Anjuman-i-Islams

Allana Institute of Management Studies

Project Report on Impact of External Environment & Porters Five
Forces model on Telecom Industry
Submitted to
Prof. A.K Kher
Subject: Strategic Management
MMS-II-Finance
Sr. No. Name Roll No.
1 Salman Haidade 28
2 Muhibuddin Shaikh 37
Date: 11
th
Aug-2014

Table of Content

1. Executive Summary.

2. Introduction.

3. PESTEL Analysis.

4. Porters Five Forces Model


1. Executive Summary:
The Indian telecommunications has been zooming up the growth curve at a feverish pace,
emerging as one of the key sectors responsible for India's resurgent economic growth.
India is has surpassed US to become the second largest wireless network in the world
with a subscriber base of over 800 million in 2012, according to the Telecom Regulatory
Authority of India (TRAI). The Government of India has taken many proactive initiatives
which have provided a framework for the rapid growth of the telecom industry in a very
short span of time. The report provides a detail study of the Indian telecom sector and
presents an analysis of the competitive environment prevailing in the industry. The
development of telecom sector is based on various political reasons like Liberalization,
reduced excise duty and many more policies, Social culture factors like the change in the
consumer behavior, knowledge about the technology, Economical factors like increase in
high disposal income, cheap charges for using a network connection. This growth needs
huge resources i.e. Capital and Human Resources. It analyses how the telecom industry
managed the Human resource for the development of industry as well the benefits of its
employee. The Human Resource management adopted different Human Resource
management policies to keep the employee satisfied in the rapidly changing external
environment before and after 2000. We also look after how the changes in external
environment affect the Recruitment, Selection, performance appraisal, Compensation
policies in detail.

2. Introduction:
Telecommunications in India can be traced back to the 19th century when the British East
India Company introduced telegraph services in India. The past two decades have been
considered as the golden period for the telecommunications industry in India with
exponential growth and development in terms of technology, penetration, as well as
policy. All this has paralleled with the liberalization in this sector and huge investment by
both domestic and foreign investors. The modern system of communications in India
started with the establishment of telegraph network. In order to ensure telegraph
networks exclusivity and establish government control over electronic communications,
various telegraph statutes were
enacted by the Government of India which laid the foundation of the present regulatory fr
amework governing telecommunications (both wired and wireless). In early days, India
witnessed increasing number of wired telephone connections. Even when wireless
communication was introduced in the form of cellular phones, it was not immediately
accepted by the Indian masses, mainly on account of high price of cellular phones as well
as high tariff structure prevalent at that point in time. Gradually, with the price of cellular
handset as well as mobile (wireless) tariff reducing there was increasing adoption of
wireless communications. Today the Indian telecom industry is already witnessing the
lowest telecom tariff globally. Like elsewhere, telecommunications in India started as a
state monopoly. In the 1980s, telephone services and postal services came under the
Department of Posts and Telegraphs. In 1985, the government separated the Department
of Post and created the Department of Telecommunications (DoT). As part of early
reforms, the government set up two new public sector undertakings:
Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited
(VSNL). MTNL looked after telecommunications operations in two megacities, Delhi
and Mumbai. VSNL provided international telecom services in India. DoT continued to
provide telecommunications operations in all regions other than Delhi and Mumbai. It is
important to note that under this regime, telecommunication services were not treated to
be a necessity that should be made available to all people but rather a luxury possible for
select few. In the early 1990s the Indian telecom sector, which was owned and controlled
by the Indian government, was liberalized and private sector participation was permitted
through a gradual process.
First, telecom equipment manufacturing sector was completely deregulated. The
government then allowed private players to provide value added services (VAS) such
as paging services. In 1994, the government unveiled the National Telecom Policy 1994
( NTP1994). NTP 1994 recognized that existing government resources would not be
sufficient to achieve telecom growth and hence private investment should be allowed to
bridge the resource gap especially in areas such as basic services. As markets and
telecom technologies started converging and the differences between voice (both fixed
and wireless) and data networks started blurring, the need for developing the modern
telecom network became an immediate necessity. Accordingly, private sector
participation was allowed in basic services. The government anticipated that a major part
of the growth of the countrys GDP would be reliant on direct and indirect contributions
of the telecom sector and accordingly the need for a comprehensive and forward looking
telecommunications policy was felt. This then paved way for New telecom Policy 1999
( NTP 1999) which largely focused on creating an environment for attracting
continuous investment in the telecom sector and allowed creation of communication
infrastructure by leveraging on technological development. India is likely to be second
largest mobile market in the BRIC nations, with 560 million mobile users representing
the next great growth curve for both mobile and interactive marketing industries,
according to a report by E- Marketers. Mobile telephony continues to fuel growth in the
Indian telecom sector with mobile subscriber base projected to grow at a CAGR of
around6.6% during 2011-12 - 2014-15.

