Application of Michael E. Porter's Five Competitive Forces and
Generic Strategy for
TELECOMMUNICATION INDUSTRY
Company- VERIZON
BY:
P.V.S. CHANDANA, 2016A1PS0635H,
MADHURA BANERJEE, 2016A7PS0087H,
ANIKA BAIRATHI, 2016A5PS0733H.
INDUSTRY ANALYSIS
Michael Porter’s Five Forces Model
Rivalry among the existing companies:
(Strong Force)
The US telecommunication industry has matured. It has attained saturation levels in core services.
Telecommunication companies don’t have the opportunity to gain access to new untapped customers
hence they compete aggressively to gain their peers’ market shares in their customer segments. The
concentration should be on the quality of the final products also there is a balance among the
competitors which is predicting that there is a very high competition between the firms.
In this process price competition is usually high. Wireless telecom is dominated by consumers. In
wireline, businesses—especially medium and large enterprises—are a significant customer segment.
They aren’t very sensitive to prices.
Integrated national carriers compete effectively in both of these customer segments. The largest
integrated telecom companies—AT&T (T) and Verizon (VZ)—represented 69% of the industry at the
end of 2013.
This component of Porter’s Five Forces analyzes the intensity of competition against Verizon
Communications. Competitive rivalry affects the telecommunications industry environment by
imposing challenges on companies in the aspects of growing and maintaining their market shares. The
following external factors affect the competition against Verizon is based on:
·
Low product differentiation (strong force)
·
High aggressiveness of firms (strong force)
·
High exit barriers (strong force)
The telecommunications industry has a low product differentiation because competing products are
highly similar, with small differences based on some variables. Low product differentiation is a crucial
factor that strengthens the competitive rivalry by making it easier for customers to consider changing
their service providers. Verizon Wireless attracts customers through the high quality of its services, but
these services are highly similar to competing services from other firms.
On the other hand, the high aggressiveness of firms creates the competitive nature in the market.
Verizon Wireless competes with other firms aggressively through marketing campaigns and innovative
technological. Also the economies of scale for this industry is very high which means for any company
to enter needs to produce more and sell more which is really tough.
Not only has this but also there exist high exit barriers, which include the high cost of
telecommunications infrastructure. This won’t let established firms leave the information and
communications technology and services industry, thereby keeping competition high. Added to this
Brand Image is one of the major non-price dimensions that is letting Verizon to stand apart from the
other major players in the market.
Thus, this component shows that competitive rivalry is a major force that shapes the strategies of the
business.
Threat of substitute products:
TCP/IP based infrastructures bring cost savings to the carriers and also allow them to
abstract key value-added services from the physical layer. But substitutes are also being built on top of the
IP protocol, commoditizing the incumbents’ own infrastructure and services. Today we find OTT-based
substitutes for all core offerings. Voice communication is being threatened by SIP and proprietary offerings
(e.g. Skype) and by asynchronous voice messages (e.g. WhatsApp) that are very popular among millennials.
Traditional DSL broadband, which has enforced “customer loyalty” in the past, is seeing growing
competition from TV-cable as well as from wireless technologies such as LTE and future 5G networks.
Cable TV companies are faced with the threat of fast growing IPTV and VOD offerings, often contending
for budgets (ads and subscription) and for customer attention (viewing time.)
Even mobile businesses are being threatened by the growing number of market participants offering IP based
alternatives to text messaging and to traditional long distance calling. The main substitutes in the
ng cards, internationally- or foreign-managed
VoIP services, satellite internet,satellite phones and NGNs. In order to analyze the threat of substitutes, it is
essential to look at the price-performance trade-off between the substitute and the industry's product. Porter
himself, for example, highlights the suffering of conventional long distance telephone service providers
following the introduction of inexpensive internet-based phone services such as Vonage and Skype (Porter,
2008). It is also vital to look at each substitute individually and determine the buyers’ switching cost.
