Following the deregulation of the telecommunication industry in United Kingdom, a number of competitors and substitute products have emerged. With the mandate under the Communications Act 2003, the Office of Communication (OfCom) was established as a regulatory office for the UK communications industries, which includes television, radio, telecommunications, and wireless communications services.
Its scope, under the Communications Act 2003, is as follows: 1. to further the interest of citizens in relation to communication matters, and 2. to further the interests of consumers in relevant markets, where appropriate by promoting competition.
The British Telecommunications (BT) is one of the world’s leading providers of communications solutions and services, which operates in 170 countries around the world. In the United Kingdom, BT serves over 20 million business and residential customers with more than 30 million exchange lines, as well as providing network services to other licensed operators. Its BT Retail subsidiary is UK’s largest communication service provider, by market share, to the consumer and small business markets. It supplies a wide range of communication products and services, including voice, data, internet, and multimedia services (online BT.
com). Once a nationalized company, BT plc has traditionally dominated the UK’s fixed line telecom market, controlling over 80 percent of the UK’s access lines, earning ? 8,507 million in revenues for 2006 (BT Annual Report 2006). However, the passage of the Communications Act 2003 has been intended to increase competition to the once monopolized of the fixed line industry in UK. Industry experts predicted that BT Retail’s share of the UK’s fixed line market will fall from 82 percent to 45 percent over the next decade as increased competition begins to bite.
At the moment, around 93 percent of UK households have a fixed line, with eight in ten supplied by BT. However, despite the predicament of many industry experts, the benefits of increased competition has not been achieved as BT continue to have strong market dominance within the UK fixed line industry (Richardson 2005). Table 1. British Telecom’s Retail connections Year end 31 March 2003 2004 2005 2006 Total Retail connections (‘000) 29,566 29,661 29,630 28,293 Business 9,208 9,111 8,780 8,353 Residential 20,358 20,550 20,850 19,940 Source: British Telecom Group plc (2006).
BT Group plc Annual 2005 Report. (United Kingdom: BT Group) [Online] Available: http://www. btplc. com/Sharesandperformance/Annualreportandreview/Annualreports/Cautionarystatement. htm Table 2. British Telecom’s Broadband customers Year end 31 March 2003 2004 2005 2006 BT Wholesale ADSL end users (‘000) 803 2,226 4,973 7,949 of which are LLU lines 3 11 41 356 of which are BT retail customers 439 967 1,752 2,584 Source: British Telecom Group plc (2006). BT Group plc Annual 2005 Report. (United Kingdom: BT Group) [Online] Available: http://www. btplc.
com/Sharesandperformance/Annualreportandreview/Annualreports/Cautionarystatement. htm Despite the high penetration of fixed line business of British Telecom, the level of penetration for broadband services is still very low in the United Kingdom. Project Aims and Objectives The primary objectives of this dissertation will be to determine why many British consumers still opt to use the dial-up as internet connection in the United Kingdom and how companies can attract users to use broadband services. We also review the current market environment such as policies of Ofcom that could affect a company’s marketing strategy.
The following is a list of objectives which the author aspires to accomplish in the dissertation: 1. A background study on the current internet access industry in the United Kingdom and prospects on the industry’s growth. 2. An exploration on the relevant theory on the impact of brand equity and brand positioning on company’s profitability and market share. 3. A proposal on effective branding approaches to mitigate the increasing competition with the deregulation of the telecommunication industry in United Kingdom. Importance and Relevance of the Research
Primarily the research will be valuable to any business industry or body attempting to build on its business strategies, customer relations and competitiveness in a competitive industry. The research would make businesses more aware of the importance of business strategies in a very competitive industry. It gives you an idea about how businesses can know more about their markets segments and attract more markets. Secondary impact of the research will be on a long term scale, it will aid retail marketing initiatives. The trends of the industry and the markets will have a significant impact on the whole field in the future.
The research may also be essential to other interested parties such as the educational institutions business universities, news papers and government. The paper will also be useful later on in academics for future references. The Overview of the Study The remainder of this study is as following statement: Chapter 2, Internet Access industry background and market analysis, will provide first a concise information on the industry market value, market segmentation, and leading companies. We will provide a strategic competitive analysis of the industry using Porter’s Five Forces of Competition and SWOT Analysis using BT Group.