3. EXTERNAL ENVIRONMENT ANALYSIS:

I. DEMOGRAPHIC ENVIRONMENT:
Demographic environment mainly consists of characteristics of population like age,
gender, ethnic origin, race, sexual orientation and social class. These forces have a lot of
impact on the organization. Large pool of professionals, growing literacy rate and large
youth population makes India very favorable for growth of Mobile Industry. In case of
Airtel, it has always targeted the entire population unlike virgin mobiles (youth
target).Airtel has never discriminated between the customers on basis of income level. It
has bought out schemes for all generations and income levels of the society.

II. ECONOMIC ENVIRONMENT:
Economic factors mainly include growth, interest rates, exchange rates and inflation
rates. These are the factors that mainly have a major impact on the operation of the
business and various decisions that are taken. India is a developing country with a lot of
potential and growth still to come. It has a good GDP growth rate of 7% even during
economic meltdown and hence provides ideal ground for many foreign players to enter in
to the Indian market. This growth is mainly fuelled by manufacturing and service sector
growth. Wireless penetration has significantly increased and so has Airtel customer base.
Hence economic are very fit for Mobile Industry to explore its full potential in India.

III. POLITICAL AND LEGAL ENVIRONMENT
Political factors are how and to what degree a government intervenes in the economy.
The unprecedented growth of the Indian telecom industry has been well supported by the
policy reforms. Some of the key Highlights are:-

2010
Proposal to Waiver of License fees in Rural Areas

2009
Regulatory on Quality of Services for Telecom Sector
Interconnection Regulation for Broadcasting Sector
Interconnection Usage Charge Regime
Resale of International Private Leased Circuit (IPLC)

2008
Guidelines for 3G Spectrum Auction issued. Foreign Players allowed to bid.
DoT issues 121 Letters of Intent (LoIs) for UAS licenses
Guidelines for Mobile Number Portability Services
DoT allows active infrastructure sharing

2007
Dual Technology Allowed

2006
Number portability proposed

2005
An attempt to boost rural telephony was made
FDI limit was raised from 49 to 74 per cent

IV. TECHNICAL ENVIRONMENT:
Technical environment mainly consists of the technological aspects such as R&D,
automation, technological incentives and rate at which technology changes. These can be
an important aspect as far as barriers to entry are concerned. Furthermore technological
shifts can affect costs, quality, and lead to innovation. The Indian telecom sector offers
immense opportunities for foreign companies in areas such as 3G,virtual private network,
VAS (value added services) etc.

a) 3G Services:
With the advent of 3G Indian telecom industry was not able to gain as much revenue as
they had expected from the new technology. The success of 2G still outshines that of 3G.
3G model failed because of several factors like-
High Cost of acquiring the telecom circles.
Different handsets are required to enable 3G.
Initial cost is high.

b) 4G Services:
With technology rapidly changing Indian telecom market is looking forward to 4G
technology which will enable them to garner more revenues, since it overcomes the
defects of 3G such as it does not require change of handsets and initial cost is also low
as compared to 3G. However the advantages are numerous such as data speed is very
high and the coverage area is also far better than 3G in terms of area covered by each
tower.

b) Infrastructure Sharing:
Optimizing Costs In the midst of the telecom boom, common infrastructure will improve
coverage and quality of calls and reduce the costs. Active Infrastructure sharing has
started in 2008 which enables sharing of Antenna systems, Cables and transmission
systems, Backhaul (core infrastructure with switches and networking).

c) Value Added Service (VAS)
Rolling out of advanced VAS has been possible due to Technological advancement and
hence creating more value for Buyers and Sellers. A number VAS are being offered by
varioustelecom players across the globe ranging from Missed call alerts to cricket updates
as well as coveringcompletely different regions such as Astrology, numerology, Call me
back tunes etc. The telecom market generates good sizeable amount of its revenue from
these services. Airtel has a range of all these features and through its leadership strategy
is always the first one to come up with new schemes and tariffs rates, which are later on
being followed by other players in the industry.

4. PORTERS FIVE FORCE MODEL:-
Porter's five forces" is a framework for the industry analysis and business strategy
development developed by Michael Porter of Harvard business School in 1979. An
unattractive industry is the one where the combination of forces acts to drive down
overall profitability. A very unattractive industry would be one approaching "pure
competition". Porters five force of Model includes:

I. Threat of new Entrants
II. Bargaining power of Buyers
III. Bargaining power of Suppliers
IV. Threat of Substitute products or services
V. Rivalry among existing firms.

