had not only been the managing partner at MTN, but had also

participated in a similar process in the US, where the US Telecommunications Act

had also been passed in 1996.Thintana signed a ―Shareholders‘ Agreement‖ with the

South African Government in May 1997, which bound the Government to terms

rather favorable to the company. That document has never been released publicly – its

contents remain unknown even to the Regulator. The Shareholders‘ Agreement was

never made public because, according to Jim Myers (an executive at SBC), some of

its provisions bound the Government so stringently and gave Thintana

Communications so much control, that had they become public knowledge it would

have raised huge outcry. Clauses in the Shareholders‘ Agreement stipulated that once

the Telecommunications Act was in place neither Telkom nor Thintana

Communications would be compelled to follow any legislation that violated the

Shareholders‘ Agreement. This created strong incentive for Government to prevent

legislation that might violate – and make public – the Shareholders‘ Agreement.

4.2.2 Policy not conducive to growth and competition

The South African treasury may have benefited in the short run from the initial

privatization and the March 2003 sale of Government-held (share price sheltered)

Telkom stock. The latter sale represented South Africa‘s biggest attempt to spread

share ownership to the black majority through what was known as the Khulisa Share

Scheme. According to Horwitz and Currie (2007) in the view of most analysts, the

exchange of liberalization and competition for privatization was damaging to the

larger economy.

World Wide Worx MD Arthur Goldstuck recently unveiled its Cisco Internet Access

in South Africa 2008 report, showing a significant slowdown in Internet users in

South Africa during the 2001 to 2006 period when Telkom‘s monopoly was at its

strongest and most damaging. This, according to Goldstuck, was a clear indication

that Government‘s "managed liberalisation was a deeply flawed and damaging policy,

becoming a euphemism for maintaining the status quo". Goldstuck argued, however,

that communications minister Ivy Matsepe-Casaburri should not be blamed as she

was merely pursuing the officially cabinet-backed policy directives.

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A recent column by Vodacom‘s ex-CEO Alan Knott-Craig, in the Financial Mail,

went one step further, saying that ―the telecommunications industry has been

fortunate to benefit from the light but firm touch of Communications Minister Ivy

Matsepe-Casaburri and her team." Knott-Craig also said that ―in SA, a predictable and

stable legislative environment had made the South African industry very attractive to

foreign investors. Proof of that was that one month after the biggest financial crisis in

decades, Vodacom‘s UK shareholder, Vodafone, said that it would invest R22,5

billion in SA to increase its share in Vodacom by 15%.‖ Many consumers, however,

argued that Vodacom was one of the biggest benefactors of the government‘s

managed liberalisation policies, making it easy for Knott-Craig to warm up to the

communications minister.

4.3. Growth of mobile phone penetration 1992-2001

Unlike its fixed-line telecommunications market, South Africa boasts a vibrant and

competitive mobile phone market that grew very quickly (Figure 4.3). Gillwald

(2004) believes that the mobile sector flourished largely because the eyes of

government and the regulator were focused on public switched telecom services.

Considerable investments in network expansion were made particularly by the

duopoly mobile operators, Vodacom and MTN, in South Africa and increasingly

across the continent .This market experienced rapid growth in the number of mobile

users increasing, as Gillwald and Kane (2003) observed, because the disappointing

performance generally in the fixed line sector had been compensated for by the

unanticipated exponential growth in the mobile sector. In their 2003 report, they

quoted the International Telecommunications Union (ITU) as saying that, from a base

of just under one million subscribers in 1996, the number of mobile subscribers in

South Africa overtook fixed line subscribers in 1999 (Table 4.2) and, according to the

figures from Cellular.co.za, stood at 8 million users in 2001, of which 80% were

estimated to be active (Table 4.2). Vodacom‘s subscribers stood at 5, 2 million

compared to MTN‘s 2, 7 million. Mobile phones have proven a far more efficient

technology in providing access to communications especially in the lower income as

well as previously disadvantaged population of South Africa (Cant & Machado,

2005:7).

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Figure 7Growth of the SA Telecommunications Industry

Through its enabling indirect effects, telecommunications had become the most

important sector of the future economy. The sector reflected the application of

continuously improving technologies emanating from the telecommunication

equipment, computing hardware /software, and consumer electronics industries.

Integration of these technologies into the telecommunication network, and in terminal

devices connected to the network such as personal computers and mobile phones, had

provided the foundation for the continuous development of new electronic

information/communication services, including the Internet, referred to as Value-

Added Network Services (VANS), which were being applied throughout the entire

economy.

Gillwald (2007) goes on further to assert that the other reason offered for the success

of the mobile market, which collectively tripled the number of subscribers on the

fixed network, was the relatively low regulatory transaction costs since its inception

in 1993. Based on estimations of a couple of hundred thousand subscribers each in

their first five years, rather than the millions they reached, the duopoly mobile

licenses were sold in 1993 for a mere R100 million (US$ 31 million at 1993 rates).

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Figure 8Mobile Teledensity in SA

For the third mobile license, Cell C paid nothing up-front but R100 million (US$14.7

million) over 12 equal installments beginning in the third year of commercial

operations or the equivalent of $2.2 per capita –a relatively small licence fee per

capita compared to Morocco‘s second mobile licence, which sold at $39.47 per capita,

and more in line with either smaller markets or where regulatory risk is generally

perceived to be higher. A per capita price of $2.44 was paid for the MTN‘s mobile

licence in Nigeria, $0.01 per capita by MTN in Uganda licence and Vodacom‘s $2.74

per capita by Vodacom in Tanzania .

Table 1Total number of Mobile subscribers

The mobile cellular market grew beyond all expectations, with over 30% of the total

voice telephony market share by 2001, and more than three times the number of

subscribers than the fixed network. Pre-paid services have been a key driver.

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According to market research firm BMI-TechKnowledge, the pre-paid market in

South Africa made up 75% of cellular subscribers, and more than 90% of new

connections were pre-paid. Indeed, new entrant Cell C estimated that 98% of its

subscribers were pre-paid users. These figures were in line with the experience

throughout Africa where BMI-T estimated that between 90% and 95% of cellular

customers were pre-paid. However, while contract customers only made up 25% of

subscribers in South Africa, they generated around 70% of revenues due to their much

higher ARPU. Vodacom‘s financials were fairly typical for South Africa in this

respect, with post-paid ARPU standing at R547 per month, over five times the pre-

paid ARPU of R93.

Table 2 Operators ARUP

That disparity had required mobile operators in South Africa to develop a very

particular business model, which they have since exported to the rest of Africa

through MTN‘s and Vodacom‘s international operations. The model was quite

different from the Northern Hemisphere model where such marginal customers were

not generally brought on to the network, and certainly not as quickly after launch or in

such large numbers as have been seen in Africa. Understanding that model, in terms

of effective regulation and ensuring continued investment in network expansion, was

critical to the sustainability and growth of mobile operations in South Africa and

Africa. More generally, where there had been pressure on operators both to reduce

retail and wholesale rates. Operators argued that the current relatively low retail rates

could only be sustained by the relatively high termination charges on the mobile

networks. The success of the mobile market in South Africa had provided the two

dominant mobile companies with a launch pad to the rest of the continent. South

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African telecommunications investment across the continent must be the most

significant investment by any single country in Africa.

Table 3 Cumulative Capex in SA and Africa

4.4 VODACOM GROUP (PTY) LTD

The Chairman of Telkom SA Ltd in the combined 1991-1993 Annual Report

announced that the company had been allowed to invest 50 % in one of the two

mobile licenses that had been issues in 1993. He went on to add that they had entered

into a joint venture with Vodafone PLC, of the UK one of the world‘s leading

providers of mobile telephone services and the Rembrandt Group to form Vodacom

Group (Pty) Ltd to operate in accordance with the license when allocated. He went on

to say that they, as Telkom, believed that the new venture would add a new dimension

to the telephone services in South Africa and that it would overcome some of the

problems Telkom had experienced in providing telephone services in areas with little

or no infrastructure. Vodafone‘s 1993 Annual report announced that, in June 2003 a

joint venture company, Vodacom, in which Vodafone had a 35% interest, had been

awarded one of two licenses to operate a GSM mobile telephone service in South

Africa. The report went on to say that commercial service commenced in April 1994

with strong initial uptake.

4.4.1 Vodacom Group’s ownership structure

Vodacom Group‘s shareholders include (See Figure 4.):

• Telkom SA Ltd (50%)

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• Vodafone Group Plc (35%)

• (Rembrandt) Ventfin Ltd (15%)

Vodacom thus had two strong shareholders, the one a traditional mobile operator, in

Vodafone and the other a traditional fixed line operator, and incumbent, Telkom. In

terms of shareholding, in December 1995, Descarte Investments, a consortium

comprising of the National Union of Mineworkers and the South African Clothing

and Textile Workers Union, acquired an option to purchase 5% of equity in Vodacom

from Vodafone and Rembrandt. This option was exercised on October 1996.

Vodafone subsequently acquired the 15% stake in Vodacom for R16-billion, buying

out Ventfin, increasing its shareholding from 35% to 50%, thus giving it joint control

of the operator. Vodafone has also bought 15% of Telkom‘s 50% shareholding, to

now hold 65% of the Vodacom Group. That valued the whole of Vodacom at R107

billion (Mochiko in Business Report, 2005), a price that worked out to roughly

US$924 per subscriber.

4.4.1.2 Vodacom’s First Mover Advantage

As reported in the Telkom 1995 Annual report, the launch of cellular telephony was

among the fastest anywhere in the word. The report also noted that in no other

country, then, had a cellular system begun operation with 10 000 subscribers on the

first day. At the time of writing of the 1995 report the subscriber base had risen to 40

000. By then, Vodacom had set up 280 base stations for the transmission of the

cellular telephone signals in the Gauteng Province, Durban, Cape Town, Empangeni,

Richards Bay, East London, Hermanus, Port Elizabeth and Bloemfontein. The report

went on to add that Telkom was proud of the Joint Venture company: Vodacom‘s

extensive coverage nationally and internationally, what its network offered and the

fact that Vodacom users could use their phones in 19 overseas countries. By August

1994, four months after launch, Vodacom had covered every metropolitan area plus

more than 30 towns in South Africa and extended its coverage to include some 3000

km of national roads

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Figure 9 Vodacom’s Organisational Structure

Voice Mail was also introduced in South Africa, in March 1995 and the local Voice

Mail system was already the biggest in the world handling about 60 000 calls a day.

Vodacom also introduced the fax and data services on 1st June 1994, making it the

first GSM network in the world to offer these services commercially. Telkom ‗were

very proud of the achievements of the joint venture company in the cellular industry.‘

Thus Vodacom grew fast in terms of revenues, profits, and subscribers. That was

largely attributed to the first-mover advantage it had when it commenced on April

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1994 (Cant & Machado, 2005:4). Lieberman and Montgomery (1987) define first-

mover advantages in terms of the ability of a pioneering firm‘s ability to earn

economic profits (that is profits in excess of the cost of capital). They go further to

assert that first-mover advantages arose endogenously within a multistage process as

illustrated in Fig 4.5. In the first stage, some asymmetry was generated, enabling a

particular firm to get a head start over rivals. They further contended that, that first-

mover opportunity may occur because the firm possesses some unique resources, or

foresight or simply because of luck. They conclude by affirming that once that was

generated there were a variety of mechanisms that may enable a firm, like Vodacom,

to exploit its position; these mechanisms enhance the magnitude or durability (or

both) of first-mover profits.

First-mover advantages arise from three primary sources: (1) technological leadership,

(2) preemption of asserts and (3) buyer switching costs. Vodacom‘s access to

technology and capital from its parent company Vodafone and as well as from its

main 50% shareholder, Telkom, were what gave Vodacom key advantages when it

captured the market and established its competitive advantage. In order to deal with

technological development and increased competition incumbent Telkom had

organized itself into various self contained business units. The new technology

businesses were found in mobile telecommunications services, IP/Data solutions and

Internet Portals. Mobile telecommunications services were organized by the business

unit Vodacom. This enabled the rapid rollout of its network, a number of innovative

new products, services and technologies were introduced like Prepaid Vodago in

1996, the Community Services Phones as well as the 4U youth package in 2001.

These are some of the factors that enabled Vodacom to gain first mover advantages in

the South African mobile market.

Vodacom, Telkom‘s strategic investment started to create value for shareholders by

providing them with options that satisfy their interests. Shareholders exchange

resources with firms whose options they perceive to be of superior value. A given

firm regularly makes investments to build competitive advantage, whether by

developing new products, augmenting its distribution channels, or enhancing its

production capability.

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Figure 10 First mover advantages

Source: Lieberman and Montgomery (1987)

72

The fundamental purpose of creating Vodacom was to create and exploit

opportunities for positive economic rents in South Africa primarily (Rumelt,

Schendel, and Teece, 1991). Through investments firms, like Telkom and Vodafone

secure more favorable configurations of industry factors (Porter, 1980) and protect

those favorable positions from rivals, like MTN (Caves and Porter, 1977; Bogner,

Mahoney, and Thomas, 1994). What drove strategic investments, in this case, were

the resources available to the firm, Vodacom, and the productive uses its top

managers envisioned for them (Penrose, 1959).

4.4.1.3 Vodacom Creating Value for Shareholders

Strategic investments originate simultaneously in a firm‘s resource base and in its

culture. Traditional approaches to competitive advantage emphasize how resources

are used to gain positions better than those of competitors (Porter, 1980). Vodacom

built its competitive advantage when it started to create value for specific resource-

holders, Telkom and Vodafone, in South Africa by realizing a positive cash-flow in

1998. Kim and Mauborgne (1997), for example, found that high growth companies

did not focus on competitors but on customer needs—an approach they termed ‗the

logic of value innovation.‘ By not focusing on competitors, value-innovators better

distinguish the factors that deliver value from the factors the industry competes on.

They concentrate resources on investments that have the highest impact on customer

evaluations. They do so by eliminating product features that the industry takes for

granted or adding features that the industry has ignored.

Similarly, a focus on suppliers‘ value may require strategic investments in developing

cooperative relationships, in contrast to a competitor focus that may require bidding

down suppliers‘ prices to outperform rivals on costs of inputs. Kim and Mauborgne

(1997: 106) observed that ironically, value innovators do not set out to build

advantages over the competition, but they end up achieving the greatest advantages.‘

Strategic investments create value for constituents both by satisfying needs and by

creating needs, which Vodacom did through the Community Services Program as well

as by introducing the Prepaid model in early 1996, as well as other products

mentioned above like fax and voice mail. By making investment choices about

customer groups, product functions, and the resources and technologies necessary to

73

serve them, Vodacom was able to satisfy its shareholders, as well as define its

business and its competitors (Abell, 1980). Thus, Vodacom‘s targeted investments to

particular resource-holders also affected the competitive conditions of its rivals, who

led by M-net and with SBC had invested in what later became MTN. MTN, in turn,

made strategic investments to protect its positions and relationships with its resource-

holders, through innovations, acquisitions as well as other strategic actions, as will be

outlined later in this chapter and in chapter 5

4.4.2 Vodacom’s Strategic Plot

The process that accounts for the consistency between a firm‘s material resources and

its micro culture, as well as between its strategic investments and projections, is the

formation of a strategic plot. Vodacom, as discussed above, was the dominant mobile

leader in the mobile communications industry and positioned itself as the ‗biggest and

the best‘ (Finnie, Lewis, Lonergan, Mendler & Northfield, 2003:145). Vodacom used

traditional incumbent tactics, exploiting its advantage in terms of distribution

channels to attract mass-market prepaid customers, and using its established

relationship with business customers to attract high-end postpaid users. Vodacom had

an estimated 70 percent of business postpaid customers, compared to 53 percent of the

total market. Thus Vodacom‘s strategic plot reflects some continuity in its activities.

It contributed to competitive advantage by providing a long-term context, within

which shareholders attributed meaning to specific investments and projections.

Vodacom‘s mission and objective in the short to medium term was to retain market

share and attract new customers through attractive products. Loyalty and retention

programmes played an integral role in achieving this objective. Vodacom also sought

to increase its contract customer base by migrating appropriate high-end prepaid

customers to contracts.

Vodacom‘s strategic plot reflected the firm‘s intended strategy—its business

definition (Abell, 1980) and generic type (Porter, 1980; Miles and Snow, 1978), as

well as emergent strategy—resulting from the co-evolution of material resources and

organizational culture. On one hand, the development of strategic plots depends on

managers‘ understandings of the resources the firm controls and the potential

combinations of these resources in productive services (Penrose, 1959). A belief

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system, such as a firm‘s ‗dominant logic‘ (Prahalad and Bettis, 1986), guided a firm‘s

strategic choices in Vodacom‘s case ‗caution‘, and through them, the resources it

sought to acquire and combine. On the other hand, the dominant logic of a firm grows

out of managerial experience with existing resources and reflects them (Mahoney and

Pandian, 1992). Micro-cultural elements develop to support current uses of resources.

Leonard-Barton (1992) found that high-tech organizations are culturally biased

toward their engineering staff and often give them privilege in decision-making.

Both a firm‘s micro-culture and its resource commitments determine the strategic plot

from which its investments and projections originate. Consistency among the three

processes initiated by a firm enhances its competitive advantage; inconsistencies can

cause one of the domains (either resources or culture) to lag behind and misfire.

Strategic projections not supported by investments can lead to loss of credibility;

investments not supported by strategic projections may fall short of realizing their

value-creating potential; and if both processes are not supported by the strategic plot

of the firm, they will lack the continuity to feed into a virtuous cycle that constructs

competitive advantage. However, the processes initiated by Vodacom in South Africa,

were only one side of the coin: The construction of competitive advantage also

depended on how MTN in the organizational field responded to, revised and redefined

competitive conditions on the continent.

4.4.3 Vodacom’s market share

Vodacom retained its leadership in the highly competitive South African market from

inception in 1994 right through to 2001 but the strong competition in the market and

the sheer volume of gross connections inevitably resulted in a margin squeeze

(Vodacom, 2004). However, despite this margin squeeze, Vodacom recorded a strong

growth. As discussed above pioneering opportunities arise endogenously through the

process illustrated in Fig 4.5. Vodacom gained first-mover advantages through some

combinations of luck and proficiency. Although various types of proficiency may be

involved, in Vodacom‘s case this included technological foresight in Telkom‘s

partnering with the world‘s largest mobile company Vodafone, perceptive market

research (the majority of the population had no access to credit), as well as skillful

product and process development (as in the early introduction of the prepaid model).

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By March the end of 1994, according to the Vodafone 1994 Annual Report Vodacom

had over 220000 subscribers accounting for 65% of the South African market. At the

end of March 1996 Vodacom had 355000 subscribers which was an increase of some

47% over the previous year

Table 4 Operators Market Share

At the end of 1996, as outlined in the Telkom 1997 Annual report, Vodacom had

approximately 60% market share and 553320 subscribers including 9700 community

service phones. According to Vodafone‘s 1996 annual report, Vodacom had 1.3 %

penetration of South Africa‘s 42 million population. Vodacom‘s ongoing expansition

in that year resulted in 79% coverage of the population on the 31st March 1997. It

also had an excellent year, with the subscriber base increasing by 65%, total revenue

increasing by 85% to R2.5 billion and attributable profit growing from R64 million to

R259 million. Capital expenditure for 1996/97 was R901 million bringing the total

investment on the network infrastructure then, to R2.6 billion and total investment by

Vodacom since inception to R3.2 billion.

Vodacom continued to enjoy spectacular growth in 1997. According to the Vodafone

Annual Report, it had 979000 customers, presenting an increase of 77% in the year

and a market share of 55%. The strong growth in the joint venture‘s customer base

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was largely due to the success of the ‗Vodago‘ prepaid product which had a customer

base of 262000, which was 353% more than the previous year in March, 1996

emphasizing the importance of prepaid product in South Africa. In recognition of its

achievement in being the first GSM network in the world to launch a prepaid product

on an intelligent platform, Vodacom received the 1998 GSM MoU World Award for

Marketing Success. Revenue rose by 76% from R2.5 billion to R4.4 billion and

attributable profits increased R460 million, representing growth in excess of 78%.

Capital expenditure for the year amounted to R1 035 billion, bringing the cumulative

investment in Vodacom‘s infrastructure then to, R 3.6 billion. Network expansion was

ongoing and expenditure for the year 1998 exceeded R3 billion. The report added

that Vodacom was profitable and was cash flow positive during 1998. Vodafone

Group‘s twin commitments, the report added, to the community and the environment

had no better expression than in the continued provision of community services to the

less privileged and in the development of ecologically friendly base stations.