Substitutes offer the greatest threat when they can provide buyers with better service at lower costs through
changes that improve the value of their products or services. Under the Telecommunications Law, the
unlicensed provision of international phone calls using VoIP is illegal and punishable with a jail term of up to
According to a report by a local English-language
newspaper, the Times of Oman, in early November 2009 over 200 people had been arrested following raids
on more than 100 homes and shops. Omantel also blocked the popular Skype VoIP internet site in an effort to
Satellite phone and satellite internet remain a threat for the
future. However, until better service provision and lower rates can be guaranteed, the threat from this kind of
substitution remains low. The overall impact of substitutes, however, is driving prices down and remains
appreciable, due to VoIP and other alternatives such as online voice chatting and international video
conferencing.
Bargaining power of suppliers:
The analysis of supplier power typically focuses on:
The relative size and concentration of suppliers relative to industry participants.
The degree of differentiation in the inputs supplied.
The importance of suppliers product to the industry.
Switching cost of the buyer to change the supplier.
The Suppliers to this industry typically are:
The manufacturers of telephone switching /switchboard equipment,
Fiber optic cables, network equipment, and billing software makers.
The prominent names in the supplier industry include Cisco, Alcatel-lucent, Nokia, Nortel
,Motorola and Tellabs etc .
After the deregulation of downstream service providers and the technological breakthrough in IP
networks, Telecom equipment makers began to ramp up manufacturing in order to meet the huge
anticipated demand, however aftermath the dot com bubble, demand did not pan out as expected and
led to overcapacity and eventually demise of several firms. The evidence of decline can be gauged
from the fact that the telecommunications industry Association (TIA) reported that in 2016, a
cumulative decline of $30.5 billion in revenues.
Services of the companies in the industry require virtual network operators .There are large
suppliers that offer wireless telecom services and network services to providers, usually through
long term contracts. Switching costs are then very high, since firms cannot easily exit such a
contract.
But, due to excess capacity and falling demand, the suppliers do not have the power and clout
to negotiate with the telecom behemoths.
However with the demand in recent years has started to pick up with fixed line providers deciding
to install fiber based networks to provide faster data and video services.
Bargaining Power of Consumers:
Impact: Moderate
The intensity of customers’ impact is evaluated in this component of the Five Forces analysis of Telecom
Industry. The most important determinants of buyer power are the size and the concentration of customers.
Other factors are the extent to which the buyers are informed and the concentration or differentiation of the
competitors. They have different standards therefore the buying power across demographics is different.
Customers or buyers affect the company’s revenues, profit margins, and business value. The following
external factors contribute to the moderate bargaining power of customers on the telecommunications
industry environment:
Low information asymmetry (strong force)
Moderate switching costs (moderate force)
Moderate price sensitivity (moderate force)
The low level of information asymmetry corresponds to the high quality of information that customers can
access to know about products in the market. Low information asymmetry also affects buying power.
Customers have access to more products that perform in the same way. However, some consumers still lack
information on specifics. Other customers can evaluate the product when placed alongside competing
products. This external factor strengthens the intensity of the bargaining power of buyers or customers,
based on variables like customers’ ability to evaluate and compare the services of a company to its
competitors.
In the context of US telecom industry we can say that, with increased choice of several technologies and
means of communication available and entrance of several new firms buyer power is been increasing. The
consumer now has access to several means of communication like email, instant messaging which are
diminishing the importance voice services. Residential consumer also benefits with local number portability
(A regulation from FCC which mandates the carriers to move the phone number when the customer switches
to a different carrier). This feature makes switching costs negligible. The business segment however is prone
to significant switching costs as they rely on more customized products which are tailored to their businesses
and most times are locked into long-term contracts.
