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UGB319 Corporate Strategy, Part 2 1.

0 INTRODUCTION
Strategy talks about the direction and scope of organization over the long term (Johnson and Scholes, 2002). Particularly, for corporate strategy, Andrews (1987) says it is a form of decisions that determines and bring out its objectives, goals and essential policies for achieving those goals, which define the companys business and the kind of company it is or is to be (De Wit and Meyer, 2010). However, in nowadays competitive environment, business should look forward to descriptive approach of strategy (Mintzberg, Ahlstrand and Lampel, 1998) in order to set the strategy in the context of learning approach instead of planning and predictive. Therefore, this report will discuss synthesis of ideas relating to strategy issues after the discussion on strategic analysis of DiGi, an organization selected in this case study in order to answer the assignment topic for UGB319 Corporate Strategy subject.

1.1 Background and performance of DiGi


DiGi Telecommunications Sdn Bhd (DiGi) is a mobile service operation under DiGi.Com Berhad which is a listed company in Bursa Malaysia Securities Berhad and is part of the global telecommunications provider, Telenor Group. DiGi commenced operations in May 1995 when it launched its fully digital GSM1800 services, the first digital mobile communications service in Malaysia. DiGis vision is to be seen as stars in excellent customer experience; while DiGis mission is every day we go the extra mile, in small and big ways, to exceed our customers expectations, by delivering mobile and internet services that are; Made for me, Make it Easier and offer the Best deal (DiGi 2009 annual report). In the last six years, DiGis revenue has more than doubled to approximately RM4.9 billion with a subscriber base of 7.7 million. DiGi focuses on making it easy,

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UGB319 Corporate Strategy, Part 2


keeping it relevant and providing the best deals to ensure excellent customer experience in mobile and internet services (DiGi annual report, 2009). DiGi presence as a leader in prepaid services resulted in a number of firsts that have set industry benchmarks for simplicity and innovation. Since the launch of its 14.4 Mbps 3G/HSPA network in late 2008, DiGis mobile broadband and internet offering Broadband Done Right and Internet Done Right has been well received by the market. Quality internet for less is now a proposition synonymous with DiGis mobile internet services.

1.2 Strategic Issues of DiGi


Since 2007, DiGi is facing the decreasing of revenue and profit growth rate and decrease in profit for the year 2009. At the end of year 2006, DiGi face reduced subscriber and increasing of consumer demand for better product and services and shifting regulatory ground (DiGi Annual Report, 2007). Then, there is a decrease in their profit due to the increased traffic and network operating costs as well as mobile internet expansion costs and higher allowance for doubtful debt due to the economy factor (DiGi Annual Report, 2009). Based on the Table 1, DiGi revenue growth rate decrease from 16.277 % (year 2006-2007) to 9.385% (year 2007-2008) and 1.937% (year 2008-2009). Then, DiGi profit after tax growth rate decrease from 24.181% (year 2006-2007) to 6.848% (year 2007-2008) and decrease in profit for -14.018 % for year 2008 to 2009. Table 1: Growth rate for DiGi revenue and profit from year 2006 - 2009 Year 2006-2007 Growth rate for revenue (%) Growth rate for profit after tax (%) 16.277 24.181 Year 2007-2008 9.385 6.848 Year 2008-2009 1.937 -14.018

(Source: adapted from DiGis 2009 annual report, see appendix 1) Tan Khim Cai (089080979/1) Page 2

UGB319 Corporate Strategy, Part 2 2.0 STRATEGIC ANALYSIS OF DIGI 2.1 PEST analysis
In a competitive environment today, organization is required to glance over their external environment to recognize weak signals (Henry, 2008). After weak signals are identified, it must be kept under surveillance to see if it might flux into a trend that can affect the organization (Henry, 2008). Therefore, PEST analysis (see appendix 2) is use to identify the drivers of changes in external and the possible of strategic drift that are affecting DiGis performance. In relation to political or legal factor, government is a key stakeholder in affecting the operation of DiGi such as in tax policy, employment law and environmental regulation (quickmba, 2010). Recently, government has introduced the National Broadband Plan ambition to achieve 50 % household broadband (DiGi annual report, 2009). This plan give opportunities to DiGi for narrow the gap in broadband penetration for the government to achieve its National Broadband Plans objectives of 50% by the end of 2010 (Brekke, 2010). However, this plan does not show any positive effect for DiGi growth to increase in 2009. This situation might due to the close competitor, Telekom Malaysia (TM), which is a government link corporation where government have 28.6 % share inside (TM capital structure, 2010). This alliances and cooperation by government may give advantages to TM in carry out their operations. Besides, with the government share inside TM, TM can implement their project, research and development without concern on their capital. Thus, the government link corporation will affect DiGi operation and market share with their capital and technology.

