COMPETITIVE RIVALRY IN TELECOMS: A STRATEGIC MANAGEMENT CASE STUDY BETWEEN VODACOM AND MTN

VUSI SILONDA

Submitted in partial fulfillment of the requirements for the degree of Masters in Business Administration MBA Unit, Nelson Mandela Metropolitan University in the Faculty of Business Administration with the University of Wales, Cardiff.

Supervisor: Dr Gillian Marcelle

April 2009

DECLARATION
This work has not been previously accepted in substance for any degree and is not being concurrently submitted in any candidature for any degree Signed Date

STATEMENT 1 This dissertation is being submitted in partial fulfillment of the requirements for the degree of Masters in Business Administration Signed. Date.

STATEMENT 2 This dissertation is the result of my own independent work/investigation, except where otherwise stated. Other sources are acknowledged by footnotes giving explicit references. A bibliography is appended. Signed Date

PREFACE AND ACKNOWLEDGEMENTS

The original title for this research was The Scramble for the African Subscriber and came from reading articles by, as well as discussions with, Marina Bidoli, of the Financial Mail, in late May 2003. The competitive rivalry between Vodacom and MTN had its roots in South Africa, but Nigeria was the epic battle ground where it finally culminated in 2003-2004. This research is a case study that will demonstrate how competitive advantage is a systematic process that develops as rival firms, like Vodacom and MTN, target each other in the material and interpretational domains. In this case study competitive advantage resulted from both actions taken by Vodacom and those taken by MTN in response.

My thanks to the following MTN staff people who were untiring in their efforts to answer endless questions: the then CEO MTN Nigeria, Adrian Wood, (replaced by the MTN Group COO and would also be the CEO MTN Nigeria, Sifiso Dabengwa) Brian Goldie, Business Operations Executive, MTN Nigeria; Afam Edozie, Chief Strategy and Marketing Officer MTN Nigeria, Yolisa Siqebengu from the MTN Innovation Center in Johannesburg. David Clark and David Black in Nigeria, who narrated how it all started in Nigeria and the challenges the organisation faced in those early years. Efforts to get information from the Vodacom Group were unsuccessful. The boardroom drama at Vodacom SA in early June 2004, illustrated how volatile, sensitive as well as pivotal the role of Nigeria in the geographical diversification strategies of both operators

My eternal gratitude to the following individuals, in particular my supervisor, Dr Gillian Marcelle who challenged me and encouraged me script after script to not only work harder, but also developed in me the love for research; Sydney Seakamela; Nthatisi Bulane who proof read my final draft; Dr Annalie Pretorious who was a source of encouragement and guidance and enabled this document to be successfully and timeously completed, Last but most certainly not least, to Rainbow, you challenged me to be the best I could ever be, just to let you know that I am greatly indebted to you, without your confidence in me I would not have embarked on this MBA

TABLE OF CONTENTS DECLARATION....................................................................................................................... 2 STATEMENT 1 ........................................................................................................................ 2 STATEMENT 2 ........................................................................................................................ 2 PREFACE AND ACKNOWLEDGEMENTS .......................................................................... 3 TABLE OF CONTENTS .......................................................................................................... 4 TABLE OF FIGURES .............................................................................................................. 7 LIST OF TABLES .................................................................................................................... 7 Chapter 1 ................................................................................................................................... 8 1. INTRODUCTION AND PROBLEM STATEMENT ........................................................... 9 1.1 Background of the research ................................................................................................. 9 1.2 Drivers of Growth ............................................................................................................... 9 1.2.1 Competing by Connectivity and Functionality................................................ 9 1.2.2 Competing Under New Rules, New Technology and New Demand ............................. 10 1.2.2.1 Liberalisation and Privatisation ..................................................................... 10 1.2.2.2 International Reciprocity ............................................................................... 11 1.2.2.3 Technological Development.......................................................................... 11 1.2.2.4 Growth of SA Multinationals and Multilateral competition ......................... 12 1.3 Statement of problem ........................................................................................................ 12 1.4 Objectives .......................................................................................................................... 13 1.5 Significance of the research............................................................................................... 13 1.6 Research methodology ...................................................................................................... 14 1.6.1 Selection of Suitable Research Methodologies .............................................................. 14 1.6.2 Literature review ............................................................................................................ 14 1.6.3 Theoretical Delimitation ................................................................................................. 14 1.6.4 Key assumptions............................................................................................................. 15 1.7 Delimitation of the research .............................................................................................. 15 1.8 Geographical demarcation ................................................................................................. 15 1.9 Layout of the study ............................................................................................................ 15 Chapter 2 ................................................................................................................................. 16 Literature Review .................................................................................................................... 16 2.1 Introduction ....................................................................................................................... 17 2.2Globalizing Telecommunications Services: The Strategic Alliance Approach.................. 17 2.2.1 Strategic Patterns: Competition through Alliances ........................................................ 18 2.2.1.1 Strategic Pattern I: Focus............................................................................................. 19 2.2.1.2 Strategic Pattern II: Best Product-Differentiation ....................................................... 20 2.2.1.3 Strategic Pattern III: Customer-Solutions Orientation ................................................ 20 2.2.1.4 Strategic Pattern IV: Lock-in Strategy ........................................................................ 23 2.2.1.5 Strategic Pattern V: Strategic Alliances for Scale, Speed, and Scope ......................... 24 2.2.1.6 Non-Structural Alliances ............................................................................................. 24 2.2.1.7 Structural Alliances ..................................................................................................... 25 2.3 Geographic and Product Diversification ........................................................................... 25 2.3.1 Relatedness and Complementary Resource Alignment .................................................. 28 2.4 Competitive Advantage ..................................................................................................... 30 2.4.1 Micro-culture .................................................................................................................. 33 2.4.2 Macro-cultures................................................................................................................ 34 2.4.3 Process of Competitive Advantage ................................................................................ 35 2.4.4 How firms build competitive Advantage........................................................................ 35 2.4.4.1 Strategic Investments................................................................................................... 36 2.4.4.2 Strategic projections .................................................................................................... 37 2.4.4.3 Strategic Plot ............................................................................................................... 38 2.4.5.1 Resource Allocations ................................................................................................... 40 2.4.5.2 Definitions of success .................................................................................................. 41 2.4.5.3 Industry paradigms ...................................................................................................... 43

2.5 Competitive advantage as a systematic outcome .............................................................. 44 2.6 Conclusion ......................................................................................................................... 46 Chapter 3 ................................................................................................................................. 48 3.1 Introduction ....................................................................................................................... 49 3.1.1 Research Process ............................................................................................................ 49 3.1.1.1 Elite interviews ............................................................................................................ 49 3.2 Qualitative research methods ............................................................................................ 51 3.3 Case Study Research Approach......................................................................................... 51 3.3.1 Brief Historical Overview .............................................................................................. 51 3.3.2 Definition of a case study ............................................................................................... 52 3.3.3 Data Collection ............................................................................................................... 52 3.3.4 Data Analysis ................................................................................................................. 53 3.4. Writing the Study Report.................................................................................................. 55 3.5 Conclusion:........................................................................................................................ 55 Chapter 4 ................................................................................................................................. 56 4. Introduction ......................................................................................................................... 57 4.1 Background to the rivalry .................................................................................................. 57 4.1.2 Telecom reform 1992-2002 ............................................................................................ 58 4.1.3 The Telecommunications Act 1996................................................................................ 59 4.2 Policy and Regulatory Institutional Framework ................................................................ 60 4.2.1 Managed Liberalisation .................................................................................................. 61 4.2.2 Policy not conducive to growth and competition ........................................................... 62 4.3. Growth of mobile phone penetration 1992-2001 ............................................................. 63 4.4 VODACOM GROUP (PTY) LTD .................................................................................... 67 4.4.1 Vodacom Groups ownership structure .......................................................................... 67 4.4.1.2 Vodacoms First Mover Advantage ............................................................................ 68 4.4.1.3 Vodacom Creating Value for Shareholders ................................................................. 72 4.4.2 Vodacoms Strategic Plot ............................................................................................... 73 4.4.3 Vodacoms market share ................................................................................................ 74 4.4.4 Revenue Growth Driven by Subscriber Growth............................................................. 78 4.4.5 Vodacoms strategic investments ................................................................................... 80 4.5.1 Home market strategy..................................................................................................... 81 4.5.2 Geographical expansion curtailed .................................................................................. 81 4.6 MOBILE TELEPHONE NETWORKS (MTN) (PTY) LTD ............................................ 83 4.6.1 MTNs ownership structure ............................................................................................ 83 4.6.1.1 Strategy and management............................................................................................ 85 4.6.2 MTNs Subscriber Growth ............................................................................................. 85 4.6.3 MTNs market share ....................................................................................................... 86 4.6.4 MTNs strategic plot....................................................................................................... 87 4.6.4.1 Home market strategy.................................................................................................. 87 4.6.4.2 Geographical expansion not curtailed ......................................................................... 89 4.6.5 MTNs Strategic Investments ......................................................................................... 90 4.6.5.1 Orbicom ....................................................................................................................... 90 4.6.5.2 MTN Nigeria ............................................................................................................... 91 4.7 Conclusion ......................................................................................................................... 91 Chapter 5 ................................................................................................................................. 92 Geographical expansion into Nigeria ...................................................................................... 92 5.1 Introduction ....................................................................................................................... 93 5.1.1 Nigeria and its telecommunications sector in 2000 ........................................................ 93 5.1.2 Structure of Nigerias telecommunications sector.......................................................... 94 5.1.3 Worlds First Spectrum Auction Successful! ................................................................. 96 5.2 The growth of the telecommunications market ................................................................. 96 5.2.1 The players in the Nigerian telecommunications ........................................................... 99 5.2.1.1 MTN Nigeria First Mover Advantage Implications ................................................ 99 5.2.2 Ownership Structure ..................................................................................................... 100

5.2.3 Expanding Footprint ..................................................................................................... 100 5.2.4 MTNNs Strategic Plot ................................................................................................. 101 5.3 MTNs market share ........................................................................................................ 102 5.3.1 Revenue Driven by subscriber growth ......................................................................... 103 5.3.2 MTN Nigeria cash cow ................................................................................................ 105 5.3.3 Strategic Investments in Nigeria .................................................................................. 106 5.3.4 MTN more profitable than Vodacom- March 2004 .................................................... 107 5.4 Vodacoms cautious strategic plot................................................................................... 108 5.4.1 Challenging rival MTN ................................................................................................ 109 5.4.1.1 Vodacoms Strategy in Nigeria ................................................................................. 110 5.4.1.2 Shareholders uncomfortable with Nigerian Investment ............................................ 111 5.4.1.3 Late entrant into Nigerian market .............................................................................. 112 5.4.2 Vodacoms unsuccessful bid for Econet Wireless Nigeria........................................... 113 5.4.2.1 Other suitors for Econet Wireless Nigeria ................................................................. 114 5.4.2.2. EWN board accepts Vodacoms offer, ..................................................................... 116 5.4.2.3 Vodacom terminates agreement with VEE Networks ............................................... 117 5.4.2.4 Management shake-up at Vodacom .......................................................................... 117 5.4.2.5 Econet Wireless International suing Vodacom ......................................................... 119 5.4.2.6 Vodacome Vodago .................................................................................................... 119 5.4.2.7 Belated lift of ban ...................................................................................................... 120 5.5 Conclusion ....................................................................................................................... 121 Chapter 6 ............................................................................................................................... 122 Comparative Analysis ........................................................................................................... 122 6.1 Introduction ..................................................................................................................... 123 Sources of competitive advantage ......................................................................................... 123 SWOT analysis of Vodacom and MTN (1993-2001) ........................................................... 124 6.2 Comparative Analysis ..................................................................................................... 132 6.2.1 Shareholding and Strategy ............................................................................................ 132 6.2.2 Entrepreneurial and enterprising management ............................................................. 137 6.2.3. Micro-culture ............................................................................................................... 140 6.2.4 Organising for geographical expansion ........................................................................ 141 6.3 CONCLUSION ............................................................................................................... 144 6.3.1 Measuring International Diversification ....................................................................... 146 6.3.2 Measuring Performance................................................................................................ 148 6.3.2.1 MTNs Critical Success Factors ................................................................................ 149 6.3.2.1.1 Organizational Integration ...................................................................................... 150 6.3.2.1.2 Leadership .............................................................................................................. 152 6.3.2.1.3 Managing strategic change ..................................................................................... 153 6.3.2.1.4 Cultural change....................................................................................................... 153 6.3.2.1.5 Learning organisation- TCB and Innovation .......................................................... 154 6.3.3 Lessons for corporate strategy and decision making .................................................... 157 References ..........................................................................................................................160 Annexture: Comparative Financials...................................................................................179

LIST OF TABLES

Table 1 Total number of Mobile subscribers ............................................................... 65 Table 2 Operators ARUP ............................................................................................ 66 Table 3 Cumulative Capex in SA and Africa ............................................................. 67 Table 4 Operators Market Share ................................................................................. 75 Table 5 Revenue, Subscriber and EBITDA Growth .................................................. 78 Table 6 Mobile data revenues ..................................................................................... 79 Table 7 Vodacoms revenue and EBITDA ................................................................. 79 Table 8 MTNs subscriber growth .............................................................................. 86 Table 9 Africas tele-density comparison 1999 .......................................................... 93 Table 10 The growth of mobile in Nigeria ................................................................. 97 Table 11 Swot Analysis of Vodacom and MTN ....................................................... 126 Table 12 Comparative Summary of Key Financial Indicators 2001-2004 ............... 128 Table 13 Summary Analysis of Key Factors ............................................................ 133 Table 14 Vodacom and MTN subscriber growth Sept 08 ........................................ 134 Table 15 Selected mobile operator presence in Africa 2005/12/31 .......................... 135 Table 16 MTN vision ................................................................................................. 142 Table 17 Proportionate Subscribers ........................................................................... 148 Table 18 MTNs Growth .......................................................................................... 149 Table 19 MTNs Critical Success Factors ................................................................ 150 TABLE OF FIGURES

Figure 1 Analytical framework influencing diversification....................................... 29 Figure 2 Sources of competitive advantage ............................................................... 31 Figure 3 How firms build competitive advantage...................................................... 32 Figure 4 How constituents affect a companys competitive advantage ..................... 33 Figure 5 A systematic model of competitive advantage ............................................ 45 Figure 6 South Africa's Telecommunications Structure ............................................ 60 Figure 7 Growth of the SA Telecommunications Industry ........................................ 64 Figure 8 Mobile Teledensity in SA ........................................................................... 65 Figure 9 Vodacoms Organisational Structure ......................................................... 69 Figure 10 First mover advantages .............................................................................. 71 Figure 11 Operators Market Share 1999-2003 ........................................................... 77 Figure 12 Vodacoms market strategy ........................................................................ 82 Figure 13: MTN Group Structure ............................................................................... 84 Figure 14 MTNs market strategy............................................................................... 88 Figure 16 Market Share in Nigerian Telecoms ......................................................... 104 Figure 17 Entering a Competitors Cell ..................................................................... 112

Chapter 1

1. INTRODUCTION AND PROBLEM STATEMENT

1.1 Background of the research This case study is a research project that traces the evolution rivalry between Vodacom and MTN in the South African market from 1993 to 2001 and then traces it to the Nigerian telecommunication market in 2003-2004 when Vodacom made an attempt to enter that market; it also assesses the business factors and environmental variables that influenced the strategic directions of the two competing firms. Specifically, this paper investigates the internal and external strategic choices that the two SA telecommunications firms made to adapt to changes and to respond to quickly in order to create or sustain competitive advantage, in a telecommunications industry where they faced important challenges from new technology, liberalization and the convergence of markets. 1.2 Drivers of Growth Chan-Olmsted and Jamison (2001:318) have asserted that the drivers of growth for the telecommunications industry are the expansions both of its products and geography. Once a geographically-bound voice transmission service provided over specialized wire based networks, telecommunications was now part of a worldwide, integrated communications system in which voice, data, and video were transmitted and transformed over integrated wire and wireless networks connected by network and customer devices. That integration has redefined markets and products and changed how rival companies, like MTN and Vodacom in this case study, compete.

1.2.1 Competing by Connectivity and Functionality

Chan-Olmsted and Jamison (2001:318) have further asserted that convergence has dramatically changed the role of competing telecommunications companies such as Vodacom and MTN. Instead of being geographically based and hardwired for voice service like Telkom, they now competed on the basis of coverage and functionality. Thus, the degree and quality of access and the variety and differentiation of features have become the strategic focus. Coverage and functionality were interrelated because of network effects, network providers became more attractive to customers when they were able to deliver a critical mass of connected customers and content

providers/packagers, and vice versa. The critical mass, in turn, allowed the network providers to exploit scale economies and develop and market viable features that made the network more valuable for these customers.

While connectivity and functionality were becoming the basis of competition, ChanOlmsted and Jamison (2001:319) assert that the means of transmitting and switching communications were becoming increasingly substitutable, creating pressure for price competition. Sappington and Weisman (1996) and Huber et al. (1993) describe how cable television networks, satellites, fiber optics, copper wires, cellular and PCS mobile radio, and numerous other networks were substitutable for some services. Broadcast, circuit switching, and various cell-based technologies, such as packet switching, were also substitutable for some services. As the mobile industry grew in South Africa during the 1993-2001 periods as well as in Nigeria from 2001, the number of mobile telephones exceeded the number of wire-line telephones and also as voice over the Internet grew in popularity; customers were substituting e-mail and voice over the Internet for voice telephone calls over traditional networks.

1.2.2 Competing Under New Rules, New Technology and New Demand An industry can be defined as global if there is some competitive advantage to integrating activities on a worldwide base. Liberalization, privatization, and a series of international reciprocal agreements have unleashed industries which had been held to traditional boundaries that were nearly 100 years old, and initiated new rules that have created a favorable environment for globalization. Technological development, customer demand, and multilateral competition (Jamison, 1999a) in the new converging market are pushing further the strategic importance of globalization. 1.2.2.1 Liberalisation and Privatisation

While the controlled liberalisation of the South African market in 1994 meant new business opportunities for Vodacom and MTN, it also translated to greater competition and possibly (in South Africas case) higher profits for the incumbent telecom service provider, Telkom, through its 50 % share holding in Vodacom (Oh, 1996). Liberalization and privatization in the early 1990s created new strategic

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challenges for traditional telecommunication companies from developed countries and developing countries. Many of the new market opportunities were in developing countries, like South Africa and later Nigeria; the latter was viewed as belonging to that group of countries that lacked strong, stable legal and regulatory institutions and had business practices unfamiliar in most developed countries.

As a result, companies from developed countries, Vodafone in this case study, adopted an entry strategy into the South African market, which allowed them to acquire local expertise and that decreased the probability and cost of expropriation of investment. Such strategies included selecting projects with fast payback, selecting well-connected local partners, and entering markets through alliances rather than through direct investment (Levy and Spiller, 1996; Oh, 1996; Whalley and Williams, 2000; Henisz, 2000). But the operative word for Vodafone, hence Vodacoms as well, in the developing markets was caution as was the case in Nigeria. 1.2.2.2 International Reciprocity

The impact of liberalization and privatization of many telecom services in the global market was enhanced further by the recent reciprocity agreement in this industry (Guy, 1997; Flanigan, 1997). The implementation of the World Trade Organization (WTO) Basic Agreement on Telecommunications and the 1997 FCC Benchmarks Order substantially reduced the settlement fees that US carriers pay foreign companies to complete calls from the US. (These fees had been set under an international settlement system to compensate countries for handling each others traffic and for any imbalance in the volume). Before the Benchmarks Order and the WTO Agreement in 1996, the average price of an international long distance call originating from the United States was 74 cents per minute. By 1999, it fell 25 per cent to 55 cents per minute (FCC, 2000). In some parts of the world, fees already have plunged as much as 80 per cent (Reinhardt et al., 1999). 1.2.2.3 Technological Development

Technology change also drives the globalization of telecommunications. ChanOlmsted and Jamison (2001:321) believe it has altered not only the types of telecommunications services available but also the Industrys operation/production

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cost structure, demands from its clients, degree of product substitution, and ability in attracting capital investment. Technology change often lowers prices and creates higher demand for both consumer and business services, thus facilitating the growth of the telecommunications industry in the domestic as well as global market. Furthermore, technology is enabling the dismissal of time and distance and reorienting telecom pricing toward a volume or bandwidth principle. For example, distance means nothing for Internet communications and is losing its meaning in mobile communications. Vodacoms and MTNs expansion has been driven by technological partnerships and this will be examined in depth in chapters 4 and 5. 1.2.2.4 Growth of SA Multinationals and Multilateral competition

As the environment of the telecom market continued to change, the nature of demand for telecom services changed as well. Multinational Corporations demanded better communication services to connect their expanding local branches. In fact, telecommunications companies were destined to operate globally as they responded to the continuous growth of multinational corporations, which increasingly commanded worldwide, integrated, and seamless communications networks. According to Gillward (2007) South African telecommunications investment across the African continent, from 1999, must be the most significant investment by any single country in Africa. Finally, the increasingly blurred industry boundaries signaled a trend toward multilateral rivalry and collaboration as competition in one industry or in one area spilled over into another (Greenstein and Khanna, 1997; Jamison, 1999a). Research has shown that multilateral competition in related product markets globally was related positively to firm performance (Geringer et al., 1989). It was suggested that an international diversification strategy, like the one MTN chose to pursue, outperformed that of product diversification alone, Vodacoms chosen strategy. (Sambharya and Hand, 1990). Kashlak and Joshi (1994) have specifically observed the emerging trend of telecom companies venturing into both product and international diversification 1.3 Statement of problem Competing firms face a challenge of growth either by product or geographical expansion. This study analyses the rivalry in the growth of two large South African telecommunications companies and the effectiveness of their geographical expansion

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as evidenced by the company performance in Nigeria; the comparative analysis provides lessons for corporate strategy and decision making. 1.4 Objectives This research has three goals:

Firstly it seeks to examine rise to the evolution of rivalry between Vodacom and MTN in the period 1993 to 2001 Secondly it will examine effectiveness of Vodacom and MTN in executing a geographical expansion as illustrated by the reference to Nigeria Lastly it will look at the lessons this expansion provides for corporate strategy and decision making

Carrying out the comparative analysis of the performance of Vodacom and MTN examined the following issues in a systematic way:

Structure of diversification Shareholding and strategy Management Micro environment 1.5 Significance of the research This study will investigate the internal and external strategic choices that Vodacom and MTN made to adapt to changes and to respond to quickly in order to create or sustain their competitive advantage. In particular they faced important challenges from new technologies, liberalization and the convergence of markets. Initially they focused on the new market in South Africa and new businesses emphasizing their plans to become major players in the South African market. However after 2001, with the entry of Cell C into the market, they refocused and restructured their businesses in order to increase their value and improve their competitiveness as evidenced by their entry into the Nigerian market, arguably the largest telecoms market in Africa. This research will provide a changed insight into the specific strategic projections, strategic plots, as well as strategic investments that MTN and Vodacom undertook to maintain, sustain and/or create new sources of competitive advantage.

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1.6 Research methodology In this section, the case study methodology to be followed in the research project is described. The following procedures will be adopted in conducting this research 1.6.1 Selection of Suitable Research Methodologies It is essential to find suitable research methodologies for data collection and data analysis. According to Leedey (1993:121), methodology is the operational framework within which the facts are placed so that their meaning may be seen more clearly. When selecting a methodology, the data to be collected should be considered, because data and methodology are inextricably interdependent and the research methodology adopted for a particular problem must always recognize the nature of the data amassed in the resolution of that problem. It is therefore necessary to investigate the data to be collected, as the nature of the data and the research problem dictate the research methodology. Given the multifaceted nature of this research project, the case study methodology was selected.

1.6.2 Literature review

An in-depth literature study will be conducted in order to identify the keys factors regarding the main problem. Information will be gathered from confidential company documents, data from resources, industry experts, libraries, the internet, newspaper articles, journals, magazines and knowledgeable people in companies as well as from the Link Centre at the Wits Business School in Parktown, Johannesburg.

1.6.3 Theoretical Delimitation

This research cannot attempt to cover all aspects of the problem, as the topic is subjective and prone to broad interpretation. It assesses the business factors and environmental variables that influenced the strategic directions of the firms. Specifically, this research investigates the sources of competitive advantage of rival firms and how firms respond to a competitive challenge.

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1.6.4 Key assumptions This section of the research sets out key assumptions made by the researcher during the investigation. The research is focused on competitive rivalry between, Vodacom and MTN, and also explores those aspects concerned with competitive advantage, in South Africa, as well as how this subsequently played itself out in Nigeria. 1.7 Delimitation of the research This research is not necessarily applicable to all industries. It is limited to the ways in which two emerging multinational South African telecoms companies used the competencies they acquired while competing locally to create competitive advantage in emerging markets. Delimitation of the research serves the purpose of making the research topic manageable from a research point of view. The omission of certain topics and areas does not imply that there is no need to research them. The study was confined to MTN and Vodacom. 1.8 Geographical demarcation This case study has been restricted to South Africa as well as Nigeria. References are made to other countries only in respect of the investments that MTN and Vodacom have made in those countries.

1.9 Layout of the study The dissertation has been divided into the following chapters: Chapter 1: Introduction Chapter 2: Literature Review Chapter 3: Research Methodology Chapter 4: Background to MTN & Vodacom; the evolution of corporate rivalry & expansion strategy Chapter 5: The geographical expansion into Nigeria . Chapter 6: Comparative Analysis and Conclusion

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Chapter 2

Literature Review

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2.1 Introduction This study examines the state of the South African telecommunications market and assesses the business factors and environmental variables that influenced the strategic directions of Vodacom and MTN two rival South African firms competing in the converging global telecommunications market. Specifically, this paper investigates the forces that have contributed to the globalization of telecommunications services, the major telecommunications strategies that the two rivals pursued and the factors that might have contributed to the outcome of these strategies. The nature of competition today in the global telecommunications industry seems to center around market activities that aim at gaining competitive advantages through strategic combinations of resources and presence in multiple products and geographical areas. Integration of competing technologies and the development of standardization that facilitate interoperability between these systems, along with the alignment of goals, information, services, and operations between firms in alliances are the keys to competitive advantages in this technology-driven industry.

2.2Globalizing Telecommunications Services: The Strategic Alliance Approach A telecom company has two distinct choices to pursue growth in the global market. It can either enter directly by building the product/service offerings with its own resources in the target country, or it can collaborate with other firms (Joshi et al., 1998). The new entrant globalization strategy gives the telecommunications firm the freedom of choice in markets and technologies. However, it is a slower and more costly process, inevitably lacks initial brand name recognition, lacks local political and business expertise, and increases risk of expropriation of investment. This approach is especially undesirable where time and speed are critical and where resource commitments in a particular market, segment, or technology might be too risky a pursuit for a company by itself, as in the case of the global telecom market (Joshi et al., 1998). A telecommunications company may also enter a target market through a strategic alliance relationship with other firms. The phrase strategic

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alliance has been used very frequently in the news reports of todays telecommunications industry. A strategic alliance is a business relationship in which two or more companies, working to achieve a collective advantage, attempt to integrate operational functions, share risks, and align corporate cultures. The degree of strategic alliances may range from a simple licensing agreement, to joint marketing effort, to establishing a consortium, to combining resources for joint ventures, to the ultimate form of mergers and acquisitions. Companies may be interested in alliances to capitalize on different expertise, build strategic synergies, mitigate risks, speed up a venture with combined resources, and develop scope economies (Chan-Olmsted, 1998) 2.2.1 Strategic Patterns: Competition through Alliances To explore the strategic patterns of the major telecommunications companies in the global market, this study will subscribe to the generic strategic taxonomy for analyzing industries and competitors proposed by Porter management framework that is especially appropriate for studying firms competitive behavior in a complex, uncertain market environment, as in the case of the converging global telecom industry (Hax and Wilde, 1999). Porter suggested that most competitive actions fall into one of the three generic strategies: cost leadership, differentiation, and focus (Porter, 1980). By achieving the lowest cost structure in the industry, a company can either reduce its prices or keep the increased profits to invest in research to develop new and better product and/or to market their products more vigorously. The development of scale economies often contributes to a companys ability to materialize low cost operations.

The second strategic approach, differentiation, involves making a product/service appear different in a certain aspect (e.g., design, reliability, and service) in the mind of the consumer through mostly a marketing/branding process. A focus strategy is when a company concentrates on a market area, a market segment, or a product. The strength of a focus strategy is derived from knowing the customer and the product category very well so as to establish a franchise in the marketplace (Porter, 1980). Hax and Wilde (1999), while recognizing the influential strategic framework espoused by Porter, argued that the generic strategies do not describe all the ways

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companies compete in the current environment. Based on the research of more than 100 companies, they proposed a new business model, the triangle strategic options for firms that compete in the current economy. These potential options include best product, customer solutions, and system lock-in. The best product approach is similar to Porters cost leadership or differentiation strategy with a focus on product or service. That is, a company may choose to develop the best product by aggressively pursuing economies of scale, product and process simplification, and significant product market share that allow it to exploit experience and learning effects. A company may also try to develop the best product in the consumers mind by differentiating itself through technology, brand image, additional features, or special services. The customer solutions strategic option focuses on customers by anticipating, studying, and offering a bundle of products or services that are customized to satisfy most if not all needs of a specific target group. Finally, the lockin strategic option emphasizes market collaborators instead of the product or the customer. In this case, the company actually concentrates on nurturing, attracting, and retaining complementors (e.g., cell phone manufacturers and mobile networks), providers of products and services that add economic value to its products or services (Hax and Wilde, 1999). The three alternatives have different scope and scale emphases. At the extreme end of the best-product position, scope may be trimmed to a minimum to develop scale economies and thus enable low cost. As a company moves to differentiate or bundle products, its scope is necessarily expanded. When a company reaches the stage of including complementors, it would have moved from a scale to a scope emphasis. 2.2.1.1 Strategic Pattern I: Focus According to Chan-Olmsted and Jamison (2001) there appears to be two segments of telecom companies that have approached the market with more of a focus strategy. The first group involves public telecom operators such as NTT and China Telecom. Either because of the recency of restructuring or the regional uniqueness, these major Public Telecoms Operators (PTOs) center their growth activities in the Asian region (i.e., a geographical focus strategy), unlike their European counterparts such as Deutsche Telekom and Telefonica, which have sought expansion opportunities not only in EU but also in other high-demand areas such as the US and the Americas. The

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other group that has focused on a particular market segment is the mobile cellular operators. While many traditional wireline service providers are expanding the scope of their services to include wireless communications networks, mobile

communications companies such as Vodafone AirTouch and Mannesmann have stayed in this particular product segment. AT&T is attempting to develop focus by breaking itself into a family of four companies AT&T Wireless, AT&T Broadband, AT&T Business, and AT&T Consumer (Rosenbush, 2001). 2.2.1.2 Strategic Pattern II: Best Product-Differentiation Many telecom service providers have attempted to develop brand assets and marketing programs that would differentiate them in this converging global market according to Chan-Olmsted and Jamison (2001). Because of the integration of services and geographical markets, the new generation of telecom companies needs to establish a market position that is associated with a growing market area and steers clear of a regional utility label. In other words, the new telecommunications multinationals are avoiding being linked with brands that highlight a service (e.g. telephone) combined with a geographic component (e.g., British). A move from British Telecom to BT is to limit potential constraints on its brand elasticity (Samzelius and Camman, 1996). Many of the key players continue to distant themselves from the old economy image and begin to build differentiated brand images that stress leadership in high growth areas, especially in mobile communication and the Internet. For example, France Telecom implemented a major branding campaign that promoted a new logo and visual identity for its worldwide communications and branded the international carrier as an innovative, customeroriented Net company, delivering services focused on wireline, wireless and availability of multimode connections (e.g., telephone, cable, and mobile connections) for a seamless telecom network to customers, mostly through alliances, has also become a differentiated point for companies like MCI WorldCom and AT&T Internet convergence (France Telecom, 2000).