In the 1998/99 period Vodacom had another strong trading year and continued leading

the market. The prepaid service continued to be popular and customers opting for this

type of product which accounted for 55% of the 2 000 000 customer base, which had

grown by over 104% from the last financial year. Vodacom‘s market penetration

stood at 8.2% and the penetration added in 1998/89 was 3.6%. By 2000, Vodacom

had some 3.1 million customers and contributed R2.1 billion to group revenue which

was 39.5% higher than in 1998/99, Vodacom‘s contribution to operating profit rose

by 51.5%. By 2001, Vodacom had a market share of 59% of the mobile market in

South Africa, 79% of whom were prepaid and subscriber growth had grown by 69%

to 5.2 million subscribers. The South African mobile market then, was approximately

20% penetrated. Vodacom had then, over 4693 radio sites across South Africa. It

reported a turnover of R13.3 billion, which was an increase of 37% on 1999/2000,

EBITDA was up 24% to R4.2 million. Vodacom also reported that R2.3 billion was

invested in the network infrastructure against R1.6 billion the previous year, total

capex grew by 60% year on year to R3.2 billion and cumulative total capital

expenditure totaled then, R11.8 billion since 1994

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Figure 11 Operators Market Share 1999-2003

Source: Sunday Times July 4 2003

.

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4.4.4 Revenue Growth Driven by Subscriber Growth

The wireless segment delivered strong revenue growth of 22% to reach R8,2 billion

(before intercompany eliminations) for the year ended 31 March 2002. Growth in the

wireless segment resulted largely from the 22% growth in Vodacom‘s revenues to

R16, 2 billion (2001: R13, 3 billion) driven by the 32% increase in the total mobile

customer base to 6 862 976 (2001: 5 212 242). Vodacom‘s launch of the 4U package

in October 2001 drove strong prepaid customer growth by exceeding 1,3 million

subscribers within the first 6 months of launch. In March 2002, 4% of the contract

customer base and 16% of the prepaid customer base was inactive (not having made

or received a call for 3 months).

The change in the mobile subscriber mix, with prepaid subscribers now representing

83% (2001: 79%) of the total South African subscriber base, has resulted in a 13%

dilution of mobile ARPUs (monthly average revenue per user) for South African

subscribers to R182 (2001: R208) at year-end. However, contract ARPUs increased

by11% to R547 (2001: R492) and prepaid ARPUs decreased by 5% to R93 (2001:

R98).

Table 5 Revenue, Subscriber and EBITDA Growth

Vodacom focused on its contract customer relationships by revising its upgrade

policy and ensuring effective rollout of this through the distribution channel partners.

That resulted in contract churn reducing from 19% to 15%. Vodacom maintained its

leadership position, with an estimated market share of 60% despite the introduction of

the third mobile operator; Cell C. Vodacom was well positioned to expand its data

revenue stream once GPRS services were launched in the new financial year. Initial

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data successes were in the meanwhile, evident in the continued growth in SMS text

messages. Mobile customers sent 941 million SMS text messages in 2002, a 93%

increase from the previous year.

Table 6 Mobile data revenues

The wireless segment saw a 50% increase in operating profits to R2, 0 billion

(2001: R1, 3 billion), before intercompany eliminations. The 41% growth in operating

profit of R3, 7 billion (2001: R2, 6 billion) reported by Vodacom differed from the

consolidated wireless segment operating profit growth of 50% largely due to the

inclusion of foreign exchange hedging income arising on the adoption of AC133 of

R315 million (2001: R2 million) in operating expenditure on consolidation as

opposed to the inclusion in net finance costs in Vodacom‘s financials.

Table 7 Vodacom’s revenue and EBITDA

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4.4.5 Vodacom’s strategic investments

By far the largest investment that Vodacom has made has been in on its network in

South Africa, which has topped R15.9 billion of the R18.3 billion that it has spent on

networks (see table 4.3). This was a reflection of Vodacom‘s strategic plot to have

unrivalled dominance in its home market. Its shareholding agreement with Vodafone

had prevented it from expanding into the Northern half of Africa as aggressively as

MTN had also because its other shareholder, Vodafone also had a presence in Africa.

But Vodacom generated massive amounts of free cash flow that it has to use to

generate growth in some way. With the avenue into Africa partially closed, it has had

to adopt a strategy of continued high growth in its home market, South Africa. To

some extent, this was informed by Vodafone‘s own strategy to enhance its position in

present markets, experiment with and create new products while adding value to

existing products, and reduce competition by raising entry barriers and altering the

technological base of competition (Strategic Direction, 2004).

Vodacom has been at the forefront of technological innovation in the South African

market. It was the first operator in the Vodafone group to introduce HSDPA, which

allowed for download speeds of around 1.8 mbit/s – comparable to what Telkom was

offering on ADSL. Vodacom‘s strategy is based on Vodafone‘s intention to ―...

extend our reach into the home and the office to deliver richer business applications

and integrated fixed and mobile services, such as higher speed Internet access. We

will use technologies such as HSDPA, DSL and WiFi to do this‖ (Vodafone 2006b:

10).

Vodacom‘s other strategic investments in Africa where it has collectively spent R2.4

billion (see table 4.3), are in Lesotho, where it was awarded a license in 1995; in

Tanzania where it was awarded a license in1999, the Democratic Republic of Congo,

where it was awarded the license in 2001, as well as in Mozambique 2003. According

to ABI Research in 2004 Vodacom acquired 51% of Smart Call (a prepaid service

provider).

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Vodacom‘s strategic projections helped it to recognized that the future of South

Africa is, to a great extent, intertwined with that of the African continent as a whole.

In this respect, Vodacom's construction of mobile networks throughout Africa is seen

as helping to realise the ideal of an African Renaissance (Vodacom, 2005). Thus

Vodacom made investments in Lesotho, Tanzania, the DRC and Mozambique..

4.5.1 Home market strategy

Vodacom was the dominant mobile leader in the South African mobile

communications industry in the period 1993 to 2001 and had positioned itself as the

‗biggest and the best‘ (Finnie, Lewis, Lonergan, Mendler & Northfield, 2003:145).

Vodacom used traditional incumbent tactics, exploiting its advantage in terms of

distribution channels to attract mass-market prepaid customers, and using its

established relationship with business customers to attract high-end postpaid users. At

the end of 2001, Vodacom had an estimated 70 percent of business postpaid

customers as well as 61 percent of the total market. The result is that Vodacom has a

higher postpaid average return per unit (ARPU) than MTN, but a lower prepaid

ARPU than MTN.

4.5.2 Geographical expansion curtailed

Chan-Olmsted and Jamison (2001) have asserted the drivers of growth in the mobile

telecommunications are both geography and products. By the year 2001, even though

Vodacom had grown and become a dominant force not only in South Africa and on

the African continent, its restrictive shareholding agreement curtailed the

geographical expansion. However, in order to achieve continued growth, Vodacom

need to continue to focus on expansion on the African continent, mainly in the

surrounding countries and was consistently evaluating new investment opportunities

(Vodacom Group Annual results, 2005:8).

Thus Vodacom‘s diversification strategy was to target product growth in the local

market and it then indentified four market segments, namely

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• Corporate Market: services to corporations and enterprises

• Developed Market: services to customers in the higher income groups

• Developing Market: services to customers in under-serviced areas and lower income

groups, who increasingly participate in the economy; and

• Youth Market: services specifically designed for the needs of the youth.

(Telkom Highlights, 2005):

Vodacom was thus prospecting and developing new markets for its products and

services .

Figure 12 Vodacom’s market strategy

Source: Kotler 2003

Vodacom‘s mission and objective as outlined above in the short to medium term were

to retain market share and attract new customers through attractive products. Loyalty

and retention programmes played an integral role in achieving this objective.

Vodacom also sought to increase its contract customer base by migrating appropriate

high-end prepaid customers to contracts. According to Cant and Machado (2005:5)

Vodacom has redirected its strategy by pursuing technological advances in its quest to

maintain growth rates of the past. Vodacom has worked closely with Telkom, its main

83

shareholder, in the areas of wireless Internet and also testing the next generation of

mobile technology known as 3G.

4.6 MOBILE TELEPHONE NETWORKS (MTN) (PTY) LTD

.

The MTN Group Limited (formerly M-Cell Limited) was launched in 1994 and has

been a leading provider of cellular and communication services in Africa and listed on

the JSE Securities Exchange under the share code: "MTN". The group encompasses

MTN South Africa, MTN International and its Strategic Investments Division, which

hosts Orbicom, Airborn and MTN Network Solutions. The MTN Group had almost

seven million subscribers across the continent in 2006, where it provided cellular,

satellite and Internet access to 14 African countries. The group‘s other strategic

investments included six GSM cellular networks in Africa, including South Africa,

Swaziland, Rwanda, Uganda, Cameroon and Nigeria. MTN out-grew the original

vision for business and became one of South Africa‘s most valuable companies,

without having fully explored its potential. The MTN Group has been characterized

by the innovative use of technology and first world, first-class marketing concepts,

highly successful company offering, unique opportunities and challenges to both

employees and investors.

4.6.1 MTN’s ownership structure

.

MTN was started by pay TV M-Net with Cable and Wireless, Transnet and Fabcos.

M-Cell then held 72 per cent interest in MTN and negotiations continue for the

remaining 28 per cent interest in exchange for the ordinary M-Cell shares. MTN (M-

Cell) was a listed holding company controlling MTN South Africa, one of South

Africa‘s two mobile operators, along with operations in Uganda, Rwanda, Swaziland,

Cameroon and, then, Nigeria in 2001. Marcelle (2001) noted that the ownership

structure of MTN had changed many times as it had set out to own 100% of the

mobile operation, MTN Holdings. The structure shown in Fig.4.9 was as at 2001.

Marcelle (2001) went on to assert that MTN‘s telecommunications investments

included the 100% ownership of MTN, which took effect from June 16, 2000 after the

acquisition of the 23% interest in MTN Holdings held by the state-owned transport

company, Transnet, for R12 billion. This acquisition was settled through the issue of

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366 million MTN shares at R33 per share. MTN also had 100% ownership of

Orbicom, a specialist satellite and signal distribution company with expertise in

multimedia technologies. The Newshelf Trust originally acquired the shares in MTN

from Transnet between December 2002 and March 2003 at an average price of

R13,90/share..

Figure 13: MTN Group Structure

The controlling shareholders of MTN then, Marcelle (2001) continued, were the two

listed companies in the Johnnic Group, Johnnic Holdings Limited and Johnnic

Communications Limited, which held 50.2% of the company. Transnet, black

empowerment investment companies and small minority shareholders held the

remaining shares. As shown in Figure 4.9, MTN was 100 percent owned by holding

85

company MTN Group in 2001. MTN has followed Vodacom in attracting foreign

investment. MCell then, Marcelle (2001) reported owned a 72 percent stake of

MTN, Transnet (the public transport utility) owned 23 percent, a variety of

empowerment groups own 3.5 percent and the National Empowerment fund owned a

1.5 percent share (Marine et al., 2001). In addition to its domestic operations, MTN

Group - through its MTN International subsidiary - had wireless subsidiaries in

Cameroon, Lesotho, Nigeria, Rwanda, Uganda and Swaziland whereas Vodacom has

wireless subsidiaries in Tanzania, Congo, Lesotho and Mozambique, Marcelle (2001)

concluded.

4.6.1.1 Strategy and management

Shareholder value has been the essential performance management and driving

objective for the company. MTN‘s mission has been to become a leading multi-

national partner of electronic communication service that rewarded and benefited all

shareholders and society. MTN had planned to take telecoms to every African country

on the continent and had built an infrastructure and made critical strategic agreements

with partners, thereby allowing previously unconnected communities to talk to each

other. In Rwanda, cellular telephony has changed a country that was recently in

deadly turmoil to one of a growing economy.

MTN has provided employees with opportunities in which they could operate as

entrepreneurs over specific projects and has allowed them to run each project almost

as a separate business. ―Customer service‖ and ―customer delight‖ were the mantras

throughout MTN.

4.6.2 MTN’s Subscriber Growth

Up until 31 March 2000 MTN had a strong subscriber growth driven by innovative

products, when it introduced the pre-paid option. From being a niche business user

provider, MTN, came from behind to make increasing gains in market share. MTN

took full advantage of the trend and developed a range of products, services and

unique technologies to service growing demand.

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Table 8 MTN’s subscriber growth

Source; Operator records

Cell phones have evolved from being a businessperson‘s tool to a must have

socialite‘s tool, to an accessible consumer item for all market sectors of the market‘s

exceeding expectations. The projected number of uptake in the first year 1994-5 was

50 000 people. However by December 1999 there were 290 000 new subscribers. The

MTN network covered 65 000 square kilometres, in 2000, half of SA, providing

cellular telecoms access to 80 per cent of population with state of the art control

centre best in the world, with lowest congestion and dropped call rates. MTN was the

second service provider in South Africa but the first service provider in the world to

have a mobile coverage of 60 000km², obtain a mobile licence in Africa and launch

prepaid packages. MTN ‘s GSM network coverage in South Africa -exclusively

provided by Ericsson- embraces almost 90 000km² of land, consists of 4000 base-

stations, and has now around 9 million subscribers (African Cellular Statistics, 2005).

4.6.3 MTN’s market share

MTN has gradually seen its market share decrease since the beginning of 2000 from

41 percent to 33 percent despite its consistently increasing customer base. The decline

in MTN‘s market share was even more apparent in the fourth quarter of 2001 when

Cell C was first launched. Whilst Vodacom lost eight percentage points of market

share when Cell C entered the market, MTN has also suffered disproportionately at

the hands of this newcomer, losing six percentage points of market share to date

(Finnie et al., 2003:131). In 2005, MTN had approximately 35 percent of the market

share (Telkom Highlights, 2005:14).

87

The competitive terrain in SA, where Vodacom had a competitive advantage altered

the competitive terrain and MTN‘s response to that as espoused by its strategic

projection was to be the leading provider of communication services in Africa. To

realize this vision, the company pursued expansion both beyond its home market in

South Africa and, in businesses, outside mobile voice services. Its main operations by

2001 were in South Africa, and consisted of the mobile operator, MTN, a mobile

service provider company, M-Tel, and a satellite communications company, Orbicom.

Outside South Africa, MTN had strategic investments in four other African countries

through a wholly owned subsidiary, MTN Africa, which managed operations in

Uganda, Rwanda, Cameroon and Swaziland. By far the most important strategic

investment that MTN made was in January 19, 2001, when MTN won a 15-year

operating licence in Nigeria, by far Africa‘s largest mobile market, with a population

three times the size of its home market and with a teledensity of 4/1000.

By then MTN South Africa, the mobile network operator, was the leading contributor

to MTN‘s revenues and profits (contributing over 97% of group revenues and

EBITDA as at September 2000). Marcelle (2001) believed that it was important for

management attention to remain equally balanced between the core operations in

South Africa and the pursuit of pan-African strategy and diversification ambitions.

This was particularly true in the short term, she went on to say, when the pan-African

expansion was unlikely to yield significant financial rewards, while at the same time

competition in South Africa was intensifying

4.6.4 MTN’s strategic plot

4.6.4.1 Home market strategy

Due to the loss incurred during Cell C‘s entry into market in 2001 (see Table 4.8),

MTN had to revise/reinforce its home market strategy and not rely on the domestic

market for its long term growth. It had played second fiddle to Vodacom and it was

most likely that the entry of the third operator would affect MTN more than it would

Vodacom. MTN‘s strategy revolved around attracting high-value consumer users. As

illustrated in Figure 4.11, MTN‘ s main focus and objective was on the higher-end

prepaid and contract section of the market. Its success in targeting these sections of

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the market was illustrated by its disproportionately high-contract market share, and

the fact that its prepaid ARPU was 20 percent higher than main rival Vodacom. As

shown in Figure 4.11, MTN‘s market position strategy was a combination of market

penetration and product development and innovation.

Figure 14MTN’s market strategy

Source Kotler (2003)

MTN placed a lot of emphasis on ongoing reward schemes as a customer retention

tool. With ―eBucks,‖ users receive reward points for incoming and outgoing calls and

sending text messages. Further points are also awarded based on subscriber longevity.

These could be exchanged for airtime or non-mobile goods and services. There were

even more loyalty schemes available for prepaid customers. The ―Big Bonus‖ plan

was an example of such a loyalty scheme and consists of two main parts (Finnie et al.,

2003:135):

• Daily Free SMS Bonus: users receive one free SMS for every chargeable call of over

one minute, although the SMS must be used on the same day;

• High Usage Bonus rewards: users with airtime for spending over R500 or R1000

per month will see their rewards ramping up the longer the subscriber stays with

MTN.

MTN had some success in adopting a ―services not technologies‖ approach to non-

voice applications. In promotional literature there is no mention of GPRS or HSCSD,

89

instead being substituted for brands such as MTNdataFAST and MTNdataLIVE. The

terms SMS (Short Message Service) and MMS (Multimedia Message Service) are

used, but these have already entered common parlance to a significant degree (Finnie

et al., 2003:136). The next section will look at how MTN‘s shareholders chose a

different growth strategy to Vodacom

4.6.4.2 Geographical expansion not curtailed

When MTN commenced its services a few months after Vodacom, it initially

followed a classic follower strategy (Cant & Machado, 2005:5). As outlined above,

Vodacom‘s dominance and its competitive advantage in SA‘s market led MTN to

follow a different growth strategy and focused more on an international growth

strategy. Whereas Vodacom strove to be the ‗biggest and the best‘ MTN on the other

hand had an African strategy since the start and implemented its vision of becoming

the leading telecoms operator on the continent. MTN focused on developing regional

hubs around which business clusters developed and from which they developed skills

in being a player in emerging markets and each of the hubs provided different sets of

skills which the company built upon. According to Marcelle (2001) MTN identified

three essential regional clusters, through tracking efficiencies, knowledge transfers,

skills sharing and mutual access to a pool of advanced and innovative technology.

These regions are the Great Lakes Region, Southern Africa and the Central/West

Africa. It extended its reach into Africa through broadening its extensive roaming

agreements and guiding established partnerships in Uganda, Rwanda, Swaziland and

Nigeria. MTN believed then in 2003 that the Nigerian telecoms market was expected

to grow to and according to its Marshal Plan it aimed to have increased its subscriber

base in Nigeria to 4 million by the end of the 2004/5 financial year, and that Nigeria

was a crucial market. According to Marcelle (2001) in the South African operations,

MTN completed its efficiency drive whereas outside the core operations, the focus

was on establishing management and decision making systems to support pan-African

expansion, as well as creating the management capacity and business relationships

necessary to support diversification of revenues. Senior management, she further

believed, with support from the Johnnic Group, continued to focus on positioning

MTN to assess, win and exploit strategic opportunities. Between 1997 and 1999 MTN

International expanded into Africa, acquiring licences in Uganda, Rwanda and

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Swaziland, MTN International also acquired a National GSM 900 licence in

Cameroon in 2000.

4.6.5 MTN’s Strategic Investments

MTN South Africa, Marcelle (2001) noted, was restructuring its business operations

to focus more on the value end of the market by beefing up its corporate marketing

and sales effort. In line with this repositioning, the company was developing

competence to service and provide business solutions to corporate accounts. These

new areas of focus were intended to complement the expertise that MTN has

developed in mass marketing. MTN in South Africa also intended to increase

operational efficiency through staff reductions and the redeployment of existing staff

as historical growth rates slow. As part of this drive, Marcelle (2001) believed, the

company had restructured its regional operations from six to four super groups to

improve coordination and reap the benefits of increased efficiency.

4.6.5.1 Orbicom

Marcelle (2001) also noted that Orbicom was a satellite signal distribution company

whose primary line of business was the distribution of satellite-based traffic for

broadcasting companies. Orbicom‘s half-year turnover was reported to stand at R45.5

million in September 2000. Orbicom had a good technical reputation in satellite

communication and had been a leader in making the transition from analogue to

digital satellite signal distribution systems. The skills and competencies in Orbicom

had been built over a number of years and had the potential to provide a platform for

this company entering the digital terrestrial broadcasting market. Orbicom was also

positioning itself as a multimedia, value-added service provider and had been active

in seeking out business opportunities outside South Africa; Marcelle (2001) went on

further to report. Up to the time of the writing of her report, Marcelle (2001) observed

that Orbicom had been successful in securing a partnership with Lockheed Martin to

provide satellite delivered internet services across Africa. Orbicom had also been

successful in establishing an electronic funds transfer network for the banking

community in Ghana, and reports interest for similar services in other African

countries.

