40379775 DiGi Strategic Management

STRATEGY MANAGEMENT GSM 5160 | WRITTEN ASSIGMENT Lecturer: PROF. DR. NOOR AZMAN ALI PREPARED BY: GROUP 1

DIGI.COM BERHAD | KUAN YEN CHING KUAN YEN NEE TUNG WAI CHEE KAMELIA SHARIFIAN

GM03709 GM03698 GM03578 1 GM03360

Table of Contents .................................... 4

1.0 1.2 1.3 1.4 1.5 1.6

Introduction to DiGi Telecommunication Sdn Bhd Market Composition ............................................................................................................... 6 Commenting on DiGi‟s Vision ............................................................................................... 7 Commenting on DiGi‟s Mission ............................................................................................. 8 DiGi‟s Long Term Objectives................................................................................................. 8 DiGi‟s Potential Issues ............................................................................................................ 9

2.0 2.1 2.2 2.3 2.4 2.5

3 Key Strategic Environments Introduction to External (Macro) Environment .................................................................... 10 PESTLE Analysis ................................................................................................................ 10 Cultural and Demographic Factors ....................................................................................... 17 15 External Environmental Factors....................................................................................... 18 5 Identified Opportunities and Threats ................................................................................. 19

3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

Introduction to Industrial Analysis (Competitive Information) Threat of New Entrants ......................................................................................................... 20 Threat of Substitute Products ................................................................................................ 21 Industrial Rivalry .................................................................................................................. 21 Bargaining Powers of Suppliers ............................................................................................ 22 Bargaining Powers of Customers .......................................................................................... 23 15 Industrial Environment Factors ........................................................................................ 23 The External Factor Evaluation (EFE) Matrix ...................................................................... 24 Top 5 Opportunities and Threats .......................................................................................... 24

4.0 4.1 4.2 4.3 4.4 4.5

Introduction to Internal Analysis DiGi‟s Common-Size Financial Statement Analysis (2005 – 2009) .................................... 26 DiGi‟s Financial Ratio Analysis (2005 – 2009).................................................................... 31 20 Internal Factors………………………………………………………………………… 32 The Internal Factor Evaluation (IFE) Matrix………………………………………………32 Top 7 Strengths and 4 Weaknesses………………………………………………………...33

5.0 5.1

Introduction to SWOT Matrix Framework DiGi SWOT Matrix .............................................................................................................. 37

6.0 6.1 6.2 6.3 6.4

Introduction to Types of Strategies DiGi‟s Possible 4 Types of Strategies................................................................................... 38 DiGi‟s Intensive Strategies – Market Penetration................................................................. 38 DiGi‟s Intensive Strategies – Market Development ............................................................. 40 DiGi‟s Intensive Strategies – Product Development ............................................................ 42

7.0 7.1 7.2

Introduction to SPACE Matrix SPACE Matrix for DiGi........................................................................................................ 45 DiGi‟s SPACE Matrix Profile............................................................................................... 46

......................................................... 9

...................... 20

.................................................... 26

.......................................... 33

................................................... 37

...................................................... 43

2

.......................................... 47

8.0 8.1 8.2

Introduction to Blue Ocean Strategy (BOS) DiGi Strategy Canvas ........................................................................................................... 49 DiGi ERRC Grid ................................................................................................................... 49

9.0 9.1 9.2

Introduction to BCG Matrix DiGi BCG Matrix ................................................................................................................. 54 DiGi BCG Matrix Justifications and Strategies .................................................................... 54

10.0 10.1

Introduction to Strategic Implementation Action Plan DiGi Strategic Implementation Action Plan ......................................................................... 59

11.0 11.1 11.2

Introduction to Strategic Evaluation – Balanced Scorecard DiGi Balanced Scorecard/Strategy Map ............................................................................... 64 DiGi Balanced Scorecard/Strategy Map Cause and Effect Relationships ............................ 66

......................................................... 53 ............................... 59 .......................... 64

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1.0

Introduction to DiGi Telecommunication Sdn Bhd

Company Overview (History, Location, Structure, Size and Key Employees) DiGi Telecommunications Sdn Bhd (herein after known as DiGi), a subsidiary of DiGi.com Berhad (former name: Mutiara Swisscom), is a mobile communications company that engaged in establishment, maintenance and provision of telecommunication and related services. DiGi, was established in May 1995, primarily operates in Malaysia with its headquartered1 in Shah Alam, Selangor. DiGi sister company, Pay By Mobile Sdn Bhd deals with electronic financial services, while its subsidiaries are DiGi Services Sdn Bhd (property holding, renting of premises) and Djuice.Com Sdn Bhd (others related services).

Note: 100% indicates wholly-own subsidiaries

1

The table below tabulates DiGi.com Berhad Key Employees who are leading DiGi  2,800 strong workforces.

affectionately called D‟House 4

Ownership As a group, DiGi.Com Berhad is listed on Bursa Malaysia Securities Berhad under the Infrastructure category with a paid-up capital of RM77.75 million and a market capitalization of approximately RM16.8 billion as at 6 April 2009. As of March 2010, DiGi market capitalisation was approximately RM17.5billion. Top 20 Shareholders as at 18 March 2010

No. of Shares

%

1

Citigroup Nominees (Asing) Sdn Bhd Telenor Asia Pte Ltd (DiGi)

380,975,030

49.00

2

Employees Provident Fund Board

124,865,095

16.06

3

Amanahraya Trustees Berhad Skim Amanah Saham Bumiputera

37,090,300

4.77

4

CIMB Group Nominees (Tempatan) Sdn Bhd Pledged Securities Account For Time dotCom Sdn Bhd

27,500,000

3.54

5

Valuecap Sdn Bhd

23,935,200

3.08

6

Kumpulan Wang Persaraan (Diperbadankan)

23,553,500

3.03

7

Amanahraya Trustees Berhad Amanah Saham Wawasan 2020

18,303,400

2.35

8

Amanahraya Trustees Berhad Amanah Saham Malaysia

14,487,300

1.86

9

HSBC Nominees (Asing) Sdn Bhd Exempt An For JPmorgan Chase Bank, National Association (U.S.A.)

9,700,600

1.25

10

Permodalan Nasional Berhad

4,868,800

0.63

11

Amanahraya Trustees Berhad As 1Malaysia

4,600,000

0.59

12

Dato Ahmad Sebi Bin Bakar

4,551,813

0.59

13

HSBC Nominees (Asing) Sdn Bhd BBH And Co Boston For Vanguard Emerging Markets Stock Index Fund

3,938,373

0.51

14

Citigroup Nominees (Tempatan) Sdn Bhd Exempt An For American International Assurance Berhad

3,930,400

0.51

15

Amanahraya Trustees Berhad Amanah Saham Didik

3,510,500

0.45

16

Alam Nusantara Sdn Bhd

3,401,523

0.44

17

Amanahraya Trustees Berhad Public Islamic Dividend Fund

3,322,300

0.43

18

Citigroup Nominees (Tempatan) Sdn Bhd Exempt An For Prudential Fund Management Berhad

3,068,300

0.39

19

ABB Nominee (Tempatan) Sdn Bhd Pledged Securities Account For Ahmad Sebi Bin Bakar

3,000,000

0.38

20

HSBC Nominees (Asing) Sdn Bhd Exempt An For Jpmorgan Chase Bank, National Association (U.A.E.)

2,918,400

0.38

701,520,834

90.24%

TOTAL

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1.1

Business Description

DiGi operates through 2 business lines:  Voice Services fixed and mobile telephony (prepaid, postpaid, international services)  Data Services dial-up, mobile and broadband internet, messaging 1.2 Market Composition The subsequent table give the overview of the Malaysia telecommunication market composition by business line: Business Line Voice Services2

Fixed Line Telephone Mobile Cellular

Data Services3

Dial-Up Internet (Narrowband/ Wired Broadband) Mobile Internet4 Wireless Broadband

Market Composition Main Rival 2009 Major Market Share Telekom, Maxis, Telekom 97.6% Time dotCom Time dotCom 1.6% Maxis 39.9% Maxis, Celcom Celcom 34.4% DiGi 25.7% Telekom, Maxis, Celcom, Time dotcom, Jaring

no statistic found

Maxis, Celcom, P1 Telekom, Maxis, Celcom, Time dotcom, P1, Jaring, UMobile

Celcom Maxis P1 Telekom DiGi

69.9% 11.7% 8.4% 6.5% 3.5%

With reference the below figure (Source: DiGi), on an overall basis, DiGi benchmark only against Maxis and Celcom since 2004. Even in 2009, when broadband was accounted for 31.7% of total

Note: above is market position back in 2004

Source: Malaysian Communications and Multimedia Commission – MCMC, 2009 Source: Starbiz, November 30, 2009 4 Mobile internet only took off in 2009 and DiGi had entered the arena with 3G for small screen in 3rd Quarter of 2009 2 3

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market growth, DiGi managed to defend its revenue market share (compare to 2008) when Maxis lost substantial share to Celcom and some to DiGi (refer below figure from DiGi‟s 13th Annual General Meeting on 13 May 2010) despite having less 3G coverage. However, notice that numbers exclude broadband.

2nd Quarter of 2010 Updates The subsequent tables compare and contrast the same parameters (subscribers, revenue and EBITA) of Maxis, Celcom and DiGi in 2nd Quarter of 2010. It echoes DiGi sentiment on Celcom overtaking Maxis on quarter revenue and EBITA while DiGi is still #3.