1. Threat of New Entrants:
It is not only the existing players that poses a threat to the firm but the possibility of a
new player altogether can also have significant impact on the strategic decisions that are
to be taken by that firm. Theoretically, any firm should be able to enter or exit a market
and if there is a free entry/exit in a market then profits are very less in that industry
because it shall have maximum number of players and hence the customer base is divided
and so is the margin.
Telecom industry has high entry barriers because:
1. Initial setup cost for equipments and infrastructure is very high.
2. License fee required to operate in a particular region is very expensive.
3. Oligopolistic structure doesnt allow a firm to have competitive advantage since the
strategies followed by a firm shall quickly be copied or retaliated heavily by other players
of the firm.
4. It is difficult to achieve product differentiation since all the players shall offer the same
product.
5. Breakeven point is difficult to obtain since a new entrant will have difficulty in
attaining the customer base and build the same brand that has been built over years
by other players like Vodafone, Airtel, reliance etc.

2. Intensity of Rivalry among Firms:
In the traditional economic model, competition drives profit to zero. But competition is
not perfect and firms are not unsophisticated price takers, rather they strive for
competitive advantage. The industry concentration or the number of business units
operating within a particular industry indicates the rivalry among them. If the number of
businesses operating in an industry is small that means that rivalry among them will also
be low and vice versa.
In the case of telecom sector there are only few major pan India operators like Airtel,
BSNL, Reliance, Tata Indicom, Vodafone etc. but rivalry among them is very high.
Each operator is trying to grab the maximum market share and they even try to woo the
customers of other operators to join their network. Also there is very little product
differentiation between different operators.
If one operator introduces a new scheme then with a few days or in some case the next
day similar schemes are offered by the rival operators. This almost negates any
first movers advantage which any operator may have. But telecom industry has a
major advantage as it is one of the fastest growing sector of the country (growing in the
range of 20-40% in past 3 years) so all the operators can stay in the industry without any
shakeout happening. Also India has a huge untapped rural market which Airtel can
exploit. Here we shall discuss two large competitors of Airtel, BSNL & Reliance and
discuss their strategies

1. Bharat Sanchar Nigam Ltd.
BSNL is a state owned service provider in India and is the seventh-largest
telecommunication company in the world. It offers wide range of services in India, such
as wire line, CDMA mobile, GSM mobile, internet, broadband, carrier, MPLS-VPN,
VSAT etc. BSNL is the largest operator in basic services in India with its cellular in India
with its services helping it to establish its presence as the largest operator in rural areas.
Rural Penetration: BSNL is playing a leadership role in developing the telecom
infrastructure in rural areas. It has been successful in increasing its cellular subscriber
base by pioneering its services in the rural terrain. Its services cover the whole of India,
except Delhi and Mumbai, which are covered by MTNL, the other state-owned player.
Low Cost Strategy: BSNL is a low-cost service provider of many services. This strategy
has helped BSNL in penetrating the market.


2. Reliance Communications
Reliance Communications, previously known as Reliance Infocom, brought about a
digital revolution in the Indian telecom industry by providing Indias vast population
with affordable means of information and communication. Reliance Infocom, with the
aim of making mobile calls cheaper than postcards.
Theybuilt a 60,000 kilometer long fiber optic backbone, crossing the entire country.
Reliance currently offers its services in 340 towns with its eight circle footprints; it also
initiated mobile data services through its R-world mobile portal. This portal leverages the
data capability of the CDMA 1X network. Integrated Service From the beginning,
Reliance believed in providing integrated communication services to its customers. The
company claims that it sells a greater number of handsets compared to those sold by
market leader, Nokia. Large Distribution Network Reliance has created the largest chain
of digital entertainment and communication stores Reliance Web World. The company is
also expanding its reach aggressively through retail outlets, sales agents and electronic
recharge outlets. Other Competitors include Vodafone, Idea & TaTa DoCoMo along
with other minor players like Aircel, Spice, MTN etc. having less than 10% combined
market share.