Consequently, this component of the Porter’s Five Forces shows that customers’ demands and expectations
exert a moderate force on the business and the industry environment. The low differentiation between the
services provided by the telecom operators and low cost of switching for retail customers backed by Mobile
Number Portability has resulted in the services being treated by customers as a commodity. Although the
customers are price takers in the market, their bargaining power is moderate on account of the ease of
switching. The business customers will however find it difficult to switch to alternative service provider.
Threat of new entrants:
Overall Effect: Moderate
Factor
Absolute Cost Advantage
Degree
Reasoning
Low
No firm has any absolute cost advantage in
the industry.
Proprietary learning curve
Low
Major technology invention is very less in
telecom industry.
Access to inputs
High
Towers and optical fibres are the major
inputs of telecom industry. Accessing them is
very difficult because the major players own
most of them and charge high amount for
using them.
Government policy
Low
Telecommunications markets tend towards
monopolies or oligopolies because of the
investments needed to construct networks
and economies of scale. So, the FCC(Federal
Communications Commission) rules are in
such a way to encourage new competitors.
FCC Still gives telecom licenses.
Economies of Scale
Low
Network externalities and cost structures that
lead to economies of scale and scope are not
unique to network industries.
Capital requirements
High
Setting up towers and optical fibres require
very high capital.
Brand identity
High
Almost 70% of the users belong to the top 3
companies in the market. This shows that
there is a high brand identity.
Switching Costs
Low
Customers can easily switch from one firm to
another firm. The costs involved are very
less.
Access to distribution
channels
High
Most of the suppliers in the industry are
dedicated to the firms. So accessing them is
very difficult.
Expected retaliation
High
The ability of competitors to control access
to resources, key suppliers and market
channels is high. The major firms are well
established with 50 years of experience.
Proprietary products
Low
Patented products used in telecom industry are less
COMPETITIVE STRATEGY ANALYSIS
(VERIZON)
Michael Porter’s Generic Strategy
Cost Leadership
Verizon follows the differentiation rather than cost leadership. Its products are priced at a higher level
than its competitors but then they make sure that their customers are treated very well. It follows a very
unique strategy i.e if few customers are happy, they in turn will get more customers which in turn
generates more profits.
Despite its goal to maintain stable average revenue per user, it is willing to be more aggressive on
pricing under the right circumstances. Also, Family plans, for example, offer higher customer
lifetime value and lower average customer acquisition cost. As such, it regularly runs promotions
where customers can add a line for free, because it makes it harder to switch and lowers the average
customer acquisition cost focusing on product design.
Differentiation:
Differentiation is a strategy that involves providing unique and desirable features in the hope of
persuading customers to purchase goods or services at a premium price. Verizon follows this strategy
through reliable wireless coverage and excellent customer care. Verizon has been able to earn higher
market share, increase profitability, and maintain the lowest level of customer disappointment.
Differentiation builds competitive advantage on the basis of product uniqueness. Uniqueness is
developed through a number of possible variables. In this case, Verizon uses quality as the most
significant factor to stand out from the competition. Quality is emphasized in each and every aspect of
company’s sales and marketing. For instance, advertisements for Verizon Wireless typically highlight
quality of wireless services, especially connectivity quality based on infrastructure quality. Intensive
growth strategies and related strategic objectives are developed to capitalize on and support such
uniqueness of products. However, because of this differentiation generic strategy, the company cannot
readily build competitive advantage on the basis of price, considering the costs of higher-quality
infrastructure in the information and communications technology industry. As such, services as those
from Verizon Wireless are priced higher compared to competitors.
Though their prices are somewhat higher than their competitors they ensure their customers are treated to
the best of their ability. Customer service is a significant factor, especially because of rampant customer
service issues and complaints experienced in the telecommunications industry. Thus, high quality
ensures customer satisfaction which generates more customers who in turn, create greater growth in
profits.
A strategic objective based on the differentiation generic strategy is to develop competitive
advantage through further investment in infrastructure. For example, to maintain high-quality
service, Verizon Wireless must implement new and advanced information and communications
technologies to improve its current infrastructure.
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