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UGB319 Corporate Strategy, Part 2


Next, economical effect also play important role in determine the success of DiGis strategies and operations. Level of economic development, interest rates, exchanges rates (tutor2u, 2011) will give direct effect in consumer buying power and therefore affect DiGis sales. For example, impacts of global financial downturn are expected to ripple throughout 2009 for DiGi and if the economy continues to slow down, DiGi revenue will be affected from this segment (Brekke, 2009). Even though the overall market share for cellular segment and broadband has been growing rapidly (Malaysia Telecommunication Industry, 2011), this does not increase the revenue and profit growth rate of DiGi. Besides, during economy downturn, DiGi has to sacrifice their level of profit due to their promotional effort such as DiGi prepaid easy win contest, mobile number portability (switch to DiGi) and

decrease in fee charges such as quality internet for less (DiGi annual report 2009; 2010) in order to attract more customer. Furthermore, custumer from different social cultural will act and behave differently. It is important for DiGi to know the Malaysia social cultural, where their customer live in; for example, the growth rate of population, educational attainment level and level of social cohesion (tutor2u, 2011). In today Malaysia, people are more educated and lifestyle has change (Malaysia budget, 2011). This situation will give DiGi opportunities in penetrating their market into many categories and do the segmentation and targeting the customer. However, more educated customer and change in lifestyle will demand for better and greater service and compare DiGi with other telecommunication company. This situation will give more stress to DiGi in providing better services. Therefore, DiGi has invested more capital in increasing traffic and network operating costs as well as mobile internet expansion costs (DiGi annual report, 2009; 2010) which finally make their profit growth decrease. Tan Khim Cai (089080979/1) Page 4

UGB319 Corporate Strategy, Part 2


Furthermore, growth rate of Malaysian population are getting lower from 2009 to 2010 (population statistic, 2010), this situation will make DiGi face the crisis of getting smaller market share than before. Finally, technology also important where it can bring competitive advantages and is a major driver of globalisation (marketingteacher, 2011). For technology element, research and development (R&D) from government and technology incentives are important (quickmba, 2011). Without R&D and incentives from government, it is very hard for DiGi to introduce new product, particularly in this telecommunication industry. For example, REDtone has introduce its WiMax which deliver better speed than other (WiMax, 2011). Then, YES telecommunication company currently has spent around RM 2.5 billion to YES 4G infrastructure, which deliver five times faster than the current 3G technology (Tee, 2010). As a result, advance technology introduces by DiGis competitors will slightly and slowly took over DiGis market share. Therefore, if DiGi do not have or lack in technology research and development, DiGi will be outdated and unable to launch its product which able to compete with its competitors. For example, DiGi need to invest more in technology in order to increase the stability of DiGis network during festive periods due to the overloads incident (Dennelind, 2009).

2.2 Porters Five Forces


Porters five forces were developed by Porter and are used in analysis of industry structure and industry attractiveness (Henry, 2008). This framework (see appendix 3) tries to get the variation of competition while remaining pervasive and rigorous (Henry, 2008). Porters five force framework is used within DiGi in order to examine the competitive environment impact upon their organization.

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UGB319 Corporate Strategy, Part 2


In relation to the rivalry among existing firm in industry, DiGi along with rivals such as Telecom Malaysia (TM), Celcom, Maxis, hotlink, REDtone and Yes. These competitors faced by DiGi are strong and have their owned competitive advantages over DiGi. For example, TM is government-link corporation, Celcom is a company under Axiata, one of the largest Asian telecommunication companies, Maxis has services multiple platforms for Small and Medium Enterprises (SMEs) and large corporations in Malaysia, REDtone with their WiMax broadband and YES with their 4G technology (TM capital structure, 2011; Celcom, 2011; Maxis profile, 2011; WiMax, 2011; Tee, 2010). With these competitors, DiGi face problems with their market share which may overtaken by the competitors instead of overtaking the competitors market share. As a result, DiGi position in this industry still in uncertainty. Next, threat of new entrant is relatively low because of the legal restriction by government and high cost in penetrating the market and technology. However, there is still new entrant recently such as REDtone and YES. REDtone has entered this industry in 2004 with their high speed internet services, data solutions and discounted Voice over IP (VoIP) services (REDtone, 2010). Then, YES launch its 4G services in 2010 with their theme 4G innovation network (BusinessTimes, 2010). Even though new in the industry, these two telecommunication companies provide a better speed and service to customer which is a threat for DiGi. Then, bargaining power of buyer is high due to the concentration of buyers, alternative sources of supplies and low switching cost (Johnson and Scholes, 2002). For example, there are common and many people nowadays using mobile phone or smart phone which require different package of services. Besides, some people even use more than two telecommunication service such as prepaid line, mobile internet Tan Khim Cai (089080979/1) Page 6

