Case-Study-Vodafone by stariya


									            Vodafone's strategy, and Arun Sarin's leadership,

                          are being put to the test by 3G

                       Nov 25th 2004, from The Economist print edition.

THE era of empire building, it was generally argued when Arun Sarin became Vodafone's
chief executive in July 2003, was over. What was needed instead was a manager capable of
integrating the global collection of mobile-phone operators assembled by Chris Gent, Mr
Sarin's swashbuckling predecessor, as he built Vodafone into the world's largest mobile
operator. Sir Chris collected the pieces: Mr Sarin's mission was to fit them together to achieve
economies of scale and so to justify Vodafone's bigger-is-better strategy. For the past 15
months, Mr Sarin has been doing just that, though mostly behind the scenes. Only now is the
curtain finally being raised, with the launch this month of “third-generation” (3G) mobile
services in 12 European countries and a relaunch in Japan. The roll-out of 3G, Mr Sarin
agrees, will provide litmus tests of both his own leadership and Vodafone's ability to function
as a unified entity.

Redrawing organisation charts, rationalising back-room systems and cutting costs are hardly
the sorts of activities that generate headlines, so Vodafone seems a less dynamic firm than it
was under Sir Chris. But this dull-but-necessary work is what Mr Sarin is good at, and what
Vodafone needs to bring its sprawling divisions together. His “One Vodafone” project has
sorted out the behind-the-scenes spaghetti at Vodafone's national affiliates, so that they are
now all using the same technology. This cuts costs by making it possible to develop a new
service once, and then introduce it in many markets simultaneously.

Grand unification theory

Mr Sarin has also restructured Vodafone's management. The bosses of its large regional
operations now report directly to him. The head of marketing at each national operator now

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reports to the group head of marketing, rather than simply to his local boss, and so on. The
aim is to bind the national operators together and give Mr Sarin more direct control of his
firm. Aligning structure with strategy in this way will, he hopes, enable the firm to “execute

This is not rocket science. But these moves are characteristic of Mr Sarin. Jovial and
pragmatic, he prefers simple explanations to torrents of jargon, and is equally at home with
both cricket and baseball analogies, as you might expect from someone born and brought up
in India, and now an American citizen. Simplifying Vodafone's structure, he believes, is the
foundation for making 3G a success, for it enables Vodafone to reap the benefits of its global
scale. A single technology platform allows it to test handsets or services in one market and
then deploy them everywhere. It ensures seamless international roaming, even for video
calling. And it has allowed Vodafone to use its Japanese operation as a test-bed for 3G.

By far the greatest benefit of Vodafone's scale is its resulting clout with handset-makers. It
has set strict standards for its 3G handsets, and even the biggest handset-makers have no
choice but to comply with them if they want Vodafone's business. Using the same technology
in both Japan and Europe means that Vodafone can offer Japanese handset-makers access to
European markets and western firms’ access to the Japanese market, while playing them off
against each other.

The launch of 3G services in 13 countries this month, with a common range of handsets and
an impressive list of content partners is, then, the result of months of reorganisation, testing,
bug-fixing and negotiation. “We've been through highs and lows,” says Mr Sarin. But he
believes the company is both stronger and more flexible as a result: “We've been tempered,
like steel.” He hopes to sign up 10m 3G users by March 2006. It is not hard to see why Mr
Sarin is optimistic. The firm's latest financial results, released last week, showed steady, solid
improvement. The firm also sent a further signal that the empire-building era is over,
announcing a doubling of its dividend and an expanded share-buyback plan—returning cash
to investors rather than hoarding it for big acquisitions.

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There is, however, a fly in the ointment: America. Vodafone owns only a non-controlling
45% of its American affiliate, Verizon Wireless, a joint-venture with Verizon. That is why Mr
Sarin made a bid for AT&T Wireless, another American operator, last February: it would
have enabled him to launch Vodafone's brand in America and align its American arm with its
operations elsewhere (since Verizon uses a different wireless standard). But he was outbid by
Cingular, another American operator, which recently completed the $41 billion acquisition.