We will also briefly discuss Ofcom’s strategic review of the telecommunication industry and its effect on industry players in particular British Telecom. Review of brand management, will review related literature on the brand management such as brand equity and brand positioning. Identify the long-term effects of the effective brand positioning in increasing market share within the industry. Chapter 3, Methodology, will present the methods of collecting primary data from consumers and the chosen research method for the dissertation. Chapter 4, Results and Discussion, will present and discuss the results of the survey.
The discussion will also relate the relevant literature and the results that have been obtained from the survey. Chapter 5, Summary, Conclusion and Recommendations, the “Summary” section will first provide a comprehensive summary of the major findings of this study. The “Conclusion” section will highlight the implications of the research findings. Finally, “Recommendations” will be proposed to on the possible approaches to effectively implement an effective branding strategy to mitigate the increasing competition in the telecommunications industry. CHAPTER 2: Review of Related Literature
The literature review will consist of three parts: (1) Environmental Analysis, highlighting the recent deregulation and increasing competition within the industry, (2) Competitive Position of British Telecoms for the market segment of broadband services, and (3) Review of related literature on brand management. In the Environmental Analysis section, the research will discuss the competitive landscape of the broadband market in UK, and define the nature of competition within the industry. The research will describe the role of Ofcom in promoting competition within the industry and specific market segment.
The research will describe the market size, volume and growth of the industry. Second, the research will discuss the competitive position of the British Telecom in the market. It will provide an assessment of BT’s strengths and weaknesses and how BT has a very strong foothold of the market. Lastly, the review will also highlight the importance of brand management in growing the broadband services business of British Telecom. In this paper, we follow the framework of Delta model which has been proposed by Hax and Wilde.
The Delta model defines three points (1) strategic positions that reflect the fundamentally new sources of profitability, (2) aligns these strategic options with a firm’s activities and provides congruency between strategic direction and execution, and (3) introduces adaptive processes capable of continually responding to an uncertain environment (Hax and Wilde II 1999). The Delta model integrates the structural analysis and value chain framework from Porter with the resource-based view on the Firm and complement those with new Extended Enterprise perspective and with offering Total Customer Solutions.
The Internet Service Providers’ Association United Kingdom defines the internet access market consisting of total revenues generated by Internet Service Providers (ISPs) from the provision of narrowband and broadband Internet connection through both consumer and corporate channels (Datamonitor, 2007). The United Kingdom Internet access market generated total revenues of $8. 2 billion in 2006, this representing a compound annual growth rate (CAGR) of 6. 4% for the period pning 2002-2006 (Datamonitor, 2007).
In a survey conducted by the Office of Telecommunications, 93 percent of homes currently own a fixed line phone, this proportion has remained stable at just over 90 percent for the last year. At least 4 in 5 households are using BT for their fixed line; however, at least a quarter of BT customers would consider using another supplier if they offered services of equal quality. Furthermore, 18 percent of the respondents mentioned barriers to switching as their reason for remaining with BT rather than positive reasons.
These consumers were largely living in non-cabled areas with less choice of fixed line suppliers (Office of Telecommunications 2003). Brand name and the Quality of service The main reason BT customers gave for not switching to another operator was satisfaction with BT, this being driven by the fact that the vast majority of satisfied customers (72%) have never experienced any problems with their services. Generally, BT customers value the service quality and reliability above cost, suggesting that the trustworthiness of other suppliers alone is not sufficient incentive for these consumers to switch (Office of Telecommunications 2003).
Barriers to switching A quarter of customers that would remain with BT if other suppliers offered an equal service, mentioned barriers as their reason for remaining with BT. This equates to 18 percent of all BT customers. The barriers mentioned included: switching being too much hassle, cost of switching, unaware of other suppliers, always used BT, and the additional services. The research, however, notes that the respondents are more likely to live in a non-cabled area – hence limited availability of alternative providers (Office of Telecommunications 2003).
Key trends in the telecommunications industry The key word in today’s technology is convergence. In the last two years, global telecommunications company have been developing the next-generation voice services that could cut corporate call costs by automatically routing traffic between fixed line and mobile infrastructure (online ITWeek). One key development has been the development of Fixed Mobile Internet Convergence, where IT and media industry deliver both content and the infrastructure to consumers.
