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The Strategic Alternatives of Vodafone UK in 2009

Article · March 2014

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The Strategic Alternatives
of Vodafone UK in 2009
Should Vodafone acquire or ally?

Abdelwahab Al-Atiqi and Faisal Mumen

March 2, 2014
Table of Contents
Abstract....................................................................................................................................................... 2
Introducing Vodafone’s Case .............................................................................................................. 2
External and Internal Analysis .......................................................................................................... 4
Porter’s Five Forces........................................................................................................................... 4
Threat of Entry ............................................................................................................................... 4
Threat of Substitutes .................................................................................................................... 5
Bargaining Power of Suppliers................................................................................................. 5
Bargaining Power of Buyers ..................................................................................................... 5
Rivalry................................................................................................................................................ 6
External Application of SWOT....................................................................................................... 6
VRIO......................................................................................................................................................... 6
Capital Access ................................................................................................................................. 7
Network Capability ....................................................................................................................... 7
Brand Equity ................................................................................................................................... 7
The Weaknesses ............................................................................................................................ 8
Internal Application of SWOT ....................................................................................................... 8
Overview of the Case Problem (What strategy should Vodafone pursue?) ..................... 8
Research on Acquisitions and Alliances......................................................................................... 9
To Acquire or to Ally ......................................................................................................................... 9
An Integrated Framework for Strategic Alliances .............................................................. 11
Application to Vodafone’s Case ...................................................................................................... 13
Should Vodafone Acquire or Ally .............................................................................................. 13
Vodafone to Form a Strategic Alliance .................................................................................... 15
Conclusion .............................................................................................................................................. 16
References .............................................................................................................................................. 17

1
Abstract

This paper studies the case Vodafone: developing a total communications strategy in the
UK market authored by Roger A. Strang and cited by Johnson et al. (2011). After
introducing the case, we attempt to develop an external and internal analysis for
Vodafone with regards to the UK communications industry. We follow this with an
overview of the case problem which we intend to study. Two scholarly articles relating to
the strategic context of the case are then summarized and later applied to Vodafone’s
specific case.

Introducing Vodafone’s Case

Vodafone, the world’s largest mobile telephone operator by revenue in 2009, was faced
with the challenge of developing new technologies for voice, data, and video
transmission. As the telecommunications market continued its rapid growth, Vodafone
was under pressure to develop a strategy that would secure the company as a leader in the
market for high-speed Internet services in the UK home market.

However, Vodafone was not the only company looking to expand its services; the
company was facing competition not only from companies in the telecommunications
industry, but from all communication companies including cable operators, mobile
suppliers, satellite-based television companies, among others. There were also significant
changes occurring in the development of new technology as well as regulatory changes in
policy. These rapid changes were causing many companies to change their market
strategies and focus on providing multiple services instead of excelling in only one sector
of communications.

Among its other competitors, Vodafone still remained mostly focused on their mobile
service rather than expanding into fixed line phones, TV, or broadband services. This was
a cause for concern for both company management and shareholders. As other companies
focused on converged services, Vodafone’s management was facing the challenge of
deciding which services to offer and if they should provide their own networks or form
partnerships to increase revenue.

Some environmental factors to consider around the time of 2009 was the global financial
crisis which meant a slow economy and longer recovery rate as governments heavily
invested to keep large banks afloat and stimulate consumer spending. Looking into the
future, immigration and birth rates were increasing which suggested an increase in
spending. Furthermore, increased disposable income and the arrival of the 2012
Olympics in London were all expected to stimulate tourism and investment.

In the UK, the fixed line telephone industry was declining and it was expected that by
2010, mobile calls would supersede fixed line voice minutes. The fixed line network that

2
had been created by the government became British Telecom (BT), a privatized
company. The Office of Communications (Ofcom) required BT to create Openreach, a
division within the company that provided network services to other operators for voice
and internet. In 2002, Ofcom also required that BT allow other operators to install their
own equipment in order to provide voice and broadband internet services through local
loop unbundling (LLU) lowering upfront costs due to wholesale rates. This meant that by
2009, BT’s fixed line voice minutes declined until their share was less than 50% with
competition from five major companies (Virgin Media, TalkTalk, Orange, Sky).

