4. STRATEGIC ANALYSIS
4.3 Internal analysis
Not only will key resources be identified, their latest development and strength will be assessed as well. As these resources are key, it is important to look at what the company is doing in order to shape and build them.
Material assets
Some of TDC’s most important ressources are the infrastructures. During the last 5 years the level of investments in infrastructure has been around 14‐15 percent of revenue, which is high.66
By the end of 2010 TDC’s fixed net in terms of triple‐play standard definition(i.e. an access line with capacity bare up to all three; telephone, broadband, and TV) coveres 90
64 Telia. TeliaSonera Annual Report 2010, p 4.
65 Telenor. Telenor Group Annual Report 2010, p 16.
66 TDC A/S. TDC Annual Report 2010, p 76.
percent of all households.67 Not setting standard on the speed(capacity) of the connection, however, the net covers nearly the entire population.68 It is well known by now, that the option of providing bundled services presents TDC with a significan advantage over its competitors. Also, the “aggressive” action with the acquisition of Dong’s fiber net has resulted in TDC having the largest fiber net, and with the advantages of fiber, this could prove to be an essential investment.
Mobile networks are a prime ressource as well. Basic coverage is very close to 100 percent, nevertheless TDC is not resting, i.e. heavily investments have been made in the new 4G network. Seeing that many services increasingly become mobile, not to mention Telenor and Telias alliance, it seems more than reasonable to keep up in this field.
Immaterial assets Brands
Immaterial assets are also important resources. Especially the many brands the TDC possesses, most of which have been added by acquisition of companies, is a strong fac‐
tor. It is, of course a balance, seeing that too many brands in the same market ultimately will lead to some sort of chaos. However, momentarily with the developments in the industry with regard to the consumer segment particularly, i.e. the price discrimination discussed in section 4.2.2, there is good reason to be present with many faces.
According to JP Morgan, the recent acquisition of Onfone was very favorable deal for TDC – i.e. a price of 0,3 billion DKK is low compared to revenue contribution of up to 0,5 billion DKK (0,3 billion EBITDA). Before the acquisition, Onfone was a valuable whole‐
sale customer of Telenor – allegedly paying Telenor around 0,2‐0,3 billion DKK. There‐
fore, integrating the activities into TDC’s net would turn the annual loss into profit.69 Customer relations
Another important immaterial asset is customer relations. With the first two of the transformational strategic priorities, especially the first ‘customer satisfaction’ but also the second ‘revitalization of behavior and culture’, TDC is certainly directing much atten‐
tion towards customers. Not having full access to all information, it is somewhat difficult to assess level and trend in customer satisfaction.
67 TDC A/S. TDC Annual Report 2010, p 12.
68 Ibid, p 50.
69 Wittig, H., Morris, D., & Achtmann, T. (12. May 2011). TDC ‐ Improved visibility, p 1‐2.
An important measure, however, is RGUs. Positive development within most markets from 2008 to 2010 can be observed – i.e. VoIP, mobile telephony, mobile broadband, broadband wholesale and retail, all TV activities, and bundled services. Fixed line te‐
lephony (PSTN/ISDN) is expectedly dropping, while the trend within wholesale mobile telephony and retail prepaid cards is a bit more turbulent.70 With very positive trends especially within TV and bundled services things look good.
Development in total RGUs however, only depicts the gross change, i.e. customer reten‐
tion is not reflected. TDC has given information on churn rates71 only for TDC Consum‐
ers mobile telephony subscribers. Despite a very dramatic rise in the first two quarters of 2010, the churn rate has by the fourth quarter gone down to a level of 28,7 percent, which is 13,4 percent points lower than in the first quarter of 2008, thus an overall very positive development.72
Human assets
Employees are an equally important resource in TDC. Clearly, the task of transforming an organization is not easy, and it certainly affects people a lot, since headcount reduc‐
tions have been a part of the process. Over a period of two years, the number of FTEs has been reduced by 11,5 percent73. Seen from an economic point of view rationalization is positive, if executed properly that is. Table 3‐1 is to help address exactly this issue.