2.2.1.3 Strategic Pattern III: Customer-Solutions Orientation

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Many of the global telecom companies have adopted a customer-solution strategy, attempting to provide the connectivity/coverage and features that are attractive to the customers, Chan-Olmsted and Jamison (2001) further assert. There are basically three types of customers whose needs are driving multinational investments by telecommunications companies. Large multinational customers often want a single network to provide them with end-to-end telecommunications across multiple countries (Kramer and NiShuilleabhain, 1997; Antonelli, 1997; Jamison, 1998). These needs for smooth end-to-end networking drive telecommunications companies to pursue local-to-global-to-local network strategies or local-to-regional-to-local strategies. In fact, the emphasis on end-to-end coverage has pushed some telecommunications companies to establish their own local networks where their customers have business locations and connect these networks via their global or regional network. Qwest and KPN in 1999 formed a joint venture to create a panEuropean IP-based fiber optic network linked to Qwests infrastructure in North America for data, voice, and video.

MCI WorldCom has invested extensively in building pan-European networks to provide service. To stay competitive in the region, Telmex has made investments in operators throughout the region including Guatemala (Telgua) and Puerto Rico (Cellular Communications). A local-to-global-to-local network with facilities in different regions will reduce a telecom companys reliance on incumbent phone monopolies, enable it to deliver greater value and better quality of service control to its customers, and improve the profitability of pricing and capacity decisions. The importance of building such a seamless network often becomes an incentive for alliances. For example, Concert, which includes BT and AT&T, is an alliance formed to pursue a local-to-global- to-local strategy. In addition to the demand of end-to-end network, customers no longer view wireline telephone, wireless telephone, and Internet as separate products. As a result, some telecommunications companies are bundling the products into a single price, or giving customers discounts for buying more than one (William and Willow, 1997). For example, BellSouth offers a single bill for wireless, Internet, and wireline products. The focus here is on the customers economics, rather than the products economics. And telecom services bundling would likely bring positive impacts on the customer economics either by lowering the customers internal costs or by allowing the customers to have higher revenue. It was 21

estimated that as the Internet continues to drive the growth of the global telecommunications industry, so-called data would constitute 80 per cent of traffic and voice the remaining 20 per cent of the total by the year 2010 (Raphael, 1998).

Following the consumer demand, many telecom players have ventured into this high growth area. MCI WorldCom has various online joint ventures, including one with Yahoo in Internet access service (Warner, 1998). British Telecom and AT&T through the alliance of Concert, the joint venture that provides telecom services to multinational companies, is investing $2 billion over three years on the development of e-commerce services (British Telecom, 2000). Deutsche Telekom has just agreed to purchase Debis System, a leading e-commerce and corporate communications software company (Deutsche Telekom, 1999). And Telefonica has invested heavily in content development, aiming to become a key player in the creation and distribution of content across markets and systems (e.g., via its Internet service provider, Terra Networks SA; TV services; and its cell-phone unit, Telefonica Moviles, in addition to the traditional wire network) (Telefonica Telecom, 2000). A customer-solutions strategic option calls for the development of partnerships and alliances, linking various firms ability to complement a customer offering.

MCI WorldCom is an example of expanding horizontally across a range of related services for the targeted customer segment, or bundling. Chan-Olmsted and Jamison assert (2001) that through a series of acquisitions such as Uunet Technologies, MFS Communications, Brooks Fiber Communications, and GridNet, it is able to bundle services such as local, long-distance, Internet, and advanced services together to reduce complexity for the customer. To develop a pan-European network, BT has purchased 26 per cent of Cegetel in France, entered a joint venture, Viag, in Germany, and participated in joint ventures with Telfort in The Netherlands, Albacom in Taly, Airtel in Spain, Ocean in Ireland, Telenordia in Sweden, and Sunrise Communications in Switzerland (Valletti and Cave, 1998; British Telecom, 2000). Also, instead of setting up a Spanish portal internally, Telmex entered a joint venture with Microsoft to develop a region-wide Spanish-language portal, counting on Microsofts extensive software applications, portal applications and strong branding and its own regional expertise and extensive access network (Hoover, 2000). To match customers communications needs, scale also becomes essential for the telecom multinationals. 22

Scale involves both customer base and geographic reach. Customer base is the number, size, and type of customers that connect directly with the companys network. Customer base is important because it determines a networks value or strength for making markets and interconnecting with other networks (Kramer and NiShuilleabhain, 1997; Yoffie, 1997) For example, Frontier Communications began as a local exchange company in New York and leveraged its local customer base to succeed in long distance. In 1997, Frontier provided local service in combination with long distance service, Internet, wireless, or calling card services to 40 per cent of its local telephone customers (Frontier Corporation, 1998). Incumbent local exchange companies in Finland had similar success when they began competing in long distance. Southern New England Telephone in the US had a similar experience when it entered the long distance market (Jamison, 1999a). 2.2.1.4 Strategic Pattern IV: Lock-in Strategy Because the epitome of this strategy is achieving the de facto proprietary standard, it appears to fall short for the telecom market. In this industry, system lockin is difficult to achieve because of open standards (e.g., TSP/IP, Java, RJ11 jacks), network interconnection requirements as mandated in the 1996 Act and by the EU (e.g., per EU, Vodafone has to allow open access to its network for 3 years), competitor propensity to compensate for lock-in (e.g., subsidization of mobile handsets in the US), and rapid technological change (e.g., innovation destroyed dBases lock-in). Positive feedback is important in some systems (e.g., Instant messenger) and may create a tipping effect (e.g., Acrobat), but has only minor effects in other systems (e.g., mobile phones). However, mergers and alliances allow companies to internalize positive feedback and so profit from integrating across markets. Also, creating open standards in all components of the system (e.g., IBMs open PC), except your own (e.g., Windows), allows the proprietary component provider to extract monopoly profits from a large market if the system achieves market dominance.

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2.2.1.5 Strategic Pattern V: Strategic Alliances for Scale (Cost Leadership), Speed, and Scope The strategies presented so far are not mutually exclusive and may be combined depending on a companys particular circumstances according to Chan-Olmsted and Jamison (2001). Note that one central theme runs through all options presented so far. It is the strategy of forming alliances to achieve size, speed, and/or scope in the market. Why and how do telecoms multinationals embrace globalization with such an alliance emphasis? Oh (1996) suggested that the strategic objectives of global alliances in this market are: (1) to reduce risks and entry costs into new markets, especially in regional trade blocks, through joint production and marketing efforts, (2) to improve global competitiveness with cost-effective procurement of critical commodities or components and produce economies of scale through global alliances, (3) to co-develop and co-produce high-tech products more efficiently and effectively, and (4 benefit from the advantages of pooling limited resources. Joshi et al. (1998) also found that most strategic alliances occurred between telecom firms that have broad product lines and focus on product innovation and new market development. They also discovered that most of the alliances which took place outside the US were within industry, while most alliances that occurred in the U.S. were inter-industry. Such developments may reflect the domestic deregulation in the US on cross-market competition and trends toward international privatization and deregulation of national telecom industries. We will now discuss the different alliance approaches in gaining scale, speed, and/or scope advantages.

2.2.1.6 Non-Structural Alliances The telecommunications industry has seen the development and collapse of many major alliances such as Global One and World Partners/Unisource. Such alliances are easier to set up and undo than a merger, and are often established to create strategic synergies, pool resources, gain access to technology, procure critical

components/production /marketing assets/ relationship, and mitigate risk. Through a non-structural alliance, partnerships in the forms of marketing agreements, licensing, joint ventures, and partial equity often involve major global telecommunications players and shape the direction of competition in the market. Oh (1996) has stressed 24

that telecom multinationals select the type of alliance depending on their relative positions with respect to size, profitability, capital structure, and R&D capability. He argued that the more profitable, heavily invested in R&D a firm is, the more selfsufficient it is and thus more likely for it to rely on non-structural alliances. Size and capital structure also influence a firms alliance options and flexibility.

2.2.1.7 Structural Alliances

Acquisition occurs when one company acquires the operating assets of another in exchange for cash, securities, or a combination of both. Typically the acquired company continues to exist, while a merger is a combination of two corporations in which only one corporation survives. In a merger, the acquiring company assumes the assets and liabilities of the merged company. A merger differs from a consolidation, which is a business combination whereby two or more companies join to form an entirely new company. Theoretically, consolidation is a friendlier, cooperative deal than either a merger or acquisition because it provides equal footing in the new firm for each corporation. Strategic alliances through mergers and acquisitions present an especially attractive avenue for the telecommunications industry since the multinationals will be able to integrate different communications segments quickly, capture a developed customer base, consolidate smaller niches, remove a rival and prevent competition from doing so, and accelerate the implementation of new technologies with combined resources. In sum, such integration a preferred method of growth when speed and scale economies are the key to success, as it is in todays information marketplace. To quickly establish a presence and leadership in the converging telecommunications market is another important incentive for many companies pursuing Merger and Acquisitions activities. For example, attempting to establish an instant presence in the European wireless market, France Telecom proposed to acquire E-Plus, one of the remaining large mobile communications companies in the region (Young, 2000). To enter the growing US telecom market, Deutsche Telekom has tried unsuccessfully to acquire both Qwest Communications and US West (Shinal, 2000). 2.3 Geographic and Product Diversification

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Diversification has had a rich tradition as a topic of research since the late 1950s (Ansoff, 1958; Chandler, 1962; Gort, 1962). Booz, Allen, and Hamilton (1985) defined diversification as a means of spreading the base of a business to achieve improved growth and/or reduce overall risk that may take the form of investments that address new products, services, customer segments, or geographic markets. Salter and Weinhold (1979) proposed three general but related models in the discussion of corporate diversification strategies. The product/market-portfolio model emphasizes the attractiveness of the target market in terms of attributes such as market size, growth rate, and profitability. The strategy model stresses the interrelationship between the core-business market and the target market, which is the emphasis of this study. The third approach, risk/return model, derives mainly from financial theories and reflects the concern and interest of investors. Studies of diversification have generally focused on one or more of the three aspects of diversification: (a) the extent (i.e., less or more diversification), (b) the directions (i.e., related or unrelated diversification), and/or (c) the mode (i.e., diversification via internal expansion/ mergers and acquisitions or choices of mergers and acquisitions [M&A] strategy) of diversification (Qian, 1997; Sambharya, 1995). Diversification strategy may be studied from either the product or geographic perspective. More recent studies in product diversification often investigate the directions of diversification as related or unrelated (Qian, 1997; Rumelt, 1984). Some have argued that related diversification might exploit economies of scope, product knowledge, and other relevant experience, thus reducing transaction costs and improving performance (Grant, 1988; Williamson, 1981). Others have found no differences or the opposite (Grant & Jammine, 1988; Michel & Shaked, 1984). In general, the resource-based view of strategic management strongly argues for strategic relatedness within a conglomerate when it comes to diversification strategy (Chatterjee & Wernerfelt, 1991).

International market or geographic market diversification may be defined as when a firm is horizontally and vertically integrated across different national submarkets (Hisey & Caves, 1985). The benefits of diversifying internationally originate from two sourcesgreater opportunities for higher returns and lower correlations of assets across countries (Cavaglia, Melas, & Tsouderos, 2000). Research has shown that 26

international diversification provides firms with significant advantages, including better firm performance (Hitt, Hoskisson, & Ireland, 1994; Tallman&Li, 1996). Some studies, on the other hand, concluded that performance declines are associated with increased international diversification, especially when the multinational firms expansion is in developing countries (Collins, 1990). The inconclusive results may be due to the notion that the relationship between international diversification and firm performance was curvilinear, as increased complexity of international operations and exposures to uncertainties, coupled with risk in consumer tastes, regulations, or access to distribution, may lead to performance declines (Geringer, Beamish, & da Costa, 1989; Hitt, Hoskisson, & Ireland, 1994; Mitchell, Shaver, & Yeung, 1992).

As for the interrelationship between international and product diversification, some research has shown that both diversifications individually have no effect on firm performance, but their interaction leads to a substantial increase in firm performance (Sambharya, 1995). Hitt, Hoskisson, and Ireland (1994) found that geographical diversification improves performance in firms that are highly diversified in terms of product markets. In fact, Kim, Hwang, and Burgers (1989) concluded that the performance of related and unrelated product diversification strategies depends on the degree of international diversification. In terms of the directions of diversification, some have advocated that relatedness is especially important, as the utilization of core skills, know-how, and management resources is necessary in reducing uncertainties in the process of internationalization (Qian, 1997). Many have stressed that organizational learning can be used to counter cultural barriers when diversifying internationally, and firms that diversify internationally can exploit economies of scale and scope, resource sharing, and core competencies across related business units (Hitt, Hoskisson,&Ireland, 1994; Shambharya, 1995). Nevertheless, studies have also indicated an inverse relationship between product and international diversification (Buhner, 1987; Madura&Rose, 1987).As both types of diversification involve substantial risks, it is unlikely that a firm would take on both strategies simultaneously (Shambharya, 1995). In sum, geographic and product diversifications interact with one another and, individually and collectively, influence differential firm performance (Grant, 1987; Palepu, 1985).

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2.3.1 Relatedness and Complementary Resource Alignment

The type of diversification one would expect to result from a resource depends on its specificity within a particular industry (Chatterjee & Wernerfelt, 1991). The products of global media conglomerates are quite different from the typical focus of many diversification studies, which examined mostly manufacturing and, occasionally, service firms. The major distinction between media and non-media products rests in the unique combination of the following media characteristics. First, media conglomerates offer dual, complementary media products of content and distribution. Second, media conglomerates rely on dual revenue sources from consumers and advertisers. Third, most media content products are nonexcludable and nondepletable public goods whose consumption by one individual does not interfere with its availability to another but adds to the scale economies in production. Fourth, many media content products are marketed under a windowing process in which content such as a theatrical film is delivered to consumers via multiple outlets sequentially in different time periods (e.g., pay per view, pay cable network, and broadcast network). In a sense, the total potential revenue for such a content product depends on the total number of and pricing at these distribution points. Finally, media products are highly subjective to the cultural preferences and existing communication infrastructure of each geographic market/country and are often subject to more regulatory control from the host country because of their pervasive impacts on individual societies. The listed characteristics of media products lead to a market environment in which related product/geographic diversification as well as complementary resource alignment are likely to be the preferred diversification strategy. For example, as the intangible, content-based media product may be stored and presented in various formats (e.g., print vs. electronic media), related product diversification that extends a conglomerates product lines into related content formats (e.g., owning a magazine and an online content site) would likely benefit the conglomerate by enabling content repurposing, marketing know-how, and sharing of production resources, thus leading to superior performance. It is also likely for media conglomerates to seek out distribution products that complement their content products and vice versa. Such a resource alignment concept has been discussed extensively in many alliance literatures, which emphasize the importance of accessing resources that a firm does 28

not already possess yet which are critical for improving its competitive position (Barney, 1991; Das & Teng, 1998).

Figure 1 Analytical framework influencing diversification

Source: Chan-Olmsted and Chung (2003)

The symbiotic relationship between media content and distribution products presents a classic case of resource alignment. The fact that an existing product may be redistributed to and reused in different outlets via a windowing process reinforces the advantage of diversifying into multiple related distribution sectors in various international markets to increase the revenue potential for such a product. The dualrevenue source mechanism would likely lead to related and complementary diversification, as the larger aggregated number of subscribers/audience enhances a conglomerates ability to offer multinational corporations promotional outlets more efficiently. The nature of public goods, on the other hand, encourages the geographic diversification of content products, as the incremental costs are minimal for such expansions. Finally, because of the importance of cultural sensitivity and understanding of the regulatory environment, global media conglomerates are more

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inclined to diversify into related product/geographic markets to take advantage of the acquired local knowledge and relationships. The dependency on local

communication/media infrastructure may also lead to a diversification strategy that is geographically related, as regionally clustered countries are often at similar stages of infrastructure development, and clusters of media systems may lead to cost/resourcesharing benefits. 2.4 Competitive Advantage Following on from Chan-Olmsted and Chungs (2003) analytical framework influencing diversification model above, this section will now examine how, as Rindova and Fombrun (1999; 691) have asserted, competitive advantage develops as firms like Vodacom and MTN and constituents strategically target each other in the material and interpretational domains. Competitive advantage, they go on to add, results both from actions initiated by firms and those taken by constituents in response. Rindova and Fombrun (1999) see these actions as multidimensional in that they affect outcomes in all four domains; they are also interconnected in that they form multiple cycles of activities through which the four domains are continuously constructed and reproduced. They therefore conclude that for these reasons, competitive advantage is a systemic outcome, rather than an outcome of isolated activities (Porter, 1985). Competitive advantage, as Rindova and Fombrun (1999;693) further assert, derives from activities that span the four domains of action described in Figure 2.2 These four domains of the competitive terrain derive from two dimensions. The first dimension distinguishes the material and interpretational domains. It contrasts the emphasis by traditional strategy research on the role of material resources with the burgeoning literature that highlights how individual, group, and industry-level interpretational processes affect strategic interactions (Porac, Thomas, and Baden- Fuller, 1989; Walsh, 1995). Cognitive simplification (Schwenk, 1984), competitive blindspots (Zajac and Bazerman, 1991), competitive categorization (Porac and Thomas, 1990; Reger and Huff, 1993; Lant and Baum, 1995), industry recipes (Spender, 1989), industry mindsets (Phillips, 1994) are known to bias, constrain, channel, and otherwise influence how managers perceive their environments and make strategic choices 30

Figure 2 Sources of competitive advantage

(Source Rindova and Fombrun 1999)

In this view, the competitive terrain is defined (South Africa in Chapter 4 and Nigeria in Chapter 5), not only by the resource conditions in various markets and potential rents associated with them (Scherer and Ross, 1990; Barney, 1986b), but also by the knowledge, expectations, and sensemaking of firms managers and of constituents that interact with firms in an industry. Sensemaking (Weick, 1995) (a term that MTN and Vodacom interpreted differently as will be outlined in Chapter 6) in industries comprises comprehending, understanding, explaining, attributing, extrapolating, predicting (Starbuck and Milliken, 1988: 51) andultimately deciding to engage in exchanges and to allocate resources.

According to Rindova and Fombrun (1999) the second dimension divides the competitive terrain into domains of action that fall either outside or inside a focal firm. Resource-based theories, for instance, emphasize the importance of the internal domainfirm-specific capabilities, knowledge, and assetsin creating competitive advantage (Penrose, 1959) as was the case with Vodacom in South Africa and MTN in Nigeria. Industrial economists point to external factors predominantly in a firms product market, such as product differentiation or market concentration (Scherer and Ross, 1990). The external domain includes all constituents, who engage in exchanges

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in product, factor, labour, and capital markets. It also includes institutional intermediaries that transmit and magnify information about firms and constituents. Competitors, like Vodacom and MTN in this case study, affect the construction of competitive advantage by taking actions in the four domains and creating strategic options for their shareholders.

Thus the rivalry between Vodacom and MTN manifested itself in the variety strategic of options made available to them. The strategic choices that Vodacom and MTN made among competitive offerings available to them, measure the relative success of each of their strategies and the degree to which each has gained advantage. Insofar as Vodacom and MTN interacted with the same constituents and vied for their attention, approval, and resources, they were each others competitors (Freeman and Hannan, 1983). Thus, the boundaries of an industry and a market are determined not only by how Vodacom and MTN have defined their businesses (Abell, 1980) but also by how constituents understand and choose among these businesses.
Figure 3 How firms build competitive advantage

(Source Rindova and Fombrun 1999)

Therefore, the external domains is better described not as an industry but as an organizational field consisting of actors, like Vodacom and MTN, who interact

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repeatedly, exchange information, form coalitions, and are aware of each other (DiMaggio and Powell, 1984).

The two dimensions describe four domains of action in which Vodacom and MTN and constituents interacted. The externalmaterial domain consists of various marketsprincipally the product, labour, factor, and capital marketsin which Vodacom and MTN as well as constituents exchanged resources. In the internal material domain, Vodacoms and MTNs resources were deployed in the production of goods and services. In the internal interpretational domain knowledge, values, and beliefs moulded both Vodacoms and MTNs micro-culture. In the external interpretational domain expectations, performance standards, and evaluations of Vodacom and MTN evolved and formed the industrys macro-culture.
Figure 4 How constituents affect a companys competitive advantage

(Source Rindova and Fombrun 1999)

2.4.1 Micro-culture In contrast to market and resource models that advance an economic rationale for the existence of competitive advantage, cognitive research in this case study will emphasizes the importance of Vodacoms as well as MTNs strategic decision-

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makers and their interpretations of economic conditions (Daft and Weick, 1984; Porac and Thomas, 1990; Zajac and Bazerman, 1991). Vodacoms and MTNs managers interpretations were deductions from the world legitimated within the organization (Weick, 1979a: 42), whether from their culture (Schein, 1985), knowledge base (Spender, 1989), or identity (Albert and Whetten, 1985; Fiol, 1991). The term micro-culture to refers to the knowledge, values, and identity beliefs in Vodacom and MTN that were consistent with a broad definition of culture as the pattern of shared beliefs and values that give the members of an institution meaning and provide them with rules for behavior (Davis, 1984: 1). Vodacoms and MTNs knowledge, values, and beliefs were resources that created sustainable competitive advantage, in SA and in Nigeria (respectively), insofar as they were valuable, rare, and difficult to imitate (Spender, 1993; Barney, 1986a; Fiol, 1991). In addition, knowledge, values, and beliefs created an advantage for Vodacom in South Africa and MTN in Nigeria, through their influence on information processing and behaviour (Ginsberg, 1994). As cognitive structures unique to both Vodacom and MTN (Weick, 1979a), they enabled their strategists to make superior evaluations of the rent-earning potential of their respective firms resources relative to each other (Penrose, 1959; Barney, 1986b). They also guided the actions of all members of Vodacom and MTN and enabled them to enact a systematic strategic direction (Meyer, 1982; Reger et al., 1994). 2.4.2 Macro-cultures Researchers have also called attention to the importance of interpretations external to a firmto the macro-culture of its industry and the transactional network from which it derives (Huff, 1982; Spender, 1989; Abrahamson and Fombrun, 1992, 1994). A macro-culture arises from the interactions between firms and their constituents, mediated by institutional intermediaries, such as the media, political, social and economic environments and various specialized organizations like the regulatory bodies, like ICASA in South Africa and the NCC in Nigeria (Hill and Jones, 1992; Fombrun, 1996). As Vodacom and MTN interacted and exchanged information, they constructed a web of interpretations characterized by: (1) a widespread exchange of information and interpretations among themselves; (2) varying degrees of knowledge

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and understanding about the industry and the their role inside it; (3) a multiplicity of interpretations, many of which are of a persuasive, self-serving nature; (4) some degree of agreement about standards of performance in the telecoms industry; and (5) evaluations of both relative to these standards and each other that gave content to their reputations. Insofar as the interpretations of constituents create preferences for some firms (and their products, stocks, and the like) over others, favourable interpretations are a source of advantage. The structure of the telecommunications market in SA and Nigeria will be discussed in Chapters 4 and 5 respectively. 2.4.3 Process of Competitive Advantage Rindova and Fombrun (1999) assert that each of the four domains described in the previous section is associated with a more or less developed body of research. However, observing and researching Vodacoms and MTNs activities in any single domain is not sufficient to explain how a firm, like Vodacom, gained its competitive advantage in South Africa and subsequently lost it on the African continent. As Astley and Van de Ven, (1983: 267) have argued that, To say that A causes B and B causes A may be predictive, but intellectually sterile until one can explain the processes by which the reciprocal relationship unfolds over time. This research contends that competitive advantage is a systemic outcome of six processes that connect these domains. Furthermore, through these connecting processes the four domains constitute and mutually produce each

other. For analytic purposes, each process will be examined separately; in the subsequent sections to show their dynamic interconnectedness.

2.4.4 How firms build competitive Advantage

Rindova and Fombrun (1999) assert that firms, like Vodacom and MTN, construct their distinctive strategic positions through three generic processes: (1) they pick strategic investments, (2) they make strategic projections, and (3) they develop a strategic plot. These processes will be described from the perspective of each of the two firms in chapters 4 and 5. However, Vodacom and MTN represent the strategic behaviour of all competing firms in an industry. To what degree and in what form they have engaged in any of them is an empirical question. The similarity of the

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competitors actions in an industry varies with the degree of imitability (Lippman and Rumelt, 1982) and isomorphism (DiMaggio and Powell, 1984). In turn, the conditions of imitability and isomorphism are created through processes that are initiated by constituents, and which we elaborate later in the paper. Figure 2.2 shows how the processes initiated by firms span markets, firms resources and micro-cultures, and industry macro-cultures. 2.4.4.1 Strategic Investments A firms strategic investments create value for shareholders by providing them with options that satisfy their interests. Shareholders exchange resources with firms whose options they perceive to be of superior value. A given firm regularly makes investments to build competitive advantage, whether by developing new products, augmenting its distribution channels, or enhancing its production capability. The fundamental purpose of strategic investments, that Vodacom and MTN have made, was to create and exploit opportunities for positive economic rents (Rumelt, Schendel, and Teece, 1991). Through investments competing firms, like Vodacom and MTN, secure more favorable configurations of industry factors (Porter, 1980) and protect those favorable positions from rivals (Caves and Porter, 1977; Bogner, Mahoney, and Thomas, 1994). What drives strategic investments are the resources available to the firm and the productive uses its top managers envision for them (Penrose, 1959). Thus, strategic investments originate simultaneously in a firms resource base and in its culture. Traditional approaches to competitive advantage emphasize how resources are used to gain positions better than those of competitors (Porter, 1980). In this study, that author contends that investments build competitive advantage when they create value for specific resource-holders. Kim and Mauborgne (1997), for example, found that high growth companies did not focus on competitors but on customer needsan approach they termed the logic of value innovation. By not focusing on competitors, value-innovators better distinguish the factors that deliver value from the factors the industry competes on. They concentrate resources on investments that have the highest impact on customer evaluations. They do so by eliminating product features that the industry takes for granted or adding features that the industry has ignored.

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Similarly, a focus on suppliers value may require strategic investments in developing cooperative relationships, in contrast to a competitor focus that may require bidding down suppliers prices to outperform rivals on costs of inputs, like MTNs cooperation with Erickson in the development of products. Kim and Mauborgne (1997: 106) observed that ironically, value innovators do not set out to build advantages over the competition, but they end up achieving the greatest advantages. Strategic investments create value for constituents both by satisfying needs and by creating needs. Otherwise, firms tend to over invest in existing customers (like Vodacom and its investment in its network in SA see chap 4) and to ignore customers in emergent markets (Christensen and Bower, 1996). By making investment choices about customer groups, product functions, and the resources and technologies necessary to serve them, a firm satisfies its constituents, as well as defines its business and its competitors (Abell, 1980). Thus, a firms targeted investments to particular resource-holders also affect the competitive conditions of its rivals; Vodacoms investment in SA influenced rival MTNs choice of strategic investments. MTN, in turn, made strategic investments to protect its position and relationships with resource-holders, through innovations, acquisitions, or other strategic actions. Strategic investments can undermine the competitive advantage of a firm when they are insufficient, misdirected, or their value is not understood by shareholders. Inadequate investments not only fail to attract resources in the material domain but also raise doubts about the strategic direction of the firm and taint its overall reputation in the interpretational domain, as was the case with Vodacom in Nigeria as will be examined in Chap 5. 2.4.4.2 Strategic projections Even well-targeted investments may not contribute to competitive advantage if their value is not apparent to constituents. To stimulate and enhance favourable interpretations of their investments firms engage in strategic projections. Rindova and Fombrun (1999) have defined strategic projections as controlled images projected in social interaction through communication to secure favourable evaluations by others. As such, they resemble the impression management tactics of individuals (Goffman,

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1959; Tedeschi, 1981). Whereas strategic investments also may serve as signals and indirectly convey information about a firm (Shapiro, 1983), strategic projections are explicit communications about characteristics of the firm. They appear in a wide range of forms including advertising, logo development, financial reports, and press releases (Salancik and Meindl, 1984).

In general, through strategic projections competing firms, like Vodacom and MTN: (1) provide more information about their strategic investmentsinformation which shareholders may use in making their decisions; (2) offer to shareholders ready-made interpretations of their investments; and (3) impress desirable symbols in shareholders minds. In addition to influencing interpretations, strategic projections contribute to the formation of firm-related schemata, such as corporate reputations, cautions Vodacom and entrepreneurial MTN (Formbrun, 1996; Rindova, 1997). Specific interpretations and reputational schemata affect how constituents evaluate a firm and how they choose to allocate the resources they control. Strategic projections, therefore, affect both the interpretational domain and the material domain.