The mobile telephone market, by contrast, was flourishing and at the end of 2008 there
were 76.8 million mobile subscriptions within the country. These subscriptions were
most likely to be consigned to one of five major operators in the market in order by
revenue: O2, Vodafone, Orange, T-Mobile, and 3UK. Furthermore, Mobile Virtual
Network Operators (MVNO’s) had a share of 12.7%. These were communication
companies that do not have their own mobile network infrastructure and entered
agreements with telecom operators to provide mobile services; the largest of them was
Virgin Mobile owning 6.2% of the market share. Offerings included purchasing handsets
from suppliers like Nokia and Samsung and selling them for discounted retail prices
while locking customers into mobile plans. Another scheme would be offering low-cost
SIM-only plans where consumers can use their own devices. In 2007, O2 had exclusive
rights to sell the iPhone until 2009 when the market was opened to Orange, and then
Vodafone in 2010. By 2009, churn rates were reduced by convincing consumers to
purchase post-paid plans.

In the UK, the public service broadcast channels were the dominating force in television;
this was comprised of BBC1, BBC2, ITV1, Channel 4, and Channel 5. All UK residents
who owned a TV were required to pay an annual license fee that supported these
channels. Other multichannel operators such as BSkyB, UKTV, Viacom, and Virgin were
mainly supported through advertisements and subscriptions. New channel license
applications were the lowest in 2008 since 1998 and advertising revenue declined as free
online advertising became more popular. As competition became fiercer, TV companies
were looking towards broadcast rights to sports events and iPlayers, or digital recorders
as new avenues of revenue. In 2009, UK residents began to switch over to digital TV and
it was projected that the changeover would be complete by 2012. Most homes were
equipped to receive satellite TV by 2008, the most likely subscriber being Sky TV while
Virgin Media dominated the market for cable TV.

Broadband Internet service was also becoming a profitable market as there was a 12%
increase from 2008 to 2009 for services available in UK households. It was projected that
by 2012 there would be 22.5 million homes with broadband, with the most growth in
DSL. Demand for wireless broadband was rapidly increasing and was provided by all
major operators. By 2009, largely due to LLU, the five largest broadband providers had
91% of all connections that included, in order, BT, TalkTalk, Virgin Media, BSkyB, and
Orange Home. Churn rate was lowest in this market, but the largest complaint among
consumers was the connection speed. Companies were promising connection speeds

3
which they were unable to deliver; companies were investing heavily in the latest
technologies to get an edge in the market.

Vodafone’s beginnings go back to 1985 when it was a division of Racal Electronics.

Since then it adopted the name Vodafone in 1991 when it became an independent public
company. Vodafone has made a series of acquisitions since the 1990’s until 2009 to reach
323 million customers and has proclaimed itself to be “the world’s leading
telecommunications company”. However, it did not begin to delve into fixed line phones
until 2007 when it finally began to acquire or lease fixed line capacity.

In 2009, CEO Vittorio Colao came to Vodafone and focused on four main objectives to
increase company performance and revenue. He wanted to increase operation
performance while reducing cost, purse opportunities in total communications instead of
mobile minutes only, expanding into new emerging markets, and strengthening capital
discipline. In these four objectives, Vodafone was successful ending the 2009 fiscal year
with revenues of 41 billion pounds. Additionally, Vodafone had stronger loyalty from
high value customers, as more were choosing post-paid contracts. The company also
attained the largest share of 3G subscribers and targeted business travelers through
offering special rates.

Some challenges faced by Vodafone included a higher churn rate and dropping to 3rd in
the mobile telephone market after the merger between Orange and O2. Additionally,
Vodafone’s prices were too high for fixed voice and broadband services which it
provides through BT; hence, Vodafone had few customers for these services.

External and Internal Analysis

In this section we attempt to analyze the external and internal factors affecting Vodafone
as an overview of the strategic context. The intention of our external analysis focuses on
the industry rather than the remote environment; hence, an industry analysis using
Porter’s Five Forces model will be used. Then we will use the VRIO framework to
evaluate the resources and capabilities that Vodafone may capitalize on.

Porter’s Five Forces

Threat of Entry

Communication companies are known to have high barriers of entry. This is mainly due
to extensive upfront costs. However, it is relatively easier for companies within one
sector of the communication field to enter a new sector of communications; this is an
aspect of convergence in the communications industry as a whole. For example, the
mobile telecommunication sector previously required high network infrastructure set-up
costs. This is currently changing as companies with no telecommunication infrastructure
are entering the market as MVNOs. Mobile shops such as Carphone Warehouse are

4
providing mobile voice and data services as packages that are bundled with their devices.
According to Ofcom, the introduction of Mobile Number Portability (MNP) has
decreased the barriers of switching operators for consumers (Ofcom.org.uk, 2001); this
further decreases the barriers to entry.