The widespread adoption of Voice over Internet Protocol (VoIP) has been a promising to consumers yet holds a mixed fate for the fixed line telecoms market. On a positive note, it offers cheap or often free long distance calling to consumers and can therefore boost market share. However, this may be at the expense of diverted traditional sales and loss of line rental and call revenue on fixed lines. On the other hand, VoIP take-up could spread with the proliferation of wireless broadband, as opposed to wireline broadband, which will serve to expand the fixed line market and encourage a more rapid take up of wireless technologies.
The development of more sophisticated mobile phones and PDA also threaten to detract from fixed line sales as these devices develop the same quality of capabilities as fixed line services (online IT Week). Analysis of Competition The Delta Model builds on the structural analysis of Michael Porter to gain insight and understand the external factors determining the industry attractiveness and match it with the firm’s resources to be successful in the industry (Hax and Wilde II 1999).
In his book Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter discusses the five forces of competition in an industry. He illustrated the five competitive forces as: (1) Rivalry between competing sellers in an industry, (2) potential entry of new competitors, (3) the market attempts of companies in other industries to win customers over to their own substitute products, (4) the competitive pressures stemming from supplier-seller collaboration and bargaining, and (5) the competitive pressure stemming from seller-buyer collaboration and bargaining (Porter 1985).
Porter’s five forces of competition is a widely used tool to determine the company’s current strengths and competitive position. Having a clear picture of the balance of power in a competitive industry will help in planning for a sustained growth in the industry. In the Figure 5, the researchers analyzed and plot the competitive forces in UK’s fixed line telecom industry (Porter 1985). Rivalry of Sellers: Moderate The UK market is relatively fragmented, with no one company dominant.
For end users, switching costs are not very high, and in fact ‘customer churn’ is often cited as an issue that ISPs must cope with, particularly in the consumer market. A typical company offers a diverse range of communication-based services, such as TV and telephony, so success in the Internet access business need not be vital to its survival. Furthermore, rapid market growth means that players are not fighting to win a share of a static market from their competitors. Rivalry in this market is assessed as moderate.
Buyer Power: Moderate ISPs offer their Internet access services to customers ranging from consumers to large corporations. As fairly similar services can be offered to customers of all sizes, the typical size is quite small. Switching costs are moderate, and include the time required to leave one contract and move to a competing contract. There is some differentiation: for example, one player may offer consumer Internet access as a standalone service, while another bundles it with cable TV services.
Also brand loyalty may be significant if an ISP gains a particularly good (or bad) reputation among users. As the Internet has high penetration in the UK, corporate customers in particular will consider the service of vital importance to their business. Overall, buyer power is assessed as moderate. Supplier Power: Strong ISPs act as intermediaries between their customers and the telecommunication infrastructure that underpins the Internet (and telephony): ADSL lines, servers, packet switching software, and so on.
Some ISPs, especially telecoms incumbents such as BT, own and operate an extensive physical network themselves. For these companies, key suppliers are manufacturers of the hardware and software involved, such as Cisco Systems. ISPs that do not own a network can purchasing wholesale access to the necessary infrastructure from an owner-operator, and then offer it at retail to end-users. For ISPs using this business model, key suppliers are BT and other network owners.
While it is unlikely that ISPs of either type will integrate backwards, since the upstream businesses are very different to their own, most network owner-operators have already integrated forwards into the retail ISP market, and are competing directly with ISPs that do not own networks. Network manufacturers are not completely reliant on the ISP market for their revenues, as they can also operate in markets such as corporate intranet; network owners usually generate revenue from telephone services and their own ISP retail business as well as wholesale Internet access.
Overall, supplier power is strong. Threats of New Entrants: Strong The threat of new entrants is strong. New players will be attracted by the continuing strong growth rates in this market. The physical infrastructure needed is usually already available. For example, a cable TV company can move into the Internet access market by making use of the cable network it has already installed; while players without their own infrastructure can buy access to telecom networks.
