Article

A Core Focus

There has been recent excitement on the "dual boom" in the mobile communications and Internet-based services sectors in Asia-Pacific.

Par Ravi Vijayaraghavan with contribution from Louis Lim

First published on octobre 01, 2001
min


There has been recent excitement on the "dual boom" in the mobile communications and Internet-based services sectors in Asia-Pacific. An increase in the region mobile cellular subscribers, for example, from barely one million to over 170 million in 1990-2000 bore testament to the massive potential of the Asian telecoms markets for operators and vendors alike. The rapidly growing Internet penetration in Japan, China and Korea also holds out the promise of vast riches for mobile carriers in the wireless Internet space. These riches may be discovered, but unlikely very soon: the positive momentum that followed the 1997 economic crisis has been dampened. Intensifying competition and pricing pressure have also hurt the share prices of mobile giants such as China Unicom, which suffered a 20% drop in shares. And as the 3G bonanza is seemingly pushed back in time, mobile operators are faced with a fundamental strategic question: should they focus on the historical core business of their network or should they explore far and wide for new growth opportunities? Recent history points to the latter, as the past few years have seen telcos entering into new and seemingly unrelated businesses, e.g. marketing of interactive role-playing games, and new geographies such as SingTel purchase of Australia Optus. But empirical data suggests that a strong focus on the core is the most powerful mechanism for mobile carriers to drive sustainable revenue and profit growth. When Bain & Company investigated the performance of 1854 public companies between 1990 and 2000, we found only 9% of these companies achieved their bottom-end growth targets, and only 13% managed to achieve 5.5% real annual growth in revenues above their cost of capital. Across industries, we discovered that most managers were not looking to expand in the right direction; the stratégie du jour was to seek growth by venturing onto new pastures. However, successful companies were those that looked within to strengthen their core business and built strong foundations from which to grow. In the 10-year period, 75% of the companies that enjoyed sustained growth had achieved leadership in their core business. And lest there be any doubt, there is strong evidence of the power of such leadership: the typical 'leader' enjoys a 22.3% return on capital compared with 8.6% for 'followers'. But even as defining a company's core business is critical for crafting successful growth strategies, it is not always easy. Two approaches exist doing this "outside-in" or "inside-out? The former adopts natural business boundaries as defined by underlying market economies; the latter is shaped by how people inside the company perceive their company business boundaries from its unique core. Many ill-fated growth initiatives have resulted from companies failing to apply the "inside-out" approach judiciously. Mobile telcos seeking to define their core business should first ask the five following questions with respect to their assets: Who are our most potentially profitable, franchise customers; What are our most differentiated and strategic capabilities; What are our most critical product offerings; What are our most important channels; and, *Are there any other critical strategic assets that contribute to the above? Optus in Australia is an example of a company that has successfully executed on its original business plans by addressing these questions. Its CEO Chris Anderson recently announced a 60% increase in profits for the year ending Mar 31, 2001. Anderson attributed this success to a "tight focus and a performance culture". Unfortunately, statistics maintain that for each Optus, nine other companies fail to deliver on their growth and profit promises. And while Asia-Pacific may be the world's biggest and arguably fastest-growing market for telecoms services today, telcos might want to rethink their strategies to harness this growth in a profitable way. From what we have seen, a narrow focus can often be advantageous. Ravi Vijayaraghavan is VP, the Asian Technology and Telecommunications Practice, Bain & Company; Louis Lim is consultant, Bain & Company

There has been recent excitement on the "dual boom" in the mobile communications and Internet-based services sectors in Asia-Pacific.

An increase in the region mobile cellular subscribers, for example, from barely one million to over 170 million in 1990-2000 bore testament to the massive potential of the Asian telecoms markets for operators and vendors alike. The rapidly growing Internet penetration in Japan, China and Korea also holds out the promise of vast riches for mobile carriers in the wireless

Internet space. These riches may be discovered, but unlikely very soon: the positive momentum that followed the 1997 economic crisis has been dampened. Intensifying competition and pricing pressure have also hurt the share prices of mobile giants such as China Unicom, which suffered a 20% drop in shares.

And as the 3G bonanza is seemingly pushed back in time, mobile operators are faced with a fundamental strategic question: should they focus on the historical core business of their network or should they explore far and wide for new growth opportunities?

Recent history points to the latter, as the past few years have seen telcos entering into new and seemingly unrelated businesses, e.g. marketing of interactive role-playing games, and new geographies such as SingTel purchase of Australia Optus. But empirical data suggests that a strong focus on the core is the most powerful mechanism for mobile carriers to drive sustainable revenue and profit growth.

When Bain & Company investigated the performance of 1854 public companies between 1990 and 2000, we found only 9% of these companies achieved their bottom-end growth targets, and only 13% managed to achieve 5.5% real annual growth in revenues above their cost of capital. Across industries, we discovered that most managers were not looking to expand in the right direction; the stratégie du jour was to seek growth by venturing onto new pastures. However, successful companies were those that looked within to strengthen their core business and built strong foundations from which to grow.

In the 10-year period, 75% of the companies that enjoyed sustained growth had achieved leadership in their core business. And lest there be any doubt, there is strong evidence of the power of such leadership: the typical 'leader' enjoys a 22.3% return on capital compared with 8.6% for 'followers'.

But even as defining a company's core business is critical for crafting successful growth strategies, it is not always easy. Two approaches exist doing this "outside-in" or "inside-out? The former adopts natural business boundaries as defined by underlying market economies; the latter is shaped by how people inside the company perceive their company business boundaries from its unique core. Many ill-fated growth initiatives have resulted from companies failing to apply the "inside-out" approach judiciously.

Mobile telcos seeking to define their core business should first ask the five following questions with respect to their assets:

*Who are our most potentially profitable, franchise customers;
*What are our most differentiated and strategic capabilities;
*What are our most critical product offerings;
*What are our most important channels; and,
*Are there any other critical strategic assets that contribute to the above?

Optus in Australia is an example of a company that has successfully executed on its original business plans by addressing these questions. Its CEO Chris Anderson recently announced a 60% increase in profits for the year ending Mar 31, 2001. Anderson attributed this success to a "tight focus and a performance culture".

Unfortunately, statistics maintain that for each Optus, nine other companies fail to deliver on their growth and profit promises. And while Asia-Pacific may be the world's biggest and arguably fastest-growing market for telecoms services today, telcos might want to rethink their strategies to harness this growth in a profitable way. From what we have seen, a narrow focus can often be advantageous.

Ravi Vijayaraghavan is VP, the Asian Technology and Telecommunications Practice, Bain & Company; Louis Lim is
consultant, Bain & Company