Optus Is the Number Two Case Study

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Pricing structure is a complicated issue in the industry. The two major diversified firms (Telstra and Optus) often combine different types of telecommunications products into bundles. These bundles are set at price points depending on their characteristics. For individual products, plans are used with pricing dependent on the characteristics of the plans (allowable usage, types of usage, etc.).

For place, the primary method of marketing is through stores, both own-branded and third-party. These stores market the telecommunications devices and the plans that go along with those products. Optus utilizes Optus World, Network Communications, Strathfield, Telechoice and Allphones to market its products. At times, hardware can be an important component of the place offering. Optus has linked with both the iPhone and the Blackberry in order to attract customers of those two popular devices.

Technological development is a key demand driver in the business. For most its existence, Optus has largely rented its carrying capacity from Telus and was dependent on that network. The company became embroiled in a battle between Telstra and the ACCC with regards to the development of broadband technology, Optus having one proposal for this development and Telstra another (Sutton, 2007). Optus is now going on its own, as one of the SingTel subsidiaries testing the parent company's next generation technology.

Customer service has long been considered a driver of competition in the telecommunications industry. Service standards are low, and consumers often express dissatisfaction with customer service at many telecommunications firms, especially Optus and Telstra. Optus outsources much of its service function to India and has a complex system of response that makes receiving strong customer service difficult.

Competitive Environment Analysis

The competitive environment in the Australian telecommunications industry is intense. Entry to the market is in part regulated by the ACCC, and for most segments the competition takes an oligopolistic form. The relevance of the competitive environment is that it helps to dictate the desirability of the industry to existing and new players. Michael Porter's Five Forces model can be used to explain the competitive environment by analyzing the wide range of factors that contribute to that environment's attractiveness (QuickMBA, 2007). The five forces are buyer power, supplier power, barriers to entry, threat of substitutes and degree of rivalry.

Supplier power in the industry is low. One of the main suppliers in the Australian telecommunications industry is Telstra, who manage the networks and lease them to the private firms in the industry. In order to ensure that Telstra does not overcharge their direct competitors, the rates at which Telstra leases the lines are dictated by the ACCC. Thus, Telstra is almost no pricing power over the lines, especially given the ACCC's desire to encourage competition in the industry.

Buyer power is relatively low. Buyers have little bargaining power and do not buy in volume. They are price sensitive, but the oligopolistic nature of the industry and the managing of rates by the ACCC means that consumers are, for the most part, price takers. The industry's concentration is high, leaving the buyer with few options. The entire mobile market, for example, is divided among three firms (Telstra, Optus and VHA). Buyers are often locked into contracts with high fees for leaving, which reduces their buying power for the duration of the contract.

There are high barriers to entry. Access to the industry is regulated by the ACCC. Technically, the ACCC encourages competition and since firms simply rent capacity from Telstra, the barriers to entry may be assumed to be low. However, there are significant economies of scale in the industry, especially with respect to service and marketing and this has limited the number of active telecommunications firms. Most firms in the industry operate in minor niches, and only a small handful of firms operate in the major segments. Retaliation against new entrants is expected to be high, due to the intense battles for market share and the value of economies of scale. For mobile, the fixed resource of bandwidth is a major constraint that poses a substantial barrier to entry for new firms.

The threat of substitutes is low. Most substitutes for telecommunications products come in the form of other telecommunications products.

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Two firms, Telstra and Optus, compete in all segments of the industry. Therefore, these firms are able to command the market for each potential substitute. There are few viable substitutes for the immediacy of telecommunications.

The intensity of rivalry is high. There are high exit barriers, in particular because the major firms in the industry are principally engaged in the telecommunications business. There are high fixed costs, in particular for Telstra, meaning that they will continue to be active in the market. Industry growth is low, as both the fixed and mobile telephony markets are saturated. As a result, existing firms are mainly competing to win market share from one another. There are few product differences -- they are all based on the same technology and the same delivery concepts (bundles, use of stores). Brand identity is high in the industry. In addition, there is a fundamental conflict between the incumbent Telstra and the private firms. The regulator, ACCC, and the Australian government, have been used as pawns in the battles between the different telcos (Sutton, 2007).

Overall, the industry is moderately favorable. The firms in the industry compete vigorously for market share, but have strong pricing power. Therefore, they compete largely on the basis of market share, and engage only moderately in competition based on price and service, focusing their efforts instead on competition based on brand equity. What this means is that firms largely earn profits from their activities, and market share determines how much profit is earned. Telstra is focused on earning profits to help maintain its networks. The foreign-owned firms like Optus and VHA earn profits largely to repatriate them to their foreign owners.

Strategy Analysis & Recommendations

The strategy analysis helps to analyze how a firm deals with its environment to better compete in its industry. Optus bears little evidence of strategy, relying more on government intervention to provide it with market opportunity and profit. To the extent that Optus has a strategy, it is a differentiated strategy. There are two points of differentiation for Optus, brand and bundles. Optus is focused on developing its brand, in particular as an alternative to Telstra. The company has successfully built its brand over the years, capitalizing on first mover advantages, a very favorable regulatory environment and customer dissatisfaction with Telstra.

Because Optus is present in the complete range of telecommunications segments, the company is able to offer a wider range of service bundles to its customers than can most telcos (Telstra excepted). This has given the firm some degree of competitive advantage, in particular because Australians view fixed and mobile telephony as complementary products. Should that change, as has happened in many other developed markets, this competitive advantage could erode. Poor customer service could erode the Optus' brand value, but only if barriers to entry are lowered, allowing for new firms to enter the market and take advantage of this opportunity.

There are two key areas of recommendation for strategy improvement at Optus. The first is to address its shortcomings. The firm is vulnerable in customer service. It was able to win market share from Telstra in part due to the latter's poor customer service reputation. Optus is now developing a poor reputation of its own, opening the door to increased competition from other parties. This is a particular problem considering that Optus may face bandwidth capacity issues in future. This is an important driver of customer service reputation, and is largely out of Optus' control. Thus it is recommended that Optus address the customer service issues that are within its control.

The second recommendation for Optus is that it roll out its next generation LTE early to gain first mover advantages. The firm has the opportunity to gain a technological competitive advantage in a key area of usage growth. By doing this, Optus can make further market share inroads in mobile. It will also then be able to leverage these gains and its bundling capabilities to drive the new mobile business to other segments of its operations as well.

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