In this white paper, we try to identify the commodity nature of the telecommunication business and the associated approaches to stay profitable. We advocate this based on a business of businesses model and by applying a differentiated transformation methodology.
Today’s business dynamics can be simplified by stating that markets are maturing, revenues are either stagnating or decreasing and there is no relief on the cost end of the P&L statement. In this backdrop – it is only fair to the shareholders – who have faith in the telecommunications industry to fight this trend – to identify the real competition, realize customers beyond traditional mechanisms and reverse margin fortunes.
Demystifying the Commodity Business:
Some of the standard measures that industry pundits would agree to as indices for a commodity business include the following:
- Tough competition and little differentiation
- Low profit margins
- Low returns on equity
- Low brand loyalty
- Ineffective asset utilization
It is important for telecommunication companies to recognize that the traditional ways of segmenting, allocating funds and managing the business will not yield the desired financial objectives. The new indices include the following:
- Product profitability index: In the telecom dictionary, products have always occupied the position of a service rather than a product approach. But, moving into the ICT space with lower shelf lives, telecommunication companies would need to look at the product approach more seriously. It would be evident that the profitability metrics would vary significantly across the telecom portfolio with a larger correlation to the customer profitability index.
- Next Generation Services Index: The telecommunication world is at the core of adopting new services. A quick recap of where the telecom industry has travelled in the last ten years will provide a better understanding of this space.
- Customer Profitability Index: The biggest challenge in measuring customer profitability is the assignment of costs to customers. It is generally easier to determine revenue generated by each customer in the network.
Here, we propagate that service providers need to adopt a differentiated strategy for transformation at the bottom of the pyramid. In the current structure of the industry, there is a need to re-invent our internal business models in which all shared services work on the “true” allocation of the costs in order to be effective in identifying the real value of the businesses within the business. This results in the advent of the Mobile Virtual Network Operators (MVNOs).
Differentiated transformation across the pyramid and especially at the bottom of the pyramid is the key to sustaining the service provider business model into the future. It is probably not long before service providers operate more like commodity trading houses with a clear line of visibility of profitability at the transaction level that will blur the commodity landscape and create a platform for telecommunication operators to survive successfully in the future.