Growth in Revenue/Employee
FTE change (’07-‘10) 2007 2008 2009 2010
TDC Consumer -24,0% 3,77 4,48 4,50 4,61
TDC Business -33,3% 4,01 5,28 5,19 5,11
TDC Nordic -13,0% 2,42 2,38 2,45 2,94
Operations & Wholesale -30,4% 0,65 0,62 0,59 0,66
YouSee 10,9% 2,55 2,72 2,84 3,26
Growth in EBITDA/Employee
TDC Consumer 1,39 1,76 1,85 1,98
TDC Business 1,58 2,26 2,44 2,47
TDC Nordic 0,27 0,28 0,35 0,41
Operations & Wholesale 0,26 0,34 0,32 0,29
YouSee 0,73 0,81 0,90 1,10
Table 4‐1 Productivity measures74
70 See appendix II, Figure II‐II to VI
71 The annual percentage of lost customers based on average number of total customers.
72 See appendix II, Figure A II‐I
73 From 11.772 in 2008 to 10.423 in 2010, see Table 3‐1 Selected key figures
74 Appendix II, Table A II‐II
From the table can be seen reported EBITDA per FTE and revenue per FTE for each of the five business units. These are two key productivity indicators over time or benched marked against one another, and when combined they provide information on 1) the
“success” of market activities reflected in revenue per FTE and 2) the “success” of inter‐
nal processes reflected in the discrepancy between the two.
An overall impression comes from observing the numbers, that TDC has become sub‐
stantially more effective on every measure, except that of Operations and Wholesale. It is not surprising to see, that the level of both measures is higher for TDC Business than TDC Consumer. In terms of the revenue measure, TDC Business is the only unit with de‐
clining trend in the last two years.
It is important to remember, naturally, that it is a balance that any company needs to trade off, i.e. the quality of service etc. versus personnel costs. Therefore, these trends in themselves being “positive” are not necessarily implication of positive change.
The relationship between the two measures is key. Figure 4‐4 depicts this relationship based on average growth in the last two fiscal years. The idea is that growth in revenue per employee alone tells only half the truth – more precisely; if a positive change in revenue per employee is not accompanied by a positive change in EBITDA per employee the company is not capturing value from the growth.
Figure 4‐4 Productivity75
75 Based on reported numbers on segment revenue, EBITDA, and FTE. The growth rates are calculated as an average of the growth from 2008 to 2009 and the growth from 2009 to 2010. See appendix II, Table A II‐I, Table A II‐II, and Table A II‐III.
-15%
-5%
5%
15%
25%
-5% 0% 5% 10% 15%
Growth in EBITDA/FTE
Growth in Revenue/FTE
TDC Consumer
TDC Business
TDC Nordic
Operations &
Wholesale YouSee
Headcount reductions in the business units should all else equal be reflected in a higher EBITDA/FTE than revenue/FTE growth. It is important to note, that the other side of the equation, i.e. development in revenues has a large impact, with respect to analysis how‐
ever, it is best treated in the financial statement analysis. For now we are focusing only in relation to FTEs.
YouSee and TDC Nordic take the lead both with more than a 50% higher growth in EBITDA/revenue indicating solid change for the better. TDC Consumer and TDC Busi‐
ness show moderate change, the latter has managed to grow in terms of EBITDA/FTE while actually experiencing a decline in revenue/FTE. Operations and Wholesale is by nature very different from the other units, as it operates across and handles everything that relates to operations.
Overall, it seems that TDC is succeeding in trimming the organization as to fit with the market conditions. Determining how much more potential there is in efficiency im‐
provements is close to impossible, interim report for 1H2011 showed a total number of FTEs of 10.107, which is a reduction of another 316 compared to ultimo 2010.
When NTC’s stock emission became a reality all employees were granted a one‐off allo‐
cation of stocks, amounting to a total value of DKK 145 millions. In addition, a stock in‐
vestment bonus program for all members of the top management was established. The program is subject to “lock‐up”, which means that the granted stocks are locked for trade for 12‐18 months.76 Clearly, this provides management with very strong incen‐
tives – the total number of shares possessed by members of the management committee as of ultimo 2010 4.389.894, which is more than 5 per thousand of the total number of outstanding stocks, and represents a current market value of nearly 200 DKK millions77. 4.3.2 Boston growth/share model
The Boston model is to help assess the current current position of each product division.
The underlying assumption is that the experience curve is working and hence that the company with the largest relative market share is able to produce at the lowest cost, and the area is then divided into four quadrants, i.e. Dog. (low/low), Question mark
76 TDC A/S. TDC Annual Report 2010, p 156157.
77 Total number of outstanding stocks is 825.000.000, and the closing price of TDC A/S was 45,53 as of Semptember 30th – 4.389.894/825.000.000 = 0,0053 and 4.389.894*45,53 DKK = 199.871.874 DKK.
Source: euroinvestor.dk.