Parameters Subscribers (million) Revenue (RM million) EBITA (RM million)

1.3

Telcos Maxis Celcom

DiGi

12.97

10.60

8.10

2,191

3,854

1,335

1,028

1,812

578

Commenting on DiGi’s Vision

DiGi‟s Vision is to be seen as stars in excellent customer experience by enhancing communications to improve customers' quality of life, at home, work and play. Comments: This is a good statement – reveals DiGi‟s core communications business. It is short – one (not so long) sentence length; thus acceptable. Plus, it does serves as the starting point in everything DiGi do and express where DiGi want to be in the long term. It does not tell how DiGi are going to get there but sets the direction. DiGi‟s strategists believe that the Vision attracts commitment and energises employees to strive for an established standard of expected excellence.

7

Commenting on DiGi’s Mission

1.4

DiGi‟s Mission is to: 1. Provide customers specific solutions to meet individual needs for communications, connectivity, and access to information and security; (1,2,4,6,7) 2. Provide an environment where our employees can grow and be fulfilled; (5,8,9) 3. Provide superior returns to shareholders; and, (5,9) 4. Contribute to improving life in Malaysia. (3,8)

Note: the numbers in parentheses correspond to the 9 essential components of the mission statement below

Customers (Who are the firm‟s customers?) Products or services (What are the firm‟s major products or service?) Markets (Where does the firm complete?) Technology (Is the firm using the latest technology?) Concern for survival, growth, and profitability (Is the firm committed to growth?) Philosophy (What are the basic beliefs, values, aspirations and ethical priorities of the firm?) 7. Self-concept (What is the firm‟s distinctive competence?) 8. Concern for public image (Is the firm responsive to social, community and environmental concerns?) 9. Concern for employees (Are employees a valuable asset of the firm?) 1. 2. 3. 4. 5. 6.

In DiGi‟s 2009 annual report, DiGi declared this in addition to their mission: 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 make things simple and easy to understand for their customers. Their products and services are practical and intuitive. They make things happen to uphold “Make it Easier”.

Comments: The statement is clear as it declares DiGi‟s “reason for being”. Apart from that, it also fulfills these characteristics of a mission statement:       

broad in scope; do not include monetary amounts, numbers, percentages, ratios or objectives  250 words in length inspiring identify the utility of DiGi‟s products – as long as it is for communication reveal that the DiGi is socially and environmentally responsible includes all 9 essential components of mission statement – making it effective reconciliatory enduring

1.5 DiGi’s Long Term Objectives DiGi‟s long term objectives is to create long-term shareholder value through providing innovative, easy-to-use and best value telecommunications services in the Malaysian market.

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1.6

DiGi’s Potential Issues

These symptoms are recognized from DiGi‟s annual and quarter Financial Statement:  slower subscribers‟ growth despite increase in total numbers of subscribers

 declining revenue growth rate despite yearly increase

Voice Services will still be DiGi cash cow (especially for prepaid Mobile Cellular), but growth will definitely come from Data Services (mobile internet and mobile/wireless broadband). Yet, the mobile/wireless broadband market is crowded with DiGi having the smallest market share in 2009 and there are many new entries in 2010 (refer 3.3 Industrial Rivalry). Hence, DiGi‟s key potential issue is how the firm should fight (strategic planning) to compete for growth and at least defend or preferably increase its market share in both Voice and Data Services? Specifically:  What action (intensive strategies) should DiGi take to increase its subscribers‟ growth and encourage more spending among its current subscribers base?  To what extend should DiGi venture into enhance communications of Data Services (especially mobile/wireless broadband) so that they can be seen as stars in excellent customer experience that improve customers' quality of life, at home, work and play, which is DiGi‟s Vision?  How should DiGi react to continued price pressure (pricing decision) while upholding their mission statement #2 (Provide an environment where our employees can grow and be fulfilled) and #3 (Provide superior returns to shareholders)? 9

2.0

3 Key Strategic Environments As shown by the left figure, strategic planning commences with an analysis phase to understand DiGi‟s 3 key strategic environments, namely: (a) External (Macro) Environment, (b) Industry Environment, and (c) Internal Environment

(a) will be cover in subsequent sections while (b) begins in 3.0 Introduction to Industrial Analysis (Competitive Information) and (c) in 4.0 Introduction to Internal Analysis. 2.1 Introduction to External (Macro) Environment External environment are conditions, entities, events, and factors surrounding DiGi which influence its activities and choices, and determine its opportunities and threats. As DiGi operates in Malaysia telecommunication industry, Macro Analysis will be done on 8 major external factors (Political, Economic, Social, Technological, Legal, Environmental, Cultural and Demographic – the first 6 are collectively known as PESTLE Analysis) that affects the industry as a whole. Each factor will be deliberate in isolation for the final listing of DiGi‟s 15 External Environmental Factors. 2.2

PESTLE Analysis

This section analyzes the political, economic, social, technological, legal and environmental structures of Malaysia that affects the telecommunication industry as a whole. POLITICAL Prolonged Internal Political Stability (despite the failure of democratic institutions to take firm root): Malaysia has enjoyed a relatively stable political climate since achieving independence under the leadership of the United Malays National Organization (UMNO). The current ruling alliance, Barisan Nasional (BN), won the 2008 elections, although it could not garner an absolute desirable 2/3 majority. Despite this, the BN-led alliance has been successful in establishing a sound governance system and has continued to follow the policies established by the previous regimes, as no significant changes have taken place in the political order since 1957. With the dominance of this alliance in the political landscape, Malaysia will enjoy continuity of policies with little opposition. (Datamonitor, 2009) Strong Malaysian Government Support (National Broadband Initiative – NBI): In 2007, Malaysian government has set to achieve 50% Malaysian household (both wired and wireless mobile) broadband penetration by the end of 20105. To aid service providers further, the government roll out supplies of broadband infrastructure and services throughout Malaysia. Plus, they also aggressively generate continuous demand – in 3 aspects: awareness, attractiveness and affordability – for broadband (refer also The Implementation Plan on Page 16). Malaysian Government discourage the usage of cell phone among school kids: In 2006, Malaysian government banned the usage of cell phone among kids in nationwide school (included fully residential schools). The decision was taken after many groups especially parents and teachers expressed their concern that allowing the handheld tool to be used by students while in schools could

5

Achieving 50% household broadband penetration in 2010 can result in tangible contribution of 1% to Malaysia‟s GDP and creates 135,000 new jobs by 2010 as of 2nd Quarter of 2010, penetration reach 37.5% (Source: Ministry of Finance, 2010) 10

lead to a lot of problems although guidelines on its use had been issued by the Education Minister earlier on. ECONOMY Globalization: The world is now borderless. Economic openness and growing interdependence between countries had spur on increase in movements of people, goods and services. As global citizen intermarriage, work in multinational companies (MNC), study abroad or travels for business and leisure, effective telecommunication tools for communication plus knowledge seeking, sharing and disseminates becomes essential. Growing Malaysia‟s GDP: Malaysia‟s GDP for 2nd Quarter of 2010 was at RM 186,047 million (8.9% growth rate from past quarter) while global economic recovery continued at an uneven pace. Previously, in 2008, the communications and multimedia industry contributed 6.1% in term of revenue to Malaysia‟s GDP. In 2009, the industry generated  RM40 billion. For 2nd Quarter of 2010, the communication sub-sector registered 8.4% growth, mainly attributed to greater usage of cellular, broadband and 3G services (Ministry of Finance, 2010). High Inflation – Increased Price: Malaysia Consumer Price Index (CPI) rose to 1.9% in July 2010 – which is still not a concern as inflation in many regional countries also shown similar uptrend. Furthermore, the Malaysian government had announced subsidy cuts in sugar and fuel products effective 16th July 2010.

On a micro level, the communication subgroup recorded growth in a slower pace compare to total CPI (refer above graph). Nevertheless, domestic inflation is expected to continue its upward trend in the coming months, but to remain at manageable levels. Higher prices are largely attributed to increased cost following subsidy cuts and other supply side related factors such as bad weather conditions. To some extent, the sudden jump in spending for the festive seasons may also exert some upward pressure on prices (Amanah Mutual Berhad, 2010). Hence, there might either be a widespread drop in consumers‟ spending on telecommunications products and services or aggressive demands for cheaper ones since telecommunication are nowadays a necessity, not a luxury. 11

SOCIAL Influx of Foreign Worker: Up to 31st December 2009,  1.91 million legal foreign workers were recorded to be in Malaysia6. The same figure are estimated for illegals, on the basis that for every legal foreign worker, there is one illegal. Malaysian government could not have accurate data on the number of foreign workers without permits as they had entered Malaysia illegally and their number was not recorded by any agency (Immigration Department, 2010). In Malaysia, majority foreign workers and migrants are working at the bottom of the economic pyramid. As such, they face the hardships of adapting to this „new‟ country and language, working long hours with low pay, and spending a long time away from their families back home. These people are the foundation for Malaysia's economic development, and therefore they should not be discriminated against or discredited in any way. Traditionally, Maxis and Celcom have neglected to provide mobile services for this segment on the assumption that they are unable to afford them. DiGi entered this full of opportunity yet neglected segment after discovering that these migrants were willing to pay for communications to connect with their loved ones back home if they were offered affordable packages without any extras and make it their stronghold. Higher Standard of Living among Malaysians: The right table below tabulates monthly household income of Malaysians in 2007 in RM1,000 interval (Source: The Star base on Household Income Survey – HIS). Average monthly household income then was RM3,686. Compared to 2004 (refer left table below), it denotes an increase in Malaysian earning and spending capacity – thus, a higher standard of living. In fact, the standard of living in Malaysia has increased dramatically in the past 20 years. What was a luxury 20 years ago, has become a norm – a color TV, washing machines, car, air-conditioning or even telecommunications like handheld mobiles.