Arguably, Mr Sarin's failure to win AT&T Wireless was a blessing in disguise. Vodafone has
been able to focus on launching 3G without being distracted by a big acquisition: AT&T
Wireless's network is a patchwork of different technologies that Cingular is likely to take two
years to sort out. Verizon Wireless is well placed to profit from the confusion, says Mr Sarin,
who is happy to play a waiting game. The technological difference between the Verizon
Wireless network and those of Vodafone's other affiliates “will matter less in time”. Already,
Vodafone offers a dual-mode handset to customers who wish to roam between its American
and European networks. Ultimately, he hopes that Verizon's shareholders will see the logic of
separating its wireline and wireless operations, which would make it easier for him to win
control of Verizon Wireless.

The unpleasant alternative would be to mount a hostile takeover of Verizon—the sort of thing
that Sir Chris might have relished, but out of keeping with Mr Sarin's more measured style.
For now, he is concentrating on getting 3G off the ground. But sooner or later Mr Sarin will
have to address his firm's weakness in America. Even if the 3G roll-out goes as planned and
validates Mr Sarin's reputation for operational expertise, some swashbuckling may yet be

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The world's biggest mobile operator hints at tweaks to its strategy

                       Jan 26th 2006, from The Economist print edition

Is it time for Vodafone, the world's biggest mobile operator, to overhaul its strategy? The idea
is not new, but it has recently become the subject of much debate. Sir John Bond, a banker
who will take over as Vodafone's chairman in July, has been doing the rounds of institutional
shareholders, many of whom have expressed disquiet about the giant firm's direction. Since
2004, Vodafone's share price has underperformed the FTSE 100, London's leading
stockmarket index, in marked contrast to the shares of O2, a far smaller mobile operator that
has just been taken over by Telefónica of Spain (see chart).

Some investors have called for Vodafone to sell its 45% stake in Verizon Wireless, a big
American mobile operator, which is worth around £25 billion ($45 billion); there are also
concerns about continuing problems at the firm's Japanese unit. Yet the company has
ploughed ahead with further geographical expansion, making a series of acquisitions during
2005, culminating in the £2.6 billion purchase of Telsim, a Turkish mobile operator.
Vodafone has continued to pursue its unique approach of being a mobile-only operator with
unrivalled global scale. But both pillars of this once-visionary strategy are now being called
into question.

“Vodafone has consistently over-promised and under-delivered on its ‘bigger is better’
strategy,” complains John Karidis, an analyst at Man Securities. Vodafone has long insisted
that its size provides huge economies of scale when buying handsets, network equipment and
software. But while nearly all of Vodafone's regional operations use the same technology,
called GSM, there are two big exceptions: its American and Japanese units.

Verizon Wireless uses a different, incompatible wireless technology called CDMA, so there is
little scope for economies of scale. Nor can Vodafone, as the minority partner, exploit its
brand in America. And Vodafone's attempt to use the same handsets worldwide was a

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spectacular failure in Japan, a unique market that is two or three years ahead of Europe in its
adoption of mobile technology. Only when Vodafone relented and launched a new range of
Japan-specific handsets was it able to halt an exodus of subscribers. In the process, it
undermined its own argument about economies of scale. And with three new operators due to
launch services later this year, the Japanese market is about to become far more competitive.

As a result, it could make sense for Vodafone to scale back its global ambitions. “The market
has lost confidence in the group's ability to deliver value by pursuing their current global
strategy,” David Cumming, head of UK equities at Standard Life, a big institutional investor
in Vodafone, said this week. Mr Karidis says he would like to see a reversal of the
expansionist strategy and more focus on execution. The company's latest trading update,
released this week, was a mixed bag, with higher-than-expected subscriber growth, but
declines in average revenue per user, a widely used industry measure, in Britain, Germany,
Italy and Japan. The stronger performance of O2 says Mr Karidis, shows that scale is less
important than “razor-sharp operating focus”.