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4.6.5.2 MTN Nigeria

The most important strategic investment by MTN International (which altered,

revised and redefined the competitive terrain with its arch rival Vodacom) was the of

National GSM 900 and GSM 1800 licences in Nigeria, at the cost of US$285 million

at the world‘s first spectrum auction held in Abuja Nigeria, and subsequent launch of

operations in August 2001. MTN Nigeria commenced with construction of

Y'helloBahn in 2002, a 3 400 kilometres-long countrywide microwave radio

transmission backbone. At the time of the issuing of the licence, Nigeria‘s tele-density

was .4 per 100 inhabitants.

4.7 Conclusion

The chapter focused on how Vodacom created and sustained its competitive

advantage over MTN in South Africa as well as how it was poised by 2001 to grow

and become a dominant force on the continent. MTN on the other hand responded to

Vodacom‘s dominance in SA by making specific strategic investments outside of

South Africa that enabled it to acquire skills as an emerging market player and those

skills included enabling its strategists to make assessments of the rent earning

potential of the Nigeria market. This aspect will be examined in detail in the next

chapter. There is no doubt that the African telecoms environment in 2001, where

Vodacom and MTN were competing, there were key variables that had a direct

influence on the participants in the telecoms industry. It was crucial for the

shareholders and management at both Vodacom and MTN to adapt to changes in the

Africa telecoms environment and make crucial decisions in order to steer their

businesses in the right path to prosperity and success.

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Chapter 5

Geographical expansion into Nigeria

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5.1 Introduction

This chapter will use the framework which advances several principles for building

competitive advantage, which are that competition takes place not only over material

resources, but over the interpretations of multiple constituents about how firms create

value in an industry. Firms develop superior industry positions from instrumental

actions that are intended, not only to defeat competitors, but to influence the

perceptions and actions of constituents. Also, firms and constituents enact the

competitive terrain on which competition in industry unfolds. Using this framework

this chapter will show how the actions MTN shifted the African telecommunications

competitive terrain in Nigeria, on which MTN ultimately flourished.

5.1.1 Nigeria and its telecommunications sector in 2000

In 2000, Nigeria‘s large population of 124 million, three times the size of SA‘s

population, made it the most populous country in Africa, representing approximately

one-sixth of the continent‘s population. The population was also growing very fast

and was young (the median age was 17.4 years). People were therefore more likely to

respond positively to new technologies. Furthermore, the telecommunications

infrastructure in 2000 served only a tiny fraction of the population and was of poor

quality. On the other hand, Nigeria‘s GDP per capita at USD473 (adjusted for relative

prices was USD853) was low and below sub-Saharan Africa as a whole (USD490 per

capita). However, Nigeria has been characterised by a very unequal distribution of

income; the richest 10% of the population account for 40.8% of the national income.

This meant that there were a significant number of people and businesses that could

potentially afford the technology, although ultimately teledensity was unlikely to be

as high as those in more developed countries for some considerable period.

Table 9 Africa’s tele-density comparison 1999

Country US-Dollar GDP per Capita Telecoms per 100 population

East Africa

Uganda 244 0.5

Kenya 278 1.0

West Africa

Nigeria 244 0.4

Cameroon 610 0.6

(Source The Sunday Times 23 June 2003)

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An insight into the likely demand for mobile telephony services in Nigeria then, could

be gained by looking at Uganda in east Africa. Uganda with a population one-sixth

the size of Nigeria, had in most other respects a very similar demographic profile,

literacy structure and GDP per capita to Nigeria. Although Uganda had a monopoly

supplier of GSM services between December 1994 and October 1999, once the

market was opened to competition with the entry of MTN, subscribers grew

dramatically from around 30,000 to 150,000 by the end of 2000.21 As the Nigerian

GSM market featured competition from day one, if the operators offered similar

tariffs and coverage to those that were offered in Uganda in late 1999. GSM services

were launched in Nigeria in August 2001 and by November 2002 there were over 1.2

million subscribers.

5.1.2 Structure of Nigeria’s telecommunications sector

The main players in the Nigerian telecommunications sector are: the Federal

Government of Nigeria, the Ministry of Communications, the NCC, and the

telecommunications service providers. The Federal Government of Nigeria is

responsible for: giving overall direction for telecommunications development;

ensuring telecommunications policy is consistent with other national policies; and

enacting necessary laws and taking other measures in support of the National

Telecommunications Policy. The Ministry of Communications is responsible for

broad telecommunications policy, which includes proposing policy options and

recommending legislation to Government and monitoring the implementation of

government policy. The NCC is the independent regulator of the telecommunications

industry. It issues licences, assigns frequencies and regulates all licensees and service

providers. The NCC performs regulatory functions necessary to promote the

development of Nigerian communications. The effectiveness of the NCC in 2000 was

reduced by the fact that it was unable to regulate Nigerian Telecommunications

Limited (NITEL), the state-owned incumbent operator. This was because the decree

under which it operated specified that the NCC was to be the economic and technical

regulator of the privatised sector of the telecommunications industry. Therefore, the

operator with a monopoly over the local loop and domestic and international fixed

lines in 2000 was not under the regulatory control of the NCC.

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NITEL was established in January 1985 following a merger between Nigerian

External Telecommunications Limited (previously responsible for external

communications) and the Telecommunications Division of the Department of Post

and Telecommunications (previously responsible for domestic telecommunications).

NITEL was commercialised in 1992, following the implementation of a program of

privatisation and commercialisation by the then Federal Military Government.

NITEL‘s Public Switched Telephony Network (PSTN) had a capacity of around

700,000 lines in 2000, of which about 500,000 were connected. It operated

approximately 1600 public payphones—or one payphone for every 77,500 in the

population.

With regard to cellular telecommunications, the state-owned company Nigerian

Mobile Telecommunications Limited (M-Tel, which was merged with NITEL in the

late 1990s, was the only national operator of cellular services in the country until the

beginning of August 2001. However, M-Tel‘s coverage was barely national as it

covered three cities (Lagos, Enugu and Abuja). M-Tel ran an analogue system with a

capacity of 210,000 lines, with around 40,000 of these connected to subscribers as at

July 2001. In addition to the two national operators, there were several small private

operators (e.g. Multi- Links Telecommunications Ltd., and Intercellular Nigeria Ltd.)

serving Lagos. These primarily deploy fixed wireless technologies and were used by

businesses and high net worth individuals. Some large companies (Shell is an

example) had constructed their own private radio communications networks.

Although in the run up to the auction there existed nine mobile (GSM) telephony

licensees, their failure to build out infrastructure and launch a commercial service

meant, according to the NCC, that they had violated the terms of their licences and

therefore were not permitted to operate a service. Furthermore, the new process meant

that their licences were not valid and de facto revoked. The issuing of new licences

effectively rendered worthless the licences issued under the military government and

the NCC returned to the licence holders their application fees. One of the companies,

Motophone, returned the funds to the NCC and mounted a legal challenge to stop the

auction process, which did not succeed.

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5.1.3 World’s First Spectrum Auction Successful!

The use of an auction in Nigeria was motivated largely by the need for transparency

and objectivity. The then Nigerian President, Olusegun Obasanjo, was quoted in

THISDAY Newspaper (Vol 10, no 3425) as saying that his administration had

enhanced the investment climate in the country, making it one of the most rewarding

opportunities not only in Africa but also in the world. He had gone on to add that

reforms were being taken in all sectors of the economy in line with his

administration‘s policy of creating an enabling environment for attracting Foreign

Direct Investment (FDI). Noting that there was a correlation between the inflow of

FDI and transparency and accountability, he said that his administration had initiated

mechanisms to guide government procurement. Obasanjo concluded by saying that

the establishment of the Economic and Financial Crimes Commission (EFCC),

Independent Corrupt Practices and Other Related Offences Commission (ICPC) and

the Extractive Industries Transparency Initiative (EITI) had restored confidence in the

system.

The amount raised in the auction exceeded many analysts‘ expectations. At the

conclusion of the auction, the Nigerian government expected to raise USD855

million. In addition, the government was expecting to raise a further USD285 million

from NITEL. However, one of the successful bidders (CIL) subsequently defaulted.

Despite the default by CIL, many in Nigeria viewed the GSM auction as a resounding

success, largely because the transparency of the process was unprecedented. A well-

designed auction was deemed superior to alternative comparative selection methods,

the latter having failed previously due to alleged wrongdoing. While opinion may

differ as to the merits of auctions in awarding spectrum licences and other scarce

public resources, the experience in Nigeria highlights how they can be applied

successfully in the most challenging of circumstances

5.2 The growth of the telecommunications market

The pent-up demand for telephony services can be seen from the massive increase in

subscribers after mobile services were introduced (see Fig 5.2 below), despite very

high prices at the inception of services. Demand for mobile services had also resulted

97

in a proliferation of smaller entrepreneurs selling single calls to that section of the

general public who cannot afford a mobile service. Nigeria‘s single-call market, or

―umbrella operators‖ as they are commonly known, significantly changed the

boundaries of the call market by forcing operators to rethink their tariffs and introduce

cheaper call rates to accommodate bulk operators.

Table 10 The growth of mobile in Nigeria

In markets where initial connection fees are high and pre-paid airtime rates are out of

reach of most people, entrepreneurs arbitrate the market by purchasing either pre-paid

or post-paid contracts from mobile operators and reselling this airtime at rates slightly

above post-paid rates but lower than pre-paid rates. For mobile operators, this

approach increases network traffic and keeps the average revenue per user high. In

markets such as Nigeria and Cameroon, airtime resellers are estimated to account for

30% to 40% of the overall post-paid traffic (Pyramid, 2005). For consumers, it

expands the reach of mobile networks, provides an interim solution to affordability

issues, especially to users who cannot afford the initial connection fees. It also forces

prices down because mobile operators are no longer in control of pricing. Resellers

are extremely sensitive to price but are valuable to operators as high value customers.

Operators therefore vie to keep these customers through lower pricing; thus forcing

price-based competition which mobile operators are keen to avoid. An added benefit

is that it creates jobs in most markets, and in Nigeria this has become a viable sub-

industry. Although the legislation gives the regulator extensive powers over tariff

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regulation, the current level of competition allows a shift from specific approval of the

tariffs of non-dominant operators to issuing guidelines and monitoring.

By 2003 Nigeria had become the fastest growing mobile market in Africa and one of

the fastest in the world. The connected lines had grown by an average of 10 000 lines

per annum in the 4 decades between independence and the end of 2000. Since August

2001 to March 2004, the average rate of growth was over 1 million lines per annum

and by March 2004 the total connected fixed lines stood at 888 854 and mobile lines

at 3 811 239 with the total number of lines at 4 700 093. The tele-density as at March

2004 stood at 3.92. Nigeria‘s ‗umbrella people‘ were doing a great job providing

access to many who could not own telephones or mobile phones. They provided a

major contribution to the access provided by mobile and fixed operators. The

ownership of mobile phones was democratised as artisans, students, taxi drivers,

market women etc now owned phones. Access to telecommunications was greatly

enhanced, with the explosion of telecenters/ cybercafés in all nooks and crannies of

the country where signals were receivable. This was because of the cheap set up costs

as well as the low overheads in the case of the ‗umbrella people‘ who only required a

table, an umbrella and a street corner (Ndukwe; 2004).

The Nigerian experience showed that liberalising before privatising was effective in

achieving development goals if appropriate licence approaches were used. In addition,

the government was able to recoup potential revenue from the privatisation through

the licence auctioning process as well as from forthcoming tax revenues from the

highly successful mobile companies. The GSM licences each sold for US$285m. The

Nigerian government granted a five-year tax holiday to new licensees, which attracted

investors. Competition, a large market with pent-up demand, innovative licensing

approaches and consumer vigilance combined to increase connectivity and access to

ICT and also drove down retail tariffs. The Nigerian experience highlighted the

significant variances from developed country approaches and the success of

innovative locally developed solutions for attracting investment and increasing access

to telecoms services.

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5.2.1 The players in the Nigerian telecommunications

The PRL Research Telecom Vendor Ratings, an initiative of Polls and Ratings

Limited on the operations of the telecommunications operators in Nigeria, the results

of which were published in the Financial Standard, July 7 2003, in Lagos, rated the

GSM operators high, and cautioned most of the Private Telecoms Operators (PTOs).

The report highlighted clearly and concisely the vendors‘ overall rating and status

when it analysed the strategy, organization, product(s), technology, marketing,

coverage and support. The companies that were analysed and rated were, Intercellular,

Starcomms, VGC Comms, Reltel, Mobitel, Cellcom, EMIS, Multi-Links, Econet

Wireless Nigeria then (now V-Mobile), MTN, MTS First Wireless, Globacom and

Nitel.

5.2.1.1 MTN Nigeria – First Mover Advantage Implications

On May 16, 2001, MTN became the first GSM network to make a call following the

globally lauded Nigerian GSM auction conducted by the Nigerian Communications

Commission earlier in the year. Thereafter, the company launched full commercial

operations beginning with Lagos, Abuja and Port Harcourt the three main regional

capitals. MTN paid $285m for one of four GSM licenses in Nigeria in January 2001.

By 2003, in excess of US$1.8 billion had been invested building mobile

telecommunications infrastructure in Nigeria. Since launch in August 2001, MTN

steadily deployed its services across Nigeria. In 2003 it provided services in 223 cities

and towns; more than 10,000 villages and communities and a growing number of

highways across the country, spanning the 36 states of removed Nigeria and the

Federal Capital Territory, Abuja. Many of these villages and communities were being

connected to the world of telecommunications for the first time ever.

As outlined in figure 4.5, MTN‘s first mover advantage in Nigeria derived from, as

Lieberman and Montgomery (1987) pointed out, some asymmetry which was

generated, enabling MTN to get a head start over rivals. They further contend that this

first-mover opportunity may have occurred because the firm possessed some unique

resources, or foresight or simply because of luck. It was a question of both foresight

and luck. Foresight that Nigeria was the most populous country in Africa and had a

100

very low teledensity, luck in that Vodacom initially considered the Nigerian venture

risky. Lieberman and Montgomery (1987) concluded by affirming that once this was

generated, there were a variety of mechanisms that may have enabled MTN to exploit

its position. These mechanisms enhanced the magnitude or durability (or both) of

first-mover profits. First-mover advantages arise from three primary sources: (1)

technological leadership, (2) preemption of asserts and (3) buyer switching costs. But

it was also that MTN had developed proficiency in rapidly rolling out a network, in

the Ugandan market, which had almost the same demographics as Nigeria.

5.2.2 Ownership Structure

MTN teamed up with well-connected Nigerian partners, chiefs and business magnets

that represented a broad spectrum of Nigeria's ethnic and religious groups. The

Nigerian partners owned 37 per cent, and were individual heavyweights, such as

Pascal Edozie (7 per cent), Colonel Sani Bello (6 per cent), Chief Victor Odili (8 per

cent), Mr Gbenga Oyebode (7 per cent) Alhaji Ahmed Dasuki (6 per cent), Mr Tunde

Folawiyo (6 per cent), (MTN Nigeria Induction Booklet; 2003) while the company,

MTN Group, owned 60 per cent of MTN Nigeria and 3 per cent was set aside for an

employee scheme. MTN Nigeria expected to raise local shareholder ratio over the

next few year to decrease MTN International‘s exposure. Ashmee Dasuki, another

MTN Nigeria (MTNN) shareholder and a Muslim executive from the north, said that

MTNN went out of its way to find representatives from different regions for its

directors and shareholders. MTNN already employs 1300 Nigerians, and peak funding

was expected to reach US $1.4 billion in five years, of which 50% will be equity, 50%

through loan. This figure has since been revised to US$2.2 billion (MTN Nigeria

Induction Booklet 2004). The then MTN Nigeria‘s CEO, Adrian Wood, had extensive

telecoms experience with Telenor and Callahan and played a pivotal role in the

growth of MTN Nigeria‘s fortunes.

5.2.3 Expanding Footprint

The MTN Group had bedded down its Nigerian operation more quickly than

anticipated and benefited from expanding its footprint in eastern Africa, Melody

Horn, a telecoms analyst at Merrill Lynch, said in a report. MTN Nigeria also signed

an interconnect agreement with the second national operator and fourth global system

101

for mobile communications operator, Globacom. "The weakening Rand relative to the

dollar would benefit MTN upon conversion of its non-South African profit into

Rands," said Horn. She added that Johnnic Holdings offered a cheaper entry into the

MTN Group because of its proposed unbundling. Johnnic unbundled 526 million

shares in MTN in a deal worth R7 billion. The MTN operations expected to contribute

its growth include Nigeria, Swaziland, Uganda, Cameroon and South Africa

(Ginsberg and Chege, 2003).

MTN expected to benefit from robust operations in Nigeria when reported on

19/06/03. Seven analysts forecast a 99 per cent jump in headline earnings a share to

R1.42. Nigeria was the star performer of the group, which also had operations in

Lesotho, Swaziland, Uganda, Rwanda and Cameroon. Subscriber numbers in the

populous west-African country hit the 1 million mark in February 2003, pushing the

overall subscriber numbers to 6.66 million. This compared with Vodacom‘s 8 million

subscribers- 7,5 million of them in South Africa.

But MTN Nigeria battled with congestion on its lines due to huge uptake in services

there, and was forced to delay expansion, while it invests heavily in infrastructure – a

factor that analysts felt then, could delay or limit operating profit. At home, MTN

faces a maturing market and increased competition from newest rival Cell C; analysts

will be watching margins closely. ―Growth in South Africa is not really a problem.

The problem is cost pressure,‖ said another analyst. Yet another said, Cell C‘s entry in

November 2001 had put pressure on MTN and Vodacom and had raised subscriber

costs. News on MTN‘s debt position was keenly awaited in the wake of a

strengthening Rand. Its debt-to-equity ratio, excluding goodwill, stood at 76 percent at

the end of March 2002 and was set to rise due to expansion in Nigeria, the group said.

MTN rose 25c to end at R14 on Friday and Telkom added R1 to R34.

5.2.4 MTNN’s Strategic Plot

MTNN‘s strategy in Nigeria was primarily aimed at revising the competitive terrain

that had been defined by its major competitor Vodacom in the home market in South

Africa and also on the continent. Thus its strategic projections were supported by

strategic investments and both processes were supported by a strategic plot of the

102

firm. The strategic plot saw the deployment of a digital microwave transmission

backbone, the 3,400 Kilometre Y‘elloBahn which was commissioned by President

Olusegun Obasanjo in January 2003 and was reputed to be the most extensive digital

microwave transmission infrastructure in all of Africa. MTN‘s experiences in South

Africa where it had deployed a network, as well as in Uganda in partnership with

Ericsson had taught it valuable lessons about rapid network rollout, securing a larger

footprint in the market place as well about being a market leader. The Y‘helloBahn

significantly helped to enhance call quality on the MTN Network. The Company

subsisted on the core brand values of leadership, relationship, integrity, innovation

and ―can-do‖. It prided itself on its ability of making the impossible possible

(entrepreneurship), connecting people with friends, family and opportunities.

MTN Nigeria also expanded its network capacity to include a new numbering range

with the prefix 0806, making MTN the first GSM network in Nigeria to have adopted

an additional numbering system, having exhausted its initial subscriber numbering

range - 0803. In its resolve to enhance quality customer service, MTN Nigeria

introduced a self-help toll-free 181 customer-care line through which subscribers

could resolve their frequently asked questions free of charge. MTN‘s overriding

mission was to be a catalyst for Nigeria‘s economic growth and development, helping

to unleash Nigeria‘s strong developmental potential not only through the provision of

world class communications but also through innovative and sustainable corporate

social responsibility initiatives.

5.3 MTN’s market share

Years of playing catch up to Vodacom had influenced MTN‘s response to the

competitive terrain and taught it valuable lessons about being the first in the market

and it had also learnt that as the second mobile operator, the entry of another operator

in the market, as was the case of the entry of Cell C in the SA market in 2001, almost

always affected the second operator more than it did the market leader.

The table below shows its market share relative to that of V-Mobile/Econet, Nitel as

well as Globacom, since inception in August 2001. MTNN revolutionized the face of

telecommunications in Nigeria with its marketing strategies. The firm further

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enhanced its investment readiness by deploying and commissioning the multi-million

dollar microwave infrastructure, Y‘helloBahn, to provide essential infrastructure

necessary for easy expansion of its services across the country. Based on specific

attributes, MTN Nigeria was the only network with the highest brand equity within

the telecoms segment, except on call tariffs. It was expected that this trend would

continue, especially as telecoms services were demand driven (Ndukwe: NCC May

2004).