2007

Source: The Edge, 2008 High Literacy Rate: Malaysia‟s Literacy Rate for 2nd Quarter of 2009 was at 95.3% – defining that majority young Malaysia  15 years old can read and write. This is good news to the telecommunication industry as literacy leads to knowledge hunger. Combine with rapidly improving telecommunication and internet connectivity, Malaysian spend more time and money to online 24/7 (surf for information, read online news, blog, chat, socializing, entertainment etc) and keep in touch more often through conveniently cheap telephone calls and texting.

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exact number = 1,918,146 – Top 5 nationals are Indonesians (991,940), Bangladeshis (319,020), Nepalese (182,668), Myanmars (139,731) and Indian (122,382) 12

Rising Telecommunication Penetration and Demand (Broadband, Cellular): The table below summarizes the stagnant fixed line but impressive penetration rate of cellular and broadband in Malaysia for 2010 (Source: Ministry of Finance, 2010). Social Indicators Fixed line telephone subscribers (per 100 households) Cellular phone subscribers (per 100 population) Broadband subscribers (per 100 households)

Penetration Rate (%) 1Q 2010 2Q 2010 44.0 44.0 107.1 108.8 34.5 37.5

Cellular performance was led by increased usage of voice, data and multimedia services. In addition, the introduction of social network contents for mobile phones, coupled with advanced data plans fuelled demand in the cellular segment. Growth was also supported by brisk SMS traffic, which expanded 9.0% to 24.0 billion (Q1 2010: 14.7%; 23.4 billion), driven by higher usage, particularly during the 2010 FIFA World Cup season. Similarly, 3G subscriptions surged 30.1% to reach 7.9 million (end-March 2010: 37.1%; 7.5 million), largely on account of rising demand for internet access and affordability. Broadband segment sturdy growth was spurred by improved service quality and extensions of network infrastructure by industry players. Furthermore, the roll-out of HSBB and WiMAX services created demand for broadband subscriptions. TECHNOLOGICAL Continuous technological advancement in wired and wireless telecommunication: The table below delineates continuous technological advancement in wired and wireless telecommunication in Malaysia. Each generation (G) of mobile technologies are also match with pioneering major players. Major Players 1G

2G

Telekom, Celcom, Mobikom

Description of Technology Based on analogue technology, communication was purely voice, with the information retransmitted to the receiver/listener without any manipulation. The big drawback, however, was illegal interception with the use of radio scanners which led to cloning.

Malaysia adopted 2 different technologies:  European-based GSM 900 (Global System for Mobile Telecommunications) Maxis, PCN 1800 (Personal Communications Networks) Celcom, DiGi,  American-based Sapura, TDMA (Time Division Multiple Access) operating on 800 MHz; Telekom offered as dual mode analogue AMPS 800 + D-AMPS 800 Although the 2 different 2G technologies did not “interoperate,” Malaysian welcomed a better world of digital wonders – voice quality, high capacity, global roaming and low power consumption.

2.5G

–

General Packet Radio Services (GPRS) is a packet-based wireless communication service specifically designed for data and allows for continuous connection to the Internet for mobile phone and computer users. The entry of GPRS enabled consumers to instantly access WAP, HTML or even I-mode sites using appropriate mobile phones, PDAs or Notebooks. Suddenly, information became accessible from anywhere, anytime, anyplace, as it allows info to be sent and received across a mobile network. GPRS works together with GSM to provide better data transmission speed. 13

Major Players

2.75G

DiGi, Maxis

3G7

Celcom, Maxis, UMobile, Time dotCom, DiGi

3.5G

Maxis, Celcom

WiMax8 and 4G

Description of Technology Enhanced Data rates for GSM Evolution (EDGE), an add-on to GPRS to increase data rates on the GPRS link, is a radio-based high-speed mobile data standard that allows data transmission speeds of 384kbps. EDGE was initially developed for mobile network operators who were either unable to obtain the 3G spectrum or did not wish to bid for one. This gave incumbent GSM operators the opportunity to offer data services at speeds that are close to those available on 3G networks. After 1G (analogue - designed for voice transfer) and 2G systems (digital – created for voice, data, fax and other value-added services) comes the most exciting 3G (global technological breakthrough based on the GSM communication standard that turns mobile phone into a multimedia machine). Simply, it is a packet-based transmission of text, digitized video and multimedia at data rates  2 Mbps, offering a consistent set of services to mobile computer and phone users wherever they may be in the world. Fully implemented 3G are constantly connected to the Internet, enabling roaming capabilities. High Speed Downlink Packet Access (HSDPA) technology is an upgraded network path that allows higher data transfer speed. The minimum speed HSDPA can achieve is 5 x faster than the current 3G technology (384kbps). HSDPA provides a smooth evolutionary path for 3G networks allowing for higher data capacity. Therefore, setting up HSDPA networks usually involves upgrading existing 3G infrastructure while competitors Worldwide Interoperability for Microwave Access (WiMax) require a totally new system. HSDPA is evolving rapidly with speeds up to 1.8, 3.6, 7.2 or 14.4 Mbps (downlink) available. Similar to fixed-line broadband services (Streamyx ADSL), the speed is optimised for downloads and can provide upload speeds of 384 Kbps. HSDPA continues to evolve to provide faster download and upload speeds. WiMAX is the next step in wireless communications technology aimed at providing high-speed wireless data over long distances in a variety of ways, from point-to-point links to full mobile cellular type access – enable the delivery of last mile wireless broadband access as an alternative to cable and DSL (Streamyx).

The bandwidth and reach of WiMAX make it suitable for the following potential applications:  Broadband Internet – providing the last mile connectivity at high P1, REDtone, data rates to commercial and residential areas YTL, Asiaspace  Mobile applications – increase bandwidth for a variety of dataintensive applications such as mobile multimedia streaming, mobile internet access The major cellular standards are being evolved to so-called 4G, high bandwidth, low latency, all-IP networks with voice services built on top. 4G allow rich applications currently enjoyed by wired broadband (desktop computer) to be enjoyed on hand-held devices (mobile phone).

7 8

when it comes to transmission speed, 3G is 6 x faster than GPRS and 3 x faster than EDGE alternative to 4G 14

Spinoff offerings from the advancement in mobile technologies are:  Short Messaging Service (SMS) enabled text messages as another means of communication apart from voice  Multimedia Messaging Service (MMS) with GPRS, the level of communication was further enhanced as messages could now contain text, still images, voice or audio clips, video clips LEGAL No legal implications on the telecommunication industry which hinders it from operating freely: The mobile market has undergone its trials and tribulations over the decade or so of its introduction and continued growth till today. It is govern by an independent regulatory body, the Malaysian Communications and Multimedia Commission (MCMC) since 1999. Following financial crisis and the stiff competition among a large field of players, the Malaysian government encouraged rationalisation of the sector in 2002. In 2003, 3 service providers emerged to a structure that remains in place today (refer below figure – Source: Malaysia Telecom Brief by Network Dynamics Associates, MCMC).

Other regulations that benefit the telecommunication industry are:  Mobile Number Portability (MNP) MNP lets mobile users move from one service provider to another without losing their number. However, operators are allowed to charge consumers that do  RM25.  Universal Service Provision (USP)9 USP main objective is to provide collective and individual access to basic telephony and Internet services throughout Malaysia. This is because network facility providers had, tend to focus on commercially lucrative areas – thus creating a Digital Divide gap between the “haves” in urban areas and the “have-nots” in rural areas. MCMC use USP to challenge private sector investment into unprofitable rural areas and allow reimburses for expenses incurred, at cost. The pie chart on the left shows overall contribution from telcos to USP Fund as at 31st December 2008.

9

the existing broadband and cellular coverage will be expanded under USP 15

 High Speed Broadband (HSBB) The Implementation Plan of NBI (refer below figure from MCMC) also involve supplying broadband to High Impact Economic Area and Businesses – in conjunction with Malaysian government effort to bring broadband to the whole nation. For that, the government has signed a Public Private Partnership (PPP) agreement with Telekom to roll out high speed broadband infrastructure at selected areas. The project is called HSBB.

 Lower Mobile Termination Rates (MTR) and Fixed Termination Rates (FTR)10 Termination/interconnection rates are the charges which one telecommunications operator charges to another for terminating calls on its network. Termination may take place on a fixed or mobile network. Effective from 15th July 2010, these new rates (reduced 5 cents/minute) applies:  MTR = 8.36 cents/minutes  FTR = 6.07 cents/minutes  Spectrum Re-farming11 Spectrum/frequencies have become a rare commodity in the telecommunication industry. Refarming is a way to free up spectrum of an age-old technology that is not used; free up a frequency that may not have been fully developed; and help a frequency where demand is huge. Moreover, modern day technologies use spectrum more efficiently. Spectrum re-farming is currently underway in Malaysia. Since June 2010, operators are said to have been bidding through tender to MCMC for several spectrums. However, in September 2010, there is flying industry rumours that the Malaysian government, this time around, will award 9 blocks of 4G12 spectrum to 9 wireless players (4 cellular – Celcom, DiGi, Maxis, U-Mobile, 4 WiMax – Asiaspace, P1, REDtone, YTL and a new player linked to billionaire Tan Sri Syed Mokhtar Al-Bukary13). The new way of awarding spectrum instead of through bidding overcomes problem of denying spectrum to deserving party14. However, the process of award is unclear and whether there will be a fee for spectrum is also not known. 10 11

12 13 14

lower interconnection rate translates to lower direct costs for the operators Re-farming is like having a plot of land where durian trees are growing but they are not giving desired returns. So, all are burn and replant with maize which give 3 x more value than durians (The Star, 2010). also known as long-term evolution (LTE) richest Bumiputra corporate figure in Malaysia, 7th richest Malaysian in 2008, DiGi had to pay huge sums to buy 3G spectrum from Time dotCom 16

ENVIRONMENTAL More Communication Towers/Base Stations: USP Fund finance building of more base stations to enable cellular operators to expand their coverage to 97% national population by 2011. This kind of construction usually requires land clearance or sometimes built near the residential area causing uneasiness among citizens (refer left picture). Besides that, there is an ongoing debate on whether exposure to electromagnetic radiation poses risk to health or not. In 2010, Information Communication and Culture Minister Datuk Seri Dr Rais Yatim reveal that studies conducted in France and Spain showed that the amount of radiation emitted by base stations is so small that it will not have any effect even on rats. So far, there are also no reported radiation cases in Malaysian hospitals. His statement was reaffirmed by World Health Organisation which declares that radiation emitted from towers is a lot lower than those by handsets.