Like inadequate strategic investments, inadequate strategic projections may undermine a firms competitive advantage. This aspect will be explored further in Chapter 5 with regards to Vodacom. Strategic projections that misrepresent a firms investments may have legal consequences (in Vodacoms case they faced a legal challenge from an irate Econet Wireless International over Econet Wireless Nigeria) or may destroy a firms credibility and trustworthiness (in Nigeria, Vodacoms exit was the butt of many jokes in the local media, with one newspaper making fun of its prepaid offering; Vodacome Vodago (Fombrun, 1996). Further, because strategic projections come in a variety of forms, they can easily convey disparate images of a firm. The more consistent strategic projections are with one another and with a firms strategic investments, the more useful they are to constituents in making interpretations and the more they contribute to the construction of competitive advantage. 2.4.4.3 Strategic Plot

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The process that accounts for the consistency between a firms material resources and its micro-culture, as well as between its strategic investments and projections, is the formation of a strategic plot, according to Rindova and Fombrun (1999). A firms strategic plot reflects some continuity in its activities. It contributes to competitive advantage by providing a long-term context, within which constituents can attribute meaning to specific investments and projections. It reflects the firms intended strategyits business definition (Abell, 1980) and generic type (Porter, 1980; Miles and Snow, 1978), as well as emergent strategyresulting from the co-evolution of material resources and organizational culture. On one hand, the development of strategic plots depends on managers understandings of the resources the firm controls and the potential combinations of these resources in productive services (Penrose, 1959). A belief system, such as a firms dominant logic (Prahalad and Bettis, 1986), guides a firms strategic choices, and through them, the resources it seeks to acquire and combine. On the other hand, the dominant logic of a firm grows out of managerial experience with existing resources and reflects them (Mahoney and Pandian, 1992). Micro-cultural elements develop to support current uses of resources. Leonard-Barton (1992) found that high-tech organizations are culturally biased toward their engineering staff and often give them privilege in decision-making. Both a firms micro-culture and its resource commitments determine the strategic plot from which its investments and projections originate. Consistency among the three processes initiated by a firm enhances its competitive advantage; inconsistencies can cause one of the domains (either resources or culture) to lag behind and misfire, as was the case with Vodacom and its abortive attempt to enter Nigeria. Strategic projections not supported by investments can lead to loss of credibility; investments not supported by strategic projections may fall short of realizing their value-creating potential; and if both processes are not supported by the strategic plot of the firm, they will lack the continuity to feed into a virtuous cycle that constructs competitive advantage, this was what the Deputy CEO and Head of Vodacom International, Andrew Mthembu came to know, albeit late, when he was fired from Vodacom in 2004. However, the processes initiated by a firm are only one side of the coin: Vodacoms actions in SA where one side of the coin as outlined in Chapter 4. The construction of competitive advantage also depends on how rival MTN in the organizational field responded to and revised competitive conditions; MTNs 39

response to Vodacoms competitive advantage in SA will be examined in greater detail in Chapter 5, as it sought to revise, redefine and shift the competitive arena from South Africa to the African Continent and beyond. 2.4.5 How the actions of Vodacom influenced MTNs competitive Advantage in Nigeria

Shareholders alter competitive conditions and contribute to the construction of competitive advantage through three processes: (1) resource allocations among firms; (2) definitions of success; and (3) development of industry paradigms shared understandings among constituents about how firms in an industry create value. Figure 2.3 depicts these processes and shows how they interrelate the four domains of action. 2.4.5.1 Resource Allocations Rindova and Fombrun (1999) assert that shareholders, engage in interactions with firms to further their own objectives: They allocate the resources that they control by making buying and selling decisions, investment decisions, and employment decisions. Each decision shifts resources to alternative uses and contributes to determining which of their firms enjoy competitive advantage. Assessments of better value depend partly on shareholders own objectives, and partly on the strategic investments and strategic projections that competing firms have made, this was the case with Vodacom and MTN in South Africa and Nigeria respectively. Assessing the value that firms offer is a complex task performed with incomplete information. Cognitive limitations in perception and interpretation prevent shareholders from making accurate assessments (Schwenk, 1984). Given limitations in evaluating firms and industries, shareholders routinely rely on ready made interpretations in the ambient macro-culture of the industry (Abrahamson and Fombrun, 1992, 1994).

Just as the strategic investments of firms originate both in their resource bases and their micro-cultures, so are the resource allocations of constituents informed by the macro-culture of the organizational field. Macro-cultures facilitate constituents sensemaking. They do so by providing shareholders with industry paradigms and by

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supplying them with definitions of success. For example, reputational ratings are an element of a companys macro-culture that help reduce uncertainty about firms likely behaviours or future levels of performance (Weigelt and Camerer, 1988; Rao, 1994; Formbrun, 1996), which was a very important consideration for both MTN and Vodacom in Nigeria. Much as individual schemata encourage automatic information processing and foster schema-consistent behaviour (Fiske and Taylor, 1990; Gioia, 1986), so do reputational schemata encourage shareholders to make resource allocations and to sustain their allocations in reputation-consistent directions (Wartick, 1992), Vodacoms reputation has since been associated with caution in exploring the dark continent, whereas MTNs has built a reputation of being entrepreneurial as well as enterprising in emerging markets.

By individually channeling resources to favoured firms, shareholders create in aggregate the various markets for firms products and services. As shareholders shift their resource allocations, they change market conditions and, through them, the resources a firm has access to. Shareholders choices gradually build the resource and structural conditions of an industry. These choices support some firms and reject others, convert some products and stocks into fads and fashions, and render others obsolete. From the choices of shareholders, a restructured industry, and the relative competitive positions of firms in the industry, emerges; this factor will be examined in chapter 6. 2.4.5.2 Definitions of success Shareholders express their judgments of firms, not only through their resource allocations, but also through direct statements about the relative success of firms in meeting their expectations. Rindova and Fombrun (1999) have also asserted that definitions of success contribute to a firms competitive advantage by affecting the firms overall position in the interpretational domain that surrounds an industry. Vodacoms and MTNs shareholders, in this study, observed, interpreted, and made sense of their firms and their actions; they also exchanged information, organized, and even took collective action to influence their firms (Hill and Jones, 1992). Shareholders compare their direct evaluations of firms against institutionally transmitted information emanating from other shareholders and the media (Hill and

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Jones, 1992; Fombrun and Shanley, 1990), and use this information to categorize firms and judge their ability to deliver value.

Categorizing rivaling firms, like Vodacom and MTN, into strategic groups, rankordering them in reputational rankings and featuring them as exemplars are common ways through which shareholders provide firms with direct definitions of success. Cognitive strategic groups result when observers perceive competing firms, like Vodacom and MTN, to be more or less similar on important strategic dimensions (Porac and Thomas, 1990; Lant and Baum, 1995; Reger and Huff, 1993). Cognitive simplification and elaboration lead shareholders to develop categories to which they assign firms; interaction and exchange of information among shareholders lead them to share categorizations of firms (Reger and Huff, 1993).

Differential perceptions about firms act as mobility barriers that surround strategic groups (Formbrun and Zajac, 1987; Reger and Huff, 1993). Category membership itself is graded: Some firms come to represent the industry more than others and some firms are more stable members of a group (Porac and Thomas, 1990). Over time, the prototypical firm is equated with success and becomes the benchmark against which all others are evaluated. Reputational rankings are another manifestation of shareholders differential perceptions of firms that affect competitive advantage, Rindova and Fombrun (1999) further assert. Whereas competitive categorizations reflect the map of the industry that shareholders have constructed, reputational rankings reflect an ordering, a status hierarchy with implications about the superiority and inferiority of its members. Reputational rankings assess firms performances on different criteria and directly compare firms with one another. Reputational rankings incorporate the demands of resource-holders, which may differ significantly and, as such, may generate contradictory rankings. For instance, some companies top the lists of best places to work; others are ranked most environmentally responsible; and others yet are ranked as most admired companies overall. These lists regularly constructed by institutional intermediaries define multiple success measures in an industry.

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By placing firms at different levels in reputational rankings, shareholders not only create exemplars and role models for competing firms, like Vodacom and MTN to follow, but also collectively define the success criteria that firms seek to include in their micro cultures (Formbrun, 1996). Business school deans report that these competing firms live and die by the highly popular rankings of business schools published by Business Week and U.S. News and World Report (Martins, 1998: 295). Hall (1992) reported that the managers he surveyed considered company reputation and product reputation to be the two most important intangible assets contributing to their firms success. Although research on the effects of reputational rankings on firms cultural practices is limited, social identity theory suggests that the definitions of success used by external constituents influence a firms identity.

Reputational rankings act like institutional mirrors: As competing firms like Vodacom and MTN, observe their reflections in those institutional mirrors, they adjust their micro-cultures and material resources to conform better to the definitions of success set by constituents (Dutton and Dukerich, 1991). These mirrors, however, often reflect the cumulative interpretations of observers rather than the current state of the firm. This position of the firm in the interpretational domain serves as a confirmation of its strategies and did not urge a company-wide overhaul of its micro-culture and resources. 2.4.5.3 Industry paradigms In order to allocate resources among firms in an industry, shareholders of competing firms like Vodacom and MTN, try to understand the products, prospects, and dynamics of the industry. They rely not only on information about firms actions, but also on interpretative frameworks that explain what those actions mean (Weick, 1995). Dosi (1982) suggests that industry members develop technological paradigms that guide the problems they work on and the kinds of solutions they propose to address those problems. In similar ways, Vodacoms and MTNs shareholders, in an organizational field develop shared understandings about such critical assessments as what constitutes efficient allocation of resources in the industry; which products are better; and how to assess risk/return trade-offs in the industry. These shared understandings, along with the preferences of constituents they guide and the

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advantageous positions of firms they confer constitute key elements of industry paradigms.

Shared understandings arise both from the strategic projections of firms and from the interpretations provided by institutional intermediaries, such as buysell recommendations of financial analysts or product evaluations by consumer organizations. Key shareholders, of MTN and Vodacom, as well as institutional intermediaries affect the development of the industry paradigm through their own interpretations and resource allocations. As they interpret industry conditions, investors, bankers, and analysts, for instance, confirm an industry paradigm by authorizing flows of financial capital to perceived winners and denying funds to perceived losers. In similar ways, customers affect the development of the industry paradigm by purchasing the products of winners and ignoring those of losers. Their resource allocations broadcast signals about the relative success of competing firms. 2.5 Competitive advantage as a systematic outcome Having discussed debated the issues above, Rindova and Fombrun (1999) come to the conclusion that competitive advantage develops as firms, such as Vodacom and MTN, and constituents strategically target each other in the material and interpretational domains. In this case study, competitive advantage resulted both from actions initiated by Vodacom and those taken by MTN in response. These actions were multidimensional in that they affected outcomes in all four domains; they are also interconnected in that they form multiple cycles of activities through which the four domains were continuously constructed and reproduced. For these reasons, competitive advantage is a systemic outcome, rather than an outcome of isolated activities (Porter, 1985). Figure 2.5 diagrams the interrelatedness of the six processes of which competitive advantage is a systemic outcome.

Although the competitive interactions were divided into material and interpretational domains for analytical purposes, these levels reciprocally determine each other: Material cues originate in resource exchanges and affect interpretations; interpretations in turn affect choice and execution of material activities (Porac et al., 1989.) For example, constituents definitions of success provide firms with an

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interpretational context for understanding the resource allocations of constituents across firms, as well as with input for adjusting their micro-cultural world-views. In addition, they directly construct the material domain by guiding exchangerelated choices. As Porac et al. (1989: 399400) observed:
material and cognitive aspects of business rivalry are thickly interwoven. Technical transactions along the value chain provide an ongoing stream of cues that must be noticed and interpreted by organizational decision-makers. Transactions are themselves partially determined by the cognitive constructions of organizational decision makers. Beliefs about the identity of competitors, suppliers, and customers focus the limited attentional resources of decision-makers on some transactional partners to the exclusion of others

Although material and interpretational conditions produce each other, the development of competitive advantage is not an automatic process. Competing firms like Vodacom and MTN selectively invested and allocated resources, projected and reflected images. Weick (1995: 81) describes the processes of selective perception and action as enactment and extraction of cues:

Cues are enacted in the sense that each competitor( both MTN and Vodacom) made strategic choices on the basis of its beliefs, and these choices put things out there that constrain the information that the firms got back. What the firm got back (in Nigeria in particular) affected the next round of choices.

In the model presented in Figure 2.5, Vodacom put out there technologies, products, investments, and communications. MTN used the cues provided by Vodacom in their own enactment cycle of resource allocations and communications. They extracted cues

in the sense that others see these enacted changes and extract them as cues of larger trends. Thus, others (MTN) come to use the same cues for their strategic choices, as does the firm (Vodacom) that first enacted those cues and made them available for extraction.

Figure 5 A systematic model of competitive advantage

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(Source Rindova and Fombrun 1999)

In turn, firms read into constituents allocations and definitions of success signals about market trends that guide their subsequent investments and projections. Industry features, such as dominant designs, industry concentration, mobility barriers, isolation mechanisms, reputational orderings, exemplars, winners and losers, emerge and crystallize from these processes. Thus, Vodacom and MTN externalized their strategic choices in the material and interpretational domains through the processes of investments, projections, allocations of resources, and definitions of success. They also objectified and internalized the resulting pattern of interactions by forming strategic plots and industry paradigms through which they adjusted beliefs and behaviours in ways that reflected their objectified reality. Along the way, therefore, Vodacom and MTN, as rival and competing firms, jointly constructed the competitive reality that they came to inhabit 2.6 Conclusion This section of the research has outlined the theoretical models that will be used for analyzing how effective were the two protagonists locked up in a rival competitive struggle to dominate the telecommunications market in South Africa and beyond. In particular, it has demonstrated that competing firms have different strategic offerings that their stakeholders can choose from in order to grow their businesses. The chapter

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also demonstrated that geographical expansion improved the performance of an organisation and that organisational integration improved the organisations strategic response and effectiveness to a competitive challenge. Thus competitive advantage develops as firms and constituents strategically target each other in the material and interpretational domains and gain competitive advantage by embarking on a geographical expansion. Thus in this study MTN competitive advantage resulted both from actions initiated by Vodacom and those taken by MTN in response. These actions are multidimensional in that they affect outcomes in all four domains; they are also interconnected in that they form multiple cycles of activities through which the four domains are continuously constructed and reproduced. For these reasons, competitive advantage is a systemic outcome, rather than an outcome of isolated activities.

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Chapter 3

Research Methodology

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3.1 Introduction This chapter will outline how this multi-disciplinary study required a range of research data in order to gain a holistic perspective on the issues by using qualitative data analysis. This research will then demonstrate how using the case study approach; it sought to examine a number of factors in order to provide a holistic framework of the key drivers and trends in the evolution of rivalry between Vodacom and MTN. 3.1.1 Research Process Defining the problem is the first step in any research project and is also the most important. Problem definition involves stating the research problem and identifying its specific components (Malhotra, 1996:35). The tasks involved in formulating this research problem included discussions with the key decision makers, interviews with industry experts and other knowledgeable individuals, analysis of secondary data, and qualitative research. These tasks helped the researcher understand the background to the problem by analyzing the environmental context of the problem.

Problem formulation then resulted in a set of objectives and research questions. The research objectives consist of the research question, the hypotheses, and the scope of the research. Research questions are refined statements of the specific components of the problem and, essentially, include questions such as What? Why? When? Where? How? While hypotheses are possible answers to the research question, the scope of the research defines the boundaries (Ali, 2003:295). It is only when the research problem or opportunity has been identified clearly that the research may be designed and conducted properly.

3.1.1.1 Elite interviews

To triangulate and add rigour to the research process, key individuals at MTN Nigeria were interviewed by the author in 2003-4 in Nigeria using semi structured interviews as well as key players in the telecoms industry, to incorporate the user experiences from a number of perspectives. The process involved interviewing organizational elites at MTN Nigeria that included, the members of staff that had been involved in the start up of the operations in Nigeria, the Chief Marketing and Strategy Officer, the Sales and Distribution Executive, the Regional Sales Executives in Port Harcourt, 49

Lagos and Abuja, the then CEO in 2003-4 as well as the new CEO who was also MTN Group COO from 2004 and had been the MTN SA MD, as well as officials from the Nigerian Communications Commission. The author also had access to the MTN Innovation Center in Johannesburg and was also privy to confidential company documentation

However Delaney (2007) points out the elite technique also presents the dilemma of access and the researcher could not have access to Vodacom given that at the time he was a contract employee of MTN International. Thus the researcher had no direct access and had to rely on secondary data, subsequent requests to Vodacoms Chief Information Officer for information and interviews not successful and the researcher was referred to the Vodacom website. Delaney (2007) goes on to point out that these problems were mitigated and turned into an advantage leading to better quality interview data. Interviewing MTN elites in this case study added an important dimension to a topic as it allowed a more thorough understanding of the strategic plots, strategic investments and strategic projections as well as motivations, interests and perceptions of those with significant power and influence in the organization particularly at the time that Vodacom was attempting to enter Nigeria which was just about the same time that a robust looking Globacom was also challenging MTN.

Telecoms are often considered to be a key strategic advantage by most businesses. As a result interviewees, particularly from Vodacom, were reluctant to divulge commercially sensitive information. Exploring topics like the Nigerian venture, ideas and engaging in conversation about Vodacoms strategy were more likely to reveal information without threatening the interviewee. Aspects that were delved into with the MTN team included understanding the importance of telecoms to businesses, their strategy in South Africa, Nigeria and beyond, their relationship with the NCC, range of services purchased and quality-of-service issues. In reporting the results of these interviews, the respondents names, will not be disclosed because of confidentiality concerns.

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3.2 Qualitative research methods The fundamental characteristic of qualitative research attempts to view events, actions, norms and values from the perspective of the people who are being studied. This approach also entails a capacity to penetrate and understand the frame of reference within which the research is being undertaken. Qualitative research is assumed to generate concepts that are then able to form the building blocks of theory (Bryman and Burgess, 1994:219). There is still significant debate about the extent of the generalisability of the theory created as well as the degree to which theory is being generated, however. (Glaser and Strauss, 1967:220) Qualitative research is situated within a holistic context, so that the meanings ascribed are set within a context of values, practices, underlying structures and multiple perceptions. Therefore, the methodology involved multiple methods by which information was drawn from various sources using different methods. The research incorporated a range of methodologies, similar to the approach adopted by Krairit (2001). 3.3 Case Study Research Approach 3.3.1 Brief Historical Overview Case study research is a long established methodology. Edwards (1990) stated that in the past, it was considered somewhat unscientific. An inappropriate focus on a quantitative nomothetic methodology modeled on physics pulled the psychology profession away from ecological, naturalistic research approaches and also from intensive study of single cases. However, the criticism that was directed at the approach has become less regular in recent years. The reason for this has partly been due to a greater requirement of all types of research to be practically applicable (Foster, Gomm, & Hammersley, 2000). Researchers began to recognize the importance of the case study approach and single case investigations for the development of a knowledge base that is unobtainable through traditional group designs in research (Edwards). A case study approach allowed this researcher to conduct an in depth comparative analysis between two organizations, Vodacom and MTN, which yielded relevant insight and results while looking at the individual or organization in its entirety.

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3.3.2 Definition of a case study According to Yin (1994), a technical definition began with the scope of a case study as set out in chapter 1 sec 1.3 which stipulated that this researcher would make use of the case study method because they deliberately wanted to cover contextual conditions that would be relevant to the case study. This involved studying an existing phenomenon, of rivalry, within its real life context. An experiment, however, would separate a phenomenon from its environment so the attention was focused on selected variables. However, because phenomena and contexts are not always completely distinguishable from each other, it was necessary to include other technical characteristics within a definition, such as data collection (chaps 4 & 5) and data analysis techniques (chapter 6).

Mitchell (1983) places an emphasis on the development of theory (outlined in chap 2) and defines case study as a detailed examination of an event, in this case study it is the rivalry between Vodacom and MTN, which the researcher believed exhibited the operation of some identified theoretical principle, competitive advantage. Both these definitions encompass different aspects of case studies and the combination of the technical along with the theoretical components is the basis of this particular study. 3.3.3 Data Collection The research approach combined data-gathering activities into qualitative methods which included interviews, policy analysis and company annual reports and records with data analysis which examined industry data like market shares, connectivity, revenues, profitability and strategy in order to draw conclusions about the current levels of competition and the structure of the market. The triangulated data-gathering approach was used and includes primary and secondary sources such as policymakers, investors, service providers and users. This method was utilised to ensure that a holistic picture of the South African market was analyzed. Throughout the datagathering process, the analysis framework outlined in chapter 2 was used to guide the relevant issues and supporting data.

Quantitative data collection consisted of a process of collecting already available secondary data that was published by reliable sources. The use of secondary research

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sources was chosen as the sources below were believed to provide the most accurate data available. It would have been impossible to conduct primary data collection within this study, from Vodacom in particular, given the time and resource constraints, as well as the commercial sensitivity of the information. The key data sources for the quantitative aspect of the study were:

SA technology market research reports from BMI Technologies, Media Africa, SAtoZ, Stats SA, Company Annual Reports, Nedlac, Analyst Reports, Link Center, The Edge; Policy and regulatory information from government gazettes, NCC Icasa, media reports; Technology market research company reports, i.e. International Data Corporation, Pyramid Research (Economist Intelligence Unit), Media Africa, BMI Technologies, etc; International data indicators from the ITU, OECD, World Bank, IMF; Website market indicators from international regulators; and Proprietary research to which the researcher had access.

The data set mainly contains information published by Telkom, Vodafone, Vodacom and MTN, particularly annual reports, press releases, and information from additional resources such as newspapers, and specialised journals which reported on business events. 3.3.4 Data Analysis Data analysis was done in conjunction with the literature review. Key issues arising from the literature review were highlighted, e.g. key indicators of competition, policy and regulatory structures, market structure, technology choices, strategy etc, and used as the benchmark against which to compare the two rivals. The authors for the literature review were chosen because they are generally regarded as leaders in telecoms growth, telecoms rivalry, and telecoms policy and market liberalization as well as on competitive advantage. In some cases, these justified the reasons for departure from international experience in view of the unique South African

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condition. In others, they highlighted problem areas, like policy and regulation and potential future problems, like the growth of the African telecoms market and the increasing interest in the sector from non-African operators.

Data gathered from the interviews and company records and annual reports was used to summarize the perspectives of the various stakeholders, particularly in attempting to characterize and understand the South African market. The data was then analyzed in terms of key competition indicators such cumulative market share, subscriber growth, profitability, geographic coverage, investment, technology used, execution of strategy, network reliability, regulatory and impact on business. In the analysis, the researcher tried to prioritize and rank some of the key issues of concern raised namely (1) shareholding and strategy (2) entrepreneurial and enterprising management (3) micro-culture and (4) organizational structuring for geographical expansion as well as draw out common views and threads emerging from the various phases of analysis.

The analysis not only based on key competition indicators but also conducted a comparative analysis that adhered to the following principles: 1. The analysis made use of all of the relevant evidence; that was done in chapter 6, a comparative analysis of Chapters 4 ( the factors that gave Vodacom Competitive advantage in South Africa) and 5 (The factors that gave MTN competitive advantage in Nigeria)

2. The analysis considered all of the major rival interpretations, and explored each of them in turn (The analysis drew on the relevant factors in both chapters 4 & 5)

3. The comparative analysis addressed the most significant aspect of the study as detailed below: (1) Shareholding and strategy (2) Management (3) Micro-culture (4) Organising for geographical expansion

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The comparative analysis drew on the researchers prior expert knowledge in the area of the case study, but in an unbiased and objective manner. 3.4. Writing the Study Report Writing this study report was a daunting task, because at this point the researcher needed to discriminate between what was to be included and the wealth of evidence that would not appear in the report, but stay in the case study database. Effective analysis of the results assisted in providing a structure. The task of writing this dissertation appeared less overwhelming as the researcher observed the advice to all researchers which was to write up as the research proceeded. Drafts of literature review and methodology sections were written in parallel with data collection. A key factor in determining the coverage and presentation of the case study report was the intended audience. This particular study was undertaken as part of the fulfillment of the conditions for the Master of Business Administration Degree with the University of Wales, Cardiff, UK. Thus for this dissertation, mastery of methodology, and an understanding of the way that the research made a contribution to existing knowledge were important considerations, in particular how effective were these two protagonists in executing a geographical expansion and what lessons the experiences of Vodacom and MTN have provided for corporate strategy and decision making 3.5 Conclusion:

The aims of this chapter were to give a brief outline of the theoretical bias of the research process as well as to discuss the practical details of how the research was conducted. The practical process and some of the problems encountered were highlighted, particularly the issue of the element of bias as a result of the nonresponses from, Vodacom. As outlined secondary sources were used to corroborate the data collected, namely the company annual reports, from Vodafone, Telkom as well as MTN, NCC, Pyramid Research, Financial Mail the Link Centre at the University of Wits in Johannesburg, and thus the element of bias was minimized. The next two chapters will deal with the results of the survey, after analyzing as well as interpreting them. The practical development of the case study

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Chapter 4

The Evolution of Rivalry

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4. Introduction This chapter will trace the evolution of rivalry between Vodacom and MTN. It will review the internal and external strategic choices influenced by their respective shareholders who made decisions about geographical expansion. It will also trace how Vodacom created and to sustained its competitive advantage in South Africa. The chapter will also examine how MTN organized itself to challenge Vodacoms competitive by choosing a different growth strategy that enabled it to acquire skills as an emerging market player. 4.1 Background to the rivalry Despite its political isolation, as far back as the late 1980s, Gillwald and Esselaar (2004) believe that the technological and economic drivers of digitalization and liberalization compelled the South African state to acknowledge that the monopoly telecom utility, Telkom, was not meeting the needs of a modern economy. The late 1980s, South African Postal and Telecommunication Services (SAPTS) had been beset by a number of problems common to many Public Telecommunications Providers (PTP). The most notable being its enormous debt, which made expansion impossible. A confluence of international and domestic pressures, including the trend towards asymmetrical deregulation abroad and the pressure of the anti-apartheid struggle at home resulted in the Departments commercialization in 1991. It would have required significant levels of investment in the network that the state could no longer provide to keep it afloat. Besides servicing less than 10% of the population, despite waiting lists going back years, uneven and inefficient internal investments even after corporatisation in 1991 had produced a gold-plated public operator. South Africa began to pry open its market in the early 1990s, in line with global trends at the time; towards the introduction of facilities-based competition aimed at shifting the financial demands on the state for the provision of telecommunications on to the private sector indebted network.

However, beyond structural changes affecting financial operations and corporate governance, the locus of power and the mechanics of the monopoly remained completely unchanged. The monopoly provider, Telkom SA Ltd fell to the control of

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the Postmaster- General and the Minister who continued to determine tariffs and fees. Telkom retained the power to prohibit others from offering any service without its explicit authorization preserving a direct link through the Minister, between government and the licensee. As The Sunday Times editorial aptly characterized it at the time, "Whatever similarity exists between [Telkoms] stranglehold on telephonic communications and private enterprise is in the imagination only of the government which foisted it on the public".

Cohen (2002) believed that the second phase of liberalization and the opening up of its fixed line market to competition took place in 1994. The democratically elected government was facing the challenge of economic and social development created by the ravages of apartheid, and thus required detailed government policy in every sector. Telecommunications was no exception. Cohen further believed that, since the promulgation of the 1996 Telecommunications Act, developmental objectives, particularly universal service, the advancement of small and medium enterprises (SMMEs) and the empowerment of historically disadvantaged individuals rivaled more pedestrian sectoral reform goals often prioritized in other countries, such as the promotion of innovation and competition. 4.1.2 Telecom reform 1992-2002 In 1994, the ANC government inherited a Telco that had largely failed to resolve its legacy dilemmas, inefficiency and debts. Little had changed, except that the delivery of telephone services to redress past inequality was now a stated government priority linked to the broader developmental goals that had buttressed the ANCs election platform. According to Cohen (2002) thus begun an historic consultation process, somewhat distinctive in its inclusiveness where all sectoral stakeholders participated in the development of a White Paper on telecoms policy which was ultimately to become the blueprint for legislation and a future beacon for assessing how the consultative policy product had been finally realized and, where appropriate, deviated from. The White Paper articulated a commitment to the ideal that telecommunications was not simply an aspect of development, but rather a precondition for its success. Thus, under the oversight of an independent regulator, competition would be

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gradually phased in while allowing a limited exclusivity for Telkom to concentrate on the roll-out of service to the previously disadvantaged. 4.1.3 The Telecommunications Act 1996 The Telecommunications Act of 1996 laid out the process for developing policies and regulations for the sector and envisioned detailed processes of consultation for effecting major and minor changes in the policy and regulatory landscape. Horwitz and Currie (2007) believe that the 1996 Telecommunications Act vested in the Minister several of the powers the White Paper had reserved for the Regulator and eliminated the White Papers painstakingly achieved liberalization timetable in favor of ministerial discretion regarding when and if various segments of the sector would be opened to competition (Republic of South Africa 1996b). The changes not only delayed the liberalization of the sector but created jurisdictional conflicts that were easily exploited by an opportunistic incumbent network operator, resulting in the effective doubling of the exclusivity period. Like most incumbent operators, Telkom, managed by its savvy and almost congenitally litigious SBC equity partner, was bent on maintaining its sectoral dominance and thwarting potential competitors to its service offerings and profitability. In assessing the South African Telecommunications reform, Melody (1999) noted that countries with monopoly telcos must make a commitment to empowering regulators to implement policies. Using SA as an example, he notes that ICASA the Independent Communications Authority of South Africa is not truly independent, nor does it have any real authority to impose its will. The over-riding challenge for Africa, he says, is to create regulation that leads, rather than lags, technological and market developments, providing a catalyst for investment and growth in eeconomies. In this regard he strongly recommends the separation of telecoms facilities and services, comparing this with what happened in the computer industry. Since software was unbundled from hardware, the software market has grown very much faster and now dwarfs the hardware market. Thus efforts to induce investment through facilities-based competition were all-but scuttled by the lack of administrative capacity, convoluted licensing process and accusations of political interference.

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4.2 Policy and Regulatory Institutional Framework The key stakeholders in the policy and regulatory debate included, as outlined in the Telecommunications Act of 1996: Cabinet and the Minister for Communications. Parliamentary Select Committee on Communications. Department of Communications. The Independent Communications Authority of South Africa (ICASA), the regulatory body established in 2000 to replace the South African Telecommunications Regulatory Authority (SATRA) and the Independent Broadcasting Authority (IBA) established by means of the ICASA Act dated May 2000.
Figure 6 South Africa's Telecommunications Structure

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Marcelle (2001) noted that the government had both a majority shareholding role in Telkom SA and by default a shareholding in Vodacom and as well as a major role in the development of the policy and regulatory framework. The Minister of Public Enterprises had the responsibility for the restructuring state assets, while the Minister of Communications was tasked with the responsibility for development of telecommunications policy. Marcelle (2001) also noted that in addition to the above mentioned arms of the legislative and executive arms of government, there were also a number of other key decision making and lobbying bodies that influenced the development of policy objectives for the sector, including: Representatives of organised labour (part of the Consultative Forum). South African Value Added Network Services (VANS) Association. The African Telecommunications Forum recently renamed the South African Telecommunications Forum. The above section looked at the early period of reform in the SA telecoms industry, the next section will deal with some of the consequences of the reforms that were implemented by the newly elected ANC government. 4.2.1 Managed Liberalisation The new governments chosen policy was one of managed liberalisation, which followed a three stage process: Partial Privatisation of Telkom in 1997 through the sale of 30% state to Thintana Communications consisting of the US conglomerate South Western Bell Company and Telekom Malaysia The maximisation of state assets where the states preoccupation shifted from the initial private offering (IPO) to creating conditions that would maximise Telkoms share price. After the listing of Telkom on both the Johannesburg and New York Stork Exchanges in 2003, Thintana Communications then sold its 30% stake in 2004.

