As a result, the $600 billion mobile network operator sector, which is little more than a decade old, must focus on areas that it has never had to before: management of multiple business lines, increased risk, organizational effectiveness and curtailed growth and margins.
"For the first time, operational and organizational excellence is imperative for cellular carriers," said Brian Corey, telecom practice leader at Katzenbach Partners and the lead author of Carriers at the Crossroads: Successfully Managing Disruptive Change in the Maturing Telecommunications Industry."
"Until now, all the carriers have needed to do is to meet demand and market their service," Mr. Corey said. "But their space is suddenly threatened by multiple new technologies, new competitors and new regulations, all in a more saturated marketplace. They are no longer upstarts -- they are big companies in a fast-maturing industry, and they need to manage accordingly."
Cellular carriers need to pursue and test a range of different strategies, the report says. But those efforts could fail unless carriers focus intelligently on frontline effectiveness, managing innovation alongside a traditional business line, and tapping the power of the informal people networks that drive innovation and flexibility.
The New Challenges
-- A Perfect Storm of Disruptive Innovation: New technologies have hit the telecommunications market -- including Internet telephone services (Voice over Internet Protocol, or VOIP) offered by companies like Skype; dual-mode handsets that can switch between the Internet and conventional cellular signals, and new wireless standards such as WiFi/WiMax. Taken individually, they have an impact. In combination, they challenge the industry power structure. For example, users with dual-mode handsets connected to WiFi/WiMax wireless networks, and supported by Internet telephone services, can bypass cellular carriers and do all their mobile calling over the Internet. A completely new carrier network might result.
-- New Players and the Prisoner's Dilemma: Excess airtime on cellular networks has led to the creation of Mobile Virtual Network Operators (MVNOs) -- companies like Virgin Mobile that lease and resell minutes without actually operating a network. There are more than 100 of them in the U.S. alone. That means more industry players competing for the same customers -- and creates a prisoner's dilemma for MNOs. Do the established carriers sell airtime to the MVNOs -- and risk cannibalizing their customer base? Or do they refuse to sell airtime -- and miss out on the revenue?
-- Legislation, Regulation and the Margin Squeeze: Legislators and regulators have begun to restrict pricing -- with a severe impact on margins. Roaming fees are particularly at risk. In the spring of 2006, JP Morgan's European Equity Research desk stated that 4.4% of Vodafone's earnings -- or nearly $1.1 billion -- was at risk due to the European Union's crackdown on European roaming fees.
"To meet these challenges, cellular carriers will have to operate more complex businesses, while at the same time dealing with shrinking margins," Mr. Corey said. "That means that the risks are higher if companies choose the wrong strategy -- and that even if the strategy is right, the critical factor will be the carrier's ability to execute."
He added, "Having power does not mean that mobile carriers have made the right decisions; mobile carriers have made bad strategic bets in the past, for example investing millions in licenses for the WAP wireless protocol and 3G or third-generation networks, which have not produced sufficient revenue and profitability. In a lower-margin environment, the risk of taking the wrong action is greater than the risk of inaction. That's a change from where the industry has been."
Strategic Options
According to the report, mobile carriers need to diversify their businesses by choosing one or more strategic options. They can:
-- Acquire or be acquired in order to build out their range of services.
They might choose to merge with a fixed-line operator like AT&T that is trying to offset reduced margins in the fixed-line local and long-distance business. The result might be a quadruple play option -- with a single carrier offering cellular service in addition to fixed-line telephone, broadband Internet and broadband TV services.
-- Build a new business alongside the existing one, for example creating a new franchise in one of the emerging arenas -- such as VoIP -- while maintaining the core cellular business. In other words, move from "CoreCo," the old business, to "MoreCo," a combination of the old and the new.
-- Create "experiments" while staying focused on the core business, a conservative move that lets the carrier dip a toe into the new business pond while improving its original game.
-- Stall the competition by lobbying -- for example, for restrictions on the use of new handsets -- and conducting tough negotiations for resources like airtime.