5.3.1 Revenue Driven by subscriber growth

While MTN had lagged behind Vodacom both in revenue and profitability from 1993

to 2001, the Nigerian venture began to show dividends, two years after launch. In the

six months to September 30 2003, cellular operator MTN surged ahead of its rival

Vodacom in the profitability stakes for the first time in its nine-year history; posting a

net profit of R2, 1bn that dwarfed Vodacom's R1, 4bn. Both companies clocked up

similar revenues, with MTN's R11, 2bn a fraction behind Vodacom's R11, 3bn. But

MTN converted that into a larger profit by emphasizing cost cutting to run a leaner

operation, said CEO Phuthuma Nhleko. Vodacom remained supreme in SA, with a

55% market share compared to MTN's 39%, but MTN was king of the continent in

terms of profitability, he said.

What could have toppled MTN's African supremacy then was Vodacom's intention to

challenge it in the lucrative Nigerian market by taking over Nigeria's second cellular

operator, Econet. Vodacom's bid for Econet was mired in legal hitches, but it had

pledged to invest hundreds of millions of dollars if the deal went through. Nhleko had

declined to speculate on how fierce the clash could become if Vodacom entered

Nigeria

104

Figure 15 Market Share in Nigerian Telecoms

The Nigerian Telecomms Market

Figures (a), (b), (c) and (d): Mobile Market Share – August 2002, September 2003, December

2003 and March 2004. Source: Nigerian Communications Commission

NITEL GSM

11%

MTN

45%

ECONET

44%

MTN

59%

ECONET

32%

GLOBACOM

4%NITEL GSM

5%

NITEL GSM

4%

MTN

52%

ECONET

31%

GLOBACOM

13%

NITEL GSM

12%

MTN

45%

ECONET

25%

GLOBACOM

18%

a) August 2002b) September 2003

c) December 2003d) March 2004

Despite the threat, MTN was already assessing opportunities in other countries. MTN

issued a cautionary notice to coincide with its results, and for the first time, Nhleko

said it might no longer limit itself to African expansion. "We are continually looking

and we are now in a far better shape because our debt-to-equity ratio is down to 8 per

cent and we are generating significant cash flows (from Nigeria)."

Expansion would preferably come by entering virgin territory, but a good acquisition

would also be attractive. "In the short term it will be African opportunities because

that is our logical footprint, but if there are interesting opportunities outside we'd

consider them," he said. MTN's results were topped by an impressive 102 per cent

growth in headline earnings a share to 123c, up from 61c. Nhleko said the

105

performance in SA was a highlight, as MTN had arrested a previous decline in profit

margins caused by stiff competition. Operating capital had been tightly controlled and

its subscriber base had grown by 537000 in six months. "Our performance in SA has

been stronger than our expectations but it has been a lot of hard work."

5.3.2 MTN Nigeria cash cow

MTN Nigeria became the cash cow for the MTN Group, as it made significant

contribution to the group‘s R2.13 billion (N42.287 billion) profit for the six months

ended September 30 2003. The Group announced that it had recorded a 168 per cent

jump in its profit after tax to R2.13 in its six months interim result. The South African

cellular operator announced in Johannesburg, that it‘s revenue outside South Africa,

with emphasis on Nigeria, jumped by 39 per cent to R4.12 billion (N81.794 billion)

while its domestic revenue grew by 26 per cent to R7.11 billion (N141.154 billion).

The announcement was made the same day that its per second billing and marginal

tariff reductions took effect in Nigeria.

Also for the first time, MTN was able to exceed the profit after tax of rival operator,

Vodacom that recorded R1.37 billion (N27.198 billion). This was the first time that its

after tax profit has exceeded that of rival operator Vodacom, although its revenue was

still marginally smaller. Vodacom‘s revenue was R11.29 billion (N224.139 billion). .

Nigeria has been the star performer of the group, which also operates in Lesotho,

Swaziland, Uganda, Rwanda and Cameroon. Subscriber numbers in the populous

west-African country hit the 1 million mark in February, pushing the overall

subscriber numbers to 6.66 million. This compared with Vodacom‘s 8 million

subscribers- 7,5 million of them in South Africa.

Despite the impressive performance of MTN Nigeria, CEO, Adrian Wood insisted

that Nigeria remained one of the most difficult terrains for the GSM operators. He

noted that the major hurdles in the operating environment then, included the

following; political turbulence surrounding the 2003 elections; regulatory uncertainty

and intervention and competitor market disruption, which continued to pose threat to

MTN Nigeria‘s operations.

106

Mr. Phuthuma Nhleko, CEO, MTN Group, said that MTN Nigeria had experienced

strong demand for its services, that required a controlled sign-up of new subscribers to

match the available network capacity while the accelerated network rollout continued.

As at the end of September 2003, MTN Nigeria had increased its base stations in

Nigeria to 652 from 378 sited in March 2003. Nhleko added that MTN N‘s subscriber

base had increased 127 per cent to 1.38 million, with the average revenue of $55 per

user. The South Africa base also showed improvement, rising by 25 per cent to 5.36

million, with the average revenue of R207 per user. MTN had, by the end of

September 2003, 7.89 million subscribers across its African operations. Nhleko

pointed out that assuming current market conditions, the group was confident that the

South African operation would continue its strong free cash flow generation, while

international operations were expected to maintain subscriber growth. Nhleko added

that, the group was ―now deriving an increasing proportion of its earnings from

outside South Africa‖ and as a result was ―becoming more susceptible to foreign

exchange movements.‖

5.3.3 Strategic Investments in Nigeria

MTN Nigeria CEO, Adrian Wood, had said that the company had plans to spend its

$1.4 billion budget and other telecom investments of $3.1 billion in the Nigerian

market where it held an estimated 59 per cent of the market. According to him, 98 per

cent of MTNN‘s 1.3 million subscribers were on the prepaid package Pay-As-You-

Go. He went on to say that the executive arm of the government was enthusiastic

about attracting foreign direct investment, but that it remained low, although the

government was putting an effort into generating such interest. However, the general

lack of infrastructure was an inhibitor. The other problem was that although Nigerian

market was large with a total population of around 128 million people, it was difficult

to measure. The gross domestic product of the country was low at around $400 per

head, with a cash economy predominating with little or no consumer credit available.

Inflation, by the end of September 2003 was high, at 19 per cent per annum, which

impacted on the cost of capital.

Wood also pointed out to the researcher in an interview, MTN was not finding that it

was not only building a GSM network, but having to put in a transmission and power

107

network as well. That included having 1400 generators that consumed 1.5million

litres of diesel per month. The full network would have 12000 generators in place,

requiring 12 million litres of diesel per month, meaning that 240 tanker trucks would

have to be deployed every day of the week, making the network susceptible to oil

price fluctuations. Security was also highlighted as a major concern, with 1400 guards

and supervisors employed on the premises, and CCTV and perimeter surveillance in

place, Wood revealed that security costs around $290 000.00 per month, and that

MTN Nigeria‘s coverage had grown to link 55 cities, 992 towns, and villages and six

geo-political zones by October 2003, compared with 22 cities and five geo-political

zones in September 2002.

5.3.4 MTN more profitable than Vodacom- March 2004

When Phuthuma Nhleko, the Chief Executive of MTN, presented the financial results

in June 2004, the results showed that MTN had overtaken Vodacom in both revenue

and profitability in the year to March 2004. MTN‘s subscriber numbers had grown by

42 per cent to over 9.5 million against Vodacom‘s 29 per cent to 11.2 million. MTN‘s

revenue was up 23 per cent to R23.9 billion while Vodacom‘s rose 18.7 per cent to

R23.5 billion. MTN‘s taxed profits jumped by 94 per cent to R3.3 billion against

Vodacom‘s 36.9 per cent increase to R3-billion, while MTN continued to grow

strongly in Nigeria, For MTN, Nigeria continued to produce excellent returns. Its

subscriber base there grew 90 per cent to almost 2 million. It grew to four million in

2005, according to MTN Nigeria‘s Marshal Plan. (Sunday Times, 4th

July 2004 M

Klein) MTN had some exciting opportunities ahead. It was no longer hampered by the

massive debts it racked up in the early days of setting up its Nigerian network, and

was now enjoying the rewards of that bold entrepreneurial investment in the form of

some serious profit.

It has also gained the skills and experience necessary to be a world-class player. Nor

does MTN have any shareholders who might inhibit its international expansion. Its

rival Vodacom, by contrast was 35 per cent owned by the UK-based Vodafone, which

has already claimed several other African countries as its own. That pretty much

limited Vodacom's expansion to neighbouring African nations. So it was no surprise

then, that MTN's CE Phuthuma Nhleko, also an MTN shareholder through Newshelf,

was assessing opportunities in other African countries and, potentially, further afield.

108

Its results for the six months ended September 30 showed revenue of R11, 2bn, and

an after-tax profit of R2, 1bn and net debt down to a manageable R700m. Its South

African operations earned 46 per cent of its profit, and of the other 54 per cent,

Nigeria contributes 80 per cent.

Pyramid Research (2004) had then posed the question of where could MTN go to

replicate that success. No other African nations had the size of population, the

undercurrent of informal wealth and the bubbling demand for cell phone services that

entrepreneurial Nigeria offered. Which meant investments in other countries may be

sound, but not spectacular. MTN, the Pyramid Report continued, could do better

looking to the east by tackling the massive Chinese market, perhaps, where the large

population was taking cellular services to heart. At the same time, it could not take its

eye off the ball in SA despite having performed better than expected in the face of

tough competition and an increasingly mature market.

Meanwhile, since becoming CEO, Nhleko had continued to build MTN‘s presence in

Nigeria, tried for a number of licences and solidified the company‘s position locally.

The group‘s empowerment credentials were enhanced through the management buy-

in of almost R4.3 billion. Investors were looking to him to prove that MTN could

continue to grow. MTN announced at the beginning of the week of the 4th

of July

2004 that it had submitted a bid for licence in Saudi Arabia. Nhleko concluded by

saying that, ―If we don‘t create shareholder value in new markets, we will become a

cash cow and that is not our intention. Our intention is to keep growing our footprint,‖

hinting that it was not their intentions to be cautious- like Vodacom.

5.4 Vodacom’s cautious strategic plot

Vodacom‘s response to the revised, redefined competitive terrain in 2003 derived

from its micro culture that bounded its strategic projections and undermined the

effectiveness of its strategic investments, particularly when it came to the Nigerian

market. Rindova and Fombrun (1999) define micro-culture as the knowledge, values

and identity beliefs in a firm consistent with a broad definition of culture as the

pattern of shared beliefs and values that give members of an institution meaning and

provide them with rules for behaviour. They go on to add that knowledge, values and

beliefs were the resources that had enabled Vodacom to create, in SA, sustainable

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competitive advantage, in so far as they were valuable, rare and difficult to imitate. In

addition, they further asserted that, knowledge, values and beliefs create an advantage

for the firm through their influence on information processing and behaviour. As

cognitive structures unique to Vodacom then, they had enabled its strategists to make

superior evaluations of the rent earning potential, in new markets, like Nigeria of the

firm‘s resources relative to that of MTN. These structures also guided the actions of

all members of Vodacom to enable them to enact a systematic ‗cautious‘ strategic

direction in response to the revised and redefined competitive terrain created by

MTN.

5.4.1 Challenging rival MTN

Vodacom‘s cognitive structures in 2003 enabled its strategists to determine that the

competitive terrain had been revised and redefined and that if it needed to maintain its

position as the largest operator in Africa it needed to challenge rival MTN on the

African Continent, in Nigeria in particular, and make international business 30 per

cent of group operating profit by 2004. Vodacom's only operations outside South

Africa were Lesotho, Mozambique, Congo and Tanzania, but it was also considering

also targeting Namibia, Zambia, Zimbabwe and the DRC Perceptions of strife in the

DRC were incorrect according to Andrew Mthembu, Vodacom Group Deputy CEO

and MD of Vodacom International, much of the economy was well away from the

troubled northeast. There were 60 000 telephones for 60 million people. Vodacom

also had a management contract with Congolese Wireless Network; the cash strapped

operator in Southern DRC.

Together with Telkom SA its majority shareholder, Vodacom would identify fixed

line and mobile opportunities in Africa, as Mthembu did not have the carte blanche to

tackle Africa. Mthembu, then, saw ―excellent opportunities‖ in Africa. He also had

pointed out at the time that telecoms in Africa had grown by 50 per cent in 2000 to

reach a penetration of 10 per cent and also to the fact that Africans spent 5-15 per

cent of their disposable income compared to just 1 per cent in Europe. Mthembu went

on to add that Vodacom wanted to find a few more Tanzanians so that their African

income represented 30 per cent of group operating profit by 2004. Nevertheless,

Vodacom shareholders, Telkom, Vodafone of the UK, Ventfin and Hosken

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Consolidated Investments were likely to stay cautious. About 200 million people lived

in the countries targeted by Vodacom; contrast this with the 128 million in Nigeria at

the time with a very low teledensity of 4/1000.

However, while MTN had launched its network in Nigeria in 2001, Vodacom had

chosen, initially, not to get involved in Nigeria as its shareholders Telkom and

Vodafone, were wary of the Nigerian market, but more because of the shareholders

agreement with Vodafone that had prevented Vodacom from expanding north of the

Limpopo. However with a strong balance sheet, Vodacom was in a position to make

an impact on the continent. Mthembu had then admitted that Vodacom had lacked a

clear strategic plot for Africa. With the South African market nearing saturation, the

arrival of Cell C in the South African market in 2001, as well as the phenomenal

returns that MTN was generating out of Nigeria in 2003 and 2004 as outlined above,

the Vodacom Board with the approval of Telkom the majority shareholder and

Vodafone, finally had agreed to target emerging markets in Africa and elsewhere, but

they were likely to be cautious.

5.4.1.1 Vodacom’s Strategy in Nigeria

For a long time, Vodacom lacked a clear strategic plot when it came to strategic

investments in Africa with investments only Lesotho, Tanzania DRC and

Mozambique, it had lagged behind rival MTN in forging into the continent, probably

because Vodafone, the fifty percent shareholder, already had a larger footprint in

Africa, as well as the fact that the shareholder‘s agreement between Vodacom and

Vodafone, prevented, until 2006, Vodacom from pursuing investment opportunities

north of the Equator.

However, with South Africa‘s market maturing and the rest of Africa untapped,

Vodacom shareholders eventually gave Mthembu the go ahead to tackle deepest

Africa. The board had initially turned down plans to tender for a Nigerian cell phone

license, because they felt then the cost and risks of investing in a risky and relatively

untried market with untested regulatory processes were simply unpalatable.

According to Vodacom‘s shareholders, Nigeria then lacked a strong administrative

tradition, the ability to undertake commitments that endured from one government to

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the next, and a judiciary that was impartial, immune to government and political

pressures and able to make enforceable decisions; even though as outlined above the

auction process was transparent. Political and economic instability, a lack of telecom

policies tradition and independent regulatory frameworks, red tape and corruption

were also complex problems that the shareholders, Vodafone and Telkom, had also

identified.

Vodafone then being a European operator and a major investor in Vodacom, was

wary of unstable developing countries governments preferring to invest former British

colonies like Kenya, Egypt and South Africa which up that time to the were relatively

stable emerging market democracies and besides Vodafone had also been involved in

the 3G saga with other operators and was saddled with a lot of debt. Telkom on the

other hand had just listed on both the Johannesburg and New York Stock Exchanges

in 2003 as part of its privatisation program as well as part of governments stated

policy the of the maximisation of state asserts and was likely to be wary of risky

ventures; this was not with standing the SA government‘s commitments to SADC‘s

protocol on ICT development that encouraged cross-border investments in ICT.

However, with the Nigerian government keen to invite credible operators with good

corporate governance to invest in the country, risks could have been hedged by

identifying the right people to open doors and provide political insurance.

5.4.1.2 Shareholders uncomfortable with Nigerian Investment

The Vodacom shareholders were uncomfortable with the Nigerian strategic

investment, even though it was the largest market on the continent, having a

population of 120 million then in 2001 but with the lowest teledensity of 0.4 per 100

in the whole continent. The shareholders who had the final say, in determining which

strategic investments would earn them a healthy return, feared then that an investment

in Nigeria then could have wiped out everything that Vodacom had built up over the

past eight years if the business did not perform for whatever reason. According to

Chan-Olmsted and Jamison (2001), Vodacom‘s shareholders viewed the new market

opportunity in Nigeria as being in a developing country that lacked strong, stable and

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regulatory institutions and with business practices that were unfamiliar in most

developed countries, as was the experience of Vodafone.

5.4.1.3 Late entrant into Nigerian market

As a result, Chan-Olmsted and Jamison (2001) go on further to assert, Vodacom, as a

late entrant into the market, would have had to adopt an entry strategy that would

have allowed them to acquire local expertise and decreased the probability and cost of

expropriation of investment, given Nigeria‘s notorious history of military coups.

Vodacom‘s strategic plot in Nigeria was therefore limited to entering the Nigerian

market by selecting a project with a fast payback period, selecting well connected

local partners and entering the market through an alliance rather than through direct

investment. Vodacom‘s cautious risk-averse strategy may have cost the company a

big deal, losing its position as the largest network in Africa, in 2004. It was anxious

and wanted to change that and according to Ball (1999:434) although Vodacom

management believed strong competition from MTN would have made a profitable

operation difficult to attain a but Vodacom management‘s change of strategy in 2003

was being influenced by management‘s decision of being present a strategy of being

where the its global competitors MTN was and probably believed that entering

MTN‘s foreign market would distract MTN‘s attention from its home market, which

was already reaching saturation.

Figure 16Entering a Competitors Cell

Source Kyrylov et al (2001)

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According to Kyrylov et al (2001) a firm like Vodacom decided to enter a

competitor‘s cell, MTN‘s cell in Nigeria, but the timing of such actions, as outlined in

this case study, was important. With the market expansion, economies of scale and

scope are important considerations. They go on to add that when entering a new

market, like Vodacom was entering Nigeria in 2004, the marginal cost of offering one

more unit of say service A, decreases the size of the company. If the company also

offers service B, using almost the same technology (like ADSL TV, which is heavily

reusing the Internet Access ADSL technology), the marginal cost of offering service

B significantly decreases.

In addition, Vodacom could also have entered the market for a different product, e.g.

fixed line communications which it did attempt with Telkom in 2005 but also later

abandoned. However in the longer run, all market players in Nigeria were to

maximize profit, in the shorter run, depending on their current position, on the market;

Vodacom and MTN may have been pursuing different goals by referring to different

performance indicators. These indicators were territory coverage, market share,

cumulative cash flow, customer loyalty, risk factor. In this case, Vodacom on entering

the Nigeria market would have had to be an aggressive risk seeker more concerned

with gaining more market share and neglecting increased risk and relatively short

term low profits. While MTNN with a larger market share were expected to be risk

averse and to most likely, to be more concerned with generating more profit.

However, given Vodacom‘s shareholders lack of stomach for risky ventures, it was

unlikely that Vodacom would have the stomach to stay in Nigeria.

5.4.2 Vodacom’s unsuccessful bid for Econet Wireless Nigeria

The opportunity to enter the Nigerian market formally presented itself for Vodacom

of South Africa when substantial capital inflows were required by the Econet Wireless

Nigeria, which it needed to expand its network, as it had to compete with the market

leader, MTN Nigeria, and meet the expected challenge of a robust looking Globacom

as well as a reinvigorated Nigerian Telecommunications Limited (NITEL).

Vodacom, the largest mobile phone operator in South Africa and Africa at the time,

was in fierce competition with MTN South Africa, the majority owner of MTN

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Nigeria. Although Vodacom had reduced its cash position by around $200 million

when it repaid a shareholder loan and paid out a dividend in 2003. However, South

African financial analysts believed then that Vodacom could have easily borrowed

enough money to take up a stake in Econet Nigeria.