2.3

Cultural and Demographic Factors

This section analyzes the cultural and demographic factors in Malaysia that affects the telecommunication industry as a whole. CULTURAL Malaysians in general are pessimistic towards telecommunication services provided (slow internet connections, network congestions): In 2007, a total of 2,147 complaints were received by MCMC (increase of 223% from 664 complaints in 2006). The large increase in the number of complaints is possibly due to the publicity and advertisements made by MCMC in the mass media on channels for registering complaints. Back then (2007), the most frequent categories of complaints received were:  poor services provided by a service provider  (service downtime/line interruption, slow Internet speed)  SMS mobile content services (receiving unsolicited SMS, unable to stop the service)  billing dispute  cellular coverage and blind spot A quick check on MCMC‟s http://aduan.skmm.gov.my/ reveals these percentages (as of 10 September 2010):  poor services (40.8%)  SMS (10.9%)  telecommunication equipment ( 1.5%)  bill and charging ( 9.7%)  poor service coverage ( 3.4%)  content (13.4%)  no service coverage ( 3.3%)  spectrum interference ( 0.8%) In a nutshell, Malaysians are pessimistic towards telecommunications services as they become more tech-savvy and demanding. 17

DEMOGRAPHIC A Young Society: Of the population, 63.6% of Malaysia population belongs to the 15 – 64 age group, 31.4% of the population in the 0–14 age group and 59% of the population is in the 65+ group. The median age is 24.9 years, indicating that the society is young. While many developed nations are faced with the problem of an ageing population and rising social expenditure, Malaysia‟s demographic structure works in its favor as there is a regular addition to its labor force (Datamonitor, 2009). This is also good news to the telecommunication industry where youngest forms the largest consumer market.

2.4

15 External Environmental Factors

The following table summarizes the 15 External Environmental Factors that are influencing DiGi‟s operation: 8 Major Factors

Political

Economy

Social

Technological Legal Environmental Cultural Demographic

Descriptions  Prolonged Internal Political Stability  Strong Malaysian Government Support (National Broadband Initiative – NBI)  Malaysian Government discourage the usage of cell phone among school kids  Globalization  Growing Malaysia‟s GDP  High Inflation – Increased Price  Influx of Foreign Worker  Higher Standard of Living Among Malaysians  High Literacy Rate  Rising Telecommunication Penetration and Demand (Broadband, Cellular)  continuous technological advancement in wired and wireless telecommunication  no legal implications on the telecommunication industry which hinders it from operating freely  More Communication Towers/Base Stations  Malaysians in general are pessimistic towards telecommunication services provided (slow internet connections, network congestions)  A Young Society

No of Factors 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

18

2.5

5 Identified Opportunities and Threats

OPPORTUNITIES

From the previous 15 External Environmental Factors, 5 Opportunities and Threats are identified and rationalize: 1. 2. 3. 4. 5.

THREATS

1. 2. 3. 4. 5.

Strong Malaysian Government Support (National Broadband Initiative – NBI) Globalization Influx of Foreign Worker Higher Standard of Living Among Malaysians High Literacy Rate High Inflation – Increased Price Malaysian Government discourage the usage of cell phone among school kids continuous technological advancement in wired and wireless telecommunication More Communication Towers / Base Stations pessimistic towards telecommunication services provided

Rationalization align to DiGi‟s possible intensive strategies increase demand for communication tools to increase quality of life … at home, work and play – align to DiGi‟s Vision

decrease demand for telecommunication products and services DiGi‟s product and services might go outdated overnight harm the environment and increase citizen uneasiness challenge to change perception and fulfil needs

19

3.0

Introduction to Industrial Analysis (Competitive Information)

Generally, Porter‟s 5 Forces provide a good, simple yet powerful, framework for developing an understanding of the competitive forces or pressure (either increase or reduce) within DiGi‟s industry that influence its pricing decision. Great competitive forces put more pressure on it while weaker competitive forces subdue the pressure.

Hence, as indicated by the combo figure above, Porter‟s 5 Forces (all forces listed in the right figure) will be use for Industry Analysis or the final listing of DiGi‟s 15 Industrial Environment Factors after deliberation of each force in isolation. 3.1

Threat of New Entrants

In general, telecommunications is not an easy entry industry despite the rumours of easy award of 4G spectrum to new entrants. Several barriers are recognized: License: Every potential entrant will need to obtain a license through MCMC. However, it is somewhat difficult and expensive to get an approve license due to MCMC‟s strict requirements and procedures. Yet, once obtain, a licensee may apply for the renewal of its individual license prior to expiry. Major Network Operators in Malaysia Company License Telekom/Celcom Fixed; Mobile 450, 800, 900, 1800 MHz Maxis Fixed; Mobile 900, 1800 MHz DiGi High Capital Investment: Other than an expensive licence, telcos also required high fixed costs and spend relatively large on network equipment and to maintain development. It might reach a few billion Ringgit Malaysia. Sole Right for Certain Projects: The government of Malaysia had granted sole right for certain projects to existing telcos (e.g. Telekom has sole right to both partnership of submarine cable for the broadband service and also HSBB). However, apart from TM, other Network Facilities Provider (NFP) licensees: Maxis, Celcom, DiGi and Time dotCom can build their own network and cable landing stations should they choose to invest in the facility. Similarly, broadband license are also granted to some private telecommunications operators. Advance Technology: The advanced technology required in telecommunication industry not only incurred high capital investment but also need professional knowledge and skills (human resources) to ensure success in the industry. It is not easy to copy or imitate. 20

3.2

Threat of Substitute Products

As highlighted before, DiGi operates through 2 business lines: Voice and Data Services. Mild threats of substitute products for both of the business lines are recognized: Voice Services (mainly mobile): Many traditional and modern substitutes – letter, fixed home line telephone, fax and email. From 2000 onwards, broadband Internet services, which enable faster and always-on connection to the worldwide web, offer more promising growth potential. In addition, the pressure on the very low cost to use the phone calling through internet or communicate through online messenger had threatened the mobile service industry. The attractiveness of internet services making it more affordable to the masses. Data Services (focusing on broadband): Consumers have become more demanding in quality broadband service and this create an opportunity for new entrants to provide a substitute product for consumers in lower price or better performance than the existing ones. 3.3

Industrial Rivalry

Malaysia mobile market is oligopoly nowadays after the consolidation in 2003. The telecommunications industry has also been undergoing gradual liberalization since 1985, when Telekom, the Malaysian government-dominated enterprise, granted a number of licenses to private sector telecommunication operators. Gradually, the industry witnessed more competition in various segments of mobile, fixed line and telephony services, and the functioning of the sector became more transparent. Early 2010 seems to favour Celcom when at the 2010 Frost & Sullivan Malaysia Telecoms Awards, Celcom triumphantly clinched 3 awards at the 2010 – the much coveted 'Service Provider of the Year' (2nd consecutive year), 'Broadband Service Provider of the Year' Award and 'Mobile Service Provider of the Year' Award thus further reaffirming its strength as one of the market leader. Yet, within the industry, together with Telekom, Maxis, Celcom and DiGi continue to compete on differentiation of products and services through improvement and introduction of new innovative features – aspects such as call rates, package price and so on. They try to gain competitive advantage through low call rate and price. Each of them also invests a lot on advertising to promote their product – successful maintaining their place in Malaysia Top 10 Advertising high spenders list from Jan – June 2010 as shown:

All key players are also aggressively pushing mobile/wireless broadband as it is expected to surpass fixed line by 2013 (refer forecast broadband subscribers and revenue next page). At the same time, WiMAX are also gaining ground and acceptance among customers. 21