Threat of Substitutes

The telecommunication sector’s main focus was providing voice communication while
mobile. The internet has led to the emergence of applications that use VoIP instead of the
traditional GSM to provide voice services. Applications such as Skype and Viber that run
on VoIP technology have reduced voice revenues from telecom operators. Furthermore,
instant messaging applications such as WhatsApp substituted the SMS services provided
by telecom operators and decreased their revenues. However, telecoms today provide
data services and the use of such applications, though decreasing voice revenues, would
increase data revenues. Telecom operators provide high Quality of Service (QoS) while
mobile for voice and data services and therefore consumers are using telecom’s data
services. New technology such as Municipal WiFi is able to deliver comparable QoS to
that afforded by telecoms (Ojala, et al. 2012). This would provide consumers with a city-
wide wireless capability where they can run their VoIP applications without the need of
using telecom data services such as EDGE, 3G and 4G.

Bargaining Power of Suppliers

In an industry which is highly converged, many suppliers exist. MVNOs are supplied by
the large telecoms with network infrastructure where they use their infrastructure to run
their services. Since MVNO’s do not have their own infrastructure, the larger mobile
operators have high bargaining power. With the regulations set by Ofcom, BT provided
other mobile operators with the ability to use their network through Openreach’s LLU to
provide voice and internet services. This also leaves BT with high bargaining power. In
addition mobile device manufacturers such as Apple and Samsung are also considered
suppliers since telecom operators are bundling devices with voice and data services and
offering them as packages with long-term commitment to reduce churn rates. O2’s
exclusive right to sell the iPhone from 2007 to 2009 is an example of how mobile device
manufacturers are considered as influencing suppliers with high bargaining power.

Bargaining Power of Buyers

The introduction of MNP has provided consumers with ability to move from one operator
to the other. Furthermore, the industry has become more competitive with more MVNOs;
therefore consumers are not limited to choosing one of the major operators and have the
option of becoming customers to MVNOs. Hence, consumers have a high bargaining
power. Moreover, having Ofcom as a regulator that is monitoring and controlling the

5
activities of different operators increases the competition which accordingly increases the
bargaining power of consumers.

Rivalry

The competition amongst companies in the communications industry is high. Price cuts
would only lead to price wars, therefore to gain competitive advantage firms must adopt a
differentiation strategy through adopting latest technologies such as 4G LTE. However,
adopting new technologies would only provide a temporary competitive advantage since
such technologies would be imitated by competitors. Convergence has intensified
competition leading different companies to enter new sectors of communications. High
expenses are incurred in terms of advertising as a result of aggressive competition. The
regulatory atmosphere of the industry has also increased rivalry amongst firms.

External Application of SWOT

The use of Porter’s Five Forces determines our external part of the SWOT analysis.
Threats and opportunities are weighted equally. Figure 1 determines the external part of
Vodafone UK’s SWOT. The ratings are scaled from 1 to 5 with 5 being the possibility to
take advantage of opportunities and the ability to handle threats. Our analysis resulted in
a total weighted score of 2.9 indicating Vodafone’s potential to take advantage of
opportunities and neutralize threats.

Weight Rating Weighted Score

O1 Entering other sectors of communications .25 4 1.0

O2 MNP mobility affect .10 3 .30
O3 Adopting new technologies .15 4 .60
T1 Regulations by Ofcom .10 2 .20
T2 VoIP and Instant messaging .20 2 .40
T3 Municipal Wireless .20 2 .40
TOTAL 1.0 2.9
Figure 1

VRIO

In an attempt to evaluate Vodafone’s internal capabilities, we use the VRIO analysis

which questions the value, rarity, imitability of each capability and whether it is
organized to exploit. Figure 2 depicts the results of the VRIO analysis.

6
Capital Access

Vodafone UK is able to access capital from Vodafone Group as its parent company. With
free cash flow of £5.6billion (Vodafone Factsheet), the group is able to provide its
subsidiary with capital to enhance its operating capabilities or intensify its advertising.
Capital access is a valuable capability. However, competitors also have access to capital
from different sources and therefore this capability is common, leaving Vodafone in a
situation of competitive parity with its competitors.