5.4.2.1 Other suitors for Econet Wireless Nigeria

However Vodacom was not the only operator interested in Econet Wireless Nigeria,

Egypt's Orascom had also expressed interest while existing operator, Econet Wireless

International of Zimbabwe (EWI) made moves to checkmate new entrants in order to

protect its brand name and position as technical managers of the network. It put

together a $150 million offer along with Autopage and Altech, two South African

companies who were also backed by South Africa's Absa Bank and Industrial

Development Bank (IDC), to gain a dominant position before new entrants like

Vodacom and Orascom were considered. EWI managing director, Mr. Strive

Musiyiwa also told THISDAY in South Africa that: Econet Wireless International had

concluded a new 5-year management contract (for Econet Nigeria) and that their

interest was to increase their stake from its current level. Musiyiwa said it was a

matter of public record that the company EWI, was trying to raise capital for the

Nigerian operation and that speculations of a buy-out were inevitable in such a

situation. He declined to disclose how much capital Econet was seeking, how it

planned to raise the money or what stake the international Econet group held in

Econet Nigeria. ―We are raising capital for the development of our business and we

have competitors, therefore we keep competitive information close to our chests," he

had said then. Musiyiwa also confirmed that his company had a long-term interest in

the Nigerian market and would not be looking to exit Econet Nigeria in the

foreseeable future.

Officials of Vodacom that had exchanged letters with Econet Nigeria last week of

July 2003, in South Africa were due in Nigeria in the first week of August 2003 to

carry out a due diligence on Econet before making its final offer. Vodacom's change

of mind about investing in Nigeria, according to a report in THISDAY newspaper in

Lagos, was as a result of the robust performance of its competitor, MTN Nigeria

Communications Limited, in the country.

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The South African mobile company had few years ago ignored the Nigerian market

but given MTN's performance, it had now realised its mistakes and was changing

strategies if it was to retain its position as continental market leaders. According to

statistics, MTN's impressive growth in Nigeria was threatening Vodacom's claim as

the largest network in Africa and since the game was about market share, Vodacom

was not ready to lose its dominance on the continent.

A reliable telecom analyst had told THISDAY that MTN Nigeria's contribution to the

larger MTN Group performance had brought the group neck-to-neck with Vodacom

and was about to overtake Vodacom if MTN was left alone to explore the depth and

challenge of the Nigerian market. However, Vodacom's movement into Nigeria was

not going to be as easy as it looked as the Econet Wireless Nigeria board was

considering other options. Chairman of Econet Nigeria, Mr. Oba Otudeko confirmed

to THISDAY newspaper that the board had authorized both Vodacom and Orascom to

come and carry out due diligence on the company in August 2003 after receiving their

expressions of interest.

According to him, the telecom business was a highly capital intensive one and they

were willing, as Econet Wireless Nigeria, to consider offers that would broaden

access of shareholders to capital. The more capital for the company the better and that

"even if shareholder's existing interests are diluted, it would only lessen their capital

constraints in the overall interest of the company". But some directors of the company

are not too keen on the EWI consortium's offer of $150 million as it was seen to fall

short of the Vodacom's offer that may give it 51 per cent of Econet Nigeria. For these

directors, the name, depth and technical competence of Vodacom would be an added

advantage

Also, these directors were of the opinion that with Vodacom taking such large

interest, the company would be able to take on the existing competition from MTN as

well as the potential competition from Globacom and Nitel/Mtel. Globacom's access

to funds was viewed as a serious threat especially given its chairman, Dr. Mike

Adenuga's Conoil‘s oil resources according to MTNN‘s Chief Marketing and Strategy

Officer as interviewed by the researcher in Port Harcourt in 2003. But Otudeko

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believed that investment from existing operators as well as from any other who have

expressed interest would be welcomed in order to broaden the company's network and

in respect of the large capital required to furnish the extensive market place with

quality GSM service and enable Econet to excel in the challenging and highly

competitive Nigerian telephony market

5.4.2.2. EWN board accepts Vodacom’s offer,

Meanwhile, rival MTN Nigeria roared ahead in its network expansion. MTN had

doubled the coverage and also had more than 1,3m subscribers, compared with

EWN's 850 000. Things however went from bad to worse; despite Musiyiwa claims to

have pre-emptive rights on increasing his stake in EWN, the Nigerian board accepted

an offer from SA's Vodacom to buy 51 per cent of the company. The issue reached

boiling point when the EWN board announced it was removing Musiyiwa as deputy

chairman, firing his most senior staff and terminating EWI's management contract,

worth 3 per cent of gross EWN revenue. Musiyiwa contested the moves as unlawful

and was fighting back. The troubles, he shad said then, started in May, when the

Nigerian board entered into an agreement stating that EWL could increase its equity

stake to 33 per cent for an investment of US$150m. Musiyiwa says that during this

period Vodacom made an offer to buy 50 per cent plus one share of the company

through an intermediary, Legacy Holdings, chaired by Bart Dorrestein. (Dorrestein is

well known in SA as the former head of Stocks & Stocks.)

Vodacom CEO Alan Knott-Craig however, denied Vodacom made the first move.

―We were invited to make a bid by the EWN board on July 22 and then made an offer

to them on August 28," he says. Another problem says Musiyiwa, is that "EWL

advised Vodacom of the existing offer, but Vodacom proceeded to make an offer for

the same shares at the same price, plus an additional offer to buy 20m shares at

$4/share from any existing shareholder who wanted to sell". The Nigerian

shareholders accepted the Vodacom offer, amounting to $230m.

Vodacom announced to the EWN board at the next shareholder meeting on December

19 whether it would take control. The opportunity was enticing and so far no

irregularities had been found in Vodacom's due diligence of EWN, said Knott-Craig.

He pointed out that with an estimated 130m people; the market had hardly been

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tapped. The strong rand and MTN's success mean the opportunity was less risky than

initially perceived. Also, despite the cash problems, EWN was profitable and most of

the $230m investment would go into working capital, after having paid back loans.

"We have been assisting in terms of an interim management agreement for two

months," said Knott-Craig. He said at the time that independent counsel concurred

that none of the existing EWN shareholders (including EWI) had pre-emptive rights

for more shares. Musiyiwa says that was for the panel to decide.

Knott-Craig countered by saying that: "It would appear that EWI has run the Nigerian

network badly and overpaid for infrastructure. The Nigerians need cash and want

Vodacom to enter as the majority shareholder."

5.4.2.3 Vodacom terminates agreement with VEE Networks

However even though the deal had been signed with Econet Nigeria and the name had

changed to Vodacom Nigeria, on the eve of the transfer, it was discovered that some

money had been paid out to brokers who had helped Econet to secure funding. The

Vodacom Board viewed this as very irregular and decided to withdraw from the

Nigerian operation. This was primarily because Vodacom‘s shareholders, Vodafone

and Telkom were listed on the New York Stock exchange, the Securities commission

would have been interested in getting to know the details of the deal, and the

shareholders stood to lose a lot. In the US, the Foreign Corrupt Practices Act of

1977, prohibits US companies, as well as companies listed on the New York Stock

Exchange, from making ―corrupt‖ payments to obtain or retain business and the

payments were viewed by the Vodacom board as falling under this category. Besides,

according to newspaper reports, there were also some massive transfers of shares just

before the deal was signed, even though the Vodacom board had put a restriction on

that.

5.4.2.4 Management shake-up at Vodacom

Clearly the shareholders were concerned not only about the debacle at Vodacom

Nigeria, but also the ensuing threat of legal action by Strive Musiyiwa CE of Econet

Wireless International, who had a history of litigation and had won against ‗Bob‘ as

Zimbabwe‘s President Mugabe was known. So serious were concerns at Vodacom

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that some directors, particularly Mthembu, who had been the Deputy CEO and

Managing Director of Vodacom International which was responsible of Vodacom‘s

forays into Africa, particularly in Nigeria, lost their positions in a massive shake-up in

2004.

In summing up the Nigerian issue, Vodacom‘s Group CEO Alan Knott-Craig in the

Group CEO‘s 2004 Annual Report had this to say:

―Our attempts to gain a foothold in the Nigerian market have been much publicized and

drawn out. We have been proceeding with a process designed to minimize our risks which

included extensive due diligence carried out by reputable international experts in this field.

Effective April 1, 2004 Vodacom International Mauritius entered into a five year management

agreement with VEE Networks Limited (formerly Econet Wireless Nigeria Limited), subject to

the right of termination in favor of each of the parties. In terms of the agreement, Vodacom

International Mauritius would have managed VEE Networks’ cellular network operations in

Nigeria for a fee which is based on VEE Networks’ turnover. VEE Networks would have been

allowed to use the Vodacom logo and brand name. Vodacom International Mauritius also

had the intention to acquire an equity stake in the business of VEE Networks.

However, on May 31, 2004, Vodacom International Mauritius and VEE Networks mutually

agreed to terminate the management agreement entered into on April 1, 2004. Vodacom

International Mauritius will continue to provide technical support to VEE Networks for a

period of up to six months. Vodacom International Mauritius has also decided not to pursue

an equity stake in the business of VEE Networks. Despite not being able to enter the Nigerian

market, our African operations grew at a healthy rate, with total customers in other African

countries increasing by 93.0% to 1,492,000 (2003: 773,000).

More tellingly on how costly it had been for Andrew Mthembu as well as the head of

strategy was the statement to the effect that:

The final element of success continues to be our strong management teams across the various

companies. These teams have recently been enhanced by new appointments which reflect our

commitment to employment equity. There have also been strategic changes to the

management structure to leverage operational efficiencies across the Group. The changes,

which took effect on April 1, 2004 will see Pieter Uys head up all the operational aspects of

the whole of the Vodacom Group including the African operations as Group Chief Operating

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Officer. These have been well received in the company, and the improved focus is already

showing encouraging signs.

Pieter Uys, was not an employment equity appointment, he had just replaced one,

Mthembu.

5.4.2.5 Econet Wireless International suing Vodacom

Besides, Econet Wireless International was suing Vodacom for inducing the Econet

Nigeria to scupper the deal with Econet Wireless International. Vodacom announced a

pullout from the Nigerian operations, but many of its employees were still working

with the company. An interesting twist to this tale was that the then Chairman, Oba

Otudeko, was forced to resign. He had been instrumental in the transfer of funds saga

that had led to Vodacom‘s pullout. Maybe there is method in Vodacom‘s madness in

pulling out of the lucrative Nigerian market.

On other matters the Vodacom Group 2005 annual report summarized Nigerian saga

as follows:

The Group is further also a defendant in certain legal proceedings related to its activities in

Nigeria. The outcome or extent of any claims against the Group, should the Group not be

successful in defending these claims, is unknown.

The directors are not aware of any other matter or circumstance since the financial year end

and the data of this report, not otherwise dealt with in the financial statements, which

significantly affects the financial position of the Group and the results of its operations.

5.4.2.6 Vodacome Vodago

Vodacom‘s micro-cultural elements particularly its shareholding, with Telkom on the

one hand who was controlled by the strategic equity partner, SBC, (who had been a

shareholder at MTN as well) and by Vodafone, who already had an even larger

footprint on the continent, contributed to some of the inconsistencies in the strategic

plot, strategic projections and strategic investments that it was to make in Nigeria.

Rindova and Fombrun (1999) assert that both a firm‘s micro culture and its resource

commitments determine the strategic plot from which its investments and projections

originate. They go on to assert that consistency among the three processes, namely,

strategic projections, strategic investments as well as the strategic plot, enhances a

firm‘s competitive advantage; inconsistencies, like the one Vodacom experienced in

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Nigeria, caused both domains resources and culture to lag behind and misfire. They

go on to add that strategic projections not supported by investments can lead to loss of

credibility.

Vodacom became the butt of jokes in the local media with one of the papers labeling

its Nigerian fiasco as ―Vodacome, Vodago‖ a pun based on Vodacom‘s prepaid

model; the paper lamented Vodacom‘s exist as a lost opportunity, then, for they had

hoped for Vodacom to challenge MTN‘s stranglehold on the market. The article

outlined the reasons why, now V-mobile, formerly known as Vodacom Nigeria,

formerly known as Econet Nigeria, was having partnership/shareholder problems.

Investments not supported by strategic projections may fall short of realising their true

value-creating potential; and if both processes are not supported by the strategic plot

of the firm, as seems to be the case with Vodacom‘s foray into Nigeria, they lacked

the continuity to feed into a vicious circle that would have constructed Vodacom‘s

new competitive advantage. However the processes initiated by Vodacom in Nigeria,

were only one side of the coin, the construction of competitive advantage would have

depended on how MTN Nigeria would have responded and revised the competitive

conditions in that market.

5.4.2.7 Belated lift of ban

As of November 2006, Vodacom‘s restriction on aggressively expanding north was

eventually lifted by Vodafone. The only problem then was that most countries in

Africa and the Middle East already had competition, making Vodacom‘s choices

either a very expensive regional purchase or continued investment in converged

services. In contrast, MTN was spending more money outside of South Africa. That

has meant that Vodacom more than doubled MTN‘s cumulative capital expenditure

since 2002 in South Africa. ―Vodafone will not stand in our way in pursuing

opportunities in Africa, and they have encouraged us to go forth and conquer. I don‘t

think there is much we couldn‘t afford‖ (Knott- Craig quoted in Stones, 2006: 21).

With the delay that Vodacom faced in its restrictive shareholder agreement, the other

operators rapidly expanded and there are now few small mobile companies available

to purchase. The added pressure of having to compete in Africa against, France

Telecom, Orascom, (MTC) Zain and MTN meant that Vodacom might have to look to

purchase a regional player.

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5.5 Conclusion

This chapter sought to trace the rivalry between MTN and Vodacom and how it

subsequently played itself out in the Nigerian market. That MTN has been a runaway

success is an open secret, as the financial figures continue to tumble out of Nigeria

and how they have since used that as a spring board to seek new markets in the

Middle East. The saga at V-Mobile with Econet Wireless was resolved with

MTC/Celtel acquisition. Meanwhile in the entire furore, Glo-mobile was quietly

making inroads into the Nigerian Telecoms sector; the one person that is benefiting

from all this is the consumer who has seen the cost of making a call come tumbling

down. Vodacom came into the Nigerian market lat and they had problems. It has

been suggested that Vodafone and Vodacom could not afford to not to be in the

growing markets and that Vodacom might make a bid for Globacom, that has not

happened, infact Globacom made an offer for the 15% stake that Vodafone acquired

from Telkom, but this was not seemingly been considered at the time. That Celtel had

approached Vodacom in 2004 and then Vodacom had spurned the offer to purchase

brings into question what Vodacom‘s strategic plot with regards emerging markets

was. It certainly was not because of lack of money, for Vodacom was cash awash.

With the continent attracting more players it remains to be seen what options

Vodacom will opt to choose, in the unfinished story of the rivalry of these two SA

mobile operators. But what remains clear is that Vodacom‘s cautious strategy in

emerging markets like Nigeria was a failure. Using the analytical framework

influencing diversification Fig 2.1, the next chapter will conduct a comparative

analysis of the two operators to determine the measure of MTN‘s effectiveness in

pursuing a diversification strategy.

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Chapter 6

Comparative Analysis

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6.1 Introduction

This chapter will conduct a comparative analysis of why Vodacom was successful in

South Africa but more importantly why MTN was subsequently more successful in

Nigeria and on the African continent. In this chapter we will use the framework

presented in Figure 2.5 a systematic model of competitive advantage, to show how the

actions of Vodacom in South Africa and MTN‘s response to Vodacom‘s dominance

shifted the competitive terrain to Nigeria where Vodacom ultimately floundered. Fig

2.1 an analytical framework influencing diversification will provide the basis for

drawing conclusions about the effectiveness of MTN‘s geographical expansion

strategy as well as what lessons can be drawn for corporate strategy formulation and

decision making.

Sources of competitive advantage

As outlined in Chapter 2, competitive advantage derives from activities that span the

four domains of action, the first dimension comprises of the material and

interpretational domains; the second dimension divides the competitive terrain into

domains that fall either inside or outside of a focal firm. Competitors affect the

construction of competitive advantage by taking actions in the four domains and

creating options for constituents. The telecoms competitive terrain, that MTN and

Vodacom inhabited in 1994-2001 as well as between 2001-2004, can be defined not

only by the resource conditions in various markets and potential rents associated with

them (Scherer and Ross, 1990; Barney, 1986b), but also by the knowledge,

expectations, and sensemaking of their respective firms‘ managers and of

shareholders that interacted with the two firms in the telecommunications industry.

Sensemaking (Weick, 1995) in the African telecoms industry comprised

comprehending, understanding, explaining, attributing, extrapolating, predicting

(Starbuck and Milliken, 1988: 51) and—ultimately— deciding to allocate resources

and. embark on a geographical expansion.

Vodacom‘s and MTN‘s rivalry manifested itself in the variety of options made

available to its shareholders both in South Africa and in other markets that included

Nigeria. The choices that Vodacom and MTN shareholders made among the

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competitive offerings that they faced in South Africa and in Nigeria in particular,

subsequently measured the relative success of each of their strategies and the degree

to which either gained or lost competitive advantage on the redefined African

telecommunications competitive terrain in 2001. Insofar as Vodacom and MTN

interacted with the same constituents and vied for their approval and resources they

were each other‘s competitor (Freeman and Hannan, 1983). Thus the boundaries of

the telecoms industry and markets were determined not only how Vodacom and MTN

defined their business (Abell, 1980) but also by how their shareholders understood

and chose among these competitive offerings. Therefore the African

telecommunications domain is better described not as an industry but as an

organisational field consisting of actors, Vodacom and MTN, amongst others, who

interacted repeatedly, exchanged information, formed coalitions and were aware of

each other (DiMaggio and Powell, 1984).

The two dimensions described above are the four domains of action in which

Vodacom and MTN interacted. The external–material domain consisted of various

markets—principally the product, labour, factor, and capital markets—in which they

exchanged resources. In the internal–material domain both Vodacom‘s and MTN

resources were deployed in the production of goods and services. In the internal–

interpretational domain knowledge, values, and beliefs moulded both Vodacom‘s and

MTN‘s micro-culture. In the external–interpretational domain expectations,

performance standards, and evaluations of firms evolved and formed the telecoms

industry‘s macro-culture.

SWOT analysis of Vodacom and MTN (1993-2001)

According to Du Plessis, Jooste & Strydom (2001) as well as Cronje, Du Toit, Marais

& Motlatla (2004) a SWOT analysis is an approach that can be used to provide a

structured framework for evaluating the strategic positioning of business

organisations by identifying their strengths, weaknesses, opportunities and threats. As

illustrated in Table 6.1 below, Vodacom‘s carefully controlled strategic projections

portrayed the company as a dominant and powerful brand, this position was

emphasised by every commercial that ‗was packed with the power of Vodacom‘,

especially the ―Yebo Gogo Adverts‖ and its strong, gruffy and commanding male

125

voice over in the ―Professor and the Clown,‖ adverts particularly. All the other

advertisements also reinforced the image that complemented Vodacom‘s dominant

position in the market but also projected it as not only a company but a national

resource and tried to position its products as essential ingredients for national

economic growth.

MTN‘s adverts were more subtle, poking fun at times at the ‗Big Brother,‘ with

jingles and their pay offline was ―The better connection.‖ MTN projected itself as an

entrepreneurial, enterprising and innovative youthful company with a can do attitude.

Vodacom‘s main weakness lay in the fact that its overall ARPU was lower than that

of MTN‘s. With the South African market nearing saturation and both operators faced

the threat of losing market share with the entry of Cell C in 2001, Vodacom‘s market

share dropped from the highs of the early 1990s 60% (1999), 59% (2000), 61%

(2001), 61% (2002), to 59% in (2003). In the year 2003, in which it was meant to be

seriously considering challenging MTN in Nigeria, Vodacom‘s management hands

were tied as the major shareholder, Telkom, was on the verge of listing on the New

York and London Exchanges and Vodacom‘s expansion plans took a back seat; the

other shareholder Vodafone was also a player in the African telecoms markets with

operations in Egypt and Kenya, had a shareholders clause prohibiting Vodacom from

expanding north of the Limpopo River.

As the second operator MTN had felt the impact of Cell C‘s entry into the market,

more than Vodacom had, as its market share dropped from the highs of 40% (1999),

41% (2000), 39% (2001), 36% (2002), to 35% in (2003). However, MTN‘s response

to Vodacom‘s dominance was a strategic plot to diversify geographically and it began

to pay dividends when they reduced their reliance on their home market, South

Africa. By 2001 Nigeria had come on stream and started making significant

contributions to group turnover by 2003. While both operators were feeling the effects

of the entry of Cell C and had lost considerable market share and needed to find new

sources of revenue, fortunately for MTN its Nigerian investments had begun to

contribute significant revenues by 2003.