The telcos aggressive market promotions and keen competition had successfully reduce prices in telecommunication products and services (drop 0.4% in 2nd Quarter of 2010) but telcos kept reiterates that they are keen to avoid price war. Other expected development in 2010 (dub the broadband year for Malaysia) will be plenty of new devices and packages flooding the market place, and the possibility of fixed broadband players stealing some market share from wireless players. For example, Telekom is expected to deliver its HSBB in some areas even if it is for trials (launch “UniFi” on 24th March with free trial until 30th June 2010). Then, Maxis re-enter the fixed broadband market in a way that surprise many. Time dotCom – a company many say is history – will re-emerge while YTL, which has been grossly overselling its WiMAX 4G idea, “sizzle” the market with a grand entry in July. And there is Tune Talk which is eager to eat into every operator‟s customer base with its smashingly cool pricing. Just to be in the game, U Mobile managed to launch its broadband service known as XFone at the 11th hour of 2009. Also, in September 2010, there is flying industry rumours that the Malaysian government will award 4G/LTE spectrum to telcos instead of the through bidding process. The award will puts Malaysia ahead of many countries that are still grappling with their 3G spectrum awards. LTE is said to be the natural migration path from 3G and do complement WiMax technologies in many ways. Both Maxis (with Huawei) and Celcom (with Huawei and Ericsson) are already move ahead by undertaking trials to test this 4G/LTE technologies to see how they can deploy richer offerings for their users. Further, in October 2010, rumours had it that Celcom will bring in iPhone 4s to Malaysia. It is unknown whether a contract has been signed. However, it would not be easy for Celcom to get iPhone 4s stocks from Apple. Even right now, Maxis and DiGi does not seem to be satisfied with the current iPhone 4 stocks that they have. Yet, in conclusion, high exits barriers of this industry due to the high investment budget and responsibility towards customer making will make companies strive to survive. Technology advanced also leads to fast industry growth and opportunities, thus, ignite further competition. 3.4

Bargaining Powers of Suppliers

Generally, the telecommunications industry in Malaysia is dependent on imports for majority of its network components as most of the equipment cannot be sourced locally resulting in high bargaining powers of suppliers. The factors contributing to these are recognized: Limited (Big Boy) Suppliers: DiGi networks utilize standard GSM equipment which is available from a limited number of suppliers. Previously, most of the GSM equipment for DiGi' mobile 22

network operations are purchased from large international companies – size increases supplier power – namely Motorola, Siemens，Ericsson and Trisilco Folec, and DiGi maintains close working relationships with its key network equipment suppliers. As there are relatively very few suppliers in this market, DiGi have limited choices. Since Siemens is now a sub-contractor of Motorola for network switching systems, DiGi left with only 2 main suppliers: Ericsson and Trilsilco Folec. Thus, the bargaining power of those suppliers becomes stronger. High Switching Cost: As DiGi cannot manufacture in-house, the other viable option – 3rd party manufacturing contracts may post complexity with terms covering cost, quality, and use of intellectual property; and switching between contract manufacturers may therefore be a more costly process. In addition, such a supply structure usually means lower control on the delivery schedules and may cause component shortages due to manufacturing process issues. Any persistent shortages in supplies due to capacity issues or manufacturing process issues would increase the price of manufactured products. If a company is not able to source required components in adequate quantities, this would affect its business operations and margins. In the future, DiGi believes that comparable equipment and support will be available from other established suppliers. 3.5

Bargaining Powers of Customers

Information technology increase the bargaining power of buyer and high availability of information makes it easier for customers to evaluate sources of materials about telecommunication. There are many alternatives product such as fax, email, and internet which enhance the bargaining power of buyer to the mobile service provider. Customer also becomes more demanding of high speed broadband (which is less costly but yields wider coverage) and after sale service, creating a relatively high competitive industry. As a consequences, the intense rivalry among mobile and broadband service providers only benefit the consumers who can enjoy lower price broadband and mobile services, and eventually making them more powerful – hence, low switching cost. 3.6

15 Industrial Environment Factors

The following table summarizes the 15 Industrial Environment Factors of DiGi:

HIGH

HIGH

HIGH

LOW

LOW

Porter‟s 5 Forces     Threat of  Substitute  Products  Industrial  Rivalry   Bargaining  Powers of  Suppliers  Bargaining  Powers of  Customers Threat of New Entrants

Descriptions difficult and expensive to get an approved license from MCMC high capital investment sole right for certain future granted to existing telcos advance technology – need competent human resource traditional and modern substitutes for mobile demanding broadband consumers create opportunity for new entrants that can offer low price or better performance tense rivalry telcos market lead by Maxis 2010 dub the broadband year of Malaysia high exit barrier non availability of substitute for GSM equipment limited (big boy) suppliers high switching cost (to other suppliers) for DiGi high bargaining power of customers consumer low switching cost as plenty of other brand with different offer are available to customers

No of Factors 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 23

3.7

The External Factor Evaluation (EFE) Matrix

The key external and industrial environmental factors are summarizes and evaluate: Key External Factors

Weight Rating

Weighted Opportunity Threat Score (largest) (largest)

Opportunities 1 Globalization

0.11

4

0.44

2 Influx of Foreign Worker

0.04

2

0.08

O1

3 Higher Standard of Living Among Malaysians

0.08

4

0.32

O2

4 Rising Telecommunication Penetration & Demand

0.08

4

0.32

O3

5 High Capital Investment

0.07

4

0.28

O4

6 Advance Technology - Need Competent Human Resource

0.04

4

0.16

O5

7 Traditional and Modern Substitutes for Mobile

0.03

4

0.12

8 High Inflation - Increased Price

0.08

3

0.24

9 Government discourage cell phone usage among school kids

0.03

1

0.03

10 continuous technology advancement in wired & wireless 11 pessimistic towards telecommunication services provided

0.08

3

0.24

0.06

1

0.06

12 2010 dub the broadband year of Malaysia

0.07

2

0.14

13 new entrants can offer low price or better performance

0.06

2

0.12

14 High Switching Cost (to other suppliers) for DiGi

0.10

3

0.30

T1

15 High Bargaining Power of Consumers

0.07

4

0.28

T2

Total

1.00

Threats T3 T4 T5

3.13

Note that the total weighted score of 3.13 indicated in the calculation is above the average (midpoint) of 2.5, so DiGi is doing pretty well, taking advantage of the external opportunities and avoiding the threats facing the firm. Yet, there are always room for improvement.

3.8

Top 5 Opportunities and Threats

From EFE, Top 5 Opportunities and Threats are recognized and rationalize: OPPORTUNITIES

1.

Globalization

2.

Higher Standards of Living Among Malaysians

3.

Rising Telecommunication Penetration and Demand (Broadband, Cellular)

Rationalization EFE Weight EFE Rating important as it greatly contributes to frequent international roaming demand DiGi can response by with instant communication capitalizing on it and kept (mobile) and information offering roaming and broadband seeking (broadband) product and services broadband important indication that most internet services to (for mobile Malaysian can afford broadband, DiGi aim to assist minimum one mobile (service MCMC in reaching 50% of the provider) and broadband Malaysian population by end 2010) – it is high quality important statistic as telecommunication services at higher penetration = higher competitive prices demand for DiGi‟s product and services 24

OPPORTUNITIES

4.

High Capital Investment

5.

Advance Technology – Need Competent Human Resource

THREATS

1.

High Switching Cost (to other suppliers) for DiGi

2.

High Bargaining Power of Consumers

3.

High Inflation – Increased Price

Rationalization EFE Weight EFE Rating important factor as entry barrier: DiGi have high capital investment high cost for new entrée to largely contributed by its largest compete with existing giant in shareholder, Telenor the industry mild important factor as DiGi are able to response by focusing human talent is one of the key on recruiting new blood while provide area for DiGi‟s continual intensive training to existing staffs and success and survival – succeeded in maintain a competent yet expertise are expensive loyal workforce at an affordable cost

Rationalization EFE Weight important because supplier relationship management can make or break DiGi as they practically control DiGi‟s product and services‟ selling price important because power of bargain for lowest price and highest quality switch to consumers due to non-existent of information asymmetry important because high inflation will decrease demand for communication tools

4.

Continuous technology advancement in wired and wireless telecommunications

important because DiGi is still trailing behind Maxis and Celcom plus once outdated, it is hard to bounce back in a short duration

5.

2010 dub the broadband year of Malaysia

important because plenty of new devices and packages flooding the market place – tense rivalry

EFE Rating DiGi can response by keeping close relationship with their existing suppliers: Ericsson and Trilsilco Folec while being optimistic that there will be new possible suppliers in the future

DiGi can response by offering high quality telecommunication services at competitive prices

DiGi can response by continuous R&D to prevent going outdated overnight and kept selling price low

DiGi is able to respond since they had invest  RM350 million for mobile broadband expansion as part of its plans to improve its infrastructure.

25

4.0

Introduction to Internal Analysis Internal Analysis is the final section in analysis phase to understand DiGi‟s 3 key strategic environments. It is all about identifying DiGi‟s businesses value proposition/core competencies. It can be use to explore what DiGi does:  better than its competitors  that are hard to replicate  that are valued by DiGi‟s customer(s)

In other words, what is DiGi‟s strengths and weaknesses? To answer that, Internal Analysis will be done by gathering and assimilating information about DiGi‟s functional areas: management, marketing, finance and accounting, production and operations, research and development (R&D) and management information system (MIS). Financial Statement Analysis is done first because it could provide numerous insights about DiGi as it exemplifies complexity of relationships among the functional areas. Common techniques for analyzing financial statements are common-size financial statements and financial ratio analysis. 4.1 DiGi’s Common-Size Financial Statement Analysis (2005 – 2009) In common-size financial statements, all items in the Balance Sheet are computed as percent of Total Assets (base). For Income Statement, all items are computed as percent of Revenue (base). From the indirect method of Cash Flows, myriads of typical questions such as how much cash was used to purchase property, plant and equipment or how good DiGi is in paying out dividend can be answered by going through its three main categories of activities: (a) operating, (b) investing and (c) financing. Then, the changes (trends) in asset and capital structures over time are evaluated. Balance Sheet (refer calculation on Page 27) Total non-current assets had been rising from 2005 – 2008 before a slight drop in 2009. This is similar to the trend of their intangible assets15. The highest portion of non-current assets comes from property, plant and equipment (60 – 70%). Total current assets conversely, had been declining from 2005 – 2008 before a slight increase in 2009. A similar trend can be seen from their cash and cash equivalents16 and an inverse one for inventories. Trade and others receivable slumps from 2005 – 2007 before picking up 2008 – 2009. On a closer look, DiGi started to have short-term investment in 2008. Current liabilities trend is the same as total non-current assets (rising from 2005 – 2008 before a slight drop in 2009). Current (secured) borrowing commence in 2007. Taxation jumped up in 2006 – 2007 but had reduced in 2008 – 2009. Non-current liabilities rose in 2006, went down in 2007 – 2008 and shoot up high in 2009.This is largely contributed by non-current (unsecured) borrowing17. 15