The second pillar of Vodafone's strategy, its mobile-only approach, also looks wobbly.
Around the world, telecoms operators are starting to integrate their fixed and mobile
networks, offering special deals to customers who buy both services together. Beyond that,
many operators are also gearing up to offer “quadruple play” bundles of fixed and mobile
telephony, broadband and television services. If such “converged” bundles prove popular,
Vodafone's mobile-only strategy will leave it isolated. Its voice revenues could also be
undermined as cheap voice-over-internet technologies, such as Skype, spread from fixed to
mobile networks. “Vodafone continues to reiterate its ‘mobile-only’ strategy when internet
standards are rapidly blurring any distinction between fixed and mobile pipes,” says Cyrus
Mewawalla, an analyst at Westhall Capital, a stockbroker. “Vodafone management has no
strategy for convergence.”

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                                              Needless to say, Arun Sarin, Vodafone's chief
                                              executive, disagrees with the critics. “There is an
                                              advantage to scale,” he insists, “and we are happy
                                              with occupying the mobility space.” But he is
                                              also, he admits, prepared to be “flexible and
                                              pragmatic” about Vodafone's strategy. Indeed,
                                              there are some signs of an impending shift.

                                              For while he insists scale is important, Mr Sarin
                                              notes that it need not be global scale that the
                                              company is after; there are also benefits to
                                              regional scale. “Is there more scale and scope in
                                              Europe versus non-Europe? Of course there is,”
                                              he says. “If you go global, especially if you are on
                                              different technology, then economies of scale
                                              exist, but to a lesser extent.” Mr Sarin notes that
                                              both the American and Japanese units are worth
                                              more today than they were a year ago. Vodafone's
                                              board regularly

reviews whether to keep them in the company's portfolio, and has so far decided to do so—
though that could change in future. “What we have to do is keep these assets in the fold until
there is clear visibility of value that we can take home to our shareholders,” he says. In other
words, he just seems to be waiting for the right time to sell.


Vodafone's investments last year—in Romania, the Czech Republic, India, South Africa and
Turkey—were all in countries that use GSM technology and have high potential for growth,
notes Mr Sarin. By making these investments, and exiting Japan and America, might
Vodafone be planning to retrench to Europe and Africa, where its scale provides the greatest
benefit? “I don't think of it as retrenchment, but as repositioning,” Mr Sarin responds.

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He disagrees that Vodafone has concentrated on expansion at the expense of execution. O2
has been run with more of a short-term strategy, to attract a buyer, he says. And Vodafone's
operations in Romania and the Czech Republic were swiftly integrated into the group and are
now performing better than expected. But Mr Sarin has signalled the end of his buying spree;
he would like to increase Vodafone's stake in Polkomtel, a Polish operator, he says, but does
not have anything else on his shopping list at the moment.

What of the suggestion that Vodafone's mobile-only strategy will be undermined by
convergence? “It's very early days,” says Mr Sarin. “We are dubious whether customers really
want all the things that people are imagining that they want.” Already, he notes, Vodafone
sometimes provides fixed/mobile bundles to big corporate customers, by buying capacity
from fixed-line operators. The company is also acting as a wireless partner to BT, Britain's
fixed-line incumbent, which lacks a mobile network, and may strike similar deals in Italy and
Japan. America's Verizon, which owns the other 55% of Verizon Wireless, plans to offer
converged services too.

As a result, Vodafone will be able to see how much demand there is for such services. It may
be that only a small fraction of customers want them, says Mr Sarin, in which case Vodafone
will collaborate with fixed-line operators where appropriate. The company is also keeping a
close eye on voice-over-internet technologies. “We are very conscious of that,” he says.

So Mr Sarin has not ruled out change altogether. But whether he will just have to tweak the
strategy or rethink it completely remains to be seen. In the meantime, Vodafone's twin pillars
remain in place—despite the wobbles.

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