Network Capability

Vodafone has invested much in their network and as a result they provide fast speed
internet with excellent indoor and outdoor coverage. Vodafone suggests that they have
got the most spectrums relative to competitors in the UK and that their low frequency 4G
signal allows for fast indoor internet speed (Vodafone.co.uk, 2014). This technological
capability is indeed valuable and puts Vodafone ahead of its competitors. However,
technology can easily be imitated and therefore this would only lead to a temporary
competitive advantage.

Brand Equity

According to The Independent, British National Newspaper, Vodafone ranked 5th for the
year 2011 in a worldwide brand ranking with a brand equity estimated at $31billion
(Kumar, 2011). Vodafone UK is able to benefit from the worldwide brand name that
Vodafone has created. Vodafone subsidiaries operate in 19 countries and serve an
increasing number of approximately 411million customers (Vodafone.com, 2013). Their
worldwide operations make consumers from all over the world familiar with the brand
and therefore, the huge number of travellers to the UK may tend to become customers of
Vodafone due to their familiarity with the brand. Vodafone’s brand equity is highly
valuable, costly to imitate and organized to exploit. Hence, due to its global brand,
Vodafone reaps a realized sustained competitive advantage.

Resources Impact on
Costly to Organized to
and Valuable Rare Competitive
Imitate Exploit
Capabilities Advantage
Realized
Access to
Yes No No No Competitive
Capital
Parity
Realized
Network Temporary
Yes Yes No No
Capability Competitive
Advantage
Realized
Sustained
Brand Equity Yes Yes Yes Yes
Competitive
Advantage
Figure 2

7
The Weaknesses

The case study presents some weaknesses that Vodafone is facing. A vital weakness is
the high churn rate that it is facing. This may be due to its inability to lock in customers
in long-term commitment plans. Another weakness is in its high prices for fixed-line
voice and broadband services. This weakness is due to the fact that Vodafone purchases
these services from BT and has to add a profit margin above BT’s initial price.

Internal Application of SWOT

The VRIO framework has been used to determine the strengths, while the previously
discussed weaknesses are pinpointed in our internal application of SWOT (illustrated in
Figure 3). Strengths occupy 60% of the weight while weaknesses occupy the remaining
40%. The ratings are scaled from 1 to 5 with 5 being high in terms of strengths or the
ability to minimize weaknesses. Vodafone scored a good total of 3.35 suggesting that the
combination of its capabilities along with its ability to minimize weaknesses could be
capitalized upon.

Weight Rating Weighted Score

S1 Access to Capital .15 3 .45

S2 Network Capabilities .15 4 .60
S3 Brand Equity .30 5 1.5
W1 High Churn Rate .20 2 .40
W2 High Prices for fixed-line and broadband .20 2 .40
TOTAL 1.0 3.35
Figure 3

Overview of the Case Problem (What strategy should Vodafone pursue?)

According to Gary Laurence who became the CEO of Vodafone UK in 2008, the
company had three choices in moving forward. Vodafone could remain focused on
mobile voice and data, search for a partner to provide better broadband services, or invest
in their own broadband network through LLU either by acquisition or DIY strategies. So
far, the first strategy had proven to be very effective. However, as more companies were
merging and providing services within all areas of communication, Vodafone may find
itself falling behind in competition. Ultimately, Vodafone must choose between a
partnership and creating their own broadband network either by acquisition or DIY.

A logical partner would be BT or O2 since other partnerships already existed with these
two companies. Despite the benefits of gaining access to a network for less cost some
areas of concern would include branding, control, and security of competitive advantage

8
on a shared network. Such a strategic alliance would require Vodafone to ally with a
company that is its competitor and at the same time collaborate with that competitor –a
situation known as ‘Co-opetition’. Dr. Raymond Cairo of the London School of
Economics states that “Co-opetition’s approach to business is on the premise that
companies’ activities involve two central elements: creating value and capturing value.
The former refers to the establishment of new or the enlargement of existing demand and
is popularly referred to as ‘creating the pie’ whilst the latter is the dividing up of the pie”
(Cairo, 2006). In this case, Vodafone and either BT or O2 would create value and
collaborate by exchanging services. However, the proportion of each company in terms
of capturing value is where the competitiveness is emphasized.

If Vodafone acquired its own network, then the company could provide a full range of
services under its own control with reduced costs through LLU on a regional basis. It
would also avoid the dilemma of co-opetition. However, Vodafone must first be able to
afford the capital expense of buying its own network. The upfront costs would be steep,
but could prove to be very profitable.