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Table 11 Swot Analysis of Vodacom and MTN

POTENTIAL STRENGTHS POTENTIAL OPPORTUNITIES VODACOM

Retained 50% market share in SA market

Retained largest share of high-end

postpaid and business users

Was best placed to extract further value

from existing customers through

advanced data services

Dominant and powerful brand

Extensive coverage and distribution

channels

Benefited from its shareholders Telkom

and Vodafone, source of competitive

advantage

First Mover advantages

Strong cash flows

VODACOM

Operations outside of South Africa

in other African countries will

become increasingly important as

the SA market matures

Had projected to earn 30% of

revenues outside of South Africa

Expansion in SA market by

introducing new products like those

targeted at low-end users

Developing sub-brand aimed at

prepaid market

MTN

Played second fiddle to Vodacom

retained an average of 40% of in the

post-paid market in SA

High ARPU targeting high-end users and

focused on new innovative services

Well defined position in the SA market

MTN

Has over 40 % of new post-paid

customers

Maintaining its strong showing amongst

the low-spending contract customers,

picking up higher percentage of future

prepaid customers

Increasing presence in other African

countries, with revenues set to

increasingly come from these operations.

POTENTIAL WEAKNESSES POTENTIAL THREATS

VODACOM

Overall ARPU lower than MTN

Over reliance on post-paid exposing it to

price competition with the entry of Cell

C in 2001

15 year roaming agreement with Cell C

that started operations in 2001

VODACOM

The shareholders agreement

prohibits Vodacom from expanding

north of Limpopo

Will face increasing competition

from MTN outside South Africa

Political, regulatory and currency

risks

Entry of Cell C into the market will

result in loss of market share

Entry of second fixed line operator

will place pressure on Telkom and

which in turn would impact on

Vodacom and introduce competition

MTN

Lost six percentage market share when

Cell C was launched

MTN

Price war sparked by Cell C in 2001

Aggressive price tactics could

significantly reduce MTN‘s ARPU

MTN would go into defensive price

reduction if Cell C decided to target

MTN‘s Core demographics

Source: Author

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Vodacom was a different story, though. As Porac et al. (1989: 399–400) observed the

material and cognitive aspects of Vodacom and MTN‘s business rivalry in 2001 were

thickly interwoven technical transactions along the value chain that provided an

ongoing stream of cues that had to be noticed and interpreted by organizational

decision-makers, particularly their respective shareholders. These transactions were

themselves partially determined by the cognitive constructions of Vodacom‘s and

MTN‘s organizational decision makers. Beliefs about the identity of competitors,

suppliers, and customers focussed the limited attentional resources of decision-makers

on some transactional partners to the exclusion of others. Although material and

interpretational conditions in the telecoms industry in South Africa had produced each

other, the development of Vodacom‘s competitive advantage was not an automatic

process.

Both MTN and Vodacom had selectively invested and allocated resources, projected

and reflected images in their quest for dominance in the SA market between 1993-

2001. Weick (1995: 81) describes the processes of selective perception and action as

enactment and extraction of cues: Vodacom and MTN had enacted cues in the sense

that each competitor made strategic choices on the basis of its beliefs, and these

choices put things out there that constrained the information that each of the firms got

back. What the firms got back affected their next round of choices as was the case

with the geographical expansion into Nigeria. In the model presented in Figure 2.5,

Vodacom and MTN ‗put out there‘ technologies, products, investments, and

communications. Their respective shareholders then used the cues provided by the

respective firms in their own enactment cycle of resource allocations and

communications. Both sets of shareholders by 2001 had ‗extracted‘ cues about

Nigeria, in the sense that others saw these enacted changes and extract them as cues of

larger trends. Thus, the shareholders come to use the same cues for their strategic

choices, as does the firm that first enacted those cues and made them available for

extraction. This aspect was important in so far as Vodacom was concerned; its

strategic choices about Nigeria were based on the cues that MTN was projecting

about the Nigerian market.

Post 2001 – geographic expansion

Thus as Chan-Olmsted and Jamison (2001) have outlined both operators needed to be

aware that growth would not only be in the home market through introducing new

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products but that they also needed to expand geographically. In turn, both Vodacom

and MTN‘s shareholders read into each other‘s allocations of resources and

definitions of success signals about market trends that guided their subsequent

investments and projections in the post 2001 period. Industry features, such as

dominant designs, industry concentration, mobility barriers, isolation mechanisms,

reputational orderings, exemplars, winners and losers, emerged and crystallized from

these processes. Thus, Vodacom and MTN externalized their strategic choices in the

material and interpretational domains through the processes of investments,

projections, allocations of resources, and definitions of success. They also objectified

and internalized the resulting pattern of interactions by forming strategic plots and

industry paradigms through which they adjusted beliefs and behaviours in ways that

reflected their respective objectified reality. Along the way, therefore, Vodacom and

MTN jointly constructed the competitive reality that they come to inhabit after 2001

Table 12 Comparative Summary of Key Financial Indicators 2001-2004

VODACOM MTN

Number of subscribers 2001 5.2 million 2.7 million

Average market share growth 55% 35%

Annual growth 20% 22%

Revenue 2001 R13, 3 billion R8,3 billion

Profits 2001 R2,6 billion R1,1 billion

Revenue 2003 R11, 3bn R11, 2bn

Profits 2003 R1, 4bn R2, 1bn

Revenue 2004 R23.5 billion R23.9 billion

Profits 2004 R3-billion R3.3 billion

As can be deduced from the above indicators, Vodacom had 5.2 million subscribers

by 2001, which was almost double the number of subscribers than MTN‘s 2.7 million,

subscribers. Vodacom had averaged an annual market share growth of 55% compared

to MTN‘s 35% and had enjoyed an annual growth was 20% compared to MTN‘s

22%. Its revenues, influenced by subscriber growth, particularly the growth of prepaid

subscribers in 2001 were R15.4 billion compared to MTN‘s R10 billion. Vodacom‘s

shareholders, Telkom SA LTD and Vodafone had enabled it in South Africa, to gain

competitive advantage and first-mover advantages in SA. Its relationship with Telkom

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was also instrumental in its realization of profits through favorable interconnection

agreements

However as table 6.2 above shows, MTN shifted the competitive terrain from 1997

and in 2001 in particular, through carefully planned geographical expansion strategy

and targeted strategic investments that enabled it to acquire skills as an emerging

market player in its regional hubs, but particularly in Uganda and Cameroon. Thus its

strategists were able to make accurate projections about Nigeria’s rent earning

potential as they had operations in West Africa, in Cameroon, which enhanced

its reputation as entrepreneurial, enterprising and innovative.

Vodacom acted ‗as a venture capitalist‘ and focussed on investing in its home market.

In so doing, the firm accelerated its growth in its home market but radically departed

from its strategic plot as the biggest and the best. Most observers questioned

Vodacom‘s neglect of the Nigerian market, others attributed its neglect to its well-

established reputation in the macro-culture of the organizational field of having

dominance in the home market and its reputation gave impetus to the development of

a new telecoms industry paradigm, regional expansionism, which encouraged MTN

expand and shift resources to other markets, particularly Nigeria. In the years between

1994 and 2001 Vodacom the company topped Financial Mail’s reputational rankings

of most admired companies and its market value reached a record high. By 2003,

however, Vodacom‘s dominance in the African telecoms was actually beginning to

dissipate. MTN, according to Marcelle (2001), made more strategic investments in

cost reduction and product innovation. A new industry paradigm with a high premium

on innovation, flexibility, and adaptability—all Vodacom weaknesses emerged. Many

elements of Vodacom‘s corporate culture, such as emphasis on fighting for market

share in its home market rather than opening new markets, were not well suited to the

fast changing telecommunications market.

The new industry paradigm in African telecoms industry included a different set of

success measures than those Vodacom had mastered. They included: organisational

integration, geographical expansion, continuous innovation, commodity prices,

organisational integration and declining brand loyalty. Thus, a new industry

paradigm, a different pattern of resource allocations, and a changing macro culture of

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the organizational field characterized Vodacom‘s competitive environment. At

Vodacom however, the changes were few. Although Vodacom had been the first

company to expand geographically when it entered new markets in Lesotho in 1995,

then Tanzania 1999, the DRC 2001 and Mozambique in 2003. The demographics of

these countries, particularly their teledensity, were unlike the large Nigeria market

however with the avenue to the north of Africa closed, cash awash Vodacom invested

in a set of investments that departed from its traditional resource base and micro-

culture. When the Nigerian market opened up in 2001, it had not built sufficient

knowledge about the West African markets as it did not have any operations in West

Africa and could not sufficiently understand the West African culture like MTN had

with its Cameroon operation. Thus Vodacom entered and exited that market and

applied its traditional competitive tactics (high growth in the home market) rooted as

they were in its micro-culture and resource strengths. According to a competitor: In

the first eight years of their operation in SA, and accumulation of resources what did

Vodacom do with them? They laid the biggest goose egg for a golden goose

opportunity but did not do anything with it.

It was all sales and distribution and marketing and advertising—and The Professor

and the Clown in the ―Yebo Gogo adverts.‖ Vodacom was locked into a ‗Big Brother

mentality‘ born of the old telecoms industry paradigm: It confidently assumed that it

was going to maintain its dominance on the continent by using a focus strategy that

meant massive investment in its home market. The result was a lack of strategic

investments and projections that could successfully give it economies of scale and

scope as well as skills to compete as an emerging market player and subsequently add

value to its stock. Lack of added value encouraged constituents to shift their resource

allocations to rivals, like MTN.

At Vodacom, it took drop in profits as well as declining earnings estimates as

compared to MTN in 2003 and 2004 (see table 6.2) before the company announced a

long-overdue change in its strategic plot. The business press reported it as Vodacom

undergoing its ‗toughest self-scrutiny in years‘ (Sunday Times 4 July, Business Times

2003). However, in the process of re-evaluating its strategic plot, Vodacom took

actions consistent with its extant resource base and micro-culture, rather than with the

changes in the industry. In an industry driven by innovation Vodacom chose to follow

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caution in new markets and to challenge its main rival in the biggest market in Africa

Vodacom‘s long-standing cultural and resource biases continued to affect its strategic

choices throughout the period. They limited Vodacom‘s ability to create value in

ways consistent with the expectations formed in the new industry macro-culture.

In contrast, rival MTN invested heavily in new markets, new product development,

organisational integration, organisational learning and capacity building through the

rapidly deployment of network that climaxed with the entry into Nigeria a market that

provided the company with economies of scale and scope that positively affected its

performance. It also produced some of the most sophisticated strategic projections in

the industry, including a famous ad alluding to Vodacom as ‗The Big Brother‘

(Orwell, 1982). Indeed, for a long time Vodacom continued to behave as if the

combined actions of its entrepreneurial rivals, sophisticated users, and savvy investors

that were looking at the opportunities on the continent had not changed the African

telecoms industry conditions. Barr, Stimpert, and Huff (1992) provide evidence of a

similar process in the railroad industry. In their study, one firm failed to adapt to the

changing conditions in the industry, not because it failed to notice the changes, but

because it failed to change its interpretations of how those changes would affect its

performance. Lazonick and West (1995) also point out how in a similar manner

American companies did not respond more quickly and effectively to the Japanese

competitive challenge. In remarkably similar ways, lack of change in the internal

interpretational domain of Vodacom led to lack of actions that would have enabled it

to sustain its advantage.

Most analysts, however, attributed Vodacom‘s loss of competitive advantage to its

focus strategy that emphasised over investment in rapidly saturated home market, thus

minimizing the effects of scale and scope in its investment. As Pyramid Research

(2004) put it: ―Vodacom and Vodafone could not reasonably have decided to stay out

of the Nigerian market.‖ But the way it plunged in was a historic blunder. Its

disinvestment in Nigeria opened the industry to a range of new entrants, like Zain.

The market exploded and MTN became the Africa‘s biggest network operator. This

explanation suggests that Vodacom lost its advantage when it lost its quasi-

monopolistic dominance in the market. Vodacom lost its advantage because it was not

quick and effective enough in its response to MTN‘s competitive challenge. Its

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structure was such that it could not reinvent the strategic plot that aligned its resources

and micro-culture, and so could not respond to the new definitions of success and

resource allocations of its rivals. Overall, Vodacom‘s loss of competitive advantage in

the African telecoms market reflected the firm‘s failure to see how competitive

advantage had emerged from the combination of its actions and those of their rivals,

MTN, in both material and interpretational domains. Vodacom‘s structures and

strategies were not sufficiently integrated to mount an effective and quick response to

MTN‘s challenge.

6.2 Comparative Analysis

This section of the research will involve a comparative analysis that focuses of on

specific issues namely (1) shareholding and strategy (2) entrepreneurial and

enterprising management (3) micro-culture and (4) organizational structuring for

geographical expansion. Table 6.3 presents a summary analysis of these key factors.

6.2.1 Shareholding and Strategy

When the mobile networks rolled out in 1994, Vodacom‘s shareholding structure was

an asset. Its shareholding consisted of 50% by incumbent Telkom, a fixed line

operator (whose majority shareholder was the government that was pursuing a policy

of managed liberalisation and the maximisation of state assets) and 35 % by Vodafone

PLC, the world's largest mobile operator. This shareholding structure provided

Vodacom with access to funding, technology and skills that enabled it to gain

competitive advantage in its home market. As Chan-Olmsted and Jamison (2001)

have asserted that the drivers of growth for the telecommunications industry are the

expansions both of its products and geography. By quickly rolling out its network,

after launch in April 1994 Vodacom took the lead. By August 1994 Vodacom had

covered every metropolitan area plus more than 30 towns in South Africa and

extended its coverage to include some 3000 km of national roads. This first mover

advantage enabled Vodacom to gain the lead in the SA market. However the existence

of two dominant shareholders created a huge problem in so far as the company was

not able to resolve which strategy, fixed line or mobile would be the focus of

expansion of the business.

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Telkom and Vodafone had enabled Vodacom to construct its distinctive strategic

positions through three generic processes: (1) they picked strategic a investment,

which was the Vodacom Group in South Africa, (2) they made strategic projections,

and (3) they developed a strategic plot, derived from Vodafone‘s own mission, which

was through Vodacom, to have total dominance in the markets in which they

operated.

Table 13 Summary Analysis of Key Factors

Indicator Vodacom MTN

Shareholding and Strategy Had conflicts which led to

curtailed expansion north of the

Limpopo, no clearly articulated

strategy

More coherent

Entrepreneurial and

enterprising Management

Did not have Had

Enabling Micro Culture Did not have Had

Organisational structure for

geographical expansion

Not well organised Had clearly identified

regional hubs; Great Lakes

Region, Southern Africa

and the Central/West Africa

When the apartheid regime dubiously issued only two mobile licences in 1993 and the

newly elected ANC government took over in 1994, it chose instead to pursue a policy

of managed liberalisation as well as the privatisation of state assets, the new

government created an environment where by the value of Telkom increased as its

revenues increased primarily on the back of the expansion of the mobile industry and

Vodacom in particular. The new government, while pursuing a policy of managed

liberalisation and opening up the sector not only to Black Economic Empowerment

but also for the provision of universal access, did not alter the competitive conditions

that had been set by the previous regime, namely, issuing only two mobile licences

and creating competition as was the intention of the White paper on ICT as Cohen

(2002), Gillward (2004) as well as Horwitz and Currie (2007) observed. This focus on

the home market compromised Vodacom‘s ability to expand.

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Vodacom has however been seriously hamstrung in Africa. Evidence of this is

provided in the comparative performance of other operators. MTN Group had 80,7m

subscribers (in the quarter to September 2008 see Table 6.4 below) (FM Tech 2008).

It grew its West and Central Africa and Middle East and North Africa operations by

10% each (to 35m and 22,6m, respectively). These are big numbers, especially when

considering that Vodacom's group wide subscriber base increased by only 13% at the

interim stage to (just) 35,7m. Future growth is not going to come from South Africa,

although both MTN and Vodacom realise that (MTN understood that a good number

of years ago see table 6.5 below). MTN estimated there would be 240m addressable

subscribers in Africa and the Middle East by 2012

Table 14 Vodacom and MTN subscriber growth Sept 08

Vodacom Group subscriber growth (1H 2008

to September)

MTN Group subscriber growth (Q3 2008 to

September)

South Africa up 8,4% to 25,2m South and East Africa 7% (to 22,3m)

Tanzania up 34,1% to 4,9m West and Central Africa 10% (to 35m)

DRC up 18,8% to 3,8m

Middle East and North Africa 10% (to 22,6m) Lesotho up 35,5% to 450 000

Mozambique up 19,3% to 1,3m

Source: FM Tech (Sept 26 2008)

This lack of clarity has meant that Vodacom‘s main shareholder Telkom has

expanded into Africa, with investments in Africa-Online an internet service provider

with presence in 9 African countries, Telkom acquired the company in order to

expand ISP services in the rest of Africa together with Telkom Media. Telkom also

acquired 75% of Multilinks, a Private Telecommunications Provider, in Nigeria, with

a Unified Access Licence, allowing fixed, mobile, long distance and international

communications services. Clearly the fixed line shareholder was pursuing a growth

strategy that they had denied its mobile wing Vodacom.

Other operators in these markets like Zain and France Telecom also got it (Zain

Africa is aiming for 110m subscribers by 2011, up from 56,3m in September). These

operators have steadily built their presence in Africa since 2003, while Vodacom has

been ‗cautious‘ about expansion into Africa. The other headache that Vodacom has is

that its other shareholder Vodafone already has a presence in Africa (see Table 6.5

above and Table 6.6 below).

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Table 15 Selected mobile operator presence in Africa 2005/12/31

Mobile

Operator

Home

Country

Countries

2003/12/31

Countries

2004/12/31

Countries

2005/12/31

No of

subscribers

(mil)

Vodacom South Africa 5 5 5 20,1

MTN South Africa 6 6 6 18,29

Zain( MTC) Kuwait 0 0 14 5,33

France

Telecom

France 10 10 10 5,55

Vodafone UK 3 3 3 11,33

In 2008, Vodafone completed the purchase of 70% of Ghana Telecom (GT) for

$900m. Ironically, it was competing against Vodacom in the sale process; again this

highlights conflicting strategies with its shareholder, Vodafone. None of the twenty

investors in an auction in 2007 were willing to pay over $500m for the stake, which

meant that Vodafone overpaid for GT. Ghana Telecom may end up reporting to

London, another market off limits to Vodacom, thus denying it the opportunity it

badly needed to further enhance its knowledge of the West African market.

Vodacom‘s shareholders lacked an appetite for risk. However, as Ball (1999:434)

contended Vodacom‘s shareholders needed to have been aware that strong

competitors like MTN would have made a profitable operation difficult to attain in

Nigeria, unless Vodacom‘s shareholders were following a strategy of being present

where its global competitors were. In this case, Vodacom on entering the Nigeria

market and any other market for that matter would have had to be an aggressive risk

seeker more concerned with gaining more market share and neglecting increased risk

and relatively short term low profits. Vodacom‘s shareholders would had to have

stomach for taking risk and realise that ‗caution‘ had them playing second fiddle to

MTN. Vodacom is now "officially" Vodafone's entry point into investing in sub-

Saharan Africa, however there are a number of messy loose ends that need tying up.

Vodafone's operation in Kenya, Safaricom (of which it and partners own 40%),

should (in theory at least) be brought into the Vodacom Group fold somehow.

MTN‘s shareholders were TV M-Net, Transnet and Fabcos. M-Cell then held 72 per

cent interest in MTN and negotiations continued for the remaining 28 per cent interest

in exchange for the ordinary M-Cell shares. Marcelle (2001) noted then that this

structure had changed over time and that at the time Johnnic Holdings had seconded

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its executives to MTN. Most notable in its shareholding was the lack of government

involvement as the shares that were held by Transnet were subsequently acquired by

the managers. Thus there were no conflicting shareholders at MTN unlike with

Vodacom. The financial re-engineering allowed for management to become

shareholders in the company and this provided them with vested interest in increasing

the value of the business. There was also clearly articulated geographical strategy that

was developed in response to Vodacom‘s dominance in the local market

The influence of the government

As Marcelle (2001) noted the government had a very significant role in the telecoms

industry both in terms of regulation of the industry but also as a player, as the major

shareholder particularly in Telkom and by default a share holder in Vodacom. As such

Vodacom became entangled in governments drive to shelter Telkom from competition

and maximise the value of the enterprise prior to listing in 2003. This came at a time

when Vodacom should have been expanding geographically fighting MTN for market

share in Nigeria. Vodacom‘s strategy to enter Nigeria became secondary to Telkom‘s

listing on the Johannesburg and New York Stock Exchanges and Vodacom lost a

valuable opportunity to challenge MTN effectively. As illustrated in Chapter 4 the

value on Telkom‘s shares appreciated on the back of Vodacom‘s revenues in South

Africa. Thus once again the shareholder‘s influence affected the strategic direction of

Vodacom, a mobile operator, by rendering its expansion strategy subservient to

Telkom‘s prospects.