However Horwitz and Currie (2007) believe that SBC strategy in this whole saga was to maximise the value of Thintana Communications investment during Telkoms 5 year exclusivity period and then exit quickly. After all, SBC had helped draft the

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Telecommunications Act of 1996 and made sure that it comported to the companys requirements. SBC had not only been the managing partner at MTN, but had also participated in a similar process in the US, where the US Telecommunications Act had also been passed in 1996.Thintana signed a Shareholders Agreement with the South African Government in May 1997, which bound the Government to terms rather favorable to the company. That document has never been released publicly its contents remain unknown even to the Regulator. The Shareholders Agreement was never made public because, according to Jim Myers (an executive at SBC), some of its provisions bound the Government so stringently and gave Thintana Communications so much control, that had they become public knowledge it would have raised huge outcry. Clauses in the Shareholders Agreement stipulated that once the Telecommunications Act was in place neither Telkom nor Thintana Communications would be compelled to follow any legislation that violated the Shareholders Agreement. This created strong incentive for Government to prevent legislation that might violate and make public the Shareholders Agreement. 4.2.2 Policy not conducive to growth and competition The South African treasury may have benefited in the short run from the initial privatization and the March 2003 sale of Government-held (share price sheltered) Telkom stock. The latter sale represented South Africas biggest attempt to spread share ownership to the black majority through what was known as the Khulisa Share Scheme. According to Horwitz and Currie (2007) in the view of most analysts, the exchange of liberalization and competition for privatization was damaging to the larger economy. World Wide Worx MD Arthur Goldstuck recently unveiled its Cisco Internet Access in South Africa 2008 report, showing a significant slowdown in Internet users in South Africa during the 2001 to 2006 period when Telkoms monopoly was at its strongest and most damaging. This, according to Goldstuck, was a clear indication that Governments "managed liberalisation was a deeply flawed and damaging policy, becoming a euphemism for maintaining the status quo". Goldstuck argued, however, that communications minister Ivy Matsepe-Casaburri should not be blamed as she was merely pursuing the officially cabinet-backed policy directives.

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A recent column by Vodacoms ex-CEO Alan Knott-Craig, in the Financial Mail, went one step further, saying that the telecommunications industry has been fortunate to benefit from the light but firm touch of Communications Minister Ivy Matsepe-Casaburri and her team." Knott-Craig also said that in SA, a predictable and stable legislative environment had made the South African industry very attractive to foreign investors. Proof of that was that one month after the biggest financial crisis in decades, Vodacoms UK shareholder, Vodafone, said that it would invest R22,5 billion in SA to increase its share in Vodacom by 15%. Many consumers, however, argued that Vodacom was one of the biggest benefactors of the governments managed liberalisation policies, making it easy for Knott-Craig to warm up to the communications minister. 4.3. Growth of mobile phone penetration 1992-2001 Unlike its fixed-line telecommunications market, South Africa boasts a vibrant and competitive mobile phone market that grew very quickly (Figure 4.3). Gillwald (2004) believes that the mobile sector flourished largely because the eyes of government and the regulator were focused on public switched telecom services. Considerable investments in network expansion were made particularly by the duopoly mobile operators, Vodacom and MTN, in South Africa and increasingly across the continent .This market experienced rapid growth in the number of mobile users increasing, as Gillwald and Kane (2003) observed, because the disappointing performance generally in the fixed line sector had been compensated for by the unanticipated exponential growth in the mobile sector. In their 2003 report, they quoted the International Telecommunications Union (ITU) as saying that, from a base of just under one million subscribers in 1996, the number of mobile subscribers in South Africa overtook fixed line subscribers in 1999 (Table 4.2) and, according to the figures from Cellular.co.za, stood at 8 million users in 2001, of which 80% were estimated to be active (Table 4.2). Vodacoms subscribers stood at 5, 2 million compared to MTNs 2, 7 million. Mobile phones have proven a far more efficient technology in providing access to communications especially in the lower income as well as previously disadvantaged population of South Africa (Cant & Machado, 2005:7).

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Figure 7Growth of the SA Telecommunications Industry

Through its enabling indirect effects, telecommunications had become the most important sector of the future economy. The sector reflected the application of continuously improving technologies emanating from the telecommunication equipment, computing hardware /software, and consumer electronics industries. Integration of these technologies into the telecommunication network, and in terminal devices connected to the network such as personal computers and mobile phones, had provided the foundation for the continuous development of new electronic information/communication services, including the Internet, referred to as ValueAdded Network Services (VANS), which were being applied throughout the entire economy.

Gillwald (2007) goes on further to assert that the other reason offered for the success of the mobile market, which collectively tripled the number of subscribers on the fixed network, was the relatively low regulatory transaction costs since its inception in 1993. Based on estimations of a couple of hundred thousand subscribers each in their first five years, rather than the millions they reached, the duopoly mobile licenses were sold in 1993 for a mere R100 million (US$ 31 million at 1993 rates).

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Figure 8Mobile Teledensity in SA

For the third mobile license, Cell C paid nothing up-front but R100 million (US$14.7 million) over 12 equal installments beginning in the third year of commercial operations or the equivalent of $2.2 per capita a relatively small licence fee per capita compared to Moroccos second mobile licence, which sold at $39.47 per capita, and more in line with either smaller markets or where regulatory risk is generally perceived to be higher. A per capita price of $2.44 was paid for the MTNs mobile licence in Nigeria, $0.01 per capita by MTN in Uganda licence and Vodacoms $2.74 per capita by Vodacom in Tanzania .
Table 1Total number of Mobile subscribers

The mobile cellular market grew beyond all expectations, with over 30% of the total voice telephony market share by 2001, and more than three times the number of subscribers than the fixed network. Pre-paid services have been a key driver.

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According to market research firm BMI-TechKnowledge, the pre-paid market in South Africa made up 75% of cellular subscribers, and more than 90% of new connections were pre-paid. Indeed, new entrant Cell C estimated that 98% of its subscribers were pre-paid users. These figures were in line with the experience throughout Africa where BMI-T estimated that between 90% and 95% of cellular customers were pre-paid. However, while contract customers only made up 25% of subscribers in South Africa, they generated around 70% of revenues due to their much higher ARPU. Vodacoms financials were fairly typical for South Africa in this respect, with post-paid ARPU standing at R547 per month, over five times the prepaid ARPU of R93.
Table 2 Operators ARUP

That disparity had required mobile operators in South Africa to develop a very particular business model, which they have since exported to the rest of Africa through MTNs and Vodacoms international operations. The model was quite different from the Northern Hemisphere model where such marginal customers were not generally brought on to the network, and certainly not as quickly after launch or in such large numbers as have been seen in Africa. Understanding that model, in terms of effective regulation and ensuring continued investment in network expansion, was critical to the sustainability and growth of mobile operations in South Africa and Africa. More generally, where there had been pressure on operators both to reduce retail and wholesale rates. Operators argued that the current relatively low retail rates could only be sustained by the relatively high termination charges on the mobile networks. The success of the mobile market in South Africa had provided the two dominant mobile companies with a launch pad to the rest of the continent. South

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African telecommunications investment across the continent must be the most significant investment by any single country in Africa.
Table 3 Cumulative Capex in SA and Africa

4.4 VODACOM GROUP (PTY) LTD The Chairman of Telkom SA Ltd in the combined 1991-1993 Annual Report announced that the company had been allowed to invest 50 % in one of the two mobile licenses that had been issues in 1993. He went on to add that they had entered into a joint venture with Vodafone PLC, of the UK one of the worlds leading providers of mobile telephone services and the Rembrandt Group to form Vodacom Group (Pty) Ltd to operate in accordance with the license when allocated. He went on to say that they, as Telkom, believed that the new venture would add a new dimension to the telephone services in South Africa and that it would overcome some of the problems Telkom had experienced in providing telephone services in areas with little or no infrastructure. Vodafones 1993 Annual report announced that, in June 2003 a joint venture company, Vodacom, in which Vodafone had a 35% interest, had been awarded one of two licenses to operate a GSM mobile telephone service in South Africa. The report went on to say that commercial service commenced in April 1994 with strong initial uptake. 4.4.1 Vodacom Groups ownership structure Vodacom Groups shareholders include (See Figure 4.): Telkom SA Ltd (50%)

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 Vodafone Group Plc (35%) (Rembrandt) Ventfin Ltd (15%)

Vodacom thus had two strong shareholders, the one a traditional mobile operator, in Vodafone and the other a traditional fixed line operator, and incumbent, Telkom. In terms of shareholding, in December 1995, Descarte Investments, a consortium comprising of the National Union of Mineworkers and the South African Clothing and Textile Workers Union, acquired an option to purchase 5% of equity in Vodacom from Vodafone and Rembrandt. This option was exercised on October 1996. Vodafone subsequently acquired the 15% stake in Vodacom for R16-billion, buying out Ventfin, increasing its shareholding from 35% to 50%, thus giving it joint control of the operator. Vodafone has also bought 15% of Telkoms 50% shareholding, to now hold 65% of the Vodacom Group. That valued the whole of Vodacom at R107 billion (Mochiko in Business Report, 2005), a price that worked out to roughly US$924 per subscriber. 4.4.1.2 Vodacoms First Mover Advantage As reported in the Telkom 1995 Annual report, the launch of cellular telephony was among the fastest anywhere in the word. The report also noted that in no other country, then, had a cellular system begun operation with 10 000 subscribers on the first day. At the time of writing of the 1995 report the subscriber base had risen to 40 000. By then, Vodacom had set up 280 base stations for the transmission of the cellular telephone signals in the Gauteng Province, Durban, Cape Town, Empangeni, Richards Bay, East London, Hermanus, Port Elizabeth and Bloemfontein. The report went on to add that Telkom was proud of the Joint Venture company: Vodacoms extensive coverage nationally and internationally, what its network offered and the fact that Vodacom users could use their phones in 19 overseas countries. By August 1994, four months after launch, Vodacom had covered every metropolitan area plus more than 30 towns in South Africa and extended its coverage to include some 3000 km of national roads

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Figure 9 Vodacoms Organisational Structure

Voice Mail was also introduced in South Africa, in March 1995 and the local Voice Mail system was already the biggest in the world handling about 60 000 calls a day. Vodacom also introduced the fax and data services on 1st June 1994, making it the first GSM network in the world to offer these services commercially. Telkom were very proud of the achievements of the joint venture company in the cellular industry.

Thus Vodacom grew fast in terms of revenues, profits, and subscribers. That was largely attributed to the first-mover advantage it had when it commenced on April 69

1994 (Cant & Machado, 2005:4). Lieberman and Montgomery (1987) define firstmover advantages in terms of the ability of a pioneering firms ability to earn economic profits (that is profits in excess of the cost of capital). They go further to assert that first-mover advantages arose endogenously within a multistage process as illustrated in Fig 4.5. In the first stage, some asymmetry was generated, enabling a particular firm to get a head start over rivals. They further contended that, that firstmover opportunity may occur because the firm possesses some unique resources, or foresight or simply because of luck. They conclude by affirming that once that was generated there were a variety of mechanisms that may enable a firm, like Vodacom, to exploit its position; these mechanisms enhance the magnitude or durability (or both) of first-mover profits.

First-mover advantages arise from three primary sources: (1) technological leadership, (2) preemption of asserts and (3) buyer switching costs. Vodacoms access to technology and capital from its parent company Vodafone and as well as from its main 50% shareholder, Telkom, were what gave Vodacom key advantages when it captured the market and established its competitive advantage. In order to deal with technological development and increased competition incumbent Telkom had organized itself into various self contained business units. The new technology businesses were found in mobile telecommunications services, IP/Data solutions and Internet Portals. Mobile telecommunications services were organized by the business unit Vodacom. This enabled the rapid rollout of its network, a number of innovative new products, services and technologies were introduced like Prepaid Vodago in 1996, the Community Services Phones as well as the 4U youth package in 2001. These are some of the factors that enabled Vodacom to gain first mover advantages in the South African mobile market. Vodacom, Telkoms strategic investment started to create value for shareholders by providing them with options that satisfy their interests. Shareholders exchange resources with firms whose options they perceive to be of superior value. A given firm regularly makes investments to build competitive advantage, whether by developing new products, augmenting its distribution channels, or enhancing its production capability.

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Figure 10 First mover advantages

Source: Lieberman and Montgomery (1987)

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The fundamental purpose of creating Vodacom was to create and exploit opportunities for positive economic rents in South Africa primarily (Rumelt, Schendel, and Teece, 1991). Through investments firms, like Telkom and Vodafone secure more favorable configurations of industry factors (Porter, 1980) and protect those favorable positions from rivals, like MTN (Caves and Porter, 1977; Bogner, Mahoney, and Thomas, 1994). What drove strategic investments, in this case, were the resources available to the firm, Vodacom, and the productive uses its top managers envisioned for them (Penrose, 1959). 4.4.1.3 Vodacom Creating Value for Shareholders Strategic investments originate simultaneously in a firms resource base and in its culture. Traditional approaches to competitive advantage emphasize how resources are used to gain positions better than those of competitors (Porter, 1980). Vodacom built its competitive advantage when it started to create value for specific resourceholders, Telkom and Vodafone, in South Africa by realizing a positive cash-flow in 1998. Kim and Mauborgne (1997), for example, found that high growth companies did not focus on competitors but on customer needsan approach they termed the logic of value innovation. By not focusing on competitors, value-innovators better distinguish the factors that deliver value from the factors the industry competes on. They concentrate resources on investments that have the highest impact on customer evaluations. They do so by eliminating product features that the industry takes for granted or adding features that the industry has ignored. Similarly, a focus on suppliers value may require strategic investments in developing cooperative relationships, in contrast to a competitor focus that may require bidding down suppliers prices to outperform rivals on costs of inputs. Kim and Mauborgne (1997: 106) observed that ironically, value innovators do not set out to build advantages over the competition, but they end up achieving the greatest advantages. Strategic investments create value for constituents both by satisfying needs and by creating needs, which Vodacom did through the Community Services Program as well as by introducing the Prepaid model in early 1996, as well as other products mentioned above like fax and voice mail. By making investment choices about customer groups, product functions, and the resources and technologies necessary to

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serve them, Vodacom was able to satisfy its shareholders, as well as define its business and its competitors (Abell, 1980). Thus, Vodacoms targeted investments to particular resource-holders also affected the competitive conditions of its rivals, who led by M-net and with SBC had invested in what later became MTN. MTN, in turn, made strategic investments to protect its positions and relationships with its resourceholders, through innovations, acquisitions as well as other strategic actions, as will be outlined later in this chapter and in chapter 5 4.4.2 Vodacoms Strategic Plot The process that accounts for the consistency between a firms material resources and its micro culture, as well as between its strategic investments and projections, is the formation of a strategic plot. Vodacom, as discussed above, was the dominant mobile leader in the mobile communications industry and positioned itself as the biggest and the best (Finnie, Lewis, Lonergan, Mendler & Northfield, 2003:145). Vodacom used traditional incumbent tactics, exploiting its advantage in terms of distribution channels to attract mass-market prepaid customers, and using its established relationship with business customers to attract high-end postpaid users. Vodacom had an estimated 70 percent of business postpaid customers, compared to 53 percent of the total market. Thus Vodacoms strategic plot reflects some continuity in its activities. It contributed to competitive advantage by providing a long-term context, within which shareholders attributed meaning to specific investments and projections. Vodacoms mission and objective in the short to medium term was to retain market share and attract new customers through attractive products. Loyalty and retention programmes played an integral role in achieving this objective. Vodacom also sought to increase its contract customer base by migrating appropriate high-end prepaid customers to contracts. Vodacoms strategic plot reflected the firms intended strategyits business definition (Abell, 1980) and generic type (Porter, 1980; Miles and Snow, 1978), as well as emergent strategyresulting from the co-evolution of material resources and organizational culture. On one hand, the development of strategic plots depends on managers understandings of the resources the firm controls and the potential combinations of these resources in productive services (Penrose, 1959). A belief

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system, such as a firms dominant logic (Prahalad and Bettis, 1986), guided a firms strategic choices in Vodacoms case caution, and through them, the resources it sought to acquire and combine. On the other hand, the dominant logic of a firm grows out of managerial experience with existing resources and reflects them (Mahoney and Pandian, 1992). Micro-cultural elements develop to support current uses of resources. Leonard-Barton (1992) found that high-tech organizations are culturally biased toward their engineering staff and often give them privilege in decision-making. Both a firms micro-culture and its resource commitments determine the strategic plot from which its investments and projections originate. Consistency among the three processes initiated by a firm enhances its competitive advantage; inconsistencies can cause one of the domains (either resources or culture) to lag behind and misfire. Strategic projections not supported by investments can lead to loss of credibility; investments not supported by strategic projections may fall short of realizing their value-creating potential; and if both processes are not supported by the strategic plot of the firm, they will lack the continuity to feed into a virtuous cycle that constructs competitive advantage. However, the processes initiated by Vodacom in South Africa, were only one side of the coin: The construction of competitive advantage also depended on how MTN in the organizational field responded to, revised and redefined competitive conditions on the continent. 4.4.3 Vodacoms market share Vodacom retained its leadership in the highly competitive South African market from inception in 1994 right through to 2001 but the strong competition in the market and the sheer volume of gross connections inevitably resulted in a margin squeeze (Vodacom, 2004). However, despite this margin squeeze, Vodacom recorded a strong growth. As discussed above pioneering opportunities arise endogenously through the process illustrated in Fig 4.5. Vodacom gained first-mover advantages through some combinations of luck and proficiency. Although various types of proficiency may be involved, in Vodacoms case this included technological foresight in Telkoms partnering with the worlds largest mobile company Vodafone, perceptive market research (the majority of the population had no access to credit), as well as skillful product and process development (as in the early introduction of the prepaid model).

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By March the end of 1994, according to the Vodafone 1994 Annual Report Vodacom had over 220000 subscribers accounting for 65% of the South African market. At the end of March 1996 Vodacom had 355000 subscribers which was an increase of some 47% over the previous year
Table 4 Operators Market Share

At the end of 1996, as outlined in the Telkom 1997 Annual report, Vodacom had approximately 60% market share and 553320 subscribers including 9700 community service phones. According to Vodafones 1996 annual report, Vodacom had 1.3 % penetration of South Africas 42 million population. Vodacoms ongoing expansition in that year resulted in 79% coverage of the population on the 31st March 1997. It also had an excellent year, with the subscriber base increasing by 65%, total revenue increasing by 85% to R2.5 billion and attributable profit growing from R64 million to R259 million. Capital expenditure for 1996/97 was R901 million bringing the total investment on the network infrastructure then, to R2.6 billion and total investment by Vodacom since inception to R3.2 billion.

Vodacom continued to enjoy spectacular growth in 1997. According to the Vodafone Annual Report, it had 979000 customers, presenting an increase of 77% in the year and a market share of 55%. The strong growth in the joint ventures customer base

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was largely due to the success of the Vodago prepaid product which had a customer base of 262000, which was 353% more than the previous year in March, 1996 emphasizing the importance of prepaid product in South Africa. In recognition of its achievement in being the first GSM network in the world to launch a prepaid product on an intelligent platform, Vodacom received the 1998 GSM MoU World Award for Marketing Success. Revenue rose by 76% from R2.5 billion to R4.4 billion and attributable profits increased R460 million, representing growth in excess of 78%. Capital expenditure for the year amounted to R1 035 billion, bringing the cumulative investment in Vodacoms infrastructure then to, R 3.6 billion. Network expansion was ongoing and expenditure for the year 1998 exceeded R3 billion. The report added that Vodacom was profitable and was cash flow positive during 1998. Vodafone Groups twin commitments, the report added, to the community and the environment had no better expression than in the continued provision of community services to the less privileged and in the development of ecologically friendly base stations.

In the 1998/99 period Vodacom had another strong trading year and continued leading the market. The prepaid service continued to be popular and customers opting for this type of product which accounted for 55% of the 2 000 000 customer base, which had grown by over 104% from the last financial year. Vodacoms market penetration stood at 8.2% and the penetration added in 1998/89 was 3.6%. By 2000, Vodacom had some 3.1 million customers and contributed R2.1 billion to group revenue which was 39.5% higher than in 1998/99, Vodacoms contribution to operating profit rose by 51.5%. By 2001, Vodacom had a market share of 59% of the mobile market in South Africa, 79% of whom were prepaid and subscriber growth had grown by 69% to 5.2 million subscribers. The South African mobile market then, was approximately 20% penetrated. Vodacom had then, over 4693 radio sites across South Africa. It reported a turnover of R13.3 billion, which was an increase of 37% on 1999/2000, EBITDA was up 24% to R4.2 million. Vodacom also reported that R2.3 billion was invested in the network infrastructure against R1.6 billion the previous year, total capex grew by 60% year on year to R3.2 billion and cumulative total capital expenditure totaled then, R11.8 billion since 1994

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Figure 11 Operators Market Share 1999-2003

Source: Sunday Times July 4 2003

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4.4.4 Revenue Growth Driven by Subscriber Growth The wireless segment delivered strong revenue growth of 22% to reach R8,2 billion (before intercompany eliminations) for the year ended 31 March 2002. Growth in the wireless segment resulted largely from the 22% growth in Vodacoms revenues to R16, 2 billion (2001: R13, 3 billion) driven by the 32% increase in the total mobile customer base to 6 862 976 (2001: 5 212 242). Vodacoms launch of the 4U package in October 2001 drove strong prepaid customer growth by exceeding 1,3 million subscribers within the first 6 months of launch. In March 2002, 4% of the contract customer base and 16% of the prepaid customer base was inactive (not having made or received a call for 3 months).

The change in the mobile subscriber mix, with prepaid subscribers now representing 83% (2001: 79%) of the total South African subscriber base, has resulted in a 13% dilution of mobile ARPUs (monthly average revenue per user) for South African subscribers to R182 (2001: R208) at year-end. However, contract ARPUs increased by11% to R547 (2001: R492) and prepaid ARPUs decreased by 5% to R93 (2001: R98).
Table 5 Revenue, Subscriber and EBITDA Growth

Vodacom focused on its contract customer relationships by revising its upgrade policy and ensuring effective rollout of this through the distribution channel partners. That resulted in contract churn reducing from 19% to 15%. Vodacom maintained its leadership position, with an estimated market share of 60% despite the introduction of the third mobile operator; Cell C. Vodacom was well positioned to expand its data revenue stream once GPRS services were launched in the new financial year. Initial 78

data successes were in the meanwhile, evident in the continued growth in SMS text messages. Mobile customers sent 941 million SMS text messages in 2002, a 93% increase from the previous year.
Table 6 Mobile data revenues

The wireless segment saw a 50% increase in operating profits to R2, 0 billion (2001: R1, 3 billion), before intercompany eliminations. The 41% growth in operating profit of R3, 7 billion (2001: R2, 6 billion) reported by Vodacom differed from the consolidated wireless segment operating profit growth of 50% largely due to the inclusion of foreign exchange hedging income arising on the adoption of AC133 of R315 million (2001: R2 million) in operating expenditure on consolidation as opposed to the inclusion in net finance costs in Vodacoms financials.
Table 7 Vodacoms revenue and EBITDA

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4.4.5 Vodacoms strategic investments By far the largest investment that Vodacom has made has been in on its network in South Africa, which has topped R15.9 billion of the R18.3 billion that it has spent on networks (see table 4.3). This was a reflection of Vodacoms strategic plot to have unrivalled dominance in its home market. Its shareholding agreement with Vodafone had prevented it from expanding into the Northern half of Africa as aggressively as MTN had also because its other shareholder, Vodafone also had a presence in Africa. But Vodacom generated massive amounts of free cash flow that it has to use to generate growth in some way. With the avenue into Africa partially closed, it has had to adopt a strategy of continued high growth in its home market, South Africa. To some extent, this was informed by Vodafones own strategy to enhance its position in present markets, experiment with and create new products while adding value to existing products, and reduce competition by raising entry barriers and altering the technological base of competition (Strategic Direction, 2004).

Vodacom has been at the forefront of technological innovation in the South African market. It was the first operator in the Vodafone group to introduce HSDPA, which allowed for download speeds of around 1.8 mbit/s comparable to what Telkom was offering on ADSL. Vodacoms strategy is based on Vodafones intention to ... extend our reach into the home and the office to deliver richer business applications and integrated fixed and mobile services, such as higher speed Internet access. We will use technologies such as HSDPA, DSL and WiFi to do this (Vodafone 2006b: 10). Vodacoms other strategic investments in Africa where it has collectively spent R2.4 billion (see table 4.3), are in Lesotho, where it was awarded a license in 1995; in Tanzania where it was awarded a license in1999, the Democratic Republic of Congo, where it was awarded the license in 2001, as well as in Mozambique 2003. According to ABI Research in 2004 Vodacom acquired 51% of Smart Call (a prepaid service provider).

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Vodacoms strategic projections helped it to recognized that the future of South Africa is, to a great extent, intertwined with that of the African continent as a whole. In this respect, Vodacom's construction of mobile networks throughout Africa is seen as helping to realise the ideal of an African Renaissance (Vodacom, 2005). Thus Vodacom made investments in Lesotho, Tanzania, the DRC and Mozambique..

4.5.1 Home market strategy Vodacom was the dominant mobile leader in the South African mobile communications industry in the period 1993 to 2001 and had positioned itself as the biggest and the best (Finnie, Lewis, Lonergan, Mendler & Northfield, 2003:145). Vodacom used traditional incumbent tactics, exploiting its advantage in terms of distribution channels to attract mass-market prepaid customers, and using its established relationship with business customers to attract high-end postpaid users. At the end of 2001, Vodacom had an estimated 70 percent of business postpaid customers as well as 61 percent of the total market. The result is that Vodacom has a higher postpaid average return per unit (ARPU) than MTN, but a lower prepaid ARPU than MTN.

4.5.2 Geographical expansion curtailed Chan-Olmsted and Jamison (2001) have asserted the drivers of growth in the mobile telecommunications are both geography and products. By the year 2001, even though Vodacom had grown and become a dominant force not only in South Africa and on the African continent, its restrictive shareholding agreement curtailed the geographical expansion. However, in order to achieve continued growth, Vodacom need to continue to focus on expansion on the African continent, mainly in the surrounding countries and was consistently evaluating new investment opportunities (Vodacom Group Annual results, 2005:8). Thus Vodacoms diversification strategy was to target product growth in the local market and it then indentified four market segments, namely

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 Corporate Market: services to corporations and enterprises Developed Market: services to customers in the higher income groups Developing Market: services to customers in under-serviced areas and lower income groups, who increasingly participate in the economy; and Youth Market: services specifically designed for the needs of the youth. (Telkom Highlights, 2005):

Vodacom was thus prospecting and developing new markets for its products and services .

Figure 12 Vodacoms market strategy

Source: Kotler 2003

Vodacoms mission and objective as outlined above in the short to medium term were to retain market share and attract new customers through attractive products. Loyalty and retention programmes played an integral role in achieving this objective. Vodacom also sought to increase its contract customer base by migrating appropriate high-end prepaid customers to contracts. According to Cant and Machado (2005:5) Vodacom has redirected its strategy by pursuing technological advances in its quest to maintain growth rates of the past. Vodacom has worked closely with Telkom, its main

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shareholder, in the areas of wireless Internet and also testing the next generation of mobile technology known as 3G.

4.6 MOBILE TELEPHONE NETWORKS (MTN) (PTY) LTD . The MTN Group Limited (formerly M-Cell Limited) was launched in 1994 and has been a leading provider of cellular and communication services in Africa and listed on the JSE Securities Exchange under the share code: "MTN". The group encompasses MTN South Africa, MTN International and its Strategic Investments Division, which hosts Orbicom, Airborn and MTN Network Solutions. The MTN Group had almost seven million subscribers across the continent in 2006, where it provided cellular, satellite and Internet access to 14 African countries. The groups other strategic investments included six GSM cellular networks in Africa, including South Africa, Swaziland, Rwanda, Uganda, Cameroon and Nigeria. MTN out-grew the original vision for business and became one of South Africas most valuable companies, without having fully explored its potential. The MTN Group has been characterized by the innovative use of technology and first world, first-class marketing concepts, highly successful company offering, unique opportunities and challenges to both employees and investors. 4.6.1 MTNs ownership structure
.

MTN was started by pay TV M-Net with Cable and Wireless, Transnet and Fabcos. M-Cell then held 72 per cent interest in MTN and negotiations continue for the remaining 28 per cent interest in exchange for the ordinary M-Cell shares. MTN (MCell) was a listed holding company controlling MTN South Africa, one of South Africas two mobile operators, along with operations in Uganda, Rwanda, Swaziland, Cameroon and, then, Nigeria in 2001. Marcelle (2001) noted that the ownership structure of MTN had changed many times as it had set out to own 100% of the mobile operation, MTN Holdings. The structure shown in Fig.4.9 was as at 2001. Marcelle (2001) went on to assert that MTNs telecommunications investments included the 100% ownership of MTN, which took effect from June 16, 2000 after the acquisition of the 23% interest in MTN Holdings held by the state-owned transport company, Transnet, for R12 billion. This acquisition was settled through the issue of

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366 million MTN shares at R33 per share. MTN also had 100% ownership of Orbicom, a specialist satellite and signal distribution company with expertise in multimedia technologies. The Newshelf Trust originally acquired the shares in MTN from Transnet between December 2002 and March 2003 at an average price of R13,90/share..
Figure 13: MTN Group Structure

The controlling shareholders of MTN then, Marcelle (2001) continued, were the two listed companies in the Johnnic Group, Johnnic Holdings Limited and Johnnic Communications Limited, which held 50.2% of the company. Transnet, black empowerment investment companies and small minority shareholders held the remaining shares. As shown in Figure 4.9, MTN was 100 percent owned by holding

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company MTN Group in 2001. MTN has followed Vodacom in attracting foreign investment. MCell then, Marcelle (2001) reported owned a 72 percent stake of MTN, Transnet (the public transport utility) owned 23 percent, a variety of empowerment groups own 3.5 percent and the National Empowerment fund owned a 1.5 percent share (Marine et al., 2001). In addition to its domestic operations, MTN Group - through its MTN International subsidiary - had wireless subsidiaries in Cameroon, Lesotho, Nigeria, Rwanda, Uganda and Swaziland whereas Vodacom has wireless subsidiaries in Tanzania, Congo, Lesotho and Mozambique, Marcelle (2001) concluded. 4.6.1.1 Strategy and management Shareholder value has been the essential performance management and driving objective for the company. MTNs mission has been to become a leading multinational partner of electronic communication service that rewarded and benefited all shareholders and society. MTN had planned to take telecoms to every African country on the continent and had built an infrastructure and made critical strategic agreements with partners, thereby allowing previously unconnected communities to talk to each other. In Rwanda, cellular telephony has changed a country that was recently in deadly turmoil to one of a growing economy.

MTN has provided employees with opportunities in which they could operate as entrepreneurs over specific projects and has allowed them to run each project almost as a separate business. Customer service and customer delight were the mantras throughout MTN. 4.6.2 MTNs Subscriber Growth Up until 31 March 2000 MTN had a strong subscriber growth driven by innovative products, when it introduced the pre-paid option. From being a niche business user provider, MTN, came from behind to make increasing gains in market share. MTN took full advantage of the trend and developed a range of products, services and unique technologies to service growing demand.