UGB319 Corporate Strategy, Part 2


and home fixed line internet like Streamyx, from TM. Then, there are also different alternative and low or zero switching cost for DiGis customer to switch DiGis services to other such as Celcom, Maxis and Hotlink for the phone line or Telekom Malaysia, Maxis, Celcom, REDtone and YES for the internet service provider. These situations finally cause DiGi to follow the industry trend and promotions efforts which lead DiGi to sacrifice some of their profit. Bargaining power of supplier refer to the prices determines by the interaction between the supplier and the organization because businesses must obtain resources in carry out their daily activities (Campbell, Stonehouse and Houston, 2002). Bargaining power of supplier may depend on the uniqueness and scarcity of the resources that supplier provide, switching cost to other resources and number and size of the resource suppliers (Campbell, Stonehouse and Houston, 2002). For DiGi, the bargaining power of supplier is moderate. Supplier of DiGi may refer to the electrical and electronic industry for DiGi to penetrate their network station and supply in term of technology from other countries where DiGi can find the alternative and there is no scarcity of the resources. However, there might be little supplier in the market which able to provide high quality of services and technology to DiGi. This situation sometimes will make DiGi have lesser power over their supplier. Finally, threat of substitute for DiGi service product is moderate where the competitive products provide homogeneous benefit in generally such as voice call and internet (TM, 2010). Substitution can reduces demand for DiGis services as customers switch to the alternative (Johnson and Scholes, 2002). For example, the TM home fixed line provide a lower charge for calling to mobile phone with RM 0.12 or RM 0.10 for different packages and free call to all Telecom Malaysia fixed line (TM Voice Deals, 2010). Even though these services do not directly substitute DiGi Tan Khim Cai (089080979/1) Page 7

UGB319 Corporate Strategy, Part 2


mobile services, these will replace DiGi partially. Besides, TM also provides different reload cards and charges a lower price for people to call to overseas which can substitute DiGi mobile voice call service. For example, iTalk only charges RM0.10 for normal access and RM 0.30 for mobile call back service (TM iTalk, 2010). With the iTalk, people can just carry a card and make call around with DiGis competitors telecommunication service.

2.3 Value chain analysis


Every organization, either with huge or small type of operation will have their own way in value added or value chain activities that go to make up a product or service, see appendix 4 (Henry, 2008). The analysis of these activities is crucial because it is the cornerstone of competitive advantage and enables an organization to determine the costs and value that come out from each of its value activities (Henry, 2008). Therefore, inappropriate value chain activities will cause a company cost to increase. For DiGi, they has invested RM 300 million to RM400 million in expanding their mobile internet footprint and RM 318 million to RM 418 million was focused on capacity and quality enhancement of their 2G network and service development (Dennelind, 2010). Besides, they also invest in developed programs to engage, develop and build their employees (DiGi annual report, 2008). Thus, the ongoing of huge investment will finally cause DiGi to face the problem increase in cost and decrease in profit in year 2009.

2.4 Resource Based View


Resource based view is the organizations internal capabilities in formulating strategy to achieve a sustainable competitive advantage in its industry (Henry, 2008). Resources are the inputs that enable an organization to carry out its activities; while Tan Khim Cai (089080979/1) Page 8

UGB319 Corporate Strategy, Part 2


Competencies is the efficient configuration of resources that provides an organisation with competencies (Henry, 2008). Resources of an organization are important; but, too much effort and investment in making DiGis employees become competencies and capable will cause DiGi to incurred extra expenditure and lead to the decrease in profit. For example, DiGi has launched Work@ program which provides greater flexibility and promotes worklife balance for their employees (DiGi annual report, 2009). This is because DiGis employees are seen as their most important asset (DiGi annual report, 2009).

3.0 DIGIS CURRENT STRATEGIES


As the worldwide economic downturn, in year 2008, DiGi has introduced strategies including cost efficiency, continuous investments and excellent customer experience. To carry out these strategies, DiGi focus and leverage on its key strengths: brand values, people and customer service. Then, with the continuous slowdown of economy, DiGi saw greater emphasis operational efficiency initiatives in year 2009. They also balanced their cost optimization exercise with prioritized investments to expand and improve their network and achieve even higher levels of excellent customer experience (DiGi annual report, 2007, 2008 and 2009). From the analyses of those strategies, DiGi seems to modify their value chain activities for cost efficiency and become cost leadership in its industry. Then, the continuous investment and excellent customer experience with their brand value, people and customer service is strategies carried out by DiGi for their differentiation strategy.