Telkom SA was owned by the SA Government and Thintana Communications. The

Shareholders Agreement on this basis of SBC‘s investment Thintana bound the

Government to terms rather favourable to the SBC. The Shareholders‘ Agreement was

never made public because, according to Jim Myers (an executive at SBC), some of

its provisions bound the Government so stringently and gave Thintana

Communications so much control, that had they become public knowledge it would

have raised huge outcry. According to Horwitz and Currie (2007) clauses in the

Shareholders‘ Agreement stipulated that once the Telecommunications Act was in

place neither Telkom (also Vodacom) nor Thintana Communications would be

compelled to follow any legislation that violated the Shareholders‘ Agreement. This

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created strong incentive for Government to prevent legislation that might violate –

and make public – the Shareholders‘ Agreement. Vodacom was caught up in this

battle and could not be seen to be acting in a manner that would jeopardise SBC‘s

investment by embarking on risky ventures in territories that had unproven regulatory

processes.

MTN on the other had was freer of government‘s direct interference, having divested

itself of government‘s influence earlier on in its corporate life when its management

bought off Transnet‘s shares in the business. This left MTN freer to pursue a growth

strategy that was not hampered by being part of government‘s drive to increase the

value of Telkom‘s shares.

While both Vodacom and MTN benefited though from government‘s influence at

macro level with the signing of the SADC ICT Protocol as well as the governments

signing of the WTO Telecoms Agreement, but at a micro-level, where it mattered

most, government‘s influence at shareholder level did not influence the fortunes of

MTN. Instead government‘s role as a player and regulator in the telecoms sector had a

negative impact on the fortunes of Vodacom, while it may have contributed to

Vodacom‘s dominance in South Africa, in the fast changing terrain of African

telecoms, it was more of an anchor that produced drag on Vodacom‘s ability to react

to newly defined environment that its rivals were taking advantage of.

Thus in as far as the shareholding and strategy aspect was concerned Vodacom had

issues with its shareholders whereas MTN seemingly was clear about what strategy to

follow in its growth and was able to follow up this in its eventual entry into Nigeria.

The MTN Group CEO Phuthuma Nhleko and his executive made the decisions,

whereas at Vodacom, Group CEO Alan Knott-Craig had to refer to his main

shareholders Telekom and Vodafone about what strategies they were to follow in

which markets.

6.2.2 Entrepreneurial and enterprising management

Vodacom‘s management culture derived mainly from it major shareholders, Telkom

and Vodafone. As a result of government‘s preoccupation with increasing the value of

138

Telkom in preparation for its listing in 2003, the shares in Vodacom were also by

proxy a national asset. Thus Vodacom‘s executive managers, who in the main were

white, could not reasonably have expected to purchase shares in a company whose

other shareholder was actively pursuing a BEE policy as Horwitz and Currie (2007)

noted. Thus although the managers may have had good intentions in terms of where

they wanted the company to go as was illustrated by Vodacom Group CEO Allan

Knott-Craig‘s lament of the shareholders‘ lack of stomach for risk in Nigeria, he

could only watch in frustration as he was ordered to hold back from entering Nigeria,

particularly at a time when MTN was racking millions, all in order to protect

Telkom‘s listing on the Johannesburg and New York Stock Exchanges, in May 2003.

This was at a time when they should have been aggressively challenging MTN in

Nigeria. The government of South Africa considered Vodacom as a national asset that

could not be risked on the shores of an unstable environment like Nigeria. There was

a limit to what management could do at Vodacom, while they could only make

recommendations, ultimately the decision making rested with the shareholders, whose

perceptions of risk and return affected every decision that they made regarding the

geographical expansion and the strategic investments of the organization. Vodacom

was in the spotlight because of government‘s interest in the value of Telkom.

MTN on the other hand had an entrepreneurial culture and evidence of this was

provided by the financial restructuring of the company, a very enterprising and

entrepreneurial management team used the Newshelf Company to buy Transnet stake.

On completion of the transaction the PIC housed them, with the result that Newshelf

holds 13,06% of MTN. Newshelf‘s shares are held by the Alpine Trust on behalf of

both managers and eligible employees. The trustees are MTN Group CEO Phuthuma

Nhleko, COO Sifiso Dabwenga, Paul Jenkins, Wendy Lucas-Bull, Zakhele Sithole

and former MTN director Irene Charnley. Newshelf originally acquired the shares in

MTN from Transnet between December 2002 and March 2003 at an average price of

R13, 90/share. If debt repayments and other costs are removed from the equation, the

value of the investment has appreciated by nearly 600% in six years - and that‘s after

MTN‘s share price pulled back sharply in the wake of the group‘s failure to make an

acquisition in India in 2008 and the subsequent turmoil in world financial markets.

When MTN‘s share price peaked at R160 on May 5, Newshelf was worth R39bn.

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Even with the decline in the share price over the past six months of 2008, the

Newshelf 664/Alpine Trust structure has proved to be one of the most financially

successful empowerment schemes in post-apartheid SA. It has proved controversial,

though, since some senior white staff have also benefited. However, according to

MTN the trust aims to allocate 75% of the benefits to black staff.

The structure at MTN allowed the management team to work knowing that they were

not only creating value for the firm, but that in the long run they were also creating

value for themselves in the asset that was their company. That MTN was not in the

spotlight like Vodacom also meant that its managers were not under as much scrutiny.

Financial reengineering such as the purchase of shares from Transnet, has allowed

MTN management to realize that they were not only managers, but also decision

makers, the buck stopped with them, they did not have to refer their decisions to

shareholders, because they were shareholders themselves. They could interpret the

changing market conditions in both the material and interpretational domains as well

as in the competitive terrains both inside and outside of the firm. They could also

assess the resource conditions in the various markets and potential rents associated

with them, as they had had the knowledge of operating in the these markets from their

operations in the three regional hubs, the Southern African hub, the Great Lakes

Region as well as the Central/West African region. They could thus reasonably fulfill

the expectations of their customers and their sensemaking enabled them to make

decisions that enhanced the value of the firm. Sensemaking for the MTN managers

comprised of them comprehending, understanding, explaining, attributing,

extrapolating, predicting and –ultimately, unlike their counterparts at Vodacom –

deciding to engage in exchanges and to allocate resources

In this instance the entrepreneurial and enterprising nature of management at MTN

played a pivotal role ultimately in the success of the enterprise. Vodacom‘s managers

on the other hand despite their competence and the sterling work that they did to make

Vodacom the dominant force that it was in the telecommunications industry in SA

and Africa, they could only comprehend, understand, explain, attribute, extrapolate

predict but they ultimately, unlike their counterparts at MTN, they could not decide to

engage in exchanges and to allocate resources.

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6.2.3. Micro-culture

As shown in chapter 2, micro-culture refers to the knowledge, values and identity

beliefs in a firm consistent with a broad definition of culture as ‗pattern of shared

beliefs and values that give members of the institution meaning and provide them

with rules for behaviour‘ (Davies 1994). Vodacom‘s knowledge (deriving from

Vodafone and Telkom), values (Vodacom is a winning company, Vodacom is a

respected company) and beliefs (Vodacom is a caring company, Vodacom believes

that it can, Vodacom seeks out the impossible to do) were resources that created

competitive advantage. These resources were valuable, rare and rather difficult to

imitate in the South African telecoms environment. In addition, knowledge, values

and beliefs created and advantage for Vodacom through their influence on

information processing and behaviour. As cognitive structures unique to Vodacom

then, they enabled its strategists to make superior evaluations of the rent-earning

potential of the firm‘s resources relative to MTN‘s. They also guided the actions of all

Vodacom members and enabled them to enact a systematic strategic direction, ‗in

everything we do we will always make sure that our shareholders remain happy and

proud of their investment in Vodacom‘ (Vodacom 2003)

Conversely at MTN whose management held the view that the firm was ‗a leading

private sector, black controlled telecommunications group‘ (MTN: 2001) pursued

knowledge of the African environment as a first priority. This was demonstrated by its

investments in the regional hubs of Southern Africa, Great Lakes Region and the

Central/ West. This enabled MTN to ‗exploit the opportunities presented by

deregulation‘ (MTN 2001), not only in South Africa where it had built its network in

a very competitive South African environment and where it had played second fiddle

to Vodacom, but also on the continent and beyond. Having been part of SBC, MTN‘s

organizational culture has been largely influenced by an American corporate culture

influence, hence open neck shirts and chinos were the corporate dress code unlike the

jacket and tie at Vodacom, were the British corporate influence of Vodafone was

present. Besides describing the company as a leading private sector black controlled

telecommunications group well poised to take advantage of opportunities presented

by deregulation, MTN‘s ‗Living the Brand‘ project became an integral part of the

‗Live-Work-Play‘ campaign whose objective was to connect all employees to the

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MTN culture where the brand values of integrity, innovation, friendliness, simplicity

and can-do were shared amongst all staff. The Group saw itself competing in two

markets, one for customers and the other for talented individuals. With this focus, the

Group transformed itself to truly become a talent focused and empowered

organisation. According to the then Chairperson, Irene Charnely, the Group had a

strategy to attract the best talent into the Group by developing a strong employer

brand image. MTN, for example, was awarded second place in 2001 in the ―Best

company to work for in South Africa‖ survey. (MTN 2001)

MTN‘s knowledge, values and beliefs were well suited to the competitive terrain to

Nigeria. MTN‘s strategists through their influence on information processing and

behaviour that had been sharpened in jungles of Uganda as well as Cameroon had

enabled its managers to accurately assess the potential of the Nigerian market. As

cognitive structures unique to MTN then, they enabled its strategists to make superior

evaluations of the rent-earning potential of the firm‘s resources in Nigeria and

beyond, relative to Vodacom‘s. They also guided the actions of all MTN‘s members

and enabled them to enact a systematic strategic direction. According to the then out

going chairperson ‗over the next two years, the funding of new ventures as well as

normal start up losses will affect the overall earnings of the Group, but we remain

fairly optimistic that significant cash flows will continue to be generated from the

South African operations. Prospects for the African operations are excellent.

Cameroon is now up and running well, and Nigeria, with a population estimated at

120 million, offers significant potential for the Group. We expect positive cash flows

within the next three to five years from these new operations.‘ (MTN 2001)

Thus MTN‘s micro-culture played a key role in the way its strategists made superior

evaluations of the rent-earning potential of the firm‘s resources relative to Vodacom‘s

in the Nigerian market and beyond. They also guided the actions of all MTN members

and enabled them to enact a systematic strategic direction of being enterprising and

entrepreneurial.

6.2.4 Organising for geographical expansion

Vodacom managers, may have comprehended, understood, the competitive

environment that they were operating in and then tried to explain, attribute,

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extrapolate, predict what they had understood to their shareholders, their hands were

tied particularly by the shareholders agreement with Vodafone that prevented

Vodacom expanding north of the Limpopo as aggressively as MTN did. This was also

in part because Vodafone had a presence in Africa. So even though the competitive

terrain shifted and the macro-environment required that Vodacom act in a different

manner it just could not. The theoretical perspective in this case study suggests that

Vodacom lost its competitive advantage, given the restrictions of its shareholders,

because it‘s managers could not reinvent the strategic plot that its resources and

micro-culture had enabled it to gain competitive advantage in SA, and so it could not

respond to the new definitions of success and resource allocations of like its rival

MTN. Over all Vodacom‘s loss of competitive advantage reflected the firm‘s failure

to see how competitive advantage had emerged from the combination of its own

actions and those of its rivals, MTN in both material and interpretational domains.

Table 16MTN vision

Source MTN Annual Report 2006

MTN on the other had organised its operations into three regional hubs that comprised

of the Great Lakes Region; the Southern African Region as well as the Central/West

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African Regions It extended its reach into Africa through broadening its extensive

roaming agreements and guiding established partnerships in Uganda, Rwanda,

Swaziland and Nigeria. MTN believed then in 2003 that the Nigerian telecoms market

was expected to grow to and according to its Marshal Plan it aimed to have increased

its subscriber base in Nigeria to 4 million by the end of the 2004/5 financial year, and

that Nigeria was a crucial market. As illustrated below this strategy involved MTN

becoming a national player, then a regional player and then an emerging market

player (see fig 6.1). They were aware that this strategy would involve risk taking and

militated against that risk by acquiring the skills that they would need to operate in

emerging markets with their technological partners Ericsson. According to Curwen

and Whalley (2008) just over one-half of MTN‘s subscribers were to be found in

South Africa at the end of 2005 (compared to two-thirds one year previously), but as

the company was growing relatively rapidly in Nigeria, easily its second-largest

market accounting for one-third of its subscribers in 2005, that dependency on a

single market was rapidly being reduced.

MTN‘s geographical expansion has not been without its flaws, it struggled to expand

since it failed to acquire either Celtel or half of Atlantique Te´ le´com in 2005; failed

to win 51% of Nigeria‘s Nitel/M-Tel in December 2005; failed to buy 35% of Tunisie

Te´ le´com in March 2006; failed to buy 34% of Namibia‘s MTC in March 2006 and

failed to win a licence in Egypt. However, in early May 2006 it appeared to have put

these disappointments behind it when it bid successfully (subject to a raft of

regulatory approvals) to take over Investcom—there were no overlaps in their

respective country coverage—receiving an irrevocable acceptance for an initial 70.6%

stake. It was also interested in taking a stake in Zimbabwe. The irony was that

Investcom had just been declared to be the provisional highest bidder for Millicom

International which had put itself up for sale in early 2006. Not surprisingly,

Investcom withdrew its offer and it remained to be seen who would acquire Millicom,

although the clear favourite was China Mobile. However, discussions broke down and

Millicom decided to remain independent. It subsequently held back from pursuing any

further interests in Africa.

After the announcement of the historic 2004 results, when MTN were ‗crowned‘

kings of the continent Nhleko said it might no longer limit itself to African expansion.

144

"We are continually looking and we are now in a far better shape because our debt-to-

equity ratio is down to 8 per cent and we are generating significant cash flows."

Expansion would preferably come by entering virgin territory, but a good acquisition

would also be attractive. "In the short term it will be African opportunities because

that is our logical footprint, but if there are interesting opportunities outside we'd

consider them,"

Nhleko pointed out that assuming current market conditions, the group was confident

that the South African operation would continue its strong free cash flow generation,

while international operations were expected to maintain subscriber growth. Nhleko

added that, the group was ―now deriving an increasing proportion of its earnings from

outside South Africa‖ and as a result was ―becoming more susceptible to foreign

exchange movements.‖

At the time Pyramid Research had wondered where MTN could go to replicate the

Nigerian success. No other African nations had the size of population (despite

Mthembu‘s claim of the 200 million subscribers in their portfolio), the undercurrent

of informal wealth and the bubbling demand for cell phone services that

entrepreneurial Nigeria offered. Which meant strategic investments in other countries

may be sound, but not spectacular. MTN may do better looking to the east by tackling

the massive Chinese market, perhaps, where the large population is taking cellular

services to heart. At the same time, Pyramid Research went on to add, MTN could not

take its eye off the ball in SA despite having performed better than expected in the

face of tough competition and an increasingly mature market.

6.3 CONCLUSION

The case study began by looking at the challenge that rival firms face in when

embarking on a geographical expansion. This study then analysed the effectiveness of

geographical expansion by of two large South African telecommunications companies

in Nigeria; conducting a comparative analysis as was shown by these indicators

namely (1) shareholding and strategy (2) entrepreneurial and enterprising

management (3) micro-culture and (4) organizational structuring for geographical

145

expansion The analysis has provided lessons for corporate strategy and decision

making.

As outlined in the SWOT analysis, both Vodacom and MTN by 2001 were aware that

they needed to do that to maintain their market share and growth after the entry of

Cell C into the market. Thus they need to find growth by pursuing both a product and

geographic diversification strategy. To that end, Vodacom had not only been the first

operator to diversify in terms of product diversification as in 1997 they offered the

prepaid model, it was also the first of the two network operators then to embark on a

geographical expansion when it won a licence in 1995 in Lesotho. This was followed

by a licence in Tanzania in 1999, then Democratic Republic of the Congo in 2001 and

Mozambique in 2003. These were, in the main, operations in Vodacom‘s

neighbourhood, stable democracies. There was not much diversity from its main

operation in South Africa in terms of culture, terrain, etc. Furthermore, although

Vodacom had considerable competitive advantage in South Africa by 2001, its

geographical expansion was severely handicapped by the shareholders agreement

with Vodafone that prevented it from pursuing operations north of the Limpopo.

By contrast, MTN shareholders actively pursued geographic expansion two years

after Vodacom, when MTN International expanded into Africa, acquiring licences in

Uganda, Rwanda and Swaziland between 1997 and 1999. MTN International also

acquired a National GSM 900 licence in Cameroon in 2000. MTN focused on

developing regional hubs in the Great Lakes Region, Southern Africa and the

Central/West Africa around which business clusters developed and from which they

developed skills of being an emerging market player and each of the hubs provided

different sets of skills which the company built upon. MTN identified three essential

regional clusters, through tracking efficiencies, knowledge transfers, skills sharing

and mutual access to a pool of advanced and innovative technology. MTN‘s

diversification exploited economies of scope, product knowledge, and other relevant

experience, thus reducing transaction costs and improving performance (Grant, 1988;

Williamson, 1981).

Thus Vodacom‘s and MTN‘s geographic market diversification was horizontally and

vertically integrated across different national submarkets (Hisey & Caves, 1985).

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However the benefits of MTN‘s geographical diversification, particularly in Nigeria,

originated from two sources—greater opportunities for higher returns and lower

correlations of assets across countries (Cavaglia, Melas, & Tsouderos, 2000).

Geographical diversification provided MTN, especially in Nigeria, with significant

advantages, including better firm performance (Hitt, Hoskisson, & Ireland, 1994;

Tallman& Li, 1996).

6.3.1 Measuring International Diversification

In measuring the extent or multiplicity of foreign markets in which the two telecoms

firms operated , the study examined the relative importance of international markets

by reviewing Vodacom‘s and MTN‘s share of sales revenues from foreign markets,

especially Nigeria, the biggest market in Africa. The study then investigated the

numbers of countries the firms entered since 1995 in their pursuits of Merger and

Acquisition transactions (as an acquirer). Vodacom operates from only five countries

including it home market, by contrast MTN now operates in 15 African countries. The

case study used this measure instead of the number of countries where either might

have established operations because of the complex and inconsistent definitions for

international branches each conglomerate has adopted, which may include

subsidiaries as well as affiliates and non-affiliated licensees, and the discrepancies in

the numbers of reported countries entered by different divisions of each conglomerate.

In terms of measuring the conglomerates‘ mode and direction/relatedness of

international diversification, the study looked at the number of countries and regions

that each of the firms had entered since 1995 years as an acquirer in M&A

transactions. MNDS, as a measurement of geographical relatedness, is also calculated

by dividing the total number of countries a conglomerate entered by the number of

regions it entered. The study further examined the M&A transactions occurring during

the period in each region to investigate the core regions of international diversification

for each firm. It should be noted that the classification of the regions was based on the

considerations of cultural, economic and physical geographic divisions and adopted

from the Economic Growth Regional Classification framework (Economic Growth

Center, 2002). MTN‘s strategy by far outclassed Vodacom‘s, in that it had three

regional hubs and operated from 15 countries compared to Vodacom‘s 5.

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Strategic Investments

Constituents engage in interactions with firms to further their own objectives: They

allocate the resources that they control by making buying and selling decisions,

investment decisions, and employment decisions. Each decision shifts resources to

alternative uses and contributes to determining which firms enjoy competitive

advantage. Assessments of ‗better value‘ depend partly on constituents‘ own

objectives and partly on the strategic investments and strategic projections that

competing firms have made. Assessing the value that firms offer is a complex task

performed with incomplete information. Cognitive limitations in perception and

interpretation prevent constituents from making accurate assessments (Schwenk,

1984). Given limitations in evaluating firms and industries, constituents routinely rely

on ready-made interpretations in the ambient macro-culture of the industry

(Abrahamson and Fombrun, 1992, 1994). Just as the strategic investments of firms

originate both in their resource bases and their micro-cultures, so are the resource

allocations of constituents informed by the macro-culture of the organizational field.