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Table 8 MTNs subscriber growth

Source; Operator records

Cell phones have evolved from being a businesspersons tool to a must have socialites tool, to an accessible consumer item for all market sectors of the markets exceeding expectations. The projected number of uptake in the first year 1994-5 was 50 000 people. However by December 1999 there were 290 000 new subscribers. The MTN network covered 65 000 square kilometres, in 2000, half of SA, providing cellular telecoms access to 80 per cent of population with state of the art control centre best in the world, with lowest congestion and dropped call rates. MTN was the second service provider in South Africa but the first service provider in the world to have a mobile coverage of 60 000km, obtain a mobile licence in Africa and launch prepaid packages. MTN s GSM network coverage in South Africa -exclusively provided by Ericsson- embraces almost 90 000km of land, consists of 4000 basestations, and has now around 9 million subscribers (African Cellular Statistics, 2005).

4.6.3 MTNs market share

MTN has gradually seen its market share decrease since the beginning of 2000 from 41 percent to 33 percent despite its consistently increasing customer base. The decline in MTNs market share was even more apparent in the fourth quarter of 2001 when Cell C was first launched. Whilst Vodacom lost eight percentage points of market share when Cell C entered the market, MTN has also suffered disproportionately at the hands of this newcomer, losing six percentage points of market share to date (Finnie et al., 2003:131). In 2005, MTN had approximately 35 percent of the market share (Telkom Highlights, 2005:14).

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The competitive terrain in SA, where Vodacom had a competitive advantage altered the competitive terrain and MTNs response to that as espoused by its strategic projection was to be the leading provider of communication services in Africa. To realize this vision, the company pursued expansion both beyond its home market in South Africa and, in businesses, outside mobile voice services. Its main operations by 2001 were in South Africa, and consisted of the mobile operator, MTN, a mobile service provider company, M-Tel, and a satellite communications company, Orbicom. Outside South Africa, MTN had strategic investments in four other African countries through a wholly owned subsidiary, MTN Africa, which managed operations in Uganda, Rwanda, Cameroon and Swaziland. By far the most important strategic investment that MTN made was in January 19, 2001, when MTN won a 15-year operating licence in Nigeria, by far Africas largest mobile market, with a population three times the size of its home market and with a teledensity of 4/1000.

By then MTN South Africa, the mobile network operator, was the leading contributor to MTNs revenues and profits (contributing over 97% of group revenues and EBITDA as at September 2000). Marcelle (2001) believed that it was important for management attention to remain equally balanced between the core operations in South Africa and the pursuit of pan-African strategy and diversification ambitions. This was particularly true in the short term, she went on to say, when the pan-African expansion was unlikely to yield significant financial rewards, while at the same time competition in South Africa was intensifying

4.6.4 MTNs strategic plot

4.6.4.1 Home market strategy Due to the loss incurred during Cell Cs entry into market in 2001 (see Table 4.8), MTN had to revise/reinforce its home market strategy and not rely on the domestic market for its long term growth. It had played second fiddle to Vodacom and it was most likely that the entry of the third operator would affect MTN more than it would Vodacom. MTNs strategy revolved around attracting high-value consumer users. As illustrated in Figure 4.11, MTN s main focus and objective was on the higher-end prepaid and contract section of the market. Its success in targeting these sections of

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the market was illustrated by its disproportionately high-contract market share, and the fact that its prepaid ARPU was 20 percent higher than main rival Vodacom. As shown in Figure 4.11, MTNs market position strategy was a combination of market penetration and product development and innovation.
Figure 14MTNs market strategy

Source Kotler (2003)

MTN placed a lot of emphasis on ongoing reward schemes as a customer retention tool. With eBucks, users receive reward points for incoming and outgoing calls and sending text messages. Further points are also awarded based on subscriber longevity. These could be exchanged for airtime or non-mobile goods and services. There were even more loyalty schemes available for prepaid customers. The Big Bonus plan was an example of such a loyalty scheme and consists of two main parts (Finnie et al., 2003:135): Daily Free SMS Bonus: users receive one free SMS for every chargeable call of over one minute, although the SMS must be used on the same day; High Usage Bonus rewards: users with airtime for spending over R500 or R1000 per month will see their rewards ramping up the longer the subscriber stays with MTN. MTN had some success in adopting a services not technologies approach to nonvoice applications. In promotional literature there is no mention of GPRS or HSCSD,

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instead being substituted for brands such as MTNdataFAST and MTNdataLIVE. The terms SMS (Short Message Service) and MMS (Multimedia Message Service) are used, but these have already entered common parlance to a significant degree (Finnie et al., 2003:136). The next section will look at how MTNs shareholders chose a different growth strategy to Vodacom 4.6.4.2 Geographical expansion not curtailed When MTN commenced its services a few months after Vodacom, it initially followed a classic follower strategy (Cant & Machado, 2005:5). As outlined above, Vodacoms dominance and its competitive advantage in SAs market led MTN to follow a different growth strategy and focused more on an international growth strategy. Whereas Vodacom strove to be the biggest and the best MTN on the other hand had an African strategy since the start and implemented its vision of becoming the leading telecoms operator on the continent. MTN focused on developing regional hubs around which business clusters developed and from which they developed skills in being a player in emerging markets and each of the hubs provided different sets of skills which the company built upon. According to Marcelle (2001) MTN identified three essential regional clusters, through tracking efficiencies, knowledge transfers, skills sharing and mutual access to a pool of advanced and innovative technology. These regions are the Great Lakes Region, Southern Africa and the Central/West Africa. It extended its reach into Africa through broadening its extensive roaming agreements and guiding established partnerships in Uganda, Rwanda, Swaziland and Nigeria. MTN believed then in 2003 that the Nigerian telecoms market was expected to grow to and according to its Marshal Plan it aimed to have increased its subscriber base in Nigeria to 4 million by the end of the 2004/5 financial year, and that Nigeria was a crucial market. According to Marcelle (2001) in the South African operations, MTN completed its efficiency drive whereas outside the core operations, the focus was on establishing management and decision making systems to support pan-African expansion, as well as creating the management capacity and business relationships necessary to support diversification of revenues. Senior management, she further believed, with support from the Johnnic Group, continued to focus on positioning MTN to assess, win and exploit strategic opportunities. Between 1997 and 1999 MTN International expanded into Africa, acquiring licences in Uganda, Rwanda and

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Swaziland, MTN International also acquired a National GSM 900 licence in Cameroon in 2000.

4.6.5 MTNs Strategic Investments MTN South Africa, Marcelle (2001) noted, was restructuring its business operations to focus more on the value end of the market by beefing up its corporate marketing and sales effort. In line with this repositioning, the company was developing competence to service and provide business solutions to corporate accounts. These new areas of focus were intended to complement the expertise that MTN has developed in mass marketing. MTN in South Africa also intended to increase operational efficiency through staff reductions and the redeployment of existing staff as historical growth rates slow. As part of this drive, Marcelle (2001) believed, the company had restructured its regional operations from six to four super groups to improve coordination and reap the benefits of increased efficiency. 4.6.5.1 Orbicom Marcelle (2001) also noted that Orbicom was a satellite signal distribution company whose primary line of business was the distribution of satellite-based traffic for broadcasting companies. Orbicoms half-year turnover was reported to stand at R45.5 million in September 2000. Orbicom had a good technical reputation in satellite communication and had been a leader in making the transition from analogue to digital satellite signal distribution systems. The skills and competencies in Orbicom had been built over a number of years and had the potential to provide a platform for this company entering the digital terrestrial broadcasting market. Orbicom was also positioning itself as a multimedia, value-added service provider and had been active in seeking out business opportunities outside South Africa; Marcelle (2001) went on further to report. Up to the time of the writing of her report, Marcelle (2001) observed that Orbicom had been successful in securing a partnership with Lockheed Martin to provide satellite delivered internet services across Africa. Orbicom had also been successful in establishing an electronic funds transfer network for the banking community in Ghana, and reports interest for similar services in other African countries.

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4.6.5.2 MTN Nigeria The most important strategic investment by MTN International (which altered, revised and redefined the competitive terrain with its arch rival Vodacom) was the of National GSM 900 and GSM 1800 licences in Nigeria, at the cost of US$285 million at the worlds first spectrum auction held in Abuja Nigeria, and subsequent launch of operations in August 2001. MTN Nigeria commenced with construction of Y'helloBahn in 2002, a 3 400 kilometres-long countrywide microwave radio transmission backbone. At the time of the issuing of the licence, Nigerias tele-density was .4 per 100 inhabitants. 4.7 Conclusion The chapter focused on how Vodacom created and sustained its competitive advantage over MTN in South Africa as well as how it was poised by 2001 to grow and become a dominant force on the continent. MTN on the other hand responded to Vodacoms dominance in SA by making specific strategic investments outside of South Africa that enabled it to acquire skills as an emerging market player and those skills included enabling its strategists to make assessments of the rent earning potential of the Nigeria market. This aspect will be examined in detail in the next chapter. There is no doubt that the African telecoms environment in 2001, where Vodacom and MTN were competing, there were key variables that had a direct influence on the participants in the telecoms industry. It was crucial for the shareholders and management at both Vodacom and MTN to adapt to changes in the Africa telecoms environment and make crucial decisions in order to steer their businesses in the right path to prosperity and success.

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Chapter 5

Geographical expansion into Nigeria

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5.1 Introduction This chapter will use the framework which advances several principles for building competitive advantage, which are that competition takes place not only over material resources, but over the interpretations of multiple constituents about how firms create value in an industry. Firms develop superior industry positions from instrumental actions that are intended, not only to defeat competitors, but to influence the perceptions and actions of constituents. Also, firms and constituents enact the competitive terrain on which competition in industry unfolds. Using this framework this chapter will show how the actions MTN shifted the African telecommunications competitive terrain in Nigeria, on which MTN ultimately flourished. 5.1.1 Nigeria and its telecommunications sector in 2000 In 2000, Nigerias large population of 124 million, three times the size of SAs population, made it the most populous country in Africa, representing approximately one-sixth of the continents population. The population was also growing very fast and was young (the median age was 17.4 years). People were therefore more likely to respond positively to new technologies. Furthermore, the telecommunications infrastructure in 2000 served only a tiny fraction of the population and was of poor quality. On the other hand, Nigerias GDP per capita at USD473 (adjusted for relative prices was USD853) was low and below sub-Saharan Africa as a whole (USD490 per capita). However, Nigeria has been characterised by a very unequal distribution of income; the richest 10% of the population account for 40.8% of the national income. This meant that there were a significant number of people and businesses that could potentially afford the technology, although ultimately teledensity was unlikely to be as high as those in more developed countries for some considerable period.
Table 9 Africas tele-density comparison 1999
Country US-Dollar GDP per Capita East Africa Uganda Kenya 244 278 West Africa Nigeria Cameroon 244 610 0.4 0.6 0.5 1.0 Telecoms per 100 population

(Source The Sunday Times 23 June 2003)

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An insight into the likely demand for mobile telephony services in Nigeria then, could be gained by looking at Uganda in east Africa. Uganda with a population one-sixth the size of Nigeria, had in most other respects a very similar demographic profile, literacy structure and GDP per capita to Nigeria. Although Uganda had a monopoly supplier of GSM services between December 1994 and October 1999, once the market was opened to competition with the entry of MTN, subscribers grew dramatically from around 30,000 to 150,000 by the end of 2000.21 As the Nigerian GSM market featured competition from day one, if the operators offered similar tariffs and coverage to those that were offered in Uganda in late 1999. GSM services were launched in Nigeria in August 2001 and by November 2002 there were over 1.2 million subscribers. 5.1.2 Structure of Nigerias telecommunications sector The main players in the Nigerian telecommunications sector are: the Federal Government of Nigeria, the Ministry of Communications, the NCC, and the telecommunications service providers. The Federal Government of Nigeria is responsible for: giving overall direction for telecommunications development; ensuring telecommunications policy is consistent with other national policies; and enacting necessary laws and taking other measures in support of the National Telecommunications Policy. The Ministry of Communications is responsible for broad telecommunications policy, which includes proposing policy options and recommending legislation to Government and monitoring the implementation of government policy. The NCC is the independent regulator of the telecommunications industry. It issues licences, assigns frequencies and regulates all licensees and service providers. The NCC performs regulatory functions necessary to promote the development of Nigerian communications. The effectiveness of the NCC in 2000 was reduced by the fact that it was unable to regulate Nigerian Telecommunications Limited (NITEL), the state-owned incumbent operator. This was because the decree under which it operated specified that the NCC was to be the economic and technical regulator of the privatised sector of the telecommunications industry. Therefore, the operator with a monopoly over the local loop and domestic and international fixed lines in 2000 was not under the regulatory control of the NCC.

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NITEL was established in January 1985 following a merger between Nigerian External Telecommunications Limited (previously responsible for external

communications) and the Telecommunications Division of the Department of Post and Telecommunications (previously responsible for domestic telecommunications). NITEL was commercialised in 1992, following the implementation of a program of privatisation and commercialisation by the then Federal Military Government. NITELs Public Switched Telephony Network (PSTN) had a capacity of around 700,000 lines in 2000, of which about 500,000 were connected. It operated approximately 1600 public payphonesor one payphone for every 77,500 in the population.

With regard to cellular telecommunications, the state-owned company Nigerian Mobile Telecommunications Limited (M-Tel, which was merged with NITEL in the late 1990s, was the only national operator of cellular services in the country until the beginning of August 2001. However, M-Tels coverage was barely national as it covered three cities (Lagos, Enugu and Abuja). M-Tel ran an analogue system with a capacity of 210,000 lines, with around 40,000 of these connected to subscribers as at July 2001. In addition to the two national operators, there were several small private operators (e.g. Multi- Links Telecommunications Ltd., and Intercellular Nigeria Ltd.) serving Lagos. These primarily deploy fixed wireless technologies and were used by businesses and high net worth individuals. Some large companies (Shell is an example) had constructed their own private radio communications networks.

Although in the run up to the auction there existed nine mobile (GSM) telephony licensees, their failure to build out infrastructure and launch a commercial service meant, according to the NCC, that they had violated the terms of their licences and therefore were not permitted to operate a service. Furthermore, the new process meant that their licences were not valid and de facto revoked. The issuing of new licences effectively rendered worthless the licences issued under the military government and the NCC returned to the licence holders their application fees. One of the companies, Motophone, returned the funds to the NCC and mounted a legal challenge to stop the auction process, which did not succeed.

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5.1.3 Worlds First Spectrum Auction Successful! The use of an auction in Nigeria was motivated largely by the need for transparency and objectivity. The then Nigerian President, Olusegun Obasanjo, was quoted in THISDAY Newspaper (Vol 10, no 3425) as saying that his administration had enhanced the investment climate in the country, making it one of the most rewarding opportunities not only in Africa but also in the world. He had gone on to add that reforms were being taken in all sectors of the economy in line with his administrations policy of creating an enabling environment for attracting Foreign Direct Investment (FDI). Noting that there was a correlation between the inflow of FDI and transparency and accountability, he said that his administration had initiated mechanisms to guide government procurement. Obasanjo concluded by saying that the establishment of the Economic and Financial Crimes Commission (EFCC), Independent Corrupt Practices and Other Related Offences Commission (ICPC) and the Extractive Industries Transparency Initiative (EITI) had restored confidence in the system. The amount raised in the auction exceeded many analysts expectations. At the conclusion of the auction, the Nigerian government expected to raise USD855 million. In addition, the government was expecting to raise a further USD285 million from NITEL. However, one of the successful bidders (CIL) subsequently defaulted. Despite the default by CIL, many in Nigeria viewed the GSM auction as a resounding success, largely because the transparency of the process was unprecedented. A welldesigned auction was deemed superior to alternative comparative selection methods, the latter having failed previously due to alleged wrongdoing. While opinion may differ as to the merits of auctions in awarding spectrum licences and other scarce public resources, the experience in Nigeria highlights how they can be applied successfully in the most challenging of circumstances

5.2 The growth of the telecommunications market The pent-up demand for telephony services can be seen from the massive increase in subscribers after mobile services were introduced (see Fig 5.2 below), despite very high prices at the inception of services. Demand for mobile services had also resulted 96

in a proliferation of smaller entrepreneurs selling single calls to that section of the general public who cannot afford a mobile service. Nigerias single-call market, or umbrella operators as they are commonly known, significantly changed the boundaries of the call market by forcing operators to rethink their tariffs and introduce cheaper call rates to accommodate bulk operators.
Table 10 The growth of mobile in Nigeria

In markets where initial connection fees are high and pre-paid airtime rates are out of reach of most people, entrepreneurs arbitrate the market by purchasing either pre-paid or post-paid contracts from mobile operators and reselling this airtime at rates slightly above post-paid rates but lower than pre-paid rates. For mobile operators, this approach increases network traffic and keeps the average revenue per user high. In markets such as Nigeria and Cameroon, airtime resellers are estimated to account for 30% to 40% of the overall post-paid traffic (Pyramid, 2005). For consumers, it expands the reach of mobile networks, provides an interim solution to affordability issues, especially to users who cannot afford the initial connection fees. It also forces prices down because mobile operators are no longer in control of pricing. Resellers are extremely sensitive to price but are valuable to operators as high value customers.

Operators therefore vie to keep these customers through lower pricing; thus forcing price-based competition which mobile operators are keen to avoid. An added benefit is that it creates jobs in most markets, and in Nigeria this has become a viable subindustry. Although the legislation gives the regulator extensive powers over tariff

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regulation, the current level of competition allows a shift from specific approval of the tariffs of non-dominant operators to issuing guidelines and monitoring.

By 2003 Nigeria had become the fastest growing mobile market in Africa and one of the fastest in the world. The connected lines had grown by an average of 10 000 lines per annum in the 4 decades between independence and the end of 2000. Since August 2001 to March 2004, the average rate of growth was over 1 million lines per annum and by March 2004 the total connected fixed lines stood at 888 854 and mobile lines at 3 811 239 with the total number of lines at 4 700 093. The tele-density as at March 2004 stood at 3.92. Nigerias umbrella people were doing a great job providing access to many who could not own telephones or mobile phones. They provided a major contribution to the access provided by mobile and fixed operators. The ownership of mobile phones was democratised as artisans, students, taxi drivers, market women etc now owned phones. Access to telecommunications was greatly enhanced, with the explosion of telecenters/ cybercafs in all nooks and crannies of the country where signals were receivable. This was because of the cheap set up costs as well as the low overheads in the case of the umbrella people who only required a table, an umbrella and a street corner (Ndukwe; 2004).

The Nigerian experience showed that liberalising before privatising was effective in achieving development goals if appropriate licence approaches were used. In addition, the government was able to recoup potential revenue from the privatisation through the licence auctioning process as well as from forthcoming tax revenues from the highly successful mobile companies. The GSM licences each sold for US$285m. The Nigerian government granted a five-year tax holiday to new licensees, which attracted investors. Competition, a large market with pent-up demand, innovative licensing approaches and consumer vigilance combined to increase connectivity and access to ICT and also drove down retail tariffs. The Nigerian experience highlighted the significant variances from developed country approaches and the success of innovative locally developed solutions for attracting investment and increasing access to telecoms services.

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5.2.1 The players in the Nigerian telecommunications The PRL Research Telecom Vendor Ratings, an initiative of Polls and Ratings Limited on the operations of the telecommunications operators in Nigeria, the results of which were published in the Financial Standard, July 7 2003, in Lagos, rated the GSM operators high, and cautioned most of the Private Telecoms Operators (PTOs). The report highlighted clearly and concisely the vendors overall rating and status when it analysed the strategy, organization, product(s), technology, marketing, coverage and support. The companies that were analysed and rated were, Intercellular, Starcomms, VGC Comms, Reltel, Mobitel, Cellcom, EMIS, Multi-Links, Econet Wireless Nigeria then (now V-Mobile), MTN, MTS First Wireless, Globacom and Nitel. 5.2.1.1 MTN Nigeria First Mover Advantage Implications

On May 16, 2001, MTN became the first GSM network to make a call following the globally lauded Nigerian GSM auction conducted by the Nigerian Communications Commission earlier in the year. Thereafter, the company launched full commercial operations beginning with Lagos, Abuja and Port Harcourt the three main regional capitals. MTN paid $285m for one of four GSM licenses in Nigeria in January 2001. By 2003, in excess of US$1.8 billion had been invested building mobile telecommunications infrastructure in Nigeria. Since launch in August 2001, MTN steadily deployed its services across Nigeria. In 2003 it provided services in 223 cities and towns; more than 10,000 villages and communities and a growing number of highways across the country, spanning the 36 states of removed Nigeria and the Federal Capital Territory, Abuja. Many of these villages and communities were being connected to the world of telecommunications for the first time ever. As outlined in figure 4.5, MTNs first mover advantage in Nigeria derived from, as Lieberman and Montgomery (1987) pointed out, some asymmetry which was generated, enabling MTN to get a head start over rivals. They further contend that this first-mover opportunity may have occurred because the firm possessed some unique resources, or foresight or simply because of luck. It was a question of both foresight and luck. Foresight that Nigeria was the most populous country in Africa and had a

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very low teledensity, luck in that Vodacom initially considered the Nigerian venture risky. Lieberman and Montgomery (1987) concluded by affirming that once this was generated, there were a variety of mechanisms that may have enabled MTN to exploit its position. These mechanisms enhanced the magnitude or durability (or both) of first-mover profits. First-mover advantages arise from three primary sources: (1) technological leadership, (2) preemption of asserts and (3) buyer switching costs. But it was also that MTN had developed proficiency in rapidly rolling out a network, in the Ugandan market, which had almost the same demographics as Nigeria. 5.2.2 Ownership Structure

MTN teamed up with well-connected Nigerian partners, chiefs and business magnets that represented a broad spectrum of Nigeria's ethnic and religious groups. The Nigerian partners owned 37 per cent, and were individual heavyweights, such as Pascal Edozie (7 per cent), Colonel Sani Bello (6 per cent), Chief Victor Odili (8 per cent), Mr Gbenga Oyebode (7 per cent) Alhaji Ahmed Dasuki (6 per cent), Mr Tunde Folawiyo (6 per cent), (MTN Nigeria Induction Booklet; 2003) while the company, MTN Group, owned 60 per cent of MTN Nigeria and 3 per cent was set aside for an employee scheme. MTN Nigeria expected to raise local shareholder ratio over the next few year to decrease MTN Internationals exposure. Ashmee Dasuki, another MTN Nigeria (MTNN) shareholder and a Muslim executive from the north, said that MTNN went out of its way to find representatives from different regions for its directors and shareholders. MTNN already employs 1300 Nigerians, and peak funding was expected to reach US $1.4 billion in five years, of which 50% will be equity, 50% through loan. This figure has since been revised to US$2.2 billion (MTN Nigeria Induction Booklet 2004). The then MTN Nigerias CEO, Adrian Wood, had extensive telecoms experience with Telenor and Callahan and played a pivotal role in the growth of MTN Nigerias fortunes. 5.2.3 Expanding Footprint The MTN Group had bedded down its Nigerian operation more quickly than anticipated and benefited from expanding its footprint in eastern Africa, Melody Horn, a telecoms analyst at Merrill Lynch, said in a report. MTN Nigeria also signed an interconnect agreement with the second national operator and fourth global system 100

for mobile communications operator, Globacom. "The weakening Rand relative to the dollar would benefit MTN upon conversion of its non-South African profit into Rands," said Horn. She added that Johnnic Holdings offered a cheaper entry into the MTN Group because of its proposed unbundling. Johnnic unbundled 526 million shares in MTN in a deal worth R7 billion. The MTN operations expected to contribute its growth include Nigeria, Swaziland, Uganda, Cameroon and South Africa (Ginsberg and Chege, 2003).

MTN expected to benefit from robust operations in Nigeria when reported on 19/06/03. Seven analysts forecast a 99 per cent jump in headline earnings a share to R1.42. Nigeria was the star performer of the group, which also had operations in Lesotho, Swaziland, Uganda, Rwanda and Cameroon. Subscriber numbers in the populous west-African country hit the 1 million mark in February 2003, pushing the overall subscriber numbers to 6.66 million. This compared with Vodacoms 8 million subscribers- 7,5 million of them in South Africa.

But MTN Nigeria battled with congestion on its lines due to huge uptake in services there, and was forced to delay expansion, while it invests heavily in infrastructure a factor that analysts felt then, could delay or limit operating profit. At home, MTN faces a maturing market and increased competition from newest rival Cell C; analysts will be watching margins closely. Growth in South Africa is not really a problem. The problem is cost pressure, said another analyst. Yet another said, Cell Cs entry in November 2001 had put pressure on MTN and Vodacom and had raised subscriber costs. News on MTNs debt position was keenly awaited in the wake of a strengthening Rand. Its debt-to-equity ratio, excluding goodwill, stood at 76 percent at the end of March 2002 and was set to rise due to expansion in Nigeria, the group said. MTN rose 25c to end at R14 on Friday and Telkom added R1 to R34. 5.2.4 MTNNs Strategic Plot MTNNs strategy in Nigeria was primarily aimed at revising the competitive terrain that had been defined by its major competitor Vodacom in the home market in South Africa and also on the continent. Thus its strategic projections were supported by strategic investments and both processes were supported by a strategic plot of the

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firm. The strategic plot saw the deployment of a digital microwave transmission backbone, the 3,400 Kilometre YelloBahn which was commissioned by President Olusegun Obasanjo in January 2003 and was reputed to be the most extensive digital microwave transmission infrastructure in all of Africa. MTNs experiences in South Africa where it had deployed a network, as well as in Uganda in partnership with Ericsson had taught it valuable lessons about rapid network rollout, securing a larger footprint in the market place as well about being a market leader. The YhelloBahn significantly helped to enhance call quality on the MTN Network. The Company subsisted on the core brand values of leadership, relationship, integrity, innovation and can-do. It prided itself on its ability of making the impossible possible (entrepreneurship), connecting people with friends, family and opportunities.

MTN Nigeria also expanded its network capacity to include a new numbering range with the prefix 0806, making MTN the first GSM network in Nigeria to have adopted an additional numbering system, having exhausted its initial subscriber numbering range - 0803. In its resolve to enhance quality customer service, MTN Nigeria introduced a self-help toll-free 181 customer-care line through which subscribers could resolve their frequently asked questions free of charge. MTNs overriding mission was to be a catalyst for Nigerias economic growth and development, helping to unleash Nigerias strong developmental potential not only through the provision of world class communications but also through innovative and sustainable corporate social responsibility initiatives. 5.3 MTNs market share Years of playing catch up to Vodacom had influenced MTNs response to the competitive terrain and taught it valuable lessons about being the first in the market and it had also learnt that as the second mobile operator, the entry of another operator in the market, as was the case of the entry of Cell C in the SA market in 2001, almost always affected the second operator more than it did the market leader.

The table below shows its market share relative to that of V-Mobile/Econet, Nitel as well as Globacom, since inception in August 2001. MTNN revolutionized the face of telecommunications in Nigeria with its marketing strategies. The firm further

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enhanced its investment readiness by deploying and commissioning the multi-million dollar microwave infrastructure, YhelloBahn, to provide essential infrastructure necessary for easy expansion of its services across the country. Based on specific attributes, MTN Nigeria was the only network with the highest brand equity within the telecoms segment, except on call tariffs. It was expected that this trend would continue, especially as telecoms services were demand driven (Ndukwe: NCC May 2004). 5.3.1 Revenue Driven by subscriber growth While MTN had lagged behind Vodacom both in revenue and profitability from 1993 to 2001, the Nigerian venture began to show dividends, two years after launch. In the six months to September 30 2003, cellular operator MTN surged ahead of its rival Vodacom in the profitability stakes for the first time in its nine-year history; posting a net profit of R2, 1bn that dwarfed Vodacom's R1, 4bn. Both companies clocked up similar revenues, with MTN's R11, 2bn a fraction behind Vodacom's R11, 3bn. But MTN converted that into a larger profit by emphasizing cost cutting to run a leaner operation, said CEO Phuthuma Nhleko. Vodacom remained supreme in SA, with a 55% market share compared to MTN's 39%, but MTN was king of the continent in terms of profitability, he said. What could have toppled MTN's African supremacy then was Vodacom's intention to challenge it in the lucrative Nigerian market by taking over Nigeria's second cellular operator, Econet. Vodacom's bid for Econet was mired in legal hitches, but it had pledged to invest hundreds of millions of dollars if the deal went through. Nhleko had declined to speculate on how fierce the clash could become if Vodacom entered Nigeria

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Figure 15 Market Share in Nigerian Telecoms

The Nigerian Telecomms Market

NITEL GSM 11% ECONET 44%
ECONET 32% GLOBACOM 4% NITEL GSM 5%

MTN 45%

MTN 59%

a) August 2002

b) September 2003
GLOBACOM 18% NITEL GSM 12%

GLOBACOM 13%

NITEL GSM 4%

ECONET 31%

MTN 52%

ECONET 25%

MTN 45%

c) December 2003

d) March 2004

Figures (a), (b), (c) and (d): Mobile Market Share August 2002, September 2003, December 2003 and March 2004. Source: Nigerian Communications Commission

Despite the threat, MTN was already assessing opportunities in other countries. MTN issued a cautionary notice to coincide with its results, and for the first time, Nhleko said it might no longer limit itself to African expansion. "We are continually looking and we are now in a far better shape because our debt-to-equity ratio is down to 8 per cent and we are generating significant cash flows (from Nigeria)." Expansion would preferably come by entering virgin territory, but a good acquisition would also be attractive. "In the short term it will be African opportunities because that is our logical footprint, but if there are interesting opportunities outside we'd consider them," he said. MTN's results were topped by an impressive 102 per cent growth in headline earnings a share to 123c, up from 61c. Nhleko said the

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performance in SA was a highlight, as MTN had arrested a previous decline in profit margins caused by stiff competition. Operating capital had been tightly controlled and its subscriber base had grown by 537000 in six months. "Our performance in SA has been stronger than our expectations but it has been a lot of hard work." 5.3.2 MTN Nigeria cash cow MTN Nigeria became the cash cow for the MTN Group, as it made significant contribution to the groups R2.13 billion (N42.287 billion) profit for the six months ended September 30 2003. The Group announced that it had recorded a 168 per cent jump in its profit after tax to R2.13 in its six months interim result. The South African cellular operator announced in Johannesburg, that its revenue outside South Africa, with emphasis on Nigeria, jumped by 39 per cent to R4.12 billion (N81.794 billion) while its domestic revenue grew by 26 per cent to R7.11 billion (N141.154 billion). The announcement was made the same day that its per second billing and marginal tariff reductions took effect in Nigeria.

Also for the first time, MTN was able to exceed the profit after tax of rival operator, Vodacom that recorded R1.37 billion (N27.198 billion). This was the first time that its after tax profit has exceeded that of rival operator Vodacom, although its revenue was still marginally smaller. Vodacoms revenue was R11.29 billion (N224.139 billion). . Nigeria has been the star performer of the group, which also operates in Lesotho, Swaziland, Uganda, Rwanda and Cameroon. Subscriber numbers in the populous west-African country hit the 1 million mark in February, pushing the overall subscriber numbers to 6.66 million. This compared with Vodacoms 8 million subscribers- 7,5 million of them in South Africa. Despite the impressive performance of MTN Nigeria, CEO, Adrian Wood insisted that Nigeria remained one of the most difficult terrains for the GSM operators. He noted that the major hurdles in the operating environment then, included the following; political turbulence surrounding the 2003 elections; regulatory uncertainty and intervention and competitor market disruption, which continued to pose threat to MTN Nigerias operations.