Research on Acquisitions and Alliances

In this section, we summarize two scholarly articles that relate to Vodafone’s case. The
first article, authored by Werner Hoffmann and Wulf Schaper-Rinkel (2001), is titled
Acquire or Ally? - A Strategy Framework for Deciding Between Acquisition and
Cooperation. Its primary focus is on determining which strategy should a company
pursue with regards to its specific conditions. The second article, authored by Sameer
Vaidya (2011), is titled Understanding Strategic Alliances: An Integrated Framework. It
proposes an integrated framework of strategic alliances based on two earlier developed
models. After summarizing the articles in this section, we develop the linkages between
the articles and Vodafone in the subsequent section.

To Acquire or to Ally

The purpose of acquisitions and alliances are to increase a company’s external resources.
Linking resources with other companies through either of these methods allow each
company to better utilize economies of scale and scope. Alliances would allow
companies to remain legally independent and economically autonomous while
exchanging resources and data. Acquisitions occur when one company takes control of
another by buying controlling shares of the target company.

Two theories exist to determine if alliances or acquisitions will be more beneficial for a
company. By taking a transaction-cost view of the firm, it is important to differentiate
between one-time and continuous transaction costs. The goal of a company is to choose
the mode of organization that best reduces the total of both types of cost. A resource-
based view of a company is a composition of all assets and capabilities that can be seen
as advantageous strengths of the company. According to this view, it is best for a firm to
9
choose an organizational method that best suits its needs for sharing and transferring
resources.

There are three main categories to consider as possibilities for influencing a company’s
decision to acquire or form an alliance with another firm which are as follows:
environmental characteristics, transactional characteristics, and firm characteristics. Each
of these three categories can be further broken down into more specific factors that
clearly define the expected outcome of a company’s decision.

Environmental characteristics are broken down into strategic uncertainty and dispersion
of knowledge. Strategic uncertainty simply means environmental uncertainty that can
result in environmental flux, complexity, and interdependency. When uncertainty is high,
alliances have been shown to be more successful, especially if a company has a limited
budget. Dispersion of knowledge is the direct result of a company’s inability to absorb
and apply knowledge due to its accelerated creation. Again, alliances are shown to be
more favorable as it allows companies to acquire knowledge for a limited period without
integration.

There are four transactional characteristics such as specificity of transaction-related

investments, behavioral uncertainty, persistence of economic synergies, and
appropriability regime that assist in the projected outcome of a company’s decision for
cooperation or mergers. When specificity is high, then it is better to choose in favor of an
acquisition. Behavioral uncertainty is the result of opportunism risks and an increase of
company efficiency is most easily achieved when there is unlimited control from an
acquisition. Based on the persistence of economic synergies, particularly economies of
scale and scope, it makes more sense to ally only if the shared resources are short-term or
it is a trusted company where previous business transactions have been established.
Otherwise, it may be more effective to decide in favor of an acquisition noting that the
company would have to endure high one-time costs and a situation where an exit strategy
lies only in selling the target company. The last category of appropriability regime is seen
as the ability to protect core capabilities and resources. If competitive advantages are
greater than a partner company’s attempts to outlearn, then an alliance is appropriate. If
the competition is too great in terms of expertise and knowledge, then the company must
choose an acquisition.

The last category to consider is firm characteristics that are subdivided into three
categories: resource endowment, absorptive capacity, and institutional capital. Alliances
are formed when a company is looking for quick and inexpensive external growth. When
companies have more capital, it is more common for them to make acquisitions to
promote external growth. A company’s ability to learn and adapt is known as its
absorptive capacity. Alliances favor the company that outperforms the other as it engages
in “learning races”. Institutional capital is the company’s social standing measured in
terms of personal and organizational relationships as well as industry and regional
networks. Firms with high social capital are seen as more cooperative and more
frequently favor alliances over acquisitions.

10
 The authors, Hoffmann and Schaper-Rinkel, conducted their own research to compare
the existing data within the field and their findings match the aforementioned
characteristics and the projected outcome of each. They offer propositions of their
findings to confirm the existing data and to assist in choosing between acquisitions and
alliances. Figure 4 summarizes their propositions.