(low/high), Star (high/high), and Cash Cow (high/low) with the parentheses represent‐
ing high or low relative market share and market growth respectively. The idea is then, that the chart helps detect where cash generation stems from and where cash should be used. Ideally, then, the excess cash generated in a Cash Cow unit should be used for ex‐
panding activities in Question Mark units, where market growth is high but penetration in terms of current market share is low or dogs with potential of becoming Star or Ques‐
tion Mark.78
Since TDC is market leader within all divisions,
Figure 4‐5 is somewhat different than when for the most part applied. It seems there are only Stars and Cash Cows, which – given positive cash flows – is very positive in deed.
Figure 4‐5 Boston Matrix79
There is currently no obvious receiver in terms of cash flow generated from the Cash Cows, which fits with current policy of dividend payout, which is to be discussed in fur‐
ther detail in the financial statement analysis. Note that both mobile broadband and IPTV are cannibalizing on fixed broadband and cable TV respectively. Focus therefore should be on maintaining and perhaps building positions of current product lines. Addi‐
tionally, since there is room for it, TDC could seek new opportunities, i.e. Question Marks.
78 Porter, M. E. (1980). Competitive strategy, p 362.
79 See appendix II – Table A II‐V -20,0%
0,0%
20,0%
0,0 5,0
10,0 15,0
20,0
Market Growth
Relative Market Share
Fixed telephony Mobile telephony Fixed broadband Mobile
broadband IPTV Cable TV
4.3.3 Strategy assessment
Apparently, TDC is in a favorable position with regard to domestic markets. Keeping this position, however, is not an easy task. As markets mature, growth options become lim‐
ited, and competition intensifies. There is always a natural limit of penetration in any given market with an existing product, and it seems that many of the current markets are in fact very close to if not definitely in the mature category or, in the case of PSTN in a declining phase. Seeing as these phases are characterized by falling prices and, there is very strong implications pointing towards that TDC must pursue either new markets or new products (or both).
Fitting the organization to market activity is certainly an important strategic objective, however downsizing should not be considered a long‐term solution for TDC. Using An‐
soff’s terminology, there is a call for product development, market development or di‐
versification if growth is to be achieved in the future. Clearly, expanding Nordic activities either through acquisitions or by adding to the current infrastructures is one option. The other option, which naturally is much more complex, is to develop new prod‐
ucts/services.
Based upon TDC’s stated 10 strategic priorities, product development does not appar‐
ently seem to be a point of special focus. This is not entirely true though; energy is fo‐
cused on extending and refining current product portfolio, yet perhaps not in the cate‐
gory of actual innovation. Point 6. Landline retention is sought achieved through offer‐
ing multi‐play products, Home Entertainment etc. Point 7. Mobile growth is partially aimed at mobile broadband, and sought achieved through the new 4G net. Also the con‐
cept of mobile payment is set out to become an important area. Lastly, point 8. “TV eve‐
rywhere” is sought achieved through advanced product offerings, such as TV on de‐
mand.80 Hence, there is some focus on product development. Also, it is important to note, that the size of TDC does not call for technology innovation on large scales.
The four big Telco’s operating in Denmark have engaged in a partnership to create a joint platform for a digital wallet.81 The idea is basically, that it will become possible to have your entire wallet in your mobile – from membership cards and library cards to
80 TDC A/S. TDC Annual Report 2010, p 17.
81 TDC A/S. (23. June 2011). Telecom providers join forces to create digital wallet. Press release.
credit cards and debit cards etc. Making this a reality, however, may not be as easy as it seems, as it is ultimately the consumers, who dictates success and failure, unless of course it is decided on a higher level that the society is to become cash‐less. Additionally, these Telco’s are unlikely to be the only ones having their eye on this opportunity, i.e.
mobile telephony and software producers such as Apple, Google and Nokia.82 TDC and the competitors seem to be making a smart move by joining forces, seeing as it will im‐
prove the likelihood of success, all else equal.
In relation to the mobile industry, there are many examples of product (/service) mar‐
ket convergence, as smartphones increasingly supports many tasks in everyday life; the mobile wallet is yet another example that the boundaries of the industry is constantly changing through what Christensen terms ‘convergence via context embedding innova‐
tion’. It is natural for the boundaries of an industry to converge or disintegrate, as mar‐
kets are maturing and companies seek new opportunities. Ultimately, it will leave win‐
ners and losers. One very obvious example of a looser in this context would be Nokia, who in contrast to Samsung were not on the market for personal computers, and there‐
fore lost its leading market position, as smartphones became the new thing. Besides Samsung, there are indeed other winners, namely in particular Apple who entered the market, and now is considered market leader.
In the case of TDC, it seems fair tot state that pursuing these types of convergence based product innovation is more attractive than autonomous product innovation for instance.
82 Datamonitor. (2011). Five Consumer Technology Predictions for 2011 5: Mobile and social payments take off, p 2.