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Mr. Phuthuma Nhleko, CEO, MTN Group, said that MTN Nigeria had experienced strong demand for its services, that required a controlled sign-up of new subscribers to match the available network capacity while the accelerated network rollout continued. As at the end of September 2003, MTN Nigeria had increased its base stations in Nigeria to 652 from 378 sited in March 2003. Nhleko added that MTN Ns subscriber base had increased 127 per cent to 1.38 million, with the average revenue of $55 per user. The South Africa base also showed improvement, rising by 25 per cent to 5.36 million, with the average revenue of R207 per user. MTN had, by the end of September 2003, 7.89 million subscribers across its African operations. Nhleko pointed out that assuming current market conditions, the group was confident that the South African operation would continue its strong free cash flow generation, while international operations were expected to maintain subscriber growth. Nhleko added that, the group was now deriving an increasing proportion of its earnings from outside South Africa and as a result was becoming more susceptible to foreign exchange movements. 5.3.3 Strategic Investments in Nigeria MTN Nigeria CEO, Adrian Wood, had said that the company had plans to spend its $1.4 billion budget and other telecom investments of $3.1 billion in the Nigerian market where it held an estimated 59 per cent of the market. According to him, 98 per cent of MTNNs 1.3 million subscribers were on the prepaid package Pay-As-YouGo. He went on to say that the executive arm of the government was enthusiastic about attracting foreign direct investment, but that it remained low, although the government was putting an effort into generating such interest. However, the general lack of infrastructure was an inhibitor. The other problem was that although Nigerian market was large with a total population of around 128 million people, it was difficult to measure. The gross domestic product of the country was low at around $400 per head, with a cash economy predominating with little or no consumer credit available. Inflation, by the end of September 2003 was high, at 19 per cent per annum, which impacted on the cost of capital.

Wood also pointed out to the researcher in an interview, MTN was not finding that it was not only building a GSM network, but having to put in a transmission and power

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network as well. That included having 1400 generators that consumed 1.5million litres of diesel per month. The full network would have 12000 generators in place, requiring 12 million litres of diesel per month, meaning that 240 tanker trucks would have to be deployed every day of the week, making the network susceptible to oil price fluctuations. Security was also highlighted as a major concern, with 1400 guards and supervisors employed on the premises, and CCTV and perimeter surveillance in place, Wood revealed that security costs around $290 000.00 per month, and that MTN Nigerias coverage had grown to link 55 cities, 992 towns, and villages and six geo-political zones by October 2003, compared with 22 cities and five geo-political zones in September 2002. 5.3.4 MTN more profitable than Vodacom- March 2004 When Phuthuma Nhleko, the Chief Executive of MTN, presented the financial results in June 2004, the results showed that MTN had overtaken Vodacom in both revenue and profitability in the year to March 2004. MTNs subscriber numbers had grown by 42 per cent to over 9.5 million against Vodacoms 29 per cent to 11.2 million. MTNs revenue was up 23 per cent to R23.9 billion while Vodacoms rose 18.7 per cent to R23.5 billion. MTNs taxed profits jumped by 94 per cent to R3.3 billion against Vodacoms 36.9 per cent increase to R3-billion, while MTN continued to grow strongly in Nigeria, For MTN, Nigeria continued to produce excellent returns. Its subscriber base there grew 90 per cent to almost 2 million. It grew to four million in 2005, according to MTN Nigerias Marshal Plan. (Sunday Times, 4th July 2004 M Klein) MTN had some exciting opportunities ahead. It was no longer hampered by the massive debts it racked up in the early days of setting up its Nigerian network, and was now enjoying the rewards of that bold entrepreneurial investment in the form of some serious profit. It has also gained the skills and experience necessary to be a world-class player. Nor does MTN have any shareholders who might inhibit its international expansion. Its rival Vodacom, by contrast was 35 per cent owned by the UK-based Vodafone, which has already claimed several other African countries as its own. That pretty much limited Vodacom's expansion to neighbouring African nations. So it was no surprise then, that MTN's CE Phuthuma Nhleko, also an MTN shareholder through Newshelf, was assessing opportunities in other African countries and, potentially, further afield.

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Its results for the six months ended September 30 showed revenue of R11, 2bn, and an after-tax profit of R2, 1bn and net debt down to a manageable R700m. Its South African operations earned 46 per cent of its profit, and of the other 54 per cent, Nigeria contributes 80 per cent. Pyramid Research (2004) had then posed the question of where could MTN go to replicate that success. No other African nations had the size of population, the undercurrent of informal wealth and the bubbling demand for cell phone services that entrepreneurial Nigeria offered. Which meant investments in other countries may be sound, but not spectacular. MTN, the Pyramid Report continued, could do better looking to the east by tackling the massive Chinese market, perhaps, where the large population was taking cellular services to heart. At the same time, it could not take its eye off the ball in SA despite having performed better than expected in the face of tough competition and an increasingly mature market. Meanwhile, since becoming CEO, Nhleko had continued to build MTNs presence in Nigeria, tried for a number of licences and solidified the companys position locally. The groups empowerment credentials were enhanced through the management buyin of almost R4.3 billion. Investors were looking to him to prove that MTN could continue to grow. MTN announced at the beginning of the week of the 4th of July 2004 that it had submitted a bid for licence in Saudi Arabia. Nhleko concluded by saying that, If we dont create shareholder value in new markets, we will become a cash cow and that is not our intention. Our intention is to keep growing our footprint, hinting that it was not their intentions to be cautious- like Vodacom. 5.4 Vodacoms cautious strategic plot Vodacoms response to the revised, redefined competitive terrain in 2003 derived from its micro culture that bounded its strategic projections and undermined the effectiveness of its strategic investments, particularly when it came to the Nigerian market. Rindova and Fombrun (1999) define micro-culture as the knowledge, values and identity beliefs in a firm consistent with a broad definition of culture as the pattern of shared beliefs and values that give members of an institution meaning and provide them with rules for behaviour. They go on to add that knowledge, values and beliefs were the resources that had enabled Vodacom to create, in SA, sustainable

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competitive advantage, in so far as they were valuable, rare and difficult to imitate. In addition, they further asserted that, knowledge, values and beliefs create an advantage for the firm through their influence on information processing and behaviour. As cognitive structures unique to Vodacom then, they had enabled its strategists to make superior evaluations of the rent earning potential, in new markets, like Nigeria of the firms resources relative to that of MTN. These structures also guided the actions of all members of Vodacom to enable them to enact a systematic cautious strategic direction in response to the revised and redefined competitive terrain created by MTN. 5.4.1 Challenging rival MTN Vodacoms cognitive structures in 2003 enabled its strategists to determine that the competitive terrain had been revised and redefined and that if it needed to maintain its position as the largest operator in Africa it needed to challenge rival MTN on the African Continent, in Nigeria in particular, and make international business 30 per cent of group operating profit by 2004. Vodacom's only operations outside South Africa were Lesotho, Mozambique, Congo and Tanzania, but it was also considering also targeting Namibia, Zambia, Zimbabwe and the DRC Perceptions of strife in the DRC were incorrect according to Andrew Mthembu, Vodacom Group Deputy CEO and MD of Vodacom International, much of the economy was well away from the troubled northeast. There were 60 000 telephones for 60 million people. Vodacom also had a management contract with Congolese Wireless Network; the cash strapped operator in Southern DRC.

Together with Telkom SA its majority shareholder, Vodacom would identify fixed line and mobile opportunities in Africa, as Mthembu did not have the carte blanche to tackle Africa. Mthembu, then, saw excellent opportunities in Africa. He also had pointed out at the time that telecoms in Africa had grown by 50 per cent in 2000 to reach a penetration of 10 per cent and also to the fact that Africans spent 5-15 per cent of their disposable income compared to just 1 per cent in Europe. Mthembu went on to add that Vodacom wanted to find a few more Tanzanians so that their African income represented 30 per cent of group operating profit by 2004. Nevertheless, Vodacom shareholders, Telkom, Vodafone of the UK, Ventfin and Hosken

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Consolidated Investments were likely to stay cautious. About 200 million people lived in the countries targeted by Vodacom; contrast this with the 128 million in Nigeria at the time with a very low teledensity of 4/1000.

However, while MTN had launched its network in Nigeria in 2001, Vodacom had chosen, initially, not to get involved in Nigeria as its shareholders Telkom and Vodafone, were wary of the Nigerian market, but more because of the shareholders agreement with Vodafone that had prevented Vodacom from expanding north of the Limpopo. However with a strong balance sheet, Vodacom was in a position to make an impact on the continent. Mthembu had then admitted that Vodacom had lacked a clear strategic plot for Africa. With the South African market nearing saturation, the arrival of Cell C in the South African market in 2001, as well as the phenomenal returns that MTN was generating out of Nigeria in 2003 and 2004 as outlined above, the Vodacom Board with the approval of Telkom the majority shareholder and Vodafone, finally had agreed to target emerging markets in Africa and elsewhere, but they were likely to be cautious. 5.4.1.1 Vodacoms Strategy in Nigeria For a long time, Vodacom lacked a clear strategic plot when it came to strategic investments in Africa with investments only Lesotho, Tanzania DRC and

Mozambique, it had lagged behind rival MTN in forging into the continent, probably because Vodafone, the fifty percent shareholder, already had a larger footprint in Africa, as well as the fact that the shareholders agreement between Vodacom and Vodafone, prevented, until 2006, Vodacom from pursuing investment opportunities north of the Equator. However, with South Africas market maturing and the rest of Africa untapped, Vodacom shareholders eventually gave Mthembu the go ahead to tackle deepest Africa. The board had initially turned down plans to tender for a Nigerian cell phone license, because they felt then the cost and risks of investing in a risky and relatively untried market with untested regulatory processes were simply unpalatable. According to Vodacoms shareholders, Nigeria then lacked a strong administrative tradition, the ability to undertake commitments that endured from one government to

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the next, and a judiciary that was impartial, immune to government and political pressures and able to make enforceable decisions; even though as outlined above the auction process was transparent. Political and economic instability, a lack of telecom policies tradition and independent regulatory frameworks, red tape and corruption were also complex problems that the shareholders, Vodafone and Telkom, had also identified.

Vodafone then being a European operator and a major investor in Vodacom, was wary of unstable developing countries governments preferring to invest former British colonies like Kenya, Egypt and South Africa which up that time to the were relatively stable emerging market democracies and besides Vodafone had also been involved in the 3G saga with other operators and was saddled with a lot of debt. Telkom on the other hand had just listed on both the Johannesburg and New York Stock Exchanges in 2003 as part of its privatisation program as well as part of governments stated policy the of the maximisation of state asserts and was likely to be wary of risky ventures; this was not with standing the SA governments commitments to SADCs protocol on ICT development that encouraged cross-border investments in ICT. However, with the Nigerian government keen to invite credible operators with good corporate governance to invest in the country, risks could have been hedged by identifying the right people to open doors and provide political insurance.

5.4.1.2 Shareholders uncomfortable with Nigerian Investment

The Vodacom shareholders were uncomfortable with the Nigerian strategic investment, even though it was the largest market on the continent, having a population of 120 million then in 2001 but with the lowest teledensity of 0.4 per 100 in the whole continent. The shareholders who had the final say, in determining which strategic investments would earn them a healthy return, feared then that an investment in Nigeria then could have wiped out everything that Vodacom had built up over the past eight years if the business did not perform for whatever reason. According to Chan-Olmsted and Jamison (2001), Vodacoms shareholders viewed the new market opportunity in Nigeria as being in a developing country that lacked strong, stable and

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regulatory institutions and with business practices that were unfamiliar in most developed countries, as was the experience of Vodafone. 5.4.1.3 Late entrant into Nigerian market As a result, Chan-Olmsted and Jamison (2001) go on further to assert, Vodacom, as a late entrant into the market, would have had to adopt an entry strategy that would have allowed them to acquire local expertise and decreased the probability and cost of expropriation of investment, given Nigerias notorious history of military coups. Vodacoms strategic plot in Nigeria was therefore limited to entering the Nigerian market by selecting a project with a fast payback period, selecting well connected local partners and entering the market through an alliance rather than through direct investment. Vodacoms cautious risk-averse strategy may have cost the company a big deal, losing its position as the largest network in Africa, in 2004. It was anxious and wanted to change that and according to Ball (1999:434) although Vodacom management believed strong competition from MTN would have made a profitable operation difficult to attain a but Vodacom managements change of strategy in 2003 was being influenced by managements decision of being present a strategy of being where the its global competitors MTN was and probably believed that entering MTNs foreign market would distract MTNs attention from its home market, which was already reaching saturation.
Figure 16Entering a Competitors Cell

Source Kyrylov et al (2001)

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According to Kyrylov et al (2001) a firm like Vodacom decided to enter a competitors cell, MTNs cell in Nigeria, but the timing of such actions, as outlined in this case study, was important. With the market expansion, economies of scale and scope are important considerations. They go on to add that when entering a new market, like Vodacom was entering Nigeria in 2004, the marginal cost of offering one more unit of say service A, decreases the size of the company. If the company also offers service B, using almost the same technology (like ADSL TV, which is heavily reusing the Internet Access ADSL technology), the marginal cost of offering service B significantly decreases.

In addition, Vodacom could also have entered the market for a different product, e.g. fixed line communications which it did attempt with Telkom in 2005 but also later abandoned. However in the longer run, all market players in Nigeria were to maximize profit, in the shorter run, depending on their current position, on the market; Vodacom and MTN may have been pursuing different goals by referring to different performance indicators. These indicators were territory coverage, market share, cumulative cash flow, customer loyalty, risk factor. In this case, Vodacom on entering the Nigeria market would have had to be an aggressive risk seeker more concerned with gaining more market share and neglecting increased risk and relatively short term low profits. While MTNN with a larger market share were expected to be risk averse and to most likely, to be more concerned with generating more profit. However, given Vodacoms shareholders lack of stomach for risky ventures, it was unlikely that Vodacom would have the stomach to stay in Nigeria. 5.4.2 Vodacoms unsuccessful bid for Econet Wireless Nigeria The opportunity to enter the Nigerian market formally presented itself for Vodacom of South Africa when substantial capital inflows were required by the Econet Wireless Nigeria, which it needed to expand its network, as it had to compete with the market leader, MTN Nigeria, and meet the expected challenge of a robust looking Globacom as well as a reinvigorated Nigerian Telecommunications Limited (NITEL).

Vodacom, the largest mobile phone operator in South Africa and Africa at the time, was in fierce competition with MTN South Africa, the majority owner of MTN

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Nigeria. Although Vodacom had reduced its cash position by around $200 million when it repaid a shareholder loan and paid out a dividend in 2003. However, South African financial analysts believed then that Vodacom could have easily borrowed enough money to take up a stake in Econet Nigeria. 5.4.2.1 Other suitors for Econet Wireless Nigeria However Vodacom was not the only operator interested in Econet Wireless Nigeria, Egypt's Orascom had also expressed interest while existing operator, Econet Wireless International of Zimbabwe (EWI) made moves to checkmate new entrants in order to protect its brand name and position as technical managers of the network. It put together a $150 million offer along with Autopage and Altech, two South African companies who were also backed by South Africa's Absa Bank and Industrial Development Bank (IDC), to gain a dominant position before new entrants like Vodacom and Orascom were considered. EWI managing director, Mr. Strive Musiyiwa also told THISDAY in South Africa that: Econet Wireless International had concluded a new 5-year management contract (for Econet Nigeria) and that their interest was to increase their stake from its current level. Musiyiwa said it was a matter of public record that the company EWI, was trying to raise capital for the Nigerian operation and that speculations of a buy-out were inevitable in such a situation. He declined to disclose how much capital Econet was seeking, how it planned to raise the money or what stake the international Econet group held in Econet Nigeria. We are raising capital for the development of our business and we have competitors, therefore we keep competitive information close to our chests," he had said then. Musiyiwa also confirmed that his company had a long-term interest in the Nigerian market and would not be looking to exit Econet Nigeria in the foreseeable future.

Officials of Vodacom that had exchanged letters with Econet Nigeria last week of July 2003, in South Africa were due in Nigeria in the first week of August 2003 to carry out a due diligence on Econet before making its final offer. Vodacom's change of mind about investing in Nigeria, according to a report in THISDAY newspaper in Lagos, was as a result of the robust performance of its competitor, MTN Nigeria Communications Limited, in the country.

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The South African mobile company had few years ago ignored the Nigerian market but given MTN's performance, it had now realised its mistakes and was changing strategies if it was to retain its position as continental market leaders. According to statistics, MTN's impressive growth in Nigeria was threatening Vodacom's claim as the largest network in Africa and since the game was about market share, Vodacom was not ready to lose its dominance on the continent.

A reliable telecom analyst had told THISDAY that MTN Nigeria's contribution to the larger MTN Group performance had brought the group neck-to-neck with Vodacom and was about to overtake Vodacom if MTN was left alone to explore the depth and challenge of the Nigerian market. However, Vodacom's movement into Nigeria was not going to be as easy as it looked as the Econet Wireless Nigeria board was considering other options. Chairman of Econet Nigeria, Mr. Oba Otudeko confirmed to THISDAY newspaper that the board had authorized both Vodacom and Orascom to come and carry out due diligence on the company in August 2003 after receiving their expressions of interest.

According to him, the telecom business was a highly capital intensive one and they were willing, as Econet Wireless Nigeria, to consider offers that would broaden access of shareholders to capital. The more capital for the company the better and that "even if shareholder's existing interests are diluted, it would only lessen their capital constraints in the overall interest of the company". But some directors of the company are not too keen on the EWI consortium's offer of $150 million as it was seen to fall short of the Vodacom's offer that may give it 51 per cent of Econet Nigeria. For these directors, the name, depth and technical competence of Vodacom would be an added advantage

Also, these directors were of the opinion that with Vodacom taking such large interest, the company would be able to take on the existing competition from MTN as well as the potential competition from Globacom and Nitel/Mtel. Globacom's access to funds was viewed as a serious threat especially given its chairman, Dr. Mike Adenuga's Conoils oil resources according to MTNNs Chief Marketing and Strategy Officer as interviewed by the researcher in Port Harcourt in 2003. But Otudeko 115

believed that investment from existing operators as well as from any other who have expressed interest would be welcomed in order to broaden the company's network and in respect of the large capital required to furnish the extensive market place with quality GSM service and enable Econet to excel in the challenging and highly competitive Nigerian telephony market 5.4.2.2. EWN board accepts Vodacoms offer, Meanwhile, rival MTN Nigeria roared ahead in its network expansion. MTN had doubled the coverage and also had more than 1,3m subscribers, compared with EWN's 850 000. Things however went from bad to worse; despite Musiyiwa claims to have pre-emptive rights on increasing his stake in EWN, the Nigerian board accepted an offer from SA's Vodacom to buy 51 per cent of the company. The issue reached boiling point when the EWN board announced it was removing Musiyiwa as deputy chairman, firing his most senior staff and terminating EWI's management contract, worth 3 per cent of gross EWN revenue. Musiyiwa contested the moves as unlawful and was fighting back. The troubles, he shad said then, started in May, when the Nigerian board entered into an agreement stating that EWL could increase its equity stake to 33 per cent for an investment of US$150m. Musiyiwa says that during this period Vodacom made an offer to buy 50 per cent plus one share of the company through an intermediary, Legacy Holdings, chaired by Bart Dorrestein. (Dorrestein is well known in SA as the former head of Stocks & Stocks.) Vodacom CEO Alan Knott-Craig however, denied Vodacom made the first move. We were invited to make a bid by the EWN board on July 22 and then made an offer to them on August 28," he says. Another problem says Musiyiwa, is that "EWL advised Vodacom of the existing offer, but Vodacom proceeded to make an offer for the same shares at the same price, plus an additional offer to buy 20m shares at $4/share from any existing shareholder who wanted to sell". The Nigerian shareholders accepted the Vodacom offer, amounting to $230m. Vodacom announced to the EWN board at the next shareholder meeting on December 19 whether it would take control. The opportunity was enticing and so far no irregularities had been found in Vodacom's due diligence of EWN, said Knott-Craig. He pointed out that with an estimated 130m people; the market had hardly been

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tapped. The strong rand and MTN's success mean the opportunity was less risky than initially perceived. Also, despite the cash problems, EWN was profitable and most of the $230m investment would go into working capital, after having paid back loans. "We have been assisting in terms of an interim management agreement for two months," said Knott-Craig. He said at the time that independent counsel concurred that none of the existing EWN shareholders (including EWI) had pre-emptive rights for more shares. Musiyiwa says that was for the panel to decide. Knott-Craig countered by saying that: "It would appear that EWI has run the Nigerian network badly and overpaid for infrastructure. The Nigerians need cash and want Vodacom to enter as the majority shareholder." 5.4.2.3 Vodacom terminates agreement with VEE Networks However even though the deal had been signed with Econet Nigeria and the name had changed to Vodacom Nigeria, on the eve of the transfer, it was discovered that some money had been paid out to brokers who had helped Econet to secure funding. The Vodacom Board viewed this as very irregular and decided to withdraw from the Nigerian operation. This was primarily because Vodacoms shareholders, Vodafone and Telkom were listed on the New York Stock exchange, the Securities commission would have been interested in getting to know the details of the deal, and the shareholders stood to lose a lot. In the US, the Foreign Corrupt Practices Act of 1977, prohibits US companies, as well as companies listed on the New York Stock Exchange, from making corrupt payments to obtain or retain business and the payments were viewed by the Vodacom board as falling under this category. Besides, according to newspaper reports, there were also some massive transfers of shares just before the deal was signed, even though the Vodacom board had put a restriction on that. 5.4.2.4 Management shake-up at Vodacom Clearly the shareholders were concerned not only about the debacle at Vodacom Nigeria, but also the ensuing threat of legal action by Strive Musiyiwa CE of Econet Wireless International, who had a history of litigation and had won against Bob as Zimbabwes President Mugabe was known. So serious were concerns at Vodacom

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that some directors, particularly Mthembu, who had been the Deputy CEO and Managing Director of Vodacom International which was responsible of Vodacoms forays into Africa, particularly in Nigeria, lost their positions in a massive shake-up in 2004. In summing up the Nigerian issue, Vodacoms Group CEO Alan Knott-Craig in the Group CEOs 2004 Annual Report had this to say:
Our

attempts to gain a foothold in the Nigerian market have been much publicized and

drawn out. We have been proceeding with a process designed to minimize our risks which included extensive due diligence carried out by reputable international experts in this field. Effective April 1, 2004 Vodacom International Mauritius entered into a five year management agreement with VEE Networks Limited (formerly Econet Wireless Nigeria Limited), subject to the right of termination in favor of each of the parties. In terms of the agreement, Vodacom International Mauritius would have managed VEE Networks cellular network operations in Nigeria for a fee which is based on VEE Networks turnover. VEE Networks would have been allowed to use the Vodacom logo and brand name. Vodacom International Mauritius also had the intention to acquire an equity stake in the business of VEE Networks.

However, on May 31, 2004, Vodacom International Mauritius and VEE Networks mutually agreed to terminate the management agreement entered into on April 1, 2004. Vodacom International Mauritius will continue to provide technical support to VEE Networks for a period of up to six months. Vodacom International Mauritius has also decided not to pursue an equity stake in the business of VEE Networks. Despite not being able to enter the Nigerian market, our African operations grew at a healthy rate, with total customers in other African countries increasing by 93.0% to 1,492,000 (2003: 773,000).

More tellingly on how costly it had been for Andrew Mthembu as well as the head of strategy was the statement to the effect that:

The final element of success continues to be our strong management teams across the various companies. These teams have recently been enhanced by new appointments which reflect our commitment to employment equity. There have also been strategic changes to the management structure to leverage operational efficiencies across the Group. The changes, which took effect on April 1, 2004 will see Pieter Uys head up all the operational aspects of the whole of the Vodacom Group including the African operations as Group Chief Operating

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Officer. These have been well received in the company, and the improved focus is already showing encouraging signs.

Pieter Uys, was not an employment equity appointment, he had just replaced one, Mthembu. 5.4.2.5 Econet Wireless International suing Vodacom Besides, Econet Wireless International was suing Vodacom for inducing the Econet Nigeria to scupper the deal with Econet Wireless International. Vodacom announced a pullout from the Nigerian operations, but many of its employees were still working with the company. An interesting twist to this tale was that the then Chairman, Oba Otudeko, was forced to resign. He had been instrumental in the transfer of funds saga that had led to Vodacoms pullout. Maybe there is method in Vodacoms madness in pulling out of the lucrative Nigerian market. On other matters the Vodacom Group 2005 annual report summarized Nigerian saga as follows:
The Group is further also a defendant in certain legal proceedings related to its activities in Nigeria. The outcome or extent of any claims against the Group, should the Group not be successful in defending these claims, is unknown. The directors are not aware of any other matter or circumstance since the financial year end and the data of this report, not otherwise dealt with in the financial statements, which significantly affects the financial position of the Group and the results of its operations.

5.4.2.6 Vodacome Vodago Vodacoms micro-cultural elements particularly its shareholding, with Telkom on the one hand who was controlled by the strategic equity partner, SBC, (who had been a shareholder at MTN as well) and by Vodafone, who already had an even larger footprint on the continent, contributed to some of the inconsistencies in the strategic plot, strategic projections and strategic investments that it was to make in Nigeria. Rindova and Fombrun (1999) assert that both a firms micro culture and its resource commitments determine the strategic plot from which its investments and projections originate. They go on to assert that consistency among the three processes, namely, strategic projections, strategic investments as well as the strategic plot, enhances a firms competitive advantage; inconsistencies, like the one Vodacom experienced in

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Nigeria, caused both domains resources and culture to lag behind and misfire. They go on to add that strategic projections not supported by investments can lead to loss of credibility.

Vodacom became the butt of jokes in the local media with one of the papers labeling its Nigerian fiasco as Vodacome, Vodago a pun based on Vodacoms prepaid model; the paper lamented Vodacoms exist as a lost opportunity, then, for they had hoped for Vodacom to challenge MTNs stranglehold on the market. The article outlined the reasons why, now V-mobile, formerly known as Vodacom Nigeria, formerly known as Econet Nigeria, was having partnership/shareholder problems. Investments not supported by strategic projections may fall short of realising their true value-creating potential; and if both processes are not supported by the strategic plot of the firm, as seems to be the case with Vodacoms foray into Nigeria, they lacked the continuity to feed into a vicious circle that would have constructed Vodacoms new competitive advantage. However the processes initiated by Vodacom in Nigeria, were only one side of the coin, the construction of competitive advantage would have depended on how MTN Nigeria would have responded and revised the competitive conditions in that market. 5.4.2.7 Belated lift of ban As of November 2006, Vodacoms restriction on aggressively expanding north was eventually lifted by Vodafone. The only problem then was that most countries in Africa and the Middle East already had competition, making Vodacoms choices either a very expensive regional purchase or continued investment in converged services. In contrast, MTN was spending more money outside of South Africa. That has meant that Vodacom more than doubled MTNs cumulative capital expenditure since 2002 in South Africa. Vodafone will not stand in our way in pursuing opportunities in Africa, and they have encouraged us to go forth and conquer. I dont think there is much we couldnt afford (Knott- Craig quoted in Stones, 2006: 21). With the delay that Vodacom faced in its restrictive shareholder agreement, the other operators rapidly expanded and there are now few small mobile companies available to purchase. The added pressure of having to compete in Africa against, France Telecom, Orascom, (MTC) Zain and MTN meant that Vodacom might have to look to purchase a regional player.

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5.5 Conclusion This chapter sought to trace the rivalry between MTN and Vodacom and how it subsequently played itself out in the Nigerian market. That MTN has been a runaway success is an open secret, as the financial figures continue to tumble out of Nigeria and how they have since used that as a spring board to seek new markets in the Middle East. The saga at V-Mobile with Econet Wireless was resolved with MTC/Celtel acquisition. Meanwhile in the entire furore, Glo-mobile was quietly making inroads into the Nigerian Telecoms sector; the one person that is benefiting from all this is the consumer who has seen the cost of making a call come tumbling down. Vodacom came into the Nigerian market lat and they had problems. It has been suggested that Vodafone and Vodacom could not afford to not to be in the growing markets and that Vodacom might make a bid for Globacom, that has not happened, infact Globacom made an offer for the 15% stake that Vodafone acquired from Telkom, but this was not seemingly been considered at the time. That Celtel had approached Vodacom in 2004 and then Vodacom had spurned the offer to purchase brings into question what Vodacoms strategic plot with regards emerging markets was. It certainly was not because of lack of money, for Vodacom was cash awash. With the continent attracting more players it remains to be seen what options Vodacom will opt to choose, in the unfinished story of the rivalry of these two SA mobile operators. But what remains clear is that Vodacoms cautious strategy in emerging markets like Nigeria was a failure. Using the analytical framework influencing diversification Fig 2.1, the next chapter will conduct a comparative analysis of the two operators to determine the measure of MTNs effectiveness in pursuing a diversification strategy.

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Chapter 6

Comparative Analysis

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6.1 Introduction

This chapter will conduct a comparative analysis of why Vodacom was successful in South Africa but more importantly why MTN was subsequently more successful in Nigeria and on the African continent. In this chapter we will use the framework presented in Figure 2.5 a systematic model of competitive advantage, to show how the actions of Vodacom in South Africa and MTNs response to Vodacoms dominance shifted the competitive terrain to Nigeria where Vodacom ultimately floundered. Fig 2.1 an analytical framework influencing diversification will provide the basis for drawing conclusions about the effectiveness of MTNs geographical expansion strategy as well as what lessons can be drawn for corporate strategy formulation and decision making. Sources of competitive advantage

As outlined in Chapter 2, competitive advantage derives from activities that span the four domains of action, the first dimension comprises of the material and interpretational domains; the second dimension divides the competitive terrain into domains that fall either inside or outside of a focal firm. Competitors affect the construction of competitive advantage by taking actions in the four domains and creating options for constituents. The telecoms competitive terrain, that MTN and Vodacom inhabited in 1994-2001 as well as between 2001-2004, can be defined not only by the resource conditions in various markets and potential rents associated with them (Scherer and Ross, 1990; Barney, 1986b), but also by the knowledge, expectations, and sensemaking of their respective firms managers and of shareholders that interacted with the two firms in the telecommunications industry. Sensemaking (Weick, 1995) in the African telecoms industry comprised comprehending, understanding, explaining, attributing, extrapolating, predicting (Starbuck and Milliken, 1988: 51) andultimately deciding to allocate resources and. embark on a geographical expansion. Vodacoms and MTNs rivalry manifested itself in the variety of options made available to its shareholders both in South Africa and in other markets that included Nigeria. The choices that Vodacom and MTN shareholders made among the 123

competitive offerings that they faced in South Africa and in Nigeria in particular, subsequently measured the relative success of each of their strategies and the degree to which either gained or lost competitive advantage on the redefined African telecommunications competitive terrain in 2001. Insofar as Vodacom and MTN interacted with the same constituents and vied for their approval and resources they were each others competitor (Freeman and Hannan, 1983). Thus the boundaries of the telecoms industry and markets were determined not only how Vodacom and MTN defined their business (Abell, 1980) but also by how their shareholders understood and chose among these competitive offerings. Therefore the African

telecommunications domain is better described not as an industry but as an organisational field consisting of actors, Vodacom and MTN, amongst others, who interacted repeatedly, exchanged information, formed coalitions and were aware of each other (DiMaggio and Powell, 1984).