Proposition Acquire Ally

1.0 High strategic uncertainty 
2.0 Environments characterized by dispersed knowledge 
3.0 Need for high transaction-specific investments 
3.1 Strong permanent specific interdependencies 
3.2 High degree of diversification of the target company 
4.0 High behavioral uncertainty 
4.1 High levels of inter-organizational trust 
4.2 High-compatibility of strategic intentions 
5.0 High expected persistence of synergies 
6.0 Weak appropriability regimes 
7.0 High resource endowment 
8.0 High absorptive capacity 
Figure 4

An Integrated Framework for Strategic Alliances

When deciding upon strategic alliances, it is important to seriously consider the pros and
cons. In terms of statistics, alliances are known for being unstable and likely to fail due to
unforeseen costs and shared responsibilities. By studying the motives for alliances,
models can be created and studied to demonstrate a positive relationship between
alliances and success.

There are three main theories used to explain strategic alliances: transaction cost
economics, organization theory, and business strategy. These three theories describe how
alliances are created to reduce production and transaction costs, consolidate resources,
and effectively deal with competition from other companies, respectively. The third
approach of business strategy is dependent upon five variables, known as Porter’s Five
Forces: the threat of new entrants, the threat of substitutes, the bargaining power of
suppliers, the bargaining power of buyers, and rivalry amongst firms. Business strategy
can be used defensively to limit strategic uncertainty. However, alliances are usually
positive and are formed largely for market growth or profit. Some scholars approach the
formation of alliances from a competitive viewpoint. Based on this competitive theory,

11
companies may form alliances as part of an international market entry, legal loopholes,
home market position protection, reduction in product line gaps, new-market domains,
raise entry barriers, improve resource use efficiency, resource extension, or for acquiring
new skills. Each of these reasons can be classified under the three aforementioned
approaches. For example, to extend resources and to enhance resource use efficiency
would be to use the transaction cost approach.

Two forms of strategic alliances exist: market-related and technology-related. Market-

related alliances tend to be more successful in mature firms while technology-related
alliances benefits companies within the technology industry as there is a higher demand
for innovation to keep up with new technologies.

One model of strategic alliance is posited by Vyas et al. (1995) and cited by Vaidya
(2011), proposing that the first step for a company to take is a SWOT analysis to study
internal and external factors. The company must first assess its strengths, weaknesses,
opportunities, and threats (SWOT) to determine if there is a need for an alliance. If a need
exists, then the next step is to develop a combined SWOT analysis of potential companies
with which to form an alliance. This would be an analysis of the Group With Alliance
Potential (GWAP). In order to determine a good match, the company who is searching
for an alliance must focus on the following four issues: goal compatibility, synergy
amongst partners, value chain, and balancing contributions. According to this model,
some barriers to the success of a strategic alliance included failure to understand and
adapt, failure to learn cultural differences, and a lack of commitment. If the partnering
companies can overcome these difficulties then a successful strategic alliance has been
formed.

Another model was proposed by Osland and Yaprak (1993) and cited by Vaidya (2011).
This model suggests that a need for alliances arises when there is a gap in a desired goal
compared to what goals the company is able to achieve. The size of this gap is usually
what determines the perceived need to an alliance. The following three needs explain
why companies form strategic alliances: market power, efficiency, and competencies.
Once a need is established, then the two companies must establish good communication,
trust, and cooperation for successful performance as allies.

In addition to analyzing the motives for alliance formation, it is important to identify the
benefits and limitations of an alliance as well. The benefits of an alliance are a direct
result of the motives listed for creating the alliance in the first place. To be successful, the
motives and the benefits of an alliance should be in harmony. To clarify, capabilities
found outside of the company serve as motives for an alliance while capabilities after an
alliance are described as benefits. There are some possible drawbacks to an alliance
which can include: control-related problems, unequal gains, differences in cultural
values, role ambiguity, partner allying with a competing firm, and the possible threat of
antitrust charges. Despite the high number of limitations, the mutual gains from an
alliance can outweigh the risks. It is important for a company to be change-oriented as
well as committed to continuous and mutual support to nurture a successful alliance.

12
Vaidya suggests an integrated framework for the two existing models by including a
selection process that consists of careful assessment of the bargaining power of each
partner, control issues, trust and commitment issues, knowledge transfer issues, stability
of the alliance, conflict resolution, and experiences of the partners. When assessing
current, strategic and desired goals, they should be subdivided into the three
aforementioned categories (strategic behavior, transaction cost and organizational
learning). Simultaneously, the use of these goals is to conduct an internal and external
environment analysis to determine if a need for an alliance exists. A firm should be
chosen as a partner by having a joint venture or through contractual agreements. Once the
alliance if formed, then a company needs to evaluate the performance of the alliance and
determine if there are any barriers to success that either need to be corrected or, if too
serious, may lead to the termination of the alliance.