16

17

technological support and technical know-how from Telenor, 3G spectrum (since 2008), computer software and license fee (previously Deferred Expenditure in 2005 and 2006) cash in hand and at bank, money on call and deposits with licensed banks for the purpose of the cash flow statements, cash and cash equivalents are net of outstanding bank overdrafts, if any 2009 improvement due to DiGi‟s strategic focus on enhancing cash-generation very high jump in 2009 (2.15% to 16.31%) 26

27

Income Statement18 (refer calculation on Page 29) Revenue increases yearly but a falling cost of sales (materials and traffic expenses) from 2005 – 2007 that rise back in 2008 – 2009 directly impacts the gross profit. This is analogous to the trend of trade and others receivables in the Balance Sheet. However, no correlation can be seen between:  cost of sales – cash and cash equivalent  trade and others receivables – cash and cash equivalent Internally, DiGi sequence of priorities in spending was:  depreciation and impartment losses (mirror trend of intangible assets in the Balance Sheet)  sales and marketing  other operating expenses  staff  rental  operations and maintenance  amortisation

Cash Flows (refer calculation on Page 30) (a) operating: Cash generated from operations steadily increase from 2005 – 2008 but tumbles in 2009 due to higher inventory and increase in deferred revenue. DiGi shows that they value their customers and employees by having increasing amount of annual provision. They have customer loyalty programme, employee leave entitlements and related benefits. (b) investing: DiGi utilizes large amount of cash (RM650,000,000 – RM900,000,000) annually to purchase property, plant and equipment and intangible assets. (c) financing No dividend has been paid or declared by DiGi in 2005. The Directors then do not recommend any dividend to be paid for the year under review. However, after that, paid dividend increases from 2006 – 2008. It only drop 8% in 2009. Huge amount of RM1,012,500,000 was being used to repay borrowing in 2006 causing lower cash and cash equivalents throughout 2006 – 2008.

18

Finance Cost in Income Statement  Interest paid in Cash Flows 28

29

30

4.2

DiGi’s Financial Ratio Analysis (2005 – 2009)

4 categories are used in Financial Ratio Analysis, namely: (a) financial liquidity and solvency, (b) efficiency, (c) profitability and (d) market performance. Each ratio formula and calculation is clearly showed in Page 32. (a) financial liquidity and solvency For 4 years (2005 – 2008), DiGi‟s liquidity ratios (current and quick ratio), cash and cash equivalent and times interest covered went downhill – making DiGi in a state of low monetary liquidity. This is a threat as there is a high chance that DiGi cannot meet its current obligations especially the interest expense on borrowings. Not being able to meet payment will further lead to problems with others creditors. In 2009, condition improve as sales and income increases substantially plus there is additional interest receive from short-term investment. For the time being, DiGi might still be able to meet its current liabilities commitment – current (secured) borrowing, accrual payables that included exposure to foreign currency denominated in USD, Special Drawing Rights and also deferred revenue. But, they be must caution as debt ratio had been bumpy since 2005 and consider taking some measures

to further curb upward trend, especially after a huge borrowing in 2009. (b) efficiency The working capital ratios (inventory turnover and accounts receivable collection period) shows a mix working capital management. DiGi manage to keep its inventory holding period between 4 – 6 days indicating they are do have slow moving and obsolete stocks. However, credit control is poor (11.44 – 14.56 years) which subsequently contribute to increase in bad debts. This reflects inefficiency of its credit management team or a less stringent collection policy adopted by DiGi. To get payments from debtors is not an easy task and its take time. DiGi must place priority in it to safeguard their cash and cash equivalent upward trend. Total asset turnover shows low utilization of assets. It shows that growth of sales has fallen relative to total assets. This may lead to perception that DiGi has reduced its efficiency in generating income with respect to its investments. In other words, DiGi has not fully optimized its resources (new property, plant, equipment and intangible assets purchased annually) for generating of sales. DiGi may want to further investigate this inefficiency issue where one of it might be the 3G spectrum. The under utilization of investments may also reflect poor operation management. (c) profitability Two profitability ratios (gross profit margin and net profit margin before tax) move in parallel trend – inverse „U‟, which mirror cost of sales. While cost of sales kept increasing in numbers, the peak gross profit margin and net profit margin before tax might be attributed by DiGi flurry launch of new exciting product and services in 2007. However, in terms of ROE, 2009 success exceeded 2007. (d) market performance DiGi‟s PE ratio climbs up from 2005 – 2007. The market price in 2007 was RM24.80 market price which reflects investor confidence in gaining future returns (dividends and increase share price). This may again due to DiGi flurry launch of new exciting product and services in then which provides an indication or „sign‟ that they are expanding operating activities (future growth), hence enabling increase in its market share. Although it slips in 2008 (having more share capital), it rise back in 2009 despite a lower profit after tax. This may suggest that in 2009, the share price of DiGi, which stood at RM21.96 is overvalued or the market may perceive the company as having good future earnings potentials. Dividend yield increases from 2006 – 2008 yet reduces in 2009. On the hindsight, 2009 dividend is higher than 2007.

31

32

4.3

20 Internal Factors

The following table summarizes the 20 Internal Factors of DiGi: Functional Area

No of Factors 1

Descriptions  strong financial performance

Financial

 healthy current ratio

2

 strong profits and net cash flow from operation

3 4 5 6 7

     Marketing

Operation R&D Management

4.4

           

stable number of subscribers – increasing reasonable debt ratio superior customer care strong company reputation dependency on strategic sharing between mobile producer, application writer and etc good reward system to subscribers DiGi Ambassadors – lack of involvement latest info on new technologies seldom/late to reach end users facilities – auto reload, online payment, etc intense and attractive advertising caring for climate – corporate image building lack of base station as compared to others operators affiliation with Telenor – wider overseas coverage innovation world class R&D flexible working environment experience management personnel from oversea

8 9 10 11 12 13 14 15 16 17 18 19 20

The Internal Factor Evaluation (IFE) Matrix Key Internal Factors

Weight Rating

Weighted Score

Strengths Weakneses (largest) (largest)

Strengths 1 experience management personnel from oversea

0.13

4

0.52

S2

stable (increasing) number of subscribers leading to 2 Strong Financial Performance

0.09

4

0.36

S4

3 affiliation with Telenor – wider overseas coverage

0.15

4

0.60

S1

4 Innovation

0.11

4

0.44

S3

5 good reward system to subscribers

0.09

3

0.27

S5

6 World Class R&D

0.07

3

0.21

S6

7 Facilities – auto reloads online payment, etc

0.01

3

0.03

S7

0.12

1

0.12

W1

0.11

1

0.11

W2

9 lack of base station compared to competitors 10 DiGi Ambassadors – lack of involvement

0.09

1

0.09

W3

0.03

2

0.06

W4

Total

1.00

Weakneses dependency on strategic sharing between mobile 7 producer, application writer and etc latest info on new technologies seldom/late to 8 reach end users

2.81

33

4.5

Top 7 Strengths and 4 Weaknesses

The Top 7 Strengths and 4 Weaknesses from IFE are recognized and rationalize: STRENGHTS

Rationalization IFE Weight

IFE Rating

DiGi major strength since they are keeping good working relationship with members of Telenor Group

1.

Affiliation with Telenor – wider overseas coverage

important because affiliation with Telenor brings collective strength19 to DiGi in terms of technology know how and industries updates plus knowledge and helps to widen overseas coverage

2.

experience management personnel from overseas

important because global experience management personnel brings new innovation to DiGi

DiGi major strength since they had been capitalizing on their experience management personnel from overseas

important because creativity and innovation play a great role to increase supply of voice and data services to individual and corporate customers

DiGi major strength because their R&D had always exceeded customer expectations through innovation offering to customers

4.

stable (increasing) number of subscribers leading to Strong Financial Performance

important because number of subscribers ensure survival and sustainability of DiGi

DiGi major strength since they had been focusing on ensuring excellent customer experience, keeping close tab on number of subscribers, attract new subscribers and reward current ones handsomely

5.

Good reward system to subscribers

important factor to motivate current and potential subscribers

DiGi minor strength as they have a string of past, current and upcoming good reward system

6.

World Class R&D

important because R&D is the key to keep up and ahead with continuous technology advancement in wired and wireless telecommunication

DiGi minor strength as their selfclaim world class R&D had wow Malaysians with a number of innovate products and services

7.

Facilities – auto reloads online payment, etc

important because facilities bring convenience to customers and cost

DiGi minor strength as other competitors are also offering the same service to customers

3.

19

Innovation

Telenor Group operates in 11 countries with market position from #1 – 3 in each country 34

WEAKNESSES

1.

2.

3.

4.