Macro-cultures facilitate constituents‘ sensemaking. They do so by providing

constituents with industry paradigms and by supplying them with definitions of

success. For example, reputational ratings are an element of a company‘s macro-

culture that help reduce uncertainty about firms‘ likely behaviours or future levels of

performance (Weigelt and Camerer, 1988; Rao, 1994; Fombrun, 1996). Much as

individual schemata encourage automatic information processing and foster schema-

consistent behaviour (Fiske and Taylor, 1990; Gioia, 1986), so do reputational

schemata encourage constituents to make resource allocations and to sustain their

allocations in reputation-consistent directions (Wartick, 1992).

In Vodacom‘s case it was clear that by 2001 it needed to make investments outside of

its network in SA if it was to maintain its competitive advantage, however as

described above, even though Vodacom was in a much stronger financial position

than MTN, its shareholders constrained its expansion strategy so much so that the

massive amounts of money that it was generating in SA were in the first instance used

to pay off a shareholders loan in 2001 and the rest reinvested again as it sought to

have total dominance in its home market.

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As can be seen from the table 6.7 on proportionate subscribers, Vodacom’s

domestic subscribers as a percentage of total was 81.5% of total subscribers by

the end of 31st December 2005 and this figure has not changed much. Compared

to other operators in Africa including its major shareholder Vodafone as well as

arch rival MTN, Vodacom is still very heavily reliant on its maturing domestic

market.

For it to have a commanding presence in Africa, it would have to resolve its

relationship with Vodafone. Perhaps the other strategy that it could adopt will be

for it to enter emerging markets where Vodafone does not seem to have a

presence, like in the Middle East as well as Central and South America as they

have acquired the necessary skills of operating in emerging markets.

Table 17 Proportionate Subscribers

Company Total no of

subscriber

s

(millions)

Domesti

c as %

of total

Wester

n

Europe

Easter

n

Europe

Middl

e East

Asi

a

Central

and

South

Americ

a

North

Americ

a

Afric

a

Vodacom 20,1 81.5 100

MTN 18,9 51.9 100

Zain(MTC

)

9,3 15.4 42.9 57.1

France

Telecom

71,4 31.4 80.0 9.7 0.4 0.1 2.1 7.7

Vodafone 179,3 9.1 60.6 3.8 16.6 12.7 6.3

Source: Curwen and Whalley

6.3.2 Measuring Performance

The study used various performance measures to determine the effectiveness of the

geographical expansion of the two competitive rivals. Averaged total revenues were

used to show the Vodacom‘s and MTN‘s relative positions in the market especially in

the period 2001-2004, while the averaged revenue growth rate was evaluated to see

the growth potential of each of the firms. Earnings before interest, taxes, depreciation,

and amortization was used to evaluate the rivals‘ profitability, and Return on Assets,

Return on Investment, and Return on Equity, which are measures of the effectiveness

and efficiency of top management rather than investors‘ expectations about future

profits such as in the case of stock price (Qian, 1997), were also examined. The

149

results are included in the annextures. Once again using this measure of performance

MTN‘s revenues and profits overtook Vodacom‘s in the years 2003 and 2004,

effectively establishing MTN as the Telecommunications ‗Kings of the Continent.‘

As can be noted from fig 6.2 as well as the financial analysis in the annexure, MTN‘s

actual growth was unanticipated. Thus it can be extrapolated from the financial

analysis (in the annexture) that MTN‘s geographical expansion strategy was more

effective than Vodacom

Table 18 MTN’s Growth

Source: Naidoo (2006)

6.3.2.1 MTN’s Critical Success Factors

This case study has shown that MTN succeeded in its geographic expansion strategy

because of the following critical success factors (1) Organizational Integration (2)

Management/ Leadership (3) Managing strategic change (4) Cultural change as well

as the fact MTN is a (5) Learning Organisation and had set itself up for Technological

Capacity Building and Innovation (Marcelle 2005) By contrast, Vodacom did not

build on its lead in South Africa because of its rigid management structure that chose

a focus strategy in a local market that was getting saturated. Subsequently its

arrogance created a blind spot and blunted its ability to respond to the changing

competitive terrain. Its ability to respond to the changing competitive terrain was

further hampered by the fact that it did not possess the skills that it needed to compete

in the redefined terrain. These critical success factors will be examined below in

detail.

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Table 19 MTN’s Critical Success Factors

MTN Vodacom

Organizational Integration Adaptable Rigid

Leadership Dynamic and

Entrepreneurial

Managing strategic change Ability to interpret market

conditions and respond

Did not respond to the

changing market

conditions

Cultural change Core skill requirement in

global market place

Monopoly power in SA

created blind-spot

Learning organisation-

Technological Capacity

Building

Valuable lessons from

being 2nd

Network

operator

Dominance created

arrogance

Source: Author

6.3.2.1.1 Organizational Integration

Lazonick and West (1995) define organisational integration as a set of ongoing

relationships that socialises participants in a complex division of labour to apply their

skills and efforts to the achievement of organisational goals. They go on to contend

that the foundation of the socialised process that achieves organisational integration is

‗membership;‘ the inclusion of the individual or group into the organisation with all

the rights and responsibilities that membership entails. In a business organisation a

fundamental right of membership is employment security, and a fundamental

responsibility is to ensure that the pursuit of one‘s individual goal is consistent with

that of the organisation. They argue that competitive advantage depends on the

strategies and the structures of the business enterprises. They further argue that, over

time, to gain competitive advantage businesses, in the US and elsewhere, had to have

achieved increasingly higher degrees of ‗organisational integration.‘

Organisational integration provided MTN with the capability to learn as an enterprise

in their battle against Vodacom in the SA market and gave MTN the ability to be have

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a quicker and effective strategic responses to Vodacom‘s dominance. It also provided

MTN the capability to learn as an enterprise and the potential to innovate in market

competition. The building of the relationships that constituted MTN‘s organizational

integration was strategic. MTN involved its employees in the process of planned

coordination, investing in their skills and extending them the options of being

shareholders. Secondly they developed long term relationships with firms that

supplied them with inputs, particularly Ericsson (their equipment supplier), and

distributed their outputs, Panelpina (logistics) and that these firms, as with their

employees and managers, enabled these firms to participate in an organizationally

integrated learning process. Thus MTN, gained competitive advantage over Vodacom

by becoming more organizationally integrated than its rival, its managerial structure

(including technical specialists) was critical for innovation but also in which the

evolution process technology with Ericsson, made the employees (who were also

shareholders), suppliers (Ericsson) and distributors (Panelpina) of central importance

for process innovation.

MTN‘s strategic response to Vodacom‘s competitive challenge in terms of qualitative

type and speed of response meant that it embarked on an innovative strategy which

entailed investments, like Nigeria, that enhanced the productive capability of the new

combination of inputs, thus making possible the generation of higher revenues, lower

inputs costs. MTN‘s innovative strategy depended on whether the upgrading and

recombination of inputs yielded sufficient increases in quality and decreases in cost to

make the enterprise‘s products competitive. The organisational integration hypothesis

argues that an important determinant of the difference between Vodacom and MTN

was the qualitative and the effectiveness of MTN‘s strategic response to Vodacom‘s

dominance in the local market, particularly its geographical expansion into Nigeria.

Even though MTN started operations in South Africa and in Africa after Vodacom

had been in the market the distinguishing factor from Vodacom was that MTN was

clear about what business it was in, the mobile telecommunications market and thus

all its business units were integrated into the provision of mobile telecommunications

in converging telecommunications market. That awareness subsequently influenced

MTN‘s strategic choices in terms of how it would pursue growth in response to

Vodacom‘s dominance not only in the local market but also in Africa. Vodacom was

not clear what strategy it had to follow, this derived from the fact that its main

152

shareholder was the incumbent, Telkom a fixed line operator, as well as Vodafone a

mobile operator. There was no organizational integration that would have allowed

Vodacom to build on its competitive advantage in SA.

6.3.2.1.2 Leadership

Gandossy and Guarnieri (2008) observed in a global study on Top Companies for

Leaders that in these top companies:

Leaders lead the way; leadership development is at the top of the CEO‘s and

senior management agenda; it is an area in which they invest substantial

amounts of time and energy.

A focus on talent; top companies do more to identify, develop and reward top

talent; differentiation of top talent is a given

Practical and Aligned programs and practices; leadership development,

performance management, succession planning and recruiting all work

together to help people in the business to achieve their goals

Leadership as discipline that reaches a critical “tipping point,” when a

company has commitment to leadership, it becomes integrated with business

planning and woven into the culture of the organisation.

In short they contend, top companies make leadership a way of life. They make

deliberate decisions to reinforce leadership expectations, through top-down

communications, promotion decisions and variable pay. In big and small ways, top

companies let it be known what they expect from their leaders and are relentless in

creating an environment that fosters the development of leadership.

Taking the above criteria into consideration it will be noted from the comments of the

then out going Chairman Irene Charnely in 2001 MTN‘s ‗Living the Brand‘ project

became an integral part of the ‗Live-Work-Play‘ campaign whose objective was to

connect all employees to the MTN culture where the brand values of integrity,

innovation, friendliness, simplicity and can-do were shared amongst all staff. The

Group saw itself competing in two markets, one for customers and the other for

talented individuals. With this focus, the Group transformed itself to truly become a

talent focused and empowered organisation. She went on to add that the Group had a

strategy to attract the best talent into the Group by developing a strong employer

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brand image. MTN, for example, was awarded second place in 2001 in the ―Best

company to work for in South Africa‖ survey. (MTN 2001). Vodacom‘s focus on the

other hand was its preoccupation with pursing its dominance of the local market and

while leadership development and employee may have been a focus as per the Skills

Development Act, it was not as intense or interwoven into the fabric of the

organisation as much as it was at MTN.

6.3.2.1.3 Managing strategic change

Managing strategic change for Vodacom and MTN required the raising questions

about the fundamental nature of organizations: What business(es) should they be in?

Who should reap what benefits from the organization? What should be the values and

norms of organizational members? For MTN it was a simple process, as they were

able to clearly define who they were ‗a leading private sector, black controlled

telecommunications group poised to exploit the opportunities presented by

deregulation‘ (MTN: 2001). They were also able to define who should reap what

benefits from the organisation; Newshelf‘s shares are held by the Alpine Trust on

behalf of both managers and eligible employees. MTN‘s ‗Living the Brand‘ project

became an integral part of the ‗Live-Work-Play‘ campaign whose objective was to

connect all employees to the MTN culture where the brand values of integrity,

innovation, friendliness, simplicity and can-do were shared amongst all staff.

Vodacom‘s shareholders by contrast could not decide what strategy Vodacom was to

follow, fixed-line or mobile and this indecision paralyzed any actions that its

management may have had in challenging MTN in Nigeria. Management‘s inability

to act in the Nigerian saga can be deduced from the companies values which state that

‗in everything we do we will always make sure that our shareholders remain happy

and proud of their investment in Vodacom‘ (Vodacom 2003), even if this meant

acting against their better judgement and not challenging MTN in Nigeria because

their shareholders did not have a stomach for risk.

6.3.2.1.4 Cultural change

Cultural change is a form of organizational transformation, that is, radical and

fundamental form of change. Cultural change involves changing the basic values,

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norms, beliefs, etc., among members of the organization in order to improve

organizational performance. It involves lasting and structural and social settings

within organisation as well as lasting changes to the shared ways of thinking, beliefs,

values, procedures and relationships of the stakeholders. MTN in particular, in light of

Vodacom‘s dominance needed to provide a positive orientation to Technological

Capacity Building (Marcelle 2002), technical developments in the telecoms industry

instigated the need for new skills in the organisation. Skills and awareness would have

required constant updating and so new approaches to training were adopted, in view

of the stated organizational goals new roles and new attitudes would have been

required of both managers and employees. As the study has shown, for MTN to

effective challenge Vodacom‘s documents they needed to have had a vision of the

organisation, even though at the time it was conceived none of the managers and

employees were guaranteed what the outcome would have been, it took the courage

and convictions of the leadership to lead the organisation in the periods of uncertainty.

In contrast, Vodacom‘s dominance created some form of lethargy within the

organisation that dulled its responses in the changing African telecoms market. When

it eventually decided to try and challenge MTN in Nigeria, it was too little too late

and did not have the organizational integration to make the challenge effective and

lasting.

6.3.2.1.5 Learning organisation- TCB and Innovation

Lazonick and West (1995) argue further that a competitive challenge entails

innovation and that MTN needed to have an innovative response for it to have gained

sustainable competitive advantage. They go on to add that the sustainable competitive

advantage that MTN required was one that did not rely on permanently reducing

returns to productive factors or living off the company‘s existing resources. Thus the

timing of MTN‘s strategic response to Vodacom‘s dominance, particularly its

investment in Nigeria, was critical because of the need to argument the productive

capabilities of its resources. The innovation process that was set in motion by MTN‘s

innovative strategy was a developmental process that took time. In order to generate

higher quality, lower costs products and processes that brought about competitive

advantage, Lazonick and West (1995) argue that MTN had to have an organisational

155

structure to implement the innovative strategy to develop and utilize technology,

which Ericsson provided. Thus their organizational structure hypothesis focuses on

the social structure of MTN‘s enterprise as a determinant of competitive advantage.

They go on to add that putting this organisational structure, in place to sustain the

learning process that MTN‘s organisational structure needed to generate, required its

strategic decision makers to have access to what they call ‗financial commitment‘ and

shareholders, MTN‘s strategic decision makers had no problem accessing this

financial commitment. A necessary condition for innovation, Lazonick and West

(1995) further contend was that those who controlled financial resources, at MTN,

choose innovative investment strategies rather than adoptive investment strategies like

at Vodacom. They needed, moreover, to keep financial resources committed to the

innovation strategy until the products and processes were sufficiently developed and

utilized to generate returns. In MTN‘s case, keeping money committed to the

innovative strategy and in particular the Nigerian operation, its shareholders needed to

have intimate knowledge of the problems and possibilities of their investment

strategy.

MTN‘s competitive advantage required a learning process that resulted in the

generation, over time, of higher quality and /or lower cost products. The general

attributes of this learning process was that it had to be concentrated, continuous,

cumulative and collective and management‘s role was to ensure the concentration

continuity, cumulatively of the learning process. Meanwhile Marcelle (2002) in her

study ‗How African Telecoms Build Capacity‘ defines the process of Technological

Capacity Building (TCB) as an investment process in which firms learn to accumulate

technological capabilities under conditions of uncertainty. She adds that TCB effort is

not linear, sequential and orderly, nor is it guaranteed to succeed without sustained,

purposive co-ordination. She contends that ―to be effective at TCB, firms must

acquire basic organizational capabilities, specific functional capabilities and the

ability to manage complex change. Firms that are successful in technological learning

are likely to overcome the challenge of reconciling tensions between activities that

may stimulate innovation, but reduce short-term productivity gains, and must have the

ability to simultaneously update old ways of knowing and doing while acquiring new

technological knowledge. Thus, in order to be successful, TCB firms must also be

able to manage complex change effectively (Pettigrew & Whipp, 1991 It is suggested

156

that for firms‘ TCB efforts to be effective, they require a system consisting of five

critical components, which include three internal processes: (1) allocating financial

resources to TCB effort; (2) management practices, systems and decision making

rules that implement and support the TCB effort; and (3) practices to establish and

maintain an organizational culture in which the TCB effort is exercised with

committed and skilled leadership; and two boundary processes: (4) accessing external

TC resources from suppliers; and (5) accessing external TC resources from the

innovation system (local and global).‖

The innovation process that was set in motion by MTN‘s innovation strategy was a

developmental process that took time, effort and sustained financial resources. In

putting the integrated organizational structure in place and in sustaining the learning

process that MTN‘s organizational structure had to generate required, its strategic

decision makers to had have access to ‗financial commitment‘ and as most of the

shareholders were also the executive team this was not an issue. Financial

commitment represented the willingness of those who controlled the resources to

commit to financing the high fixed costs of developmental investments in Nigeria in

2001, which because of innovation, promised uncertain returns. Financial

commitment, for MTN, thus played a critical role in its innovation process, because

its shareholders, who were also managers, chose what strategy the enterprise was to

pursue. MTN‘s innovative strategy inherently entailed fixed costs because

investments, like Nigeria in particular, had to be made in physical (Y‘helloBhaan) and

human capital (expatriates) with a time lag before the receipt of returns. These fixed

costs were high in Nigeria, because of not only the scale of the investments but also

the developmental period had to occur before the investments that entailed fixed cost

could generate returns.

This was a very important differentiator between Vodacom and MTN which

ultimately led to MTN‘s competitive advantage. As outlined in Chapter 4, Vodacom

had been the first organisation to launch in SA and subsequently to have competitive

advantage over MTN. To all intents and purposes, MTN was going to have to play

catch up to Vodacom, especially when Vodacom had been also the first company to

embark on geographical expansion in 1995 when it won a licence in Lesotho. It

therefore required that MTN organize itself in such a way that it would effectively

157

challenge and ultimately succeed in overcoming that dominance. Creating a learning

organisation was one such response and MTN also has an Innovation Centre. The key

therefore to MTN‘s organizational learning and Innovation was in the integration of

the three cultures ―the operator culture‖ the internal culture based on its operational

success; ‗engineering culture‘ which involved the designers and the technocrats who

drove its core technologies, Ericsson as well as its ‗executive culture‘ that included

the executive management, the CEO and his immediate subordinates. Schlein (1996)

argues that the three cultures are not often aligned with each other and it was this lack

of alignment at Vodacom that caused failures of organizational learning as this study

has demonstrated. It was MTN‘s ability to create new organizational forms and

processes, to innovate in both the technical and organizational arenas that were crucial

to them attaining competitive advantage over Vodacom in the dynamic African

telecommunications environment.

6.3.3 Lessons for corporate strategy and decision making

In concluding, this analysis provides insights for firms executing geographic

expansion strategies and shows that the following are important success factors(1)

Organizational Integration (2) Management/ Leadership (3) Managing strategic

change (4) Cultural change as well as the fact MTN is a (5) Learning Organisation

and had set itself up for Technological Capacity Building and Innovation outlined as

critical to MTN‘s success above. Furthermore, to strategists, the systemic framework

presented in chapter two fig 2.5 in this case study shows that MTN‘s competitive

advantage did not derive from any single source—be it industry conditions or

corporate culture. Rather, advantage was an outcome of a cycle of processes. Weick

(1979b: 52) warned that managers get into trouble because they forget to think in

circles.‘ In part it is because organizational structures inhibit thinking in cyclical

terms: Each process in the cycle is typically managed by a separate function and level

in the organization. Moreover, different professionals normally manage the

knowledge base associated with each domain. For example, economists are generally

charged with forecasting market behaviours; line managers with developing

investment proposals; human resource specialists with managing the systems that

support the firm‘s micro-culture; and marketing and public relations staffs with

158

monitoring and maintaining the macro-culture. Differentiation along these lines

makes cyclical thinking difficult to achieve.

The results presented in this case study appear to validate this theoretical proposition.

As such, it is recommended that a firm‘s strategists should recognize the disparity

created by their internal structures and actively exploit the interdependencies

according to the systemic logic of competitive advantage. To attain and sustain

competitive advantage, strategies in one domain must be consistent with strategies

developed in another; and strategies coordinated across domains will achieve better

results. Many researchers have suggested that interpretations about firms are more

actively constructed in the early life of a firm (Aldrich and Fiol, 1994; Suchman,

1995). The systemic model calls attention to the fact that industry paradigms emerge

from interactions between firms and constituents and reflects the legitimacy of

technologies, individual firms, and even strategic groups. When the industry paradigm

changes it undermines the legitimacy of established firms. Therefore, the acquisition

of legitimacy may be a strategic activity that occurs, not only at the beginning of a

firm‘s life, but every time its competitive terrain shifts.

Finally, interpretational variables introduce a new set of time lags into models of

competitive interaction. Since interpretations such as corporate reputations are

inertial, a firm may be able to continue to attract resources for a period of time even

when its strategy is no longer viable, as the case of Vodacom shows. Such a firm may

be misled into believing that it enjoys actual advantage when it is using up

accumulated goodwill. When constituents find out that their reputation-based

expectations are not met, they may have extreme negative reactions. Projecting an

image leads to social expectations that amount to obligations to behave in ways

consistent with the image (Schlenker, 1980). Violating these obligations can have

grave social consequences. At the firm level these social consequences have profound

implications for the firm‘s economic performance. Ultimately, the systemic model

that the case study uses makes it very clear why control over resources alone is not

enough to reproduce competitive success. Even firms with exceptional resource bases

can fall with astonishing speed when they lose the confidence of resource-holders.

Therefore, firms need to audit their reputational base as well as their market positions,

their cultural compatibility with constituents as well as their resource adequacy.

159

160

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