Application to Vodafone’s Case

This section will apply the theories learnt from the scholarly articles to the particular case
of Vodafone. Through the application of Hoffmann and Schaper-Rinkel (2001)
propositions, we have come to the conclusion that Vodafone should pursue a strategic
alliance. Therefore, we then apply the integrated framework of strategic alliances
suggested by Vaidya (2011) specifically to Vodafone’s case.

Should Vodafone Acquire or Ally

It is clear to us from Vodafone’s business case and SWOT analysis that Vodafone’s
prices are too high for fixed-line and broadband services due to the fact that it purchases
these services from BT. Further to this, convergence into all services of communication is
vital for Vodafone. Therefore, Vodafone can approach one of three strategies to fulfill its
needs. It must ultimately choose between DIY, acquiring a company that has fixed-line
and broadband infrastructure and allying with such a company. It must be noted that this
application has the limitation of neglecting the organic development (DIY strategy) and
focuses only on acquisitions and strategic alliances.

Vodafone’s case study explicates that the fixed-line telephone market is in decline.
Although holding up to 2009 and superseding mobile voice minutes, it is uncertain on
how the trend with move further. Ofcom stated “The decline in fixed line voice revenues
accelerated in 2009, falling by 3.1% to £8.8bn. This was partly due to a decline in
revenue from international calls (-7.3%) as well as a decline in revenues from calls to
mobiles (-5.8%) as the volume of fixed-to-mobile calls decreased (-6.3%)”
(Ofcom.org.uk, 2010). Furthermore, Ofcom suggests that there is significant uncertainty
for demand on fast broadband services and the consumers’ enthusiasm to pay for such
services (Richards, 2011). Hence there is high strategic uncertainty and Vodafone is
better off, with respect to proposition 1.0, in pursuing a strategic alliance.

Although mobile telephony, fixed line telephony and broadband are within the
communications umbrella, these fields require partially different technological resources
13
and knowledge. The knowledge of fixed-line telephony and broadband is to some extent
dispersed. Therefore, due to the dispersion of knowledge and with regards to proposition
2.0, Vodafone should lean towards a strategic alliance rather than acquiring a firm with
fixed-line and broadband capabilities.

Fixed-line and broadband services of companies such as BT or O2 are considered vital for
both companies’ success. Fixed-line and broadband services have strong synergies
between them in terms of infrastructure. Therefore, it would be costly for BT or O2 to
afford losing one or each of these services. This makes strategic alliances more favorable.
On the other hand BT and O2 are not considered as diversified firms and their services are
highly interdependent. An acquisition in this case is not offset by the complications of
highly diversified companies and may be an option. The two paradoxical applications of
the sub-propositions (3.1 and 3.2) illustrated in Figure 4 complicate the parent
proposition (3.0) making it difficult to choose a strategy for proposition 3.0.

A high level of uncertainty and risk of opportunism is present although Vodafone already
has previous partnerships with BT and O2. However, both are considered competitors.
This situation presents the theory of co-opetition discussed earlier. Inter-organizational
trust cannot be capitalized upon due to competitiveness. Furthermore, the strategic
intentions of each company differ in the sense that each company’s primary focus lies
within its unilateral growth. Therefore, with regards to proposition 4.0, Vodafone should
acquire one of the target firms.

The emphasis of proposition 5.0 and 6.0 lies within the ability of one firm to outlearn the
other firm’s core capabilities. Knowledge and capabilities that should not be exposed are
protected through clearly defining the areas of cooperation and the areas where
knowledge would be restricted (Hoffmann and Schaper-Rinkel, 2001). Hence, Vodafone
can clearly define the areas of cooperation and restriction nullifying the high expected
persistence of synergies and creating strong appropriability regimes. Therefore forming a
strategic alliance would still be a potential option.

A positive relationship between financial strength and tendency to acquire exists

(Hoffmann and Schaper-Rinkel, 2001). If a company is financially strong and is able to
endure the extensive one-time costs of an acquisition, it would most likely acquire rather
than ally. Vodafone is financially strong, with a free cash flow of £5.6billion and can
endure such costs. Hence, with regards to proposition 7.0, Vodafone may acquire rather
than ally.