The two dimensions described above are the four domains of action in which Vodacom and MTN interacted. The externalmaterial domain consisted of various marketsprincipally the product, labour, factor, and capital marketsin which they exchanged resources. In the internalmaterial domain both Vodacoms and MTN resources were deployed in the production of goods and services. In the internal interpretational domain knowledge, values, and beliefs moulded both Vodacoms and MTNs micro-culture. In the externalinterpretational domain expectations, performance standards, and evaluations of firms evolved and formed the telecoms industrys macro-culture. SWOT analysis of Vodacom and MTN (1993-2001) According to Du Plessis, Jooste & Strydom (2001) as well as Cronje, Du Toit, Marais & Motlatla (2004) a SWOT analysis is an approach that can be used to provide a structured framework for evaluating the strategic positioning of business organisations by identifying their strengths, weaknesses, opportunities and threats. As illustrated in Table 6.1 below, Vodacoms carefully controlled strategic projections portrayed the company as a dominant and powerful brand, this position was emphasised by every commercial that was packed with the power of Vodacom, especially the Yebo Gogo Adverts and its strong, gruffy and commanding male

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voice over in the Professor and the Clown, adverts particularly. All the other advertisements also reinforced the image that complemented Vodacoms dominant position in the market but also projected it as not only a company but a national resource and tried to position its products as essential ingredients for national economic growth. MTNs adverts were more subtle, poking fun at times at the Big Brother, with jingles and their pay offline was The better connection. MTN projected itself as an entrepreneurial, enterprising and innovative youthful company with a can do attitude. Vodacoms main weakness lay in the fact that its overall ARPU was lower than that of MTNs. With the South African market nearing saturation and both operators faced the threat of losing market share with the entry of Cell C in 2001, Vodacoms market share dropped from the highs of the early 1990s 60% (1999), 59% (2000), 61% (2001), 61% (2002), to 59% in (2003). In the year 2003, in which it was meant to be seriously considering challenging MTN in Nigeria, Vodacoms management hands were tied as the major shareholder, Telkom, was on the verge of listing on the New York and London Exchanges and Vodacoms expansion plans took a back seat; the other shareholder Vodafone was also a player in the African telecoms markets with operations in Egypt and Kenya, had a shareholders clause prohibiting Vodacom from expanding north of the Limpopo River. As the second operator MTN had felt the impact of Cell Cs entry into the market, more than Vodacom had, as its market share dropped from the highs of 40% (1999), 41% (2000), 39% (2001), 36% (2002), to 35% in (2003). However, MTNs response to Vodacoms dominance was a strategic plot to diversify geographically and it began to pay dividends when they reduced their reliance on their home market, South Africa. By 2001 Nigeria had come on stream and started making significant contributions to group turnover by 2003. While both operators were feeling the effects of the entry of Cell C and had lost considerable market share and needed to find new sources of revenue, fortunately for MTN its Nigerian investments had begun to contribute significant revenues by 2003.

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Table 11 Swot Analysis of Vodacom and MTN

POTENTIAL STRENGTHS VODACOM Retained 50% market share in SA market Retained largest share of high-end postpaid and business users Was best placed to extract further value from existing customers through advanced data services Dominant and powerful brand Extensive coverage and distribution channels Benefited from its shareholders Telkom and Vodafone, source of competitive advantage First Mover advantages Strong cash flows MTN Played second fiddle to Vodacom retained an average of 40% of in the post-paid market in SA High ARPU targeting high-end users and focused on new innovative services Well defined position in the SA market

POTENTIAL OPPORTUNITIES VODACOM Operations outside of South Africa in other African countries will become increasingly important as the SA market matures Had projected to earn 30% of revenues outside of South Africa Expansion in SA market by introducing new products like those targeted at low-end users Developing sub-brand aimed at prepaid market

MTN Has over 40 % of new post-paid customers Maintaining its strong showing amongst the low-spending contract customers, picking up higher percentage of future prepaid customers Increasing presence in other African countries, with revenues set to increasingly come from these operations. POTENTIAL THREATS VODACOM The shareholders agreement prohibits Vodacom from expanding north of Limpopo Will face increasing competition from MTN outside South Africa Political, regulatory and currency risks Entry of Cell C into the market will result in loss of market share Entry of second fixed line operator will place pressure on Telkom and which in turn would impact on Vodacom and introduce competition MTN Price war sparked by Cell C in 2001 Aggressive price tactics could significantly reduce MTNs ARPU MTN would go into defensive price reduction if Cell C decided to target MTNs Core demographics

POTENTIAL WEAKNESSES VODACOM Overall ARPU lower than MTN Over reliance on post-paid exposing it to price competition with the entry of Cell C in 2001 15 year roaming agreement with Cell C that started operations in 2001

MTN Lost six percentage market share when Cell C was launched

Source: Author

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Vodacom was a different story, though. As Porac et al. (1989: 399400) observed the material and cognitive aspects of Vodacom and MTNs business rivalry in 2001 were thickly interwoven technical transactions along the value chain that provided an ongoing stream of cues that had to be noticed and interpreted by organizational decision-makers, particularly their respective shareholders. These transactions were themselves partially determined by the cognitive constructions of Vodacoms and MTNs organizational decision makers. Beliefs about the identity of competitors, suppliers, and customers focussed the limited attentional resources of decision-makers on some transactional partners to the exclusion of others. Although material and interpretational conditions in the telecoms industry in South Africa had produced each other, the development of Vodacoms competitive advantage was not an automatic process.

Both MTN and Vodacom had selectively invested and allocated resources, projected and reflected images in their quest for dominance in the SA market between 19932001. Weick (1995: 81) describes the processes of selective perception and action as enactment and extraction of cues: Vodacom and MTN had enacted cues in the sense that each competitor made strategic choices on the basis of its beliefs, and these choices put things out there that constrained the information that each of the firms got back. What the firms got back affected their next round of choices as was the case with the geographical expansion into Nigeria. In the model presented in Figure 2.5, Vodacom and MTN put out there technologies, products, investments, and communications. Their respective shareholders then used the cues provided by the respective firms in their own enactment cycle of resource allocations and communications. Both sets of shareholders by 2001 had extracted cues about Nigeria, in the sense that others saw these enacted changes and extract them as cues of larger trends. Thus, the shareholders come to use the same cues for their strategic choices, as does the firm that first enacted those cues and made them available for extraction. This aspect was important in so far as Vodacom was concerned; its strategic choices about Nigeria were based on the cues that MTN was projecting about the Nigerian market. Post 2001 geographic expansion Thus as Chan-Olmsted and Jamison (2001) have outlined both operators needed to be aware that growth would not only be in the home market through introducing new 127

products but that they also needed to expand geographically. In turn, both Vodacom and MTNs shareholders read into each others allocations of resources and definitions of success signals about market trends that guided their subsequent investments and projections in the post 2001 period. Industry features, such as dominant designs, industry concentration, mobility barriers, isolation mechanisms, reputational orderings, exemplars, winners and losers, emerged and crystallized from these processes. Thus, Vodacom and MTN externalized their strategic choices in the material and interpretational domains through the processes of investments, projections, allocations of resources, and definitions of success. They also objectified and internalized the resulting pattern of interactions by forming strategic plots and industry paradigms through which they adjusted beliefs and behaviours in ways that reflected their respective objectified reality. Along the way, therefore, Vodacom and MTN jointly constructed the competitive reality that they come to inhabit after 2001

Table 12 Comparative Summary of Key Financial Indicators 2001-2004 VODACOM Number of subscribers 2001 Average market share growth Annual growth Revenue 2001 Profits 2001 Revenue 2003 Profits 2003 Revenue 2004 Profits 2004 5.2 million 55% 20% R13, 3 billion R2,6 billion R11, 3bn R1, 4bn R23.5 billion R3-billion MTN 2.7 million 35% 22% R8,3 billion R1,1 billion R11, 2bn R2, 1bn R23.9 billion R3.3 billion

As can be deduced from the above indicators, Vodacom had 5.2 million subscribers by 2001, which was almost double the number of subscribers than MTNs 2.7 million, subscribers. Vodacom had averaged an annual market share growth of 55% compared to MTNs 35% and had enjoyed an annual growth was 20% compared to MTNs 22%. Its revenues, influenced by subscriber growth, particularly the growth of prepaid subscribers in 2001 were R15.4 billion compared to MTNs R10 billion. Vodacoms shareholders, Telkom SA LTD and Vodafone had enabled it in South Africa, to gain competitive advantage and first-mover advantages in SA. Its relationship with Telkom

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was also instrumental in its realization of profits through favorable interconnection agreements

However as table 6.2 above shows, MTN shifted the competitive terrain from 1997 and in 2001 in particular, through carefully planned geographical expansion strategy and targeted strategic investments that enabled it to acquire skills as an emerging market player in its regional hubs, but particularly in Uganda and Cameroon. Thus its strategists were able to make accurate projections about Nigerias rent earning potential as they had operations in West Africa, in Cameroon, which enhanced its reputation as entrepreneurial, enterprising and innovative. Vodacom acted as a venture capitalist and focussed on investing in its home market. In so doing, the firm accelerated its growth in its home market but radically departed from its strategic plot as the biggest and the best. Most observers questioned Vodacoms neglect of the Nigerian market, others attributed its neglect to its wellestablished reputation in the macro-culture of the organizational field of having dominance in the home market and its reputation gave impetus to the development of a new telecoms industry paradigm, regional expansionism, which encouraged MTN expand and shift resources to other markets, particularly Nigeria. In the years between 1994 and 2001 Vodacom the company topped Financial Mails reputational rankings of most admired companies and its market value reached a record high. By 2003, however, Vodacoms dominance in the African telecoms was actually beginning to dissipate. MTN, according to Marcelle (2001), made more strategic investments in cost reduction and product innovation. A new industry paradigm with a high premium on innovation, flexibility, and adaptabilityall Vodacom weaknesses emerged. Many elements of Vodacoms corporate culture, such as emphasis on fighting for market share in its home market rather than opening new markets, were not well suited to the fast changing telecommunications market.

The new industry paradigm in African telecoms industry included a different set of success measures than those Vodacom had mastered. They included: organisational integration, geographical expansion, continuous innovation, commodity prices, organisational integration and declining brand loyalty. Thus, a new industry paradigm, a different pattern of resource allocations, and a changing macro culture of 129

the organizational field characterized Vodacoms competitive environment. At Vodacom however, the changes were few. Although Vodacom had been the first company to expand geographically when it entered new markets in Lesotho in 1995, then Tanzania 1999, the DRC 2001 and Mozambique in 2003. The demographics of these countries, particularly their teledensity, were unlike the large Nigeria market however with the avenue to the north of Africa closed, cash awash Vodacom invested in a set of investments that departed from its traditional resource base and microculture. When the Nigerian market opened up in 2001, it had not built sufficient knowledge about the West African markets as it did not have any operations in West Africa and could not sufficiently understand the West African culture like MTN had with its Cameroon operation. Thus Vodacom entered and exited that market and applied its traditional competitive tactics (high growth in the home market) rooted as they were in its micro-culture and resource strengths. According to a competitor: In the first eight years of their operation in SA, and accumulation of resources what did Vodacom do with them? They laid the biggest goose egg for a golden goose opportunity but did not do anything with it.

It was all sales and distribution and marketing and advertisingand The Professor and the Clown in the Yebo Gogo adverts. Vodacom was locked into a Big Brother mentality born of the old telecoms industry paradigm: It confidently assumed that it was going to maintain its dominance on the continent by using a focus strategy that meant massive investment in its home market. The result was a lack of strategic investments and projections that could successfully give it economies of scale and scope as well as skills to compete as an emerging market player and subsequently add value to its stock. Lack of added value encouraged constituents to shift their resource allocations to rivals, like MTN.

At Vodacom, it took drop in profits as well as declining earnings estimates as compared to MTN in 2003 and 2004 (see table 6.2) before the company announced a long-overdue change in its strategic plot. The business press reported it as Vodacom undergoing its toughest self-scrutiny in years (Sunday Times 4 July, Business Times 2003). However, in the process of re-evaluating its strategic plot, Vodacom took actions consistent with its extant resource base and micro-culture, rather than with the changes in the industry. In an industry driven by innovation Vodacom chose to follow 130

caution in new markets and to challenge its main rival in the biggest market in Africa Vodacoms long-standing cultural and resource biases continued to affect its strategic choices throughout the period. They limited Vodacoms ability to create value in ways consistent with the expectations formed in the new industry macro-culture.

In contrast, rival MTN invested heavily in new markets, new product development, organisational integration, organisational learning and capacity building through the rapidly deployment of network that climaxed with the entry into Nigeria a market that provided the company with economies of scale and scope that positively affected its performance. It also produced some of the most sophisticated strategic projections in the industry, including a famous ad alluding to Vodacom as The Big Brother (Orwell, 1982). Indeed, for a long time Vodacom continued to behave as if the combined actions of its entrepreneurial rivals, sophisticated users, and savvy investors that were looking at the opportunities on the continent had not changed the African telecoms industry conditions. Barr, Stimpert, and Huff (1992) provide evidence of a similar process in the railroad industry. In their study, one firm failed to adapt to the changing conditions in the industry, not because it failed to notice the changes, but because it failed to change its interpretations of how those changes would affect its performance. Lazonick and West (1995) also point out how in a similar manner American companies did not respond more quickly and effectively to the Japanese competitive challenge. In remarkably similar ways, lack of change in the internal interpretational domain of Vodacom led to lack of actions that would have enabled it to sustain its advantage. Most analysts, however, attributed Vodacoms loss of competitive advantage to its focus strategy that emphasised over investment in rapidly saturated home market, thus minimizing the effects of scale and scope in its investment. As Pyramid Research (2004) put it: Vodacom and Vodafone could not reasonably have decided to stay out of the Nigerian market. But the way it plunged in was a historic blunder. Its disinvestment in Nigeria opened the industry to a range of new entrants, like Zain. The market exploded and MTN became the Africas biggest network operator. This explanation suggests that Vodacom lost its advantage when it lost its quasimonopolistic dominance in the market. Vodacom lost its advantage because it was not quick and effective enough in its response to MTNs competitive challenge. Its 131

structure was such that it could not reinvent the strategic plot that aligned its resources and micro-culture, and so could not respond to the new definitions of success and resource allocations of its rivals. Overall, Vodacoms loss of competitive advantage in the African telecoms market reflected the firms failure to see how competitive advantage had emerged from the combination of its actions and those of their rivals, MTN, in both material and interpretational domains. Vodacoms structures and strategies were not sufficiently integrated to mount an effective and quick response to MTNs challenge. 6.2 Comparative Analysis This section of the research will involve a comparative analysis that focuses of on specific issues namely (1) shareholding and strategy (2) entrepreneurial and enterprising management (3) micro-culture and (4) organizational structuring for geographical expansion. Table 6.3 presents a summary analysis of these key factors. 6.2.1 Shareholding and Strategy When the mobile networks rolled out in 1994, Vodacoms shareholding structure was an asset. Its shareholding consisted of 50% by incumbent Telkom, a fixed line operator (whose majority shareholder was the government that was pursuing a policy of managed liberalisation and the maximisation of state assets) and 35 % by Vodafone PLC, the world's largest mobile operator. This shareholding structure provided Vodacom with access to funding, technology and skills that enabled it to gain competitive advantage in its home market. As Chan-Olmsted and Jamison (2001) have asserted that the drivers of growth for the telecommunications industry are the expansions both of its products and geography. By quickly rolling out its network, after launch in April 1994 Vodacom took the lead. By August 1994 Vodacom had covered every metropolitan area plus more than 30 towns in South Africa and extended its coverage to include some 3000 km of national roads. This first mover advantage enabled Vodacom to gain the lead in the SA market. However the existence of two dominant shareholders created a huge problem in so far as the company was not able to resolve which strategy, fixed line or mobile would be the focus of expansion of the business.

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Telkom and Vodafone had enabled Vodacom to construct its distinctive strategic positions through three generic processes: (1) they picked strategic a investment, which was the Vodacom Group in South Africa, (2) they made strategic projections, and (3) they developed a strategic plot, derived from Vodafones own mission, which was through Vodacom, to have total dominance in the markets in which they operated.
Table 13 Summary Analysis of Key Factors Indicator Shareholding and Strategy Vodacom Had conflicts which led to curtailed expansion north of the Limpopo, no clearly articulated strategy Entrepreneurial enterprising Management Enabling Micro Culture Organisational structure for geographical expansion Did not have Not well organised Had Had clearly identified and Did not have Had MTN More coherent

regional hubs; Great Lakes Region, Southern Africa

and the Central/West Africa

When the apartheid regime dubiously issued only two mobile licences in 1993 and the newly elected ANC government took over in 1994, it chose instead to pursue a policy of managed liberalisation as well as the privatisation of state assets, the new government created an environment where by the value of Telkom increased as its revenues increased primarily on the back of the expansion of the mobile industry and Vodacom in particular. The new government, while pursuing a policy of managed liberalisation and opening up the sector not only to Black Economic Empowerment but also for the provision of universal access, did not alter the competitive conditions that had been set by the previous regime, namely, issuing only two mobile licences and creating competition as was the intention of the White paper on ICT as Cohen (2002), Gillward (2004) as well as Horwitz and Currie (2007) observed. This focus on the home market compromised Vodacoms ability to expand.

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Vodacom has however been seriously hamstrung in Africa. Evidence of this is provided in the comparative performance of other operators. MTN Group had 80,7m subscribers (in the quarter to September 2008 see Table 6.4 below) (FM Tech 2008). It grew its West and Central Africa and Middle East and North Africa operations by 10% each (to 35m and 22,6m, respectively). These are big numbers, especially when considering that Vodacom's group wide subscriber base increased by only 13% at the interim stage to (just) 35,7m. Future growth is not going to come from South Africa, although both MTN and Vodacom realise that (MTN understood that a good number of years ago see table 6.5 below). MTN estimated there would be 240m addressable subscribers in Africa and the Middle East by 2012
Table 14 Vodacom and MTN subscriber growth Sept 08 Vodacom Group subscriber growth (1H 2008 MTN Group subscriber growth (Q3 2008 to to September) September) South Africa up 8,4% to 25,2m South and East Africa 7% (to 22,3m) Tanzania up 34,1% to 4,9m West and Central Africa 10% (to 35m) DRC up 18,8% to 3,8m Lesotho up 35,5% to 450 000 Middle East and North Africa 10% (to 22,6m) Mozambique up 19,3% to 1,3m Source: FM Tech (Sept 26 2008)

This lack of clarity has meant that Vodacoms main shareholder Telkom has expanded into Africa, with investments in Africa-Online an internet service provider with presence in 9 African countries, Telkom acquired the company in order to expand ISP services in the rest of Africa together with Telkom Media. Telkom also acquired 75% of Multilinks, a Private Telecommunications Provider, in Nigeria, with a Unified Access Licence, allowing fixed, mobile, long distance and international communications services. Clearly the fixed line shareholder was pursuing a growth strategy that they had denied its mobile wing Vodacom. Other operators in these markets like Zain and France Telecom also got it (Zain Africa is aiming for 110m subscribers by 2011, up from 56,3m in September). These operators have steadily built their presence in Africa since 2003, while Vodacom has been cautious about expansion into Africa. The other headache that Vodacom has is that its other shareholder Vodafone already has a presence in Africa (see Table 6.5 above and Table 6.6 below).

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Table 15 Selected mobile operator presence in Africa 2005/12/31 Mobile Operator Vodacom MTN Zain( MTC) France Telecom Vodafone Home Country South Africa South Africa Kuwait France UK Countries 2003/12/31 5 6 0 10 3 Countries 2004/12/31 5 6 0 10 3 Countries 2005/12/31 5 6 14 10 3 No of subscribers (mil) 20,1 18,29 5,33 5,55 11,33

In 2008, Vodafone completed the purchase of 70% of Ghana Telecom (GT) for $900m. Ironically, it was competing against Vodacom in the sale process; again this highlights conflicting strategies with its shareholder, Vodafone. None of the twenty investors in an auction in 2007 were willing to pay over $500m for the stake, which meant that Vodafone overpaid for GT. Ghana Telecom may end up reporting to London, another market off limits to Vodacom, thus denying it the opportunity it badly needed to further enhance its knowledge of the West African market. Vodacoms shareholders lacked an appetite for risk. However, as Ball (1999:434) contended Vodacoms shareholders needed to have been aware that strong competitors like MTN would have made a profitable operation difficult to attain in Nigeria, unless Vodacoms shareholders were following a strategy of being present where its global competitors were. In this case, Vodacom on entering the Nigeria market and any other market for that matter would have had to be an aggressive risk seeker more concerned with gaining more market share and neglecting increased risk and relatively short term low profits. Vodacoms shareholders would had to have stomach for taking risk and realise that caution had them playing second fiddle to MTN. Vodacom is now "officially" Vodafone's entry point into investing in subSaharan Africa, however there are a number of messy loose ends that need tying up. Vodafone's operation in Kenya, Safaricom (of which it and partners own 40%), should (in theory at least) be brought into the Vodacom Group fold somehow. MTNs shareholders were TV M-Net, Transnet and Fabcos. M-Cell then held 72 per cent interest in MTN and negotiations continued for the remaining 28 per cent interest in exchange for the ordinary M-Cell shares. Marcelle (2001) noted then that this structure had changed over time and that at the time Johnnic Holdings had seconded

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its executives to MTN. Most notable in its shareholding was the lack of government involvement as the shares that were held by Transnet were subsequently acquired by the managers. Thus there were no conflicting shareholders at MTN unlike with Vodacom. The financial re-engineering allowed for management to become shareholders in the company and this provided them with vested interest in increasing the value of the business. There was also clearly articulated geographical strategy that was developed in response to Vodacoms dominance in the local market

The influence of the government

As Marcelle (2001) noted the government had a very significant role in the telecoms industry both in terms of regulation of the industry but also as a player, as the major shareholder particularly in Telkom and by default a share holder in Vodacom. As such Vodacom became entangled in governments drive to shelter Telkom from competition and maximise the value of the enterprise prior to listing in 2003. This came at a time when Vodacom should have been expanding geographically fighting MTN for market share in Nigeria. Vodacoms strategy to enter Nigeria became secondary to Telkoms listing on the Johannesburg and New York Stock Exchanges and Vodacom lost a valuable opportunity to challenge MTN effectively. As illustrated in Chapter 4 the value on Telkoms shares appreciated on the back of Vodacoms revenues in South Africa. Thus once again the shareholders influence affected the strategic direction of Vodacom, a mobile operator, by rendering its expansion strategy subservient to Telkoms prospects.

Telkom SA was owned by the SA Government and Thintana Communications. The Shareholders Agreement on this basis of SBCs investment Thintana bound the Government to terms rather favourable to the SBC. The Shareholders Agreement was never made public because, according to Jim Myers (an executive at SBC), some of its provisions bound the Government so stringently and gave Thintana Communications so much control, that had they become public knowledge it would have raised huge outcry. According to Horwitz and Currie (2007) clauses in the Shareholders Agreement stipulated that once the Telecommunications Act was in place neither Telkom (also Vodacom) nor Thintana Communications would be compelled to follow any legislation that violated the Shareholders Agreement. This 136

created strong incentive for Government to prevent legislation that might violate and make public the Shareholders Agreement. Vodacom was caught up in this battle and could not be seen to be acting in a manner that would jeopardise SBCs investment by embarking on risky ventures in territories that had unproven regulatory processes. MTN on the other had was freer of governments direct interference, having divested itself of governments influence earlier on in its corporate life when its management bought off Transnets shares in the business. This left MTN freer to pursue a growth strategy that was not hampered by being part of governments drive to increase the value of Telkoms shares. While both Vodacom and MTN benefited though from governments influence at macro level with the signing of the SADC ICT Protocol as well as the governments signing of the WTO Telecoms Agreement, but at a micro-level, where it mattered most, governments influence at shareholder level did not influence the fortunes of MTN. Instead governments role as a player and regulator in the telecoms sector had a negative impact on the fortunes of Vodacom, while it may have contributed to Vodacoms dominance in South Africa, in the fast changing terrain of African telecoms, it was more of an anchor that produced drag on Vodacoms ability to react to newly defined environment that its rivals were taking advantage of.

Thus in as far as the shareholding and strategy aspect was concerned Vodacom had issues with its shareholders whereas MTN seemingly was clear about what strategy to follow in its growth and was able to follow up this in its eventual entry into Nigeria. The MTN Group CEO Phuthuma Nhleko and his executive made the decisions, whereas at Vodacom, Group CEO Alan Knott-Craig had to refer to his main shareholders Telekom and Vodafone about what strategies they were to follow in which markets. 6.2.2 Entrepreneurial and enterprising management Vodacoms management culture derived mainly from it major shareholders, Telkom and Vodafone. As a result of governments preoccupation with increasing the value of

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Telkom in preparation for its listing in 2003, the shares in Vodacom were also by proxy a national asset. Thus Vodacoms executive managers, who in the main were white, could not reasonably have expected to purchase shares in a company whose other shareholder was actively pursuing a BEE policy as Horwitz and Currie (2007) noted. Thus although the managers may have had good intentions in terms of where they wanted the company to go as was illustrated by Vodacom Group CEO Allan Knott-Craigs lament of the shareholders lack of stomach for risk in Nigeria, he could only watch in frustration as he was ordered to hold back from entering Nigeria, particularly at a time when MTN was racking millions, all in order to protect Telkoms listing on the Johannesburg and New York Stock Exchanges, in May 2003. This was at a time when they should have been aggressively challenging MTN in Nigeria. The government of South Africa considered Vodacom as a national asset that could not be risked on the shores of an unstable environment like Nigeria. There was a limit to what management could do at Vodacom, while they could only make recommendations, ultimately the decision making rested with the shareholders, whose perceptions of risk and return affected every decision that they made regarding the geographical expansion and the strategic investments of the organization. Vodacom was in the spotlight because of governments interest in the value of Telkom. MTN on the other hand had an entrepreneurial culture and evidence of this was provided by the financial restructuring of the company, a very enterprising and entrepreneurial management team used the Newshelf Company to buy Transnet stake. On completion of the transaction the PIC housed them, with the result that Newshelf holds 13,06% of MTN. Newshelfs shares are held by the Alpine Trust on behalf of both managers and eligible employees. The trustees are MTN Group CEO Phuthuma Nhleko, COO Sifiso Dabwenga, Paul Jenkins, Wendy Lucas-Bull, Zakhele Sithole and former MTN director Irene Charnley. Newshelf originally acquired the shares in MTN from Transnet between December 2002 and March 2003 at an average price of R13, 90/share. If debt repayments and other costs are removed from the equation, the value of the investment has appreciated by nearly 600% in six years - and thats after MTNs share price pulled back sharply in the wake of the groups failure to make an acquisition in India in 2008 and the subsequent turmoil in world financial markets. When MTNs share price peaked at R160 on May 5, Newshelf was worth R39bn.

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Even with the decline in the share price over the past six months of 2008, the Newshelf 664/Alpine Trust structure has proved to be one of the most financially successful empowerment schemes in post-apartheid SA. It has proved controversial, though, since some senior white staff have also benefited. However, according to MTN the trust aims to allocate 75% of the benefits to black staff. The structure at MTN allowed the management team to work knowing that they were not only creating value for the firm, but that in the long run they were also creating value for themselves in the asset that was their company. That MTN was not in the spotlight like Vodacom also meant that its managers were not under as much scrutiny. Financial reengineering such as the purchase of shares from Transnet, has allowed MTN management to realize that they were not only managers, but also decision makers, the buck stopped with them, they did not have to refer their decisions to shareholders, because they were shareholders themselves. They could interpret the changing market conditions in both the material and interpretational domains as well as in the competitive terrains both inside and outside of the firm. They could also assess the resource conditions in the various markets and potential rents associated with them, as they had had the knowledge of operating in the these markets from their operations in the three regional hubs, the Southern African hub, the Great Lakes Region as well as the Central/West African region. They could thus reasonably fulfill the expectations of their customers and their sensemaking enabled them to make decisions that enhanced the value of the firm. Sensemaking for the MTN managers comprised of them comprehending, understanding, explaining, attributing, extrapolating, predicting and ultimately, unlike their counterparts at Vodacom deciding to engage in exchanges and to allocate resources

In this instance the entrepreneurial and enterprising nature of management at MTN played a pivotal role ultimately in the success of the enterprise. Vodacoms managers on the other hand despite their competence and the sterling work that they did to make Vodacom the dominant force that it was in the telecommunications industry in SA and Africa, they could only comprehend, understand, explain, attribute, extrapolate predict but they ultimately, unlike their counterparts at MTN, they could not decide to engage in exchanges and to allocate resources.