20

Rationalization IFE Weight

IFE Rating

dependency on strategic sharing between mobile producer, application writer and etc

important because DiGi product/services cannot operates without complementary product/services from mobile producer, application writer etc

DiGi major weakness because they did and still highly depend on product development through joint venture with mobile producer, application writer and etc to serve customer better

latest info on new technologies seldom/late to reach end users

important because low customers awareness towards DiGi products/services not only reduce its consumption but indirectly “giveaway” potential customers to competitors

DiGi major weakness because they seldom promote on new offerings compare to competitors

lack of base station as compared to others operators

important factor because lack of base station leads to poor line reception (coverage area) which weaken customer satisfaction and loyalty – reduce in subscribing

Digi Ambassadors20 – lack of involvement

mild important factor because Digi Ambassadors serve as free of charge and influential marketing tools for DiGi

DiGi major weakness as they have to either build or share base station with competitors to expand coverage area

DiGi minor weakness as there is lack of involvement among these ambassadors to effectively and aggressively promote DiGi other products/services

a postpaid, without monthly fee or minimum usage package plan for staff/close friend with free unlimited calls, SMS and MMS to 016 numbers 35

5.0

Introduction to SWOT Matrix Framework

Environmental Scan / Internal Analysis /\ Strengths Weaknesses

\ External Analysis /\ Opportunities Threats

| SWOT Matrix

As indicated by the above figure, previous section of environmental scan (Internal and External Analysis) had successfully produced input in the form of DiGi‟s Strengths, Weakness, Opportunities and Threats factors (collectively known as SWOT). SWOT Matrix is a commonly used strategic planning matching tool that provides structure or clarifies strategic analysis. This technique guide complex decision making by effectively removes subjectivity and emotion from the decision process, and help in generation of several options/strategies21 for DiGi.

Opportunities Threats

Degree of Importance

A typical SWOT (Strategic Alternatives) Matrix look like this: Strengths

Weaknesses

SO Strategies

WO Strategies

ST Strategies

WT Strategies

Degree of Urgency SO Strategies  using internal strengths to capture external opportunities by pursuing opportunities that are a good fit to DiGi's strengths WO Strategies  using external opportunities to improve internal weaknesses ST Strategies  using internal strengths to reduce/prevent external threats  identify ways DiGi can use its strengths to reduce its vulnerability to external threats WT Strategies  using defending method to reduce internal weaknesses and at the same time avoiding external threats  establish a defensive plan to prevent the DiGi's weaknesses from making it highly susceptible to external threats 21

ideally, strategies capitalize on DiGi‟s strengths, minimize the effects of any weaknesses, exploit available opportunities and defend against threats 36

5.1

DiGi SWOT Matrix

The following matrix summarizes DiGi SWOT and lay out several options/strategies: Strengths 1. Innovation 2. Affiliation with Telenor – wider overseas coverage 3. experienced management personnel from overseas 4. good reward systems to subscribers 5. stable (increasing) number of subscribers leading to Strong Financial Performance 6. World Class R&D 7. Facilities – auto reloads online payment, etc Opportunities

SO Strategies 1. Market Penetration increase customer rewards and provide consistent good services to existing customers (S4,S5,S7,04)

1. Globalization 2. Influx of Foreign Worker 3. High Capital Investment 4. Malaysian Higher Standards of Living 5. Advance Technology – Need Competent Human Resource

2. Market Development provide myriad International Services (Foreign Worker) and continuously pursue USP obligation by providing access to basic telephony communications to districts designated to DiGi (Rural Communities) (S2,S5,O1,O2)

Weaknesses 1. dependency on strategic sharing between mobile producer, application writer and etc 2. DiGi Ambassadors – lack of involvement 3. latest info on new technologies seldom/late to reach end users 4. lack of base station compared to other operators/competitors

WO Strategies 1. taking benefits/strength of other categories of provider e.g. joint venture to increase the number of base station by sharing through MOU (O3,W1,W4) 2. Forward Integration utilize latest technology by marketing new products through dealers instead of ambassadors (O3,W3)

3. effective management, marketing and R&D with competent human resource increases sales (S3,S6,O1,05) Threats 1. High inflation – increased price 2. 2010 dub the broadband year of Malaysia 3. High Bargaining Power of Consumers 4. Malaysian Government discourage cell phone usage among school kids 5. Continuous technology advancement in wired & wireless technology

ST Strategies 1. Product Development joint venture with handheld mobile providers to include latest technologies and internet function into mobile (S1,S6,T2,T3,T5) 2. stand ahead of the competitors and encourage consumers to switch to DiGi with the slogan „IT‟S TIME TO CHANGE TO DIGI‟ (S1,S2,S4,S7,T3)

WT Strategies 1. reduction of the number of DiGi Ambassadors to enable the cost to be switch to sponsoring educational program to strengthen DiGi name – students will subscribe to DiGi in the future (W2,T4) 2. lower down the calling rate to remain competitive (W3,T1,T3)

3. produce new and tech savvy product to prevent going outdated overnight (S1,T5)

37

6.0

Introduction to Types of Strategies

In building business strategies, there is no one method. The most common approach of building a vision, then trying to work out how to reach the vision, is just one of a number of alternative views of strategy. 6.1

DiGi’s Possible 4 Types of Strategies

From SWOT, DiGi‟s possible 4 Types of Strategies are as such:  Market Penetration  Market Development Intensive Strategies  Product Development  Forward Integration Vertical Strategies The first 3 are collectively known as Intensive Strategies while the last one is a form of Vertical Strategies – however, the subsequent section only focuses on deliberation of Intensive Strategies. 6.2

DiGi’s Intensive Strategies – Market Penetration

As simplified by the figure on the right, market penetrations seek to increase market share for existing products in existing markets through greater marketing efforts that encourages more usage/spending among consumers. In the first half of 2010, DiGi had invested heavily on advertising to promote their product and successfully maintaining their place in Malaysia Top 10 Advertising high spenders list from Jan – June 2010 (refer bar chart below) making it viable for them to do so budget wise.

38

The subsequent table matches DiGi‟s Existing Markets and Products with their potential Market Penetration Strategies. Existing Products  Voice Services fixed and mobile telephony (prepaid, postpaid, international services)  Data Services dial-up, mobile and broadband internet, messaging Existing Markets

Market Penetration increase customer rewards and provide consistent good services to existing customers increase customer rewards  Malaysian Digital Native  plenty of mobile apps, offerings and outdoor gathering in “hot buttons” of youth lifestyle areas (gaming, sports, music, movie, TV show, internet, weather forecast, games, picture messages etc)

 Malaysian Digital Native mostly youth below 24 years old who are technologically driven and savvy  Business Entity  Foreign Workers  Malaysian general public

 Business Entity various monthly business call plans depending on size of business, budget and average call volume; some package even combine unlimited internet (data plan), broadband (business solutions), enterprise and immediate family members  Foreign Workers and Malaysian general public  prepaid offered flat voice rate of 12 cents/ minute nationwide to ALL networks and SMS rate of 1 sen (DiGi to DiGi only) when daily usage reaches RM1; talktime transfer, GPRS, EDGE (Enhanced Data rates for Global Evolution), flexi e-load (top-up)  BonusLink Points based on monthly usage bill for postpaid mobile and broadband  family plan  myriads international services (refer details in Page 41) provide consistent good services  customer support  corporate website (information on mobile and others Frequently Asked Questions, technical chat function – online and by phone)  nationwide centres, specialized store, service counters and dealers (prepaid and postpaid)  concept store equip with Simbioz system (DiGi360°)

39

6.3

DiGi’s Intensive Strategies – Market Development

As simplified by the figure on the right, market development is the term used in introducing existing products to new markets – which can be new geographic areas or currently underserved communities (DiGi recognized 2 sources of new markets: potential or new foreign workers and rural communities)

Supporting Factors Market Development  according to Malaysian Communications and Multimedia Commission (MCMC), back in August 2007, cellular coverage area was 95% (Peninsula) and 77% (East Malaysia) – refer supporting diagram below – making the rest of Malaysia blind spots and experiencing dropped calls

 May 2010 national population coverage for cellular improved to 94% (MCMC, 2010)  MCMC under USP target to reach 97% national population coverage for cellular by 2011  rural, remote, suburban, low cost housing areas and tourist spots (high Foreign Worker patron during public holidays) are a few areas that need broader access to communication infrastructure although affordability is low  as a USP, DiGi is entitled to claim certain qualified expenses from the MCMC in relation to USP projects  in June 2010, DiGi and Celcom signed a Memorandum of Understanding (MoU) on infrastructure sharing at both company (DiGi and Celcom) and group level (Telenor and Axiata) benefiting DiGi on access to Celcom‟s well publicized whole Malaysia coverage – refer below for current DiGi coverage

40

The subsequent table matches DiGi‟s New Markets to Existing Products with their potential Market Development Strategies.