3. Bargaining Power of Suppliers:
Similar to buyer power, suppliers also exert pressure on companies. If there is only one or
two supplier of the major raw material for any industry then suppliers can exert great
pressure on the firms. The supplies in Mobile sectors primarily comprise of Switch
Suppliers, Tower Service providers and the Handset providers, Network Equipments:
There are limited numbers of Network Equipment providers like ZTE, Nokia Siemens,
Ericsson, and Huawei. Due to increase in demand and limited suppliers the power of
these suppliers are high and may impact the growth plan of the operators if supplies are
not smooth. Tower Providers: Though the new sharing technology has enhanced the
utilization of towers i.e. now a single tower can be shared by many telecom players by
keeping their transmitting and receiving antennas at different height and since they use
different frequencies, as a result by keeping proper space between the antennas that is
avoiding inter-frequency overlap ensures that tower is working at its maximum output
efficiency. But still the coverage remains a problem due to few Tower providers. The
bargaining power of Tower providers if High. Handset Suppliers: Nokia, Samsung, LG,
Sony, iPhone and numerous other players. The bargaining power of Handset Suppliers is
less as they are also competing amongst themselves. As a result we see that because of
inter rivalry existing between the handset suppliers they become fragmented and hence
their bargaining power with the buyers decreases. From the above three suppliers we can
make out that suppliers have high bargaining power in two cases (Network equipments
& Tower Providers) but Handset providers have a low bargaining power. Thus we can
say that the bargaining power of suppliers in this case is high.


4. Bargaining Power of Buyers:
The power of buyers is the impact which the customers have on any industry. If there are
few buyers and large number of supplies then buyers set the price. However we see that
in case of Telecom Industry the buyers are in huge number and scattered throughout the
country that is the buyers in this case are fragmented and as a result the power of buyers
to bargain from the supplier decreases to a great extent. The end consumer has to accept
the terms and condition (in this case the tariffs and other plans) offered by the firm.
The customer is only benefited in case there is tough competitive rivalry within the firm.
In telecom market, since the competitive structure is oligopolistic in nature a single firm
cannot have any control over the market. Because of the price war that was started by
entry of TATA DoCoMo all the other players in the market had to decrease the prices of
their tariffs and hence customer was the one that benefited the most from this price war.
However one more aspect that can be looked upon is that bargaining power of buyers has
increased with increase in number of suppliers and also due to regulatory policies that are
being setup by the TRAI (Telecom Regulatory Authority of
India). This enabled the users to switch their operator by keepingsame number and
thereby opt for a scheme that was more suitable to their pockets. However even with the
number portability policy being implemented by TRAI, it didnt change the dynamics of
their revenue system. Telecom in the present day holds low brand loyalty and brand
switching is becoming more and more a norm. This would be more rampant when the
clearance of free transfer of number while changing the service takes place. The end user
should now be targeted more like a retail customer than that of specialty goods.

5. Threat of Substitutes:
In porter model substitute products refer to products of other industry. As more
substitutes become available, the demand becomes more elastic since the customers have
more choice. Also the presence of substitutes constraints the ability of firms in industry to
raise price. In the recent years with the advent of internet into the domain of mobile, the
demarcation between the two sectors has faded. As high speed internet is made available
on the mobile phones the role of phone calls and short messaging services will diminish,
which are a major source of revenue for the telecom companies in India. The use of
software like SKYPE and Gtalk will be the order of the day. Recently even social
networking websites such as Facebook Whats up, Hike, Line etc. has come up with video
chat options and Google recently came up with a VoIP service which enables a user to
send SMS and call other person right from his Gmail account by installing a small add-
on software which is also available free of cost. The software works similar to a phone
which can be recharged with amount and can be used in similar way as a mobile phone is
being used. This has created a new theatre for the telecom companies to look into
for revenue generation because if they are not prepared the losses due to the inclusion of
internet based communication devices would be a lot. Along with substitutes available
there is always a threat from a different technology such as CDMA (Code Division
Multiple Access). This technology has got higher initial setup cost but maintenance cost
is very low as compared to the GSM model. Also the capacity to more number of users is
more in case of CDMA. This technology is not much of success in India, however it is
used in many developed countries including Japan where in the major market has been
captured by CDMA players. Initially when this technology was introduced it had several
technical glitches, however with passage of time this technology (CDMA) was trimmed
to better version and since then has been providing tough competition to its age old rival

GSM Airtel also faces threat of substitution from different products. Airtel operates in
mobile telephony and the substitutes of mobile telephony are landlines, broadband and
internet. Major chunk of Indias landline is under state owned BSNL and MTNL.
However since the sector has been opened to the private players by the government of
India, even Airtel has started up with its fixed landline services. In case of internet
service Airtel has started up with its own internet services such as 3G internet in order to
retain customers. Hence we see that Airtel is also giving a tough fight to the substitutes
that are trying to penetrate the wireless market.

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