This month, Access departs from our traditional, detailed look at CRM—to
reflect on how tough economic times may affect customers. As organizations
restructure, they all too often set aside critically important customer
initiatives, such as CRM, until the market settles down—potentially to their
detriment. But regardless of the external economic factors, organizations
cannot afford to ignore the imperative of addressing their customers’
expectations. As service providers plot their strategy for weathering the
current global economic downturn, they must be sure to keep customers’ needs
foremost in their plans—and use this time to position themselves to rebound
when the markets recover. In addressing consolidation, and the ensuing threats
and challenges, the customer will remain a constant. The firms that can chart a
course through the storm, while retaining their customers, will be better
prepared for the ever-changing industry and economic environments.
Like the movie industry that scoffed at the tiny screen
called television or the punch-card giant that marveled at but ignored early
electronic computers, industries in transition don’t always recognize the
factors and elements that may one day threaten their very existence. Sometimes
organizations eventually embrace new technology and profit from it. But when
you’re in the middle of a storm, it’s difficult to chart a safe course to shore
if you’re too busy bailing to keep the boat afloat. And for many telecom
companies, the current economic and technology-driven storm may have them
wondering: “What’s next?”
Facing tumbling stock valuations, heavy debt loads and
excess capacity, many telecom companies are too busy trying to stay in business
to focus their attention beyond their immediate needs. Squeezed for capital and
revenue, many firms have already failed—and more are likely to follow. The time
is ripe for industry consolidation—and the question for many industry observers
is: “Who’s next?” There’s another question on the minds of telecom executives,
though, and that is “How will we survive?”
Surviving telecom industry consolidation
This turbulent environment is a dramatic turnaround from the optimism that
fueled a rush of investment into the sector following the Telecommunications
Act of 1996. Local market deregulation, coupled with Internet-related
investment in fiber optic, DSL (digital service line), and other bandwidth
providers, spurred entry by an array of small, stock-option-powered, upstart
communications companies.
Now, these firms face the challenge of determining whether
and how they can continue to operate in the current climate. Specifically,
wireline telecom firms need to prepare a detailed assessment of what they
should do to survive. Drawing on lessons from consolidation in other “network”
industries (airlines, trucking, railways, etc.), here’s a three-part approach
designed to help telecom companies navigate through this difficult period.
1. Determine your financial flexibility A crucial first step is to determine the company’s financial
flexibility, which is a combination of the following:
- Point indicators: including cash and current
ratios; leverage; relative market share; revenue; etc.
- Trend indicators: including margin
improvements; revenue projections; EBITDA (earnings before interest, taxes
depreciation and amortization) projections; cash burn rate; etc.
One way to visualize a company’s relative financial flexibility is simply
to plot its liquidity position (in terms of quarterly burn rate relative to
cash reserves, for example) and market share relative to competition. Companies
that are low on leverage and low on relative market share are
the weakest, most at risk for consolidation or failure. Those that are
high on liquidity and high on relative market share are the
strongest, “Goliath” players. These firms may be less concerned with smaller
competitors than with competition and mergers among themselves. Companies with
middle positions on liquidity and relative market share could
be capable niche players whose greater liquidity and relative access to capital
would give them increased leverage in more fragmented markets.
2. Assess asset differentiation
Another component of flexibility is a company’s internal assets. An
assessment of asset strength involves examining a firm’s specific technologies;
patents; proprietary processes; management capabilities; regulatory and other
barriers; and the scope of combined assets and other sources of sustained
differentiation and competitive advantage. The value of these assets is tied to
their uniqueness, or “specificity,” relative to competitors and customer needs.
In other words, asset assessment will be inherently comparative and
context-specific. Unlike financial flexibility, which can be extracted from
company accounts and financial filings, asset specificity is more difficult to
define.
One useful approach is to examine the degree to which a given firm is a
price taker or price maker in its relevant market. Price makers are often those
firms with differentiated technology or other product attributes and/or firms
protected by regulatory barriers. These advantages are differentiated assets.
Another approach is to examine a firm’s EBITDA margin. Firms with comparatively
high EBITDA margins relative to peers are often firms with uniquely efficient
processes—a differentiated asset.
3. Develop action plan
The final step is to develop an action plan tailored to a company’s
competitive context. Using the financial flexibility and asset value
assessment, a company can be plotted relative to its competitors on the matrix
below (Figure 1). Depending on position, a given firm will have one of the
following four options: Defend, Differentiate, Develop and Demise.
- Defend: Firms in this quadrant have both
financial flexibility and a unique set of assets that allow them to compete
effectively on their primary attribute of competition, such as price. These
firms must protect their position and be wary of those outside their immediate
market space, such as international telecom players, who may seek to enter.
Protecting their space may require acquisition.
- Differentiate: Firms in this quadrant have financial flexibility but lack a differentiating asset inventory. They are at risk of
losing the competitive battle to firms in the Defend quadrant. These firms must
take steps to develop or acquire a differentiating asset. To do so, they should
look to firms in the Develop quadrant. Looking at the airline industry, Eastern
Airlines was in the Differentiate quadrant during that industry’s deregulation.
It had financial flexibility, but failed to differentiate and went out of
business.
- Develop: These firms have a valuable
asset—or business model—but have not, perhaps because of an undeveloped market
or tight financing, been able to use this asset to gain financial flexibility.
They must either develop their asset further, or look to sell— perhaps to a
firm in the Differentiate quadrant.
- Demise: Firms in this quadrant are in the
most difficult position. They cannot usually continue alone, yet they lack a
differentiating asset that would make them a desirable acquisition target. They
must develop or convince a buyer that they can develop a unique asset in order
to boost chances of acquisition on favorable terms before they are forced to
simply exit.
It’s not always easy to see what your options are when
you’re being buffeted by powerful business forces. But, eventually, this too
shall pass. By plotting telecom industry competitors on this framework,
companies can begin to see the range of merger, acquisition and other
strategies that are open to them. This approach can provide a powerful visual
tool for telecom companies trying to determine what their options are in the
current market climate—and it may help them weather the current economic storm.
About the author: Steve Pickle
is manager-Strategy & Business Architecture, Communications & High
Tech, is based in San Francisco, while Lon E. Welsh, senior manager—Strategy
& Business Architecture, Communications & High Tech, is based in
Denver.
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