The ability of a company to learn and adapt would reduce the risk of losing ‘learning
races’ (Hoffmann and Schaper-Rinkel, 2001). We cannot take a stance on whether
Vodafone would learn faster than its potential partners. However, Vodafone has adapted
new technologies such as 4G rather quickly and therefore tends to be a company that
basis an emphasis on learning. Thus, with respect to proposition 8.0, Vodafone may find
allying as a promising strategy.

14
The above application of the propositions leans more towards Vodafone allying with
firms such as BT or O2 in order to reduce its fixed-line voice and broadband costs. This
would make Vodafone capable of providing more competitive prices for these services.

Vodafone to Form a Strategic Alliance

Since we have come to the conclusion that Vodafone should ally rather than acquire, we
will further confirm this and apply the integrated strategic alliance framework proposed
by Vaidya (2011). The application of Vaidya’s integrated framework to Vodafone is
depicted in Figure 5. A strategic gap exists in Vodafone’s strategy since its current
situation does not match its desired goals. The current situation presents the fact that
fixed-line voice and broadband costs are high for Vodafone and are accordingly provided
with a high price to customers. The desired goal lies within minimizing these costs to be
able to provide these services at a competitive price to customers; making Vodafone
capable of offering consumers converged communication services.

The business strategy approach, also named as the strategic behavior approach, where
Porter’s Five Forces are emphasized complies with our industry analysis specifically in
terms of high bargaining power of suppliers and buyers. BT as a supplier of fixed-line
and broadband services has the power of bargaining over Vodafone. Furthermore,
consumers also have bargaining power due to the existence of different offerings by
various firms. Therefore, a vital motive to ally is conceptualized in the strategic behavior
approach.

Now that the need for a strategic alliance is confirmed, the partner selection criteria
would depend on Vodafone’s SWOT as well as the SWOT of the GWAP. In terms of
partner selection, we emphasize on goal compatibility and synergies between the two
partnering firms. O2 is a direct competitor to Vodafone as one of the major telecom
operators and therefore is unlikely to be compatible with Vodafone in terms of goals. It is
more likely that BT would have goal compatibility with Vodafone. Moreover, synergies
between Vodafone and BT already exist. Hence, BT would more likely be a suitable
partner.

The formation of a strategic alliance between Vodafone and BT would require

contractual agreements. These agreements may include licensing, technology agreements
and supplier arrangements (Vaidya, 2011). Finally, Vodafone should conduct a
performance evaluation of the strategic alliance in order to determine whether the alliance
is successful and to understand the barriers to success. The results of the evaluation
would determine whether motives for a strategic alliance still exist to further extend the
alliance or if a termination is required.

15
 Motives for allying

Current
Situation
(High fixed-line
and broadband
costs)
Contractual
Agreements
(Licensing,
Environment (Emphasis on
technology
Bargaining Power of
agreements and Barriers to
Strategic Gap suppliers and buyers as
supplier Success
well as Vodafone’s
arrangements)
weaknesses)

Desired Goals
Partner with BT
(Decrease fixed- Need to form
(due to goal Formation of Performance
line and strategic
compatibility Alliance Evaluation
broadband alliance
and synergies)
costs)

Strategic
Behavior feedback
Approach

Figure 5

Conclusion

This paper reviewed Vodafone’s case study and analyzed Vodafone’s external
environment in terms of industry as well as its internal capabilities. Furthermore, an
overview of the case problem has been conducted. Two scholarly articles relating to the
case’s strategic context were then presented and applied to the specific case of Vodafone.
Through the application of the propositions of Hoffmann and Schaper-Rinkel (2001), we
have determined that Vodafone would be better off in pursuing a strategic alliance
strategy rather than that of an acquisition. We have then applied the integrated strategic
alliance framework proposed by Vaidya (2011) to Vodafone’s case. Through this
application, we have found that BT would be a potentially successful partner that
Vodafone could form a strategic alliance with.

Our strategic choice has the limitation of neglecting an organic development strategy
which should be further investigated before concluding the favorability of pursuing a
strategic alliance formation strategy. Furthermore, we recommend that a SWOT analysis
to the GWAP should be developed as part of the partner selection criteria. This paper also
has the limitation of neglecting a GWAP SWOT analysis.

16
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