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6.2.3. Micro-culture As shown in chapter 2, micro-culture refers to the knowledge, values and identity beliefs in a firm consistent with a broad definition of culture as pattern of shared beliefs and values that give members of the institution meaning and provide them with rules for behaviour (Davies 1994). Vodacoms knowledge (deriving from Vodafone and Telkom), values (Vodacom is a winning company, Vodacom is a respected company) and beliefs (Vodacom is a caring company, Vodacom believes that it can, Vodacom seeks out the impossible to do) were resources that created competitive advantage. These resources were valuable, rare and rather difficult to imitate in the South African telecoms environment. In addition, knowledge, values and beliefs created and advantage for Vodacom through their influence on information processing and behaviour. As cognitive structures unique to Vodacom then, they enabled its strategists to make superior evaluations of the rent-earning potential of the firms resources relative to MTNs. They also guided the actions of all Vodacom members and enabled them to enact a systematic strategic direction, in everything we do we will always make sure that our shareholders remain happy and proud of their investment in Vodacom (Vodacom 2003) Conversely at MTN whose management held the view that the firm was a leading private sector, black controlled telecommunications group (MTN: 2001) pursued knowledge of the African environment as a first priority. This was demonstrated by its investments in the regional hubs of Southern Africa, Great Lakes Region and the Central/ West. This enabled MTN to exploit the opportunities presented by deregulation (MTN 2001), not only in South Africa where it had built its network in a very competitive South African environment and where it had played second fiddle to Vodacom, but also on the continent and beyond. Having been part of SBC, MTNs organizational culture has been largely influenced by an American corporate culture influence, hence open neck shirts and chinos were the corporate dress code unlike the jacket and tie at Vodacom, were the British corporate influence of Vodafone was present. Besides describing the company as a leading private sector black controlled telecommunications group well poised to take advantage of opportunities presented by deregulation, MTNs Living the Brand project became an integral part of the Live-Work-Play campaign whose objective was to connect all employees to the

140

MTN culture where the brand values of integrity, innovation, friendliness, simplicity and can-do were shared amongst all staff. The Group saw itself competing in two markets, one for customers and the other for talented individuals. With this focus, the Group transformed itself to truly become a talent focused and empowered organisation. According to the then Chairperson, Irene Charnely, the Group had a strategy to attract the best talent into the Group by developing a strong employer brand image. MTN, for example, was awarded second place in 2001 in the Best company to work for in South Africa survey. (MTN 2001) MTNs knowledge, values and beliefs were well suited to the competitive terrain to Nigeria. MTNs strategists through their influence on information processing and behaviour that had been sharpened in jungles of Uganda as well as Cameroon had enabled its managers to accurately assess the potential of the Nigerian market. As cognitive structures unique to MTN then, they enabled its strategists to make superior evaluations of the rent-earning potential of the firms resources in Nigeria and beyond, relative to Vodacoms. They also guided the actions of all MTNs members and enabled them to enact a systematic strategic direction. According to the then out going chairperson over the next two years, the funding of new ventures as well as normal start up losses will affect the overall earnings of the Group, but we remain fairly optimistic that significant cash flows will continue to be generated from the South African operations. Prospects for the African operations are excellent. Cameroon is now up and running well, and Nigeria, with a population estimated at 120 million, offers significant potential for the Group. We expect positive cash flows within the next three to five years from these new operations. (MTN 2001) Thus MTNs micro-culture played a key role in the way its strategists made superior evaluations of the rent-earning potential of the firms resources relative to Vodacoms in the Nigerian market and beyond. They also guided the actions of all MTN members and enabled them to enact a systematic strategic direction of being enterprising and entrepreneurial. 6.2.4 Organising for geographical expansion Vodacom managers, may have comprehended, understood, the competitive environment that they were operating in and then tried to explain, attribute,

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extrapolate, predict what they had understood to their shareholders, their hands were tied particularly by the shareholders agreement with Vodafone that prevented Vodacom expanding north of the Limpopo as aggressively as MTN did. This was also in part because Vodafone had a presence in Africa. So even though the competitive terrain shifted and the macro-environment required that Vodacom act in a different manner it just could not. The theoretical perspective in this case study suggests that Vodacom lost its competitive advantage, given the restrictions of its shareholders, because its managers could not reinvent the strategic plot that its resources and micro-culture had enabled it to gain competitive advantage in SA, and so it could not respond to the new definitions of success and resource allocations of like its rival MTN. Over all Vodacoms loss of competitive advantage reflected the firms failure to see how competitive advantage had emerged from the combination of its own actions and those of its rivals, MTN in both material and interpretational domains.
Table 16MTN vision

Source MTN Annual Report 2006

MTN on the other had organised its operations into three regional hubs that comprised of the Great Lakes Region; the Southern African Region as well as the Central/West

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African Regions It extended its reach into Africa through broadening its extensive roaming agreements and guiding established partnerships in Uganda, Rwanda, Swaziland and Nigeria. MTN believed then in 2003 that the Nigerian telecoms market was expected to grow to and according to its Marshal Plan it aimed to have increased its subscriber base in Nigeria to 4 million by the end of the 2004/5 financial year, and that Nigeria was a crucial market. As illustrated below this strategy involved MTN becoming a national player, then a regional player and then an emerging market player (see fig 6.1). They were aware that this strategy would involve risk taking and militated against that risk by acquiring the skills that they would need to operate in emerging markets with their technological partners Ericsson. According to Curwen and Whalley (2008) just over one-half of MTNs subscribers were to be found in South Africa at the end of 2005 (compared to two-thirds one year previously), but as the company was growing relatively rapidly in Nigeria, easily its second-largest market accounting for one-third of its subscribers in 2005, that dependency on a single market was rapidly being reduced. MTNs geographical expansion has not been without its flaws, it struggled to expand since it failed to acquire either Celtel or half of Atlantique Te lecom in 2005; failed to win 51% of Nigerias Nitel/M-Tel in December 2005; failed to buy 35% of Tunisie Te lecom in March 2006; failed to buy 34% of Namibias MTC in March 2006 and failed to win a licence in Egypt. However, in early May 2006 it appeared to have put these disappointments behind it when it bid successfully (subject to a raft of regulatory approvals) to take over Investcomthere were no overlaps in their respective country coveragereceiving an irrevocable acceptance for an initial 70.6% stake. It was also interested in taking a stake in Zimbabwe. The irony was that Investcom had just been declared to be the provisional highest bidder for Millicom International which had put itself up for sale in early 2006. Not surprisingly, Investcom withdrew its offer and it remained to be seen who would acquire Millicom, although the clear favourite was China Mobile. However, discussions broke down and Millicom decided to remain independent. It subsequently held back from pursuing any further interests in Africa. After the announcement of the historic 2004 results, when MTN were crowned kings of the continent Nhleko said it might no longer limit itself to African expansion. 143

"We are continually looking and we are now in a far better shape because our debt-toequity ratio is down to 8 per cent and we are generating significant cash flows." Expansion would preferably come by entering virgin territory, but a good acquisition would also be attractive. "In the short term it will be African opportunities because that is our logical footprint, but if there are interesting opportunities outside we'd consider them,"

Nhleko pointed out that assuming current market conditions, the group was confident that the South African operation would continue its strong free cash flow generation, while international operations were expected to maintain subscriber growth. Nhleko added that, the group was now deriving an increasing proportion of its earnings from outside South Africa and as a result was becoming more susceptible to foreign exchange movements. At the time Pyramid Research had wondered where MTN could go to replicate the Nigerian success. No other African nations had the size of population (despite Mthembus claim of the 200 million subscribers in their portfolio), the undercurrent of informal wealth and the bubbling demand for cell phone services that entrepreneurial Nigeria offered. Which meant strategic investments in other countries may be sound, but not spectacular. MTN may do better looking to the east by tackling the massive Chinese market, perhaps, where the large population is taking cellular services to heart. At the same time, Pyramid Research went on to add, MTN could not take its eye off the ball in SA despite having performed better than expected in the face of tough competition and an increasingly mature market. 6.3 CONCLUSION The case study began by looking at the challenge that rival firms face in when embarking on a geographical expansion. This study then analysed the effectiveness of geographical expansion by of two large South African telecommunications companies in Nigeria; conducting a comparative analysis as was shown by these indicators namely (1) shareholding and strategy (2) entrepreneurial and enterprising management (3) micro-culture and (4) organizational structuring for geographical

144

expansion The analysis has provided lessons for corporate strategy and decision making.

As outlined in the SWOT analysis, both Vodacom and MTN by 2001 were aware that they needed to do that to maintain their market share and growth after the entry of Cell C into the market. Thus they need to find growth by pursuing both a product and geographic diversification strategy. To that end, Vodacom had not only been the first operator to diversify in terms of product diversification as in 1997 they offered the prepaid model, it was also the first of the two network operators then to embark on a geographical expansion when it won a licence in 1995 in Lesotho. This was followed by a licence in Tanzania in 1999, then Democratic Republic of the Congo in 2001 and Mozambique in 2003. These were, in the main, operations in Vodacoms neighbourhood, stable democracies. There was not much diversity from its main operation in South Africa in terms of culture, terrain, etc. Furthermore, although Vodacom had considerable competitive advantage in South Africa by 2001, its geographical expansion was severely handicapped by the shareholders agreement with Vodafone that prevented it from pursuing operations north of the Limpopo.

By contrast, MTN shareholders actively pursued geographic expansion two years after Vodacom, when MTN International expanded into Africa, acquiring licences in Uganda, Rwanda and Swaziland between 1997 and 1999. MTN International also acquired a National GSM 900 licence in Cameroon in 2000. MTN focused on developing regional hubs in the Great Lakes Region, Southern Africa and the Central/West Africa around which business clusters developed and from which they developed skills of being an emerging market player and each of the hubs provided different sets of skills which the company built upon. MTN identified three essential regional clusters, through tracking efficiencies, knowledge transfers, skills sharing and mutual access to a pool of advanced and innovative technology. MTNs diversification exploited economies of scope, product knowledge, and other relevant experience, thus reducing transaction costs and improving performance (Grant, 1988; Williamson, 1981). Thus Vodacoms and MTNs geographic market diversification was horizontally and vertically integrated across different national submarkets (Hisey & Caves, 1985). 145

However the benefits of MTNs geographical diversification, particularly in Nigeria, originated from two sourcesgreater opportunities for higher returns and lower correlations of assets across countries (Cavaglia, Melas, & Tsouderos, 2000). Geographical diversification provided MTN, especially in Nigeria, with significant advantages, including better firm performance (Hitt, Hoskisson, & Ireland, 1994; Tallman& Li, 1996). 6.3.1 Measuring International Diversification In measuring the extent or multiplicity of foreign markets in which the two telecoms firms operated , the study examined the relative importance of international markets by reviewing Vodacoms and MTNs share of sales revenues from foreign markets, especially Nigeria, the biggest market in Africa. The study then investigated the numbers of countries the firms entered since 1995 in their pursuits of Merger and Acquisition transactions (as an acquirer). Vodacom operates from only five countries including it home market, by contrast MTN now operates in 15 African countries. The case study used this measure instead of the number of countries where either might have established operations because of the complex and inconsistent definitions for international branches each conglomerate has adopted, which may include subsidiaries as well as affiliates and non-affiliated licensees, and the discrepancies in the numbers of reported countries entered by different divisions of each conglomerate. In terms of measuring the conglomerates mode and direction/relatedness of international diversification, the study looked at the number of countries and regions that each of the firms had entered since 1995 years as an acquirer in M&A transactions. MNDS, as a measurement of geographical relatedness, is also calculated by dividing the total number of countries a conglomerate entered by the number of regions it entered. The study further examined the M&A transactions occurring during the period in each region to investigate the core regions of international diversification for each firm. It should be noted that the classification of the regions was based on the considerations of cultural, economic and physical geographic divisions and adopted from the Economic Growth Regional Classification framework (Economic Growth Center, 2002). MTNs strategy by far outclassed Vodacoms, in that it had three regional hubs and operated from 15 countries compared to Vodacoms 5.

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Strategic Investments Constituents engage in interactions with firms to further their own objectives: They allocate the resources that they control by making buying and selling decisions, investment decisions, and employment decisions. Each decision shifts resources to alternative uses and contributes to determining which firms enjoy competitive advantage. Assessments of better value depend partly on constituents own objectives and partly on the strategic investments and strategic projections that competing firms have made. Assessing the value that firms offer is a complex task performed with incomplete information. Cognitive limitations in perception and interpretation prevent constituents from making accurate assessments (Schwenk, 1984). Given limitations in evaluating firms and industries, constituents routinely rely on ready-made interpretations in the ambient macro-culture of the industry (Abrahamson and Fombrun, 1992, 1994). Just as the strategic investments of firms originate both in their resource bases and their micro-cultures, so are the resource allocations of constituents informed by the macro-culture of the organizational field. Macro-cultures facilitate constituents sensemaking. They do so by providing constituents with industry paradigms and by supplying them with definitions of success. For example, reputational ratings are an element of a companys macroculture that help reduce uncertainty about firms likely behaviours or future levels of performance (Weigelt and Camerer, 1988; Rao, 1994; Fombrun, 1996). Much as individual schemata encourage automatic information processing and foster schemaconsistent behaviour (Fiske and Taylor, 1990; Gioia, 1986), so do reputational schemata encourage constituents to make resource allocations and to sustain their allocations in reputation-consistent directions (Wartick, 1992).

In Vodacoms case it was clear that by 2001 it needed to make investments outside of its network in SA if it was to maintain its competitive advantage, however as described above, even though Vodacom was in a much stronger financial position than MTN, its shareholders constrained its expansion strategy so much so that the massive amounts of money that it was generating in SA were in the first instance used to pay off a shareholders loan in 2001 and the rest reinvested again as it sought to have total dominance in its home market.

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As can be seen from the table 6.7 on proportionate subscribers, Vodacoms domestic subscribers as a percentage of total was 81.5% of total subscribers by the end of 31st December 2005 and this figure has not changed much. Compared to other operators in Africa including its major shareholder Vodafone as well as arch rival MTN, Vodacom is still very heavily reliant on its maturing domestic market.

For it to have a commanding presence in Africa, it would have to resolve its relationship with Vodafone. Perhaps the other strategy that it could adopt will be for it to enter emerging markets where Vodafone does not seem to have a presence, like in the Middle East as well as Central and South America as they have acquired the necessary skills of operating in emerging markets.
Table 17 Proportionate Subscribers
Company Total no of subscriber s (millions) 20,1 18,9 9,3 Domesti c as % of total Wester n Europe Easter n Europe Middl e East Asi a Central and South Americ a North Americ a Afric a

Vodacom MTN Zain(MTC ) France Telecom Vodafone

81.5 51.9 15.4 42.9

100 100 57.1

71,4

31.4

80.0

9.7

0.4

0.1

2.1

7.7

179,3

9.1

60.6

3.8

16.6

12.7

6.3

Source: Curwen and Whalley

6.3.2 Measuring Performance The study used various performance measures to determine the effectiveness of the geographical expansion of the two competitive rivals. Averaged total revenues were used to show the Vodacoms and MTNs relative positions in the market especially in the period 2001-2004, while the averaged revenue growth rate was evaluated to see the growth potential of each of the firms. Earnings before interest, taxes, depreciation, and amortization was used to evaluate the rivals profitability, and Return on Assets, Return on Investment, and Return on Equity, which are measures of the effectiveness and efficiency of top management rather than investors expectations about future profits such as in the case of stock price (Qian, 1997), were also examined. The

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results are included in the annextures. Once again using this measure of performance MTNs revenues and profits overtook Vodacoms in the years 2003 and 2004, effectively establishing MTN as the Telecommunications Kings of the Continent. As can be noted from fig 6.2 as well as the financial analysis in the annexure, MTNs actual growth was unanticipated. Thus it can be extrapolated from the financial analysis (in the annexture) that MTNs geographical expansion strategy was more effective than Vodacom
Table 18 MTNs Growth

Source: Naidoo (2006)

6.3.2.1 MTNs Critical Success Factors This case study has shown that MTN succeeded in its geographic expansion strategy because of the following critical success factors (1) Organizational Integration (2) Management/ Leadership (3) Managing strategic change (4) Cultural change as well as the fact MTN is a (5) Learning Organisation and had set itself up for Technological Capacity Building and Innovation (Marcelle 2005) By contrast, Vodacom did not build on its lead in South Africa because of its rigid management structure that chose a focus strategy in a local market that was getting saturated. Subsequently its

arrogance created a blind spot and blunted its ability to respond to the changing competitive terrain. Its ability to respond to the changing competitive terrain was further hampered by the fact that it did not possess the skills that it needed to compete in the redefined terrain. These critical success factors will be examined below in detail. 149

Table 19 MTNs Critical Success Factors

MTN Organizational Integration Leadership Adaptable Dynamic Entrepreneurial Managing strategic change and

Vodacom Rigid

Ability to interpret market Did not respond to the conditions and respond changing conditions market

Cultural change

Core skill requirement in Monopoly power in SA global market place created blind-spot from Dominance created

Learning

organisation- Valuable Capacity being operator 2nd

lessons

Technological Building

Network arrogance

Source: Author

6.3.2.1.1 Organizational Integration Lazonick and West (1995) define organisational integration as a set of ongoing relationships that socialises participants in a complex division of labour to apply their skills and efforts to the achievement of organisational goals. They go on to contend that the foundation of the socialised process that achieves organisational integration is membership; the inclusion of the individual or group into the organisation with all the rights and responsibilities that membership entails. In a business organisation a fundamental right of membership is employment security, and a fundamental responsibility is to ensure that the pursuit of ones individual goal is consistent with that of the organisation. They argue that competitive advantage depends on the strategies and the structures of the business enterprises. They further argue that, over time, to gain competitive advantage businesses, in the US and elsewhere, had to have achieved increasingly higher degrees of organisational integration.

Organisational integration provided MTN with the capability to learn as an enterprise in their battle against Vodacom in the SA market and gave MTN the ability to be have 150

a quicker and effective strategic responses to Vodacoms dominance. It also provided MTN the capability to learn as an enterprise and the potential to innovate in market competition. The building of the relationships that constituted MTNs organizational integration was strategic. MTN involved its employees in the process of planned coordination, investing in their skills and extending them the options of being shareholders. Secondly they developed long term relationships with firms that supplied them with inputs, particularly Ericsson (their equipment supplier), and distributed their outputs, Panelpina (logistics) and that these firms, as with their employees and managers, enabled these firms to participate in an organizationally integrated learning process. Thus MTN, gained competitive advantage over Vodacom by becoming more organizationally integrated than its rival, its managerial structure (including technical specialists) was critical for innovation but also in which the evolution process technology with Ericsson, made the employees (who were also shareholders), suppliers (Ericsson) and distributors (Panelpina) of central importance for process innovation. MTNs strategic response to Vodacoms competitive challenge in terms of qualitative type and speed of response meant that it embarked on an innovative strategy which entailed investments, like Nigeria, that enhanced the productive capability of the new combination of inputs, thus making possible the generation of higher revenues, lower inputs costs. MTNs innovative strategy depended on whether the upgrading and recombination of inputs yielded sufficient increases in quality and decreases in cost to make the enterprises products competitive. The organisational integration hypothesis argues that an important determinant of the difference between Vodacom and MTN was the qualitative and the effectiveness of MTNs strategic response to Vodacoms dominance in the local market, particularly its geographical expansion into Nigeria. Even though MTN started operations in South Africa and in Africa after Vodacom had been in the market the distinguishing factor from Vodacom was that MTN was clear about what business it was in, the mobile telecommunications market and thus all its business units were integrated into the provision of mobile telecommunications in converging telecommunications market. That awareness subsequently influenced MTNs strategic choices in terms of how it would pursue growth in response to Vodacoms dominance not only in the local market but also in Africa. Vodacom was not clear what strategy it had to follow, this derived from the fact that its main 151

shareholder was the incumbent, Telkom a fixed line operator, as well as Vodafone a mobile operator. There was no organizational integration that would have allowed Vodacom to build on its competitive advantage in SA. 6.3.2.1.2 Leadership Gandossy and Guarnieri (2008) observed in a global study on Top Companies for Leaders that in these top companies: Leaders lead the way; leadership development is at the top of the CEOs and senior management agenda; it is an area in which they invest substantial amounts of time and energy. A focus on talent; top companies do more to identify, develop and reward top talent; differentiation of top talent is a given Practical and Aligned programs and practices; leadership development, performance management, succession planning and recruiting all work together to help people in the business to achieve their goals Leadership as discipline that reaches a critical tipping point, when a company has commitment to leadership, it becomes integrated with business planning and woven into the culture of the organisation.

In short they contend, top companies make leadership a way of life. They make deliberate decisions to reinforce leadership expectations, through top-down communications, promotion decisions and variable pay. In big and small ways, top companies let it be known what they expect from their leaders and are relentless in creating an environment that fosters the development of leadership.

Taking the above criteria into consideration it will be noted from the comments of the then out going Chairman Irene Charnely in 2001 MTNs Living the Brand project became an integral part of the Live-Work-Play campaign whose objective was to connect all employees to the MTN culture where the brand values of integrity, innovation, friendliness, simplicity and can-do were shared amongst all staff. The Group saw itself competing in two markets, one for customers and the other for talented individuals. With this focus, the Group transformed itself to truly become a talent focused and empowered organisation. She went on to add that the Group had a strategy to attract the best talent into the Group by developing a strong employer 152

brand image. MTN, for example, was awarded second place in 2001 in the Best company to work for in South Africa survey. (MTN 2001). Vodacoms focus on the other hand was its preoccupation with pursing its dominance of the local market and while leadership development and employee may have been a focus as per the Skills Development Act, it was not as intense or interwoven into the fabric of the organisation as much as it was at MTN.

6.3.2.1.3 Managing strategic change Managing strategic change for Vodacom and MTN required the raising questions about the fundamental nature of organizations: What business(es) should they be in? Who should reap what benefits from the organization? What should be the values and norms of organizational members? For MTN it was a simple process, as they were able to clearly define who they were a leading private sector, black controlled telecommunications group poised to exploit the opportunities presented by deregulation (MTN: 2001). They were also able to define who should reap what benefits from the organisation; Newshelfs shares are held by the Alpine Trust on behalf of both managers and eligible employees. MTNs Living the Brand project became an integral part of the Live-Work-Play campaign whose objective was to connect all employees to the MTN culture where the brand values of integrity, innovation, friendliness, simplicity and can-do were shared amongst all staff. Vodacoms shareholders by contrast could not decide what strategy Vodacom was to follow, fixed-line or mobile and this indecision paralyzed any actions that its management may have had in challenging MTN in Nigeria. Managements inability to act in the Nigerian saga can be deduced from the companies values which state that in everything we do we will always make sure that our shareholders remain happy and proud of their investment in Vodacom (Vodacom 2003), even if this meant acting against their better judgement and not challenging MTN in Nigeria because their shareholders did not have a stomach for risk. 6.3.2.1.4 Cultural change Cultural change is a form of organizational transformation, that is, radical and fundamental form of change. Cultural change involves changing the basic values,

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norms, beliefs, etc., among members of the organization in order to improve organizational performance. It involves lasting and structural and social settings within organisation as well as lasting changes to the shared ways of thinking, beliefs, values, procedures and relationships of the stakeholders. MTN in particular, in light of Vodacoms dominance needed to provide a positive orientation to Technological Capacity Building (Marcelle 2002), technical developments in the telecoms industry instigated the need for new skills in the organisation. Skills and awareness would have required constant updating and so new approaches to training were adopted, in view of the stated organizational goals new roles and new attitudes would have been required of both managers and employees. As the study has shown, for MTN to effective challenge Vodacoms documents they needed to have had a vision of the organisation, even though at the time it was conceived none of the managers and employees were guaranteed what the outcome would have been, it took the courage and convictions of the leadership to lead the organisation in the periods of uncertainty. In contrast, Vodacoms dominance created some form of lethargy within the organisation that dulled its responses in the changing African telecoms market. When it eventually decided to try and challenge MTN in Nigeria, it was too little too late and did not have the organizational integration to make the challenge effective and lasting.

6.3.2.1.5 Learning organisation- TCB and Innovation Lazonick and West (1995) argue further that a competitive challenge entails innovation and that MTN needed to have an innovative response for it to have gained sustainable competitive advantage. They go on to add that the sustainable competitive advantage that MTN required was one that did not rely on permanently reducing returns to productive factors or living off the companys existing resources. Thus the timing of MTNs strategic response to Vodacoms dominance, particularly its investment in Nigeria, was critical because of the need to argument the productive capabilities of its resources. The innovation process that was set in motion by MTNs innovative strategy was a developmental process that took time. In order to generate higher quality, lower costs products and processes that brought about competitive advantage, Lazonick and West (1995) argue that MTN had to have an organisational

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structure to implement the innovative strategy to develop and utilize technology, which Ericsson provided. Thus their organizational structure hypothesis focuses on the social structure of MTNs enterprise as a determinant of competitive advantage. They go on to add that putting this organisational structure, in place to sustain the learning process that MTNs organisational structure needed to generate, required its strategic decision makers to have access to what they call financial commitment and shareholders, MTNs strategic decision makers had no problem accessing this financial commitment. A necessary condition for innovation, Lazonick and West (1995) further contend was that those who controlled financial resources, at MTN, choose innovative investment strategies rather than adoptive investment strategies like at Vodacom. They needed, moreover, to keep financial resources committed to the innovation strategy until the products and processes were sufficiently developed and utilized to generate returns. In MTNs case, keeping money committed to the innovative strategy and in particular the Nigerian operation, its shareholders needed to have intimate knowledge of the problems and possibilities of their investment strategy. MTNs competitive advantage required a learning process that resulted in the generation, over time, of higher quality and /or lower cost products. The general attributes of this learning process was that it had to be concentrated, continuous, cumulative and collective and managements role was to ensure the concentration continuity, cumulatively of the learning process. Meanwhile Marcelle (2002) in her study How African Telecoms Build Capacity defines the process of Technological Capacity Building (TCB) as an investment process in which firms learn to accumulate technological capabilities under conditions of uncertainty. She adds that TCB effort is not linear, sequential and orderly, nor is it guaranteed to succeed without sustained, purposive co-ordination. She contends that to be effective at TCB, firms must acquire basic organizational capabilities, specific functional capabilities and the ability to manage complex change. Firms that are successful in technological learning are likely to overcome the challenge of reconciling tensions between activities that may stimulate innovation, but reduce short-term productivity gains, and must have the ability to simultaneously update old ways of knowing and doing while acquiring new technological knowledge. Thus, in order to be successful, TCB firms must also be able to manage complex change effectively (Pettigrew & Whipp, 1991 It is suggested 155

that for firms TCB efforts to be effective, they require a system consisting of five critical components, which include three internal processes: (1) allocating financial resources to TCB effort; (2) management practices, systems and decision making rules that implement and support the TCB effort; and (3) practices to establish and maintain an organizational culture in which the TCB effort is exercised with committed and skilled leadership; and two boundary processes: (4) accessing external TC resources from suppliers; and (5) accessing external TC resources from the innovation system (local and global). The innovation process that was set in motion by MTNs innovation strategy was a developmental process that took time, effort and sustained financial resources. In putting the integrated organizational structure in place and in sustaining the learning process that MTNs organizational structure had to generate required, its strategic decision makers to had have access to financial commitment and as most of the shareholders were also the executive team this was not an issue. Financial commitment represented the willingness of those who controlled the resources to commit to financing the high fixed costs of developmental investments in Nigeria in 2001, which because of innovation, promised uncertain returns. Financial commitment, for MTN, thus played a critical role in its innovation process, because its shareholders, who were also managers, chose what strategy the enterprise was to pursue. MTNs innovative strategy inherently entailed fixed costs because investments, like Nigeria in particular, had to be made in physical (YhelloBhaan) and human capital (expatriates) with a time lag before the receipt of returns. These fixed costs were high in Nigeria, because of not only the scale of the investments but also the developmental period had to occur before the investments that entailed fixed cost could generate returns.

This was a very important differentiator between Vodacom and MTN which ultimately led to MTNs competitive advantage. As outlined in Chapter 4, Vodacom had been the first organisation to launch in SA and subsequently to have competitive advantage over MTN. To all intents and purposes, MTN was going to have to play catch up to Vodacom, especially when Vodacom had been also the first company to embark on geographical expansion in 1995 when it won a licence in Lesotho. It therefore required that MTN organize itself in such a way that it would effectively 156

challenge and ultimately succeed in overcoming that dominance. Creating a learning organisation was one such response and MTN also has an Innovation Centre. The key therefore to MTNs organizational learning and Innovation was in the integration of the three cultures the operator culture the internal culture based on its operational success; engineering culture which involved the designers and the technocrats who drove its core technologies, Ericsson as well as its executive culture that included the executive management, the CEO and his immediate subordinates. Schlein (1996) argues that the three cultures are not often aligned with each other and it was this lack of alignment at Vodacom that caused failures of organizational learning as this study has demonstrated. It was MTNs ability to create new organizational forms and processes, to innovate in both the technical and organizational arenas that were crucial to them attaining competitive advantage over Vodacom in the dynamic African telecommunications environment. 6.3.3 Lessons for corporate strategy and decision making In concluding, this analysis provides insights for firms executing geographic expansion strategies and shows that the following are important success factors(1) Organizational Integration (2) Management/ Leadership (3) Managing strategic change (4) Cultural change as well as the fact MTN is a (5) Learning Organisation and had set itself up for Technological Capacity Building and Innovation outlined as critical to MTNs success above. Furthermore, to strategists, the systemic framework presented in chapter two fig 2.5 in this case study shows that MTNs competitive advantage did not derive from any single sourcebe it industry conditions or corporate culture. Rather, advantage was an outcome of a cycle of processes. Weick (1979b: 52) warned that managers get into trouble because they forget to think in circles. In part it is because organizational structures inhibit thinking in cyclical terms: Each process in the cycle is typically managed by a separate function and level in the organization. Moreover, different professionals normally manage the knowledge base associated with each domain. For example, economists are generally charged with forecasting market behaviours; line managers with developing investment proposals; human resource specialists with managing the systems that support the firms micro-culture; and marketing and public relations staffs with

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monitoring and maintaining the macro-culture. Differentiation along these lines makes cyclical thinking difficult to achieve.

The results presented in this case study appear to validate this theoretical proposition. As such, it is recommended that a firms strategists should recognize the disparity created by their internal structures and actively exploit the interdependencies according to the systemic logic of competitive advantage. To attain and sustain competitive advantage, strategies in one domain must be consistent with strategies developed in another; and strategies coordinated across domains will achieve better results. Many researchers have suggested that interpretations about firms are more actively constructed in the early life of a firm (Aldrich and Fiol, 1994; Suchman, 1995). The systemic model calls attention to the fact that industry paradigms emerge from interactions between firms and constituents and reflects the legitimacy of technologies, individual firms, and even strategic groups. When the industry paradigm changes it undermines the legitimacy of established firms. Therefore, the acquisition of legitimacy may be a strategic activity that occurs, not only at the beginning of a firms life, but every time its competitive terrain shifts.

Finally, interpretational variables introduce a new set of time lags into models of competitive interaction. Since interpretations such as corporate reputations are inertial, a firm may be able to continue to attract resources for a period of time even when its strategy is no longer viable, as the case of Vodacom shows. Such a firm may be misled into believing that it enjoys actual advantage when it is using up accumulated goodwill. When constituents find out that their reputation-based expectations are not met, they may have extreme negative reactions. Projecting an image leads to social expectations that amount to obligations to behave in ways consistent with the image (Schlenker, 1980). Violating these obligations can have grave social consequences. At the firm level these social consequences have profound implications for the firms economic performance. Ultimately, the systemic model that the case study uses makes it very clear why control over resources alone is not enough to reproduce competitive success. Even firms with exceptional resource bases can fall with astonishing speed when they lose the confidence of resource-holders. Therefore, firms need to audit their reputational base as well as their market positions, their cultural compatibility with constituents as well as their resource adequacy. 158

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. Annexture: Comparative Financials

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Annexture BVodacom resp From: Mari-louise Esterhuizen (Mari-Louise.Esterhuizen@vodacom.co.za) Sent: 04 November 2008 04:02:41 PM To: 'vusi.silonda@live.co.za' (vusi.silonda@live.co.za) 1 attachment(s) Vusi - Wa...pdf (99.8 KB)
4 November 2008

Dear Thomas,

Thank you for your enquiry. Please note that Vodacom does not take part in research, however you are welcome to visit our website on www.vodacom.co.za for any information you might find helpful.

We wish you the best with your project.

Kind regards,

Dot Field

Chief Communications Officer Vodacom Group

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From: Thomas Silonda [mailto:vusi.silonda@live.co.za] Sent: 04 November 2008 01:14 PM To: Corporate Affairs Subject: FW: Wales MBA Research

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