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For DiGi, they may use their low price service to achieve competitive advantage over their competitors; however, it is difficult to sustain this competitive advantage because the competitors may be able to do the same (Johnson and Scholes, 2002). In reality practice, other competitors will keep on imitating each other pricing and promotional method in order to attract customer. For example, DiGi promote their friends and family where customer can call and message their friends and family number with low charge (FnFTM, 2011); and Celcom have their Xpax plan which provide customer lowest rates to fifteen friends on all networks (Xpax plan, 2011). Then, differentiation strategy is to provide services unique or different from competitors in term of dimensions widely valued by customers (Johnson and Scholes, 2002). It is true that DiGi has utilized this strategy with their excellent customer experience and service and brand value; however, if DiGi really carry out a good differentiation strategy, in long run, other competitors also able to imitate DiGi differences. For example, DiGi has launched D campus plan, a specially designed plan for university student with low rates (DiGi Prepaid campus, 2011), this plan has boost DiGi image inside universities across Malaysia. Then, Celcom also have their own specially designed package for university student called U.O.X (University of Xpax) and additional package for secondary school called S.O.X (School of Xpax) (UOX, 2011, SOX, 2011). With the Celcom U.O.X and S.O.X plans, DiGi targeted market share in student will be affected.

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UGB319 Corporate Strategy, Part 2 4.0 SYNTHESIS OF IDEAS RELATING TO THE STRATEGY ISSUES
Based on the analyses from DiGi strategies, DiGi is using Porters generic strategies including cost leadership and differentiation. In fact, a business should not get stuck in the middle for cost leadership and differentiation (Campbell, 2002). Thus, if DiGi want to implement its differentiation strategy with excellent customer experience and brand value, it is difficult to make their value chain to become cost efficiency to introduce low price for customer (annual report, 2009, 2010). This situation also applied in contrast, if DiGi want to promote low price services, it is paradox for them to make an ongoing huge amount of investment which eventually higher their cost. Therefore, if DiGi implement the high and continuous investment of technology and make their cost efficiency for lower price services simultaneously, DiGi will tend to suffer from its profit. In order to sustain in this telecommunication industry, corporate management of DiGi should rethinking the concept of its corporation that suggested by Prahalad and Hamel (De Wit and Meyers, 2010). Thus, DiGi should implement related diversification for their growth strategy (Henry, 2008). DiGi should identify and make new segmentation in the business to business (B-t-B) market (Hollensen, 2003) and maintain its low-end market for current and ordinary customers. This is because if DiGi only target its current customer with the investment DiGi has made, DiGi will unable to charge high price compare to the B-t-B market. Then, with the investment DiGi has made, DiGi is able to provide its B-t-B market such as corporate and SMEs customer with high quality of services. At the same time, DiGi also able to provide its current customer with better quality of services based on their new technology from investment. As a result from the segmentation and targeting, DiGi able to provide Tan Khim Cai (089080979/1) Page 11

UGB319 Corporate Strategy, Part 2


different services to different market in order to suite with their customers requirements and needs. Eventually, both B-t-C and B-t-B market will enable DiGi to gain more market share and revenue. For the implementation of diversification for growth strategy, DiGi can implement strategic alliances (Henry, 2008) with certain corporate and SMEs company such as broadcast for huge event; for example, in football match and car racing event. Moreover, DiGi also can provide services to huge corporate like insurance company and enterprise business that rely heavily on telecommunication service. With these alliances and B-t-B customer, it will enable DiGi to gain more revenue and a valuable intangible asset, their position and image in this industry.

5.0 CONCLUSION
With the discussion in this report, there is evidence to suggest that strategy, particularly in corporate level plays an important role in an organization success or failure. Good strategies do not able to promise the successful of an organization; it is depend on the ways the strategies being carried out and the uncontrollable external environment. Thus, good strategies should be implemented in a strategic ways with the cooperation among employees and a regularly inspection in order to make modification and changes for the learning process in strategies instead of keep the strategies on track. In a conclusion, DiGi has the good strategies for their cost leadership and differentiation in their excellent customer service and brand value; the successful of DiGi will depend upon the ways DiGi implement their strategies and their inspection for the strategies.

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UGB319 Corporate Strategy, Part 2 APPENDIX Appendix 1 DiGis financial summary


2009 RM 4,909,565 1,366,455 1,000,471 2008 RM 4,814,475 1,546,896 1,140,715 2007 RM 4,362,635 1,445,314 1,062,595 2006 RM 3,652,536 1,087,139 805,653

Revenue Profit before tax Profit after tax

Appendix 2 PEST analysis


Political factor impact on DiGi

Technology factor impact on DiGi

DiGis operation

Economic factor impact on DiGi

Social factor impact on DiGi

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UGB319 Corporate Strategy, Part 2 Appendix 3 Porters Five Forces


Threat of new entrants

Bargaining power of suppliers

Rivalry among existing firms

Bargaining power of buyers

Threat of substitute

Appendix 4 Value Chain Analysis


M A R > G I N

Inbound Logistic s

>

Operation s

>

Outbound Logistics Support by

>

Marketing and Sales

> Service

Procurement, Technology Development, Human Resource Management, Firm Infrastructure

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