This reduces the capital requirements for market entry – although customer demand for ever-increasing bandwidth may mean that investment in infrastructure will be needed for future growth. Retaliation in terms of price competition is very likely in this market, and new entrants need to differentiate themselves from incumbents – not an easy task when selling a commoditized service that can be specified completely with a few parameters such as bandwidth and downtime. Threats of Substitute: Weak
The threat of substitutes is weak: the Internet has developed as rapidly as it has because it is itself a substitute for many other services and products. These include traditional forms of advertising, news providers, music (and increasingly video) physical media such as CDs and DVDs, ‘bricks and mortar’ outlets for supplying goods and services, and communication services such as mail and telephony. The benefits of these older substitutes are assessed as small, as the Internet alternatives have clearly demonstrated their popularity with consumer and corporate customers.
However, to take two examples, for consumers with concerns over the security of online financial transactions, or businesses who wish to advertise to segments of the population who are not online, the older substitutes may retain advantages. British Telecom’s Competitive Position A company’s strategy consists of the competitive efforts and business approaches that managers employ to please customers, compete successfully, and achieve organizational objectives.
It represents management’s answers to such fundamental business questions as whether to concentrate on a single business or build a diversified group of business, which cater to a broad range of customer or focus on a particular market niche. A strategy thus reflects the managerial choices among alternatives and signals organizational commitment to particular products, markets, competitive approaches, and ways of operating the enterprise (Hooley et al. 2001). Sustainable competitive advantage as argued by John Kay is only achieved if the company has distinctive capabilities or resources that its competitors does not have.
Kay (1999) argues that resources can be considered as unique or reproducible. A unique resource, for example the brand name of BT, can be considered as an important asset that can be a basis of sustainable competitive advantage. A reproducible resource and capabilities, on the other hand, pertains to assets that can be easily copied or reproduced by competitors and does not offer the company the distinctive competitive advantage. A good example of a reproducible resource would be the process of delivery voice calls.
Many are now able to voice call services on their own and can learn the process more very quickly and easily; however, what differentiate BT is its extensive network infrastructure which it has built over the years to gain scale economies, and build on their strategic brand name (Kay 1999). In understanding the sources of competitive advantage, Hooley & Broderick (1998) introduced two fundamental approach in creating sustainable competitive advantage based from Micheal Porter’s Competitive Advantage.
Micheal Porter suggests that companies undertake two roads towards establishing itself as a market leader. First, a company can position itself through cost leadership or differentiation. The former strategy requires that a company to operate more efficiently, thereby lowering its operational cost relative to its competitors. The later strategy requires that a company identify a resource that add value for the customer and modify the product or service in a way that will entice the customer to buy (Hooley & Broderick 1998).
Hunt and Morgan (1996) recommends a resource-based model as a way to investigate competency and superior firm performance through a more intimate integration of organizational theory, marketing and economics. Furthermore, strategic resource improves a firm’s performance over time. If a firm mobilizes unique and immobile resources to create sustainable competitive advantage, then a firm can enjoy generating greater economic rents than competitors in the industry.
In addition, the resource-based theory asserts that distinctive competencies of a firm can ultimately result to superior outcomes and performance (Luo, Sivakumar, & Luo 2005). Kay (1999) also defined the three primary sources of sustainable competitive advantage as: (1) the market’s barriers to entry; (2) a unique firm history and experience which has transformed the firm and industry; (3) the tacitness of relationship with customers or suppliers. In this section, we assess BT’s competitive position in the market using SWOT Analysis to identify its sources for competitive advantage. SWOT Analysis
As we have analyzed the competing forces that could affect the overall success of BT in the fixed line telecom industry in UK, we also recognize the need to be able to identify the strength and weakness of BT as well as external opportunities, and threats. Exhibit 3 illustrates a SWOT analysis of BT strategic capabilities. The value of the SWOT analysis is its ease of use, its simplicity, and its flexibility. In addition, SWOT analysis allows the synthesis and integration of various types of information which are generally known but still provides the possibility to organize and synthesize recent information as well.
The insight to be gained in performing the SWOT analysis is the understanding of the core competency of the company that would give it a distinctive competitive advantage over its rival. More importantly, it provides the groundwork on (1) how the company’s strategy can be matched to both its resource capabilities and its market opportunities, and (2) how urgent it is for the company to correct which particular resource deficiency and guard against to particular