Most Probable Approach: Combined Strategies that Test the Organization
"Rather than choosing a single strategy, most carriers will adopt two or more of the strategies in combination," said George Appling, chief operating officer and president of Global Solutions for Brightstar Corporation, a leading wireless distributor and supply chain outsourcing provider, and a co- author of the report. "For example, they may try to delay competitors through negotiation while giving a new business unit time to mature."
According to the report, the pursuit of multiple strategies makes organizational performance critical. The best strategy will fail if the organization is not properly aligned with it, the report says. That is particularly true as the MNOs enter a more complex operating environment, and are forced to operate with more complex structures. Whether the company is participating in a merger -- as acquirer or acquired -- or trying to build new units and a culture of innovation alongside an existing culture, the burden falls on management to execute, align people and goals and balance the demands of the old and the new.
The Beginning of Maturity for Cellular Carriers
"Cellular carriers are moving from a world where ideas rule, to a world where the idea only succeeds if the organization can perform," Mr. Corey continued. "It's the end of the land-grab era of acting quickly and pushing for growth, and the beginning of maturity."
Carriers Must Manage the Organization
"The best way to execute is to manage the organization -- especially the informal organization that drives change and innovation," Mr. Corey says. "The informal organization -- the network that connects people outside of the formal org chart -- is the best mechanism for capturing new ways of doing business and integrating them into traditional structures. That's exactly what mobile carriers will have to do to ensure they stay profitable and competitive in the face of disruptive change."
More specifically, mobile carriers must get better at:
-- "Minding the Store" at the "frontline": As mobile markets become saturated and products less differentiated, brand and customer service experiences become the most important differentiators. Sales and customer service employees are therefore a key factor in competitive advantage. And better point-of-sale and customer data derived from the storefront can drive cost savings -- critical in a time of declining margins. But mobile carriers have not developed the training and compensation programs that would ensure that the in-store experience turns customers into brand loyalists and drives information back to the organization's leadership. "This is the first area where the land-grab mentality needs to give way to a higher level of organizational maturity," Mr. Corey says.
-- Balancing innovation and day-to-day excellence: Carriers will no longer be single-focused entities: they will have to integrate multiple businesses or multiple operating units, each with its own culture and needs. To do this, in the words of Katzenbach senior fellow Chris Trimble, they will need to "forget, learn and borrow" -- knowing what to leave behind, what to share and what to invent. In practice that means creating innovative operating units, then balancing them with the existing culture to get the best performance out of both old and new businesses. Communication and the active management of organizational culture are key.
-- Managing the "informal organization," where the work really gets done: All organizations have formal reporting structures -- and they also have the informal networks of employees who connect to each other, share knowledge, culture and values and really get things done. "In complex situations -- post-merger, or where a company is building dual business models -- the informal organization is the glue that holds people together and creates alignment by disseminating motivation, values and best practices," Mr. Corey says. "And where middle managers need to play a more important role -- as they will at the frontline, in the storefront -- the informal organization supports them, giving them fast, critical information and a flexible framework for decision-making. Carriers already have informal organizations -- as a result of constant reorganization -- but they need to manage them actively in order to derive real value from them."
"For mobile carriers, the conditions of engagement are decreasing margins, and increasing competition, complexity and risk," says Mr. Corey. "Those are the hallmarks of a maturing industry, and the successful players will be those that adopt a mature approach -- to strategy, execution and, above all, the management of the organization itself."
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Brian Corey leads the telecommunications practice at Katzenbach Partners LLC. He has advised mobile network operators on the creation of retail strategies and organizations, and on corporate, sales and distribution strategy, negotiation, marketing, operational improvements and human resource planning. He also advises clients in the technology and energy industries. Prior to joining Katzenbach Partners, he was a consultant at Accenture and at The Structure Group, and worked in corporate finance at Amazon.com.
Katzenbach Partners LLC is a management consulting firm with over 150 consultants and staff with offices in New York, Houston and Chicago.
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