New Markets

Existing Products  Voice Services fixed and mobile telephony (prepaid, postpaid, international services)  Data Services dial-up, mobile and broadband internet, messaging Market Development provide myriad International Services and continuously pursue USP obligation by providing access to basic telephony communications to districts designated to DiGi

 Potential or New Foreign Workers  Rural Communities

provide myriad International Services Potential or New Foreign Workers  International Direct Dial (IDD) prepaid and postpaid with rates as low as 13 cents/minute for call to both mobile and fixed line recipients around the world  offer a few special rates package:  prepaid long distance savers plan for foreigners from Saudi Arabia and UAE  cakap-cakap (from 9 pm – 9 am) for foreigners from Pakistan, Vietnam, Nepal and Indonesia  cakap-cakap lagi (from 12 pm – 2 pm) for foreigners from India and Indonesia  International Calling Card (Chatz and Desher Kotha)  when roaming abroad (e.g. back in home country or anywhere on Earth), no charges when receiving SMS but sending it at low flat rate of 99 cents  RM 1.50 per International MMS  in-flight Mobile Services continuously pursue USP obligation by providing access to basic telephony communications to districts designated to DiGi Rural Communities  up to 2009, DiGi had provided 5,000 household fixed lines and 200 payphones to 7 under-served districts in Malaysia  DiGi was provisioned 13 Community Broadband Centre (CBC) sites in various areas in Malaysia (Sarawak, Johor, Melaka, Kelantan, Terengganu and Pahang) under USP  up to April 2010, DiGi had officially launched CBC in Lundu (Sarawak) and Kampung Teriang Besar (Johor)  Lundu CBC is equipped with facilities that include 20 desktop computers connected to DiGi's Turbo 3G™ network with a minimum speed of 2Mbps and others gadgets such as printer, scanner, copier machine as well as an LCD projector  CBC members pay lifetime membership fee of RM5.00 to enjoy Internet access for as low as RM1/hour (non members pay RM1.50/hour) 41

6.4

DiGi’s Intensive Strategies – Product Development

As simplified by the figure on the right, product development seeks to increase sales and profit by improving/modifying present products/services or developing new ones for its existing markets. This is especially important in the era whereby global consumer multitask with their mobile devices – refer below figure on the Evolution of Mobile Devices Use from 1995 to (predicted) 2015 (Source: Nokia).

Some might use less Voice Services but more on Data Services (to surf the net, chat using MSN Messengers, Facebook, Twitter, Mobile TV, GPS for navigation). They also to install tons of other apps such as mobile wallet without caring much on what operating system it runs on – as long as they can do their stuff on it. iPad or Mobile Internet Devide (MIDs) is not a choice because it hardly fits into their trousers pocket or handbag. In other words, consumers are gradually switching to basic phones/mobiles to smartphones with computer functions that fulfill their needs and wants – and DiGi had jumped into the bandwagon as well by strategically having joint venture with handheld mobile providers to include latest technologies and internet function into their product.

42

The subsequent table matches DiGi‟s Existing Markets to New Products with their potential Product Development Strategies. New Products  Voice Services combine postpaid and prepaid for family package  Data Services smartphones (Blackberry, HTC, iPhone), Android apps, MiFi, DiGiREMIT™  Personal Accident Insurance Existing Markets Product Development joint venture with handheld mobile providers to include latest technologies and internet function into mobile stand ahead of the competitors and encourage consumers to switch to DIGI with the slogan „IT‟S TIME TO CHANGE TO DIGI‟ produce new and tech savvy product to prevent going outdated overnight

 Malaysian Digital Native mostly youth below 24 years old who are technologically driven and savvy  Business Entity  Foreign Workers  Malaysian general public

 Malaysian Digital Native  tie up with Apple Inc for the rights to distribute iPhone 3G, 3Gs and 4s  partnering HSBC Credit Card and Guess to lure potential iPhone owner with iDiGi Plan through 24months Easy Payment Plan plus a free GUESS iPhone casing  open Android apps for wider array of phones  bring to Malaysians Huawei portable wireless router – MiFi (Mobile WiFi Device) that can have 5 different WiFi (eg combination: iPad, iPod Touch, iPhone, Blackberry and laptop or netbook) enabled devices to connect to the Internet simultaneously  Business Entity offer BlackBerry® solution with help from Research in Motion (RIM)  Foreign Workers and Malaysian general public  partnering Citibank to allows subscribers to transfer funds via SMS up to RM5,000 from Malaysia to Indonesia, Bangladesh and the Philippines in a secure manner – direct debit to their local banks in the beneficiary's country or cash pick-up at designated agents  partnering AIG to entitled subscribers with  3 months‟ tenure Personal Accident Insurance coverage via SMS activation  encourage other service provider users (mobile, smartphone) to switch to DiGi many rate plans while retaining the original number at no extra cost (DiGi is absorbing it)  offer DG Family™ that allows combination of prepaid and postpaid as supplementary line 43

7.0

Introduction to SPACE Matrix

Strategic Position and Action Evolution (SPACE) Matrix is another management matching tool use to analyze DiGi. SPACE focuses on strategy formulation which relates to DiGi overall strategic position. SPACE Matrix is broken down into 4 strategies quadrants (aggressive, conservative, defensive or competitive) which indicate which one is most appropriate for DiGi. FP

CP

IP

SP Internal/ External Dimension Internal External

Sources of Factors DiGi‟s IFE DiGi‟s EFE

Comparison (Benchmark) competitors other industries

Type of Position

Axes

Financial Position (FP) Competitive Position (CP) Stability Position (SP) Industry Position (IP)

Y X Y X

Numerical Value Range +1 to +7 (best) -1 to -7 (worst) +1 to +7 (best)

As shown by the above figure and table, a number of variables could make up each of the dimensions represented by the axes of a typical SPACE Matrix. The importance of each dimension are then value numerically, calculate and plot on the Cartesian graph considering factors from DiGi‟s External Factor Evaluation (EFE) and Internal Factor Evaluation (IFE).

44

7.1

SPACE Matrix for DiGi Ratings Financial Position (FP) Strong profits and net cash flow from operation Digi paid out total of RM1.4 billion of cash dividend to shareholders Revenue revenue growth rate in excess of 11% in the period. In, 2009 sought to distribute a minimum 80% of the Digi annual net profit to shareholders from financial year 2010. EBITDA margin reduced to 43.3% from 44.6% Industrial Position (IP) Malaysia telecommunications industry is expected to reach US$6.7 billion (RM22.85 billion) in 2010, a growth of 4.4% over 2009.  Tense telecommunication industry rivalry does not hinder profit potential.  All key telecommunication players are stable financially.  Malaysia telecommunications operators optimized resource utilization by signing MoU to share infrastructure.

7.0 4.0 5.0 5.0 4.0 25.0 6.0 5.0 4.0 4.0 19.0

Stability Position (SP)  Continuous technology advancement in wired and wireless  High inflation rates – increased price.  Price range of competing products  Increasing competitive pressure facing global telco. Competitve Position (CP)  DiGi is still trailing behind Maxis (leader) and Celcom in market share.  Reasonable good product and service quality.  Somewhat high customer loyalty and reputation . Conclusion FP Average is SP Average is

25.0  5 = -11.0  4 =

5.00 -2.75 2.25 Directional Vector Conclusion y-axis

IP Average is CP Average is

19.0  4 = -7.0  3 =

4.75 -2.33 2.42 Directional Vector Conclusion x-axis

-3.0 -3.0 -2.0 -3.0 -11.0 -2.0 -3.0 -2.0 -7.0

\ DiGi should pursue Aggressive Strategies

45

7.2

DiGi’s SPACE Matrix Profile

Conservative

Aggressive +6 +4

+2

-6

-5

-4

-3

-2

-1

+1

+2

+3

+4

+5

+6

-2 -4 -6 Defensive

Competitive

Proven by the graph above, DiGi‟s falls into the aggressive quadrant of the SPACE Matrix. It is located at the coordinates of 2.42 for x-axis and a y–axis of 2.25, indicating that DiGi should adopt an aggressive strategy – forward integration, market penetration, market development, product development and also possible concentric diversification (related or unrelated). Those strategies mentioned are aligned to those concluded from SWOT Analysis earlier on.

46

8.0

Introduction to Blue Ocean Strategy (BOS)

BOS is yet another management matching tool use to analyze DiGi. There are many strategy tools, frameworks and methodologies to develop and explain BOS as shown below. However, only 4 of it (highlighted in yellow boxes) are further deliberate.

Red vs Blue

47

Strategy Canvas

As shown by the above figure, Strategy Canvas is the central diagnostic and action framework to build a compelling BOS. The y-axis captures the range of factors that the industry competes on and invests in while x-axis captures the offering level that consumer receive across key competing factors. Strategy Canvas serves 2 purposes: (1) captures the current state of play in the known market space, allowing DiGi to understand where the competition is currently investing and the factors that the industry competes on. (2) propels DiGi to action by reorienting focus from competitors to alternatives and from customers to noncustomers of the industry.

4 Actions Framework and ERRC (Eliminate-Raise-Reduce-Create) Grid As shown by both figures below, 4 Actions Framework and ERRC Grid complements each other. It pushes DiGi not only to ask all 4 questions in 4 Actions Framework but also to act on it in order to create a new value curve, which is essential for unlocking a new blue ocean.

4 Actions Framework

ERRC Grid 48

8.1

DiGi Strategy Canvas

8.2

DiGi ERRC Grid

From Strategy Canvas, DiGi ERRC Grid is tabulated below followed by detailed justifications by quadrant:

ELIMINATE fixed line telephony Voice Services: As highlighted in PESTLE analysis (under social), the penetration rate of fixed line is almost stagnant. Also, fixed line is monopoly by Telekom up to 2009 leaving DiGi with a miserable tiny market share. Therefore, elimination of fixed line telephony Voice Services is a more feasible choice. paper billing for all customers: The figure next page shows the chronology of e-billing practice by DiGi from 2007 to 2009 and its respective success switch rate for those years. Since e-billing is gaining momentum and approval from customers, it is possible to eliminate paper biling for all customers in their dealings with DiGi instead of only postpaid subscribers. 49

DiGi Prepaid™ Campus22: This special package was introduced back in 2008 to nationwide tertiary students  25 years old. However, since then, users had been complaining heavily on various social media that DiGi is cheating them. On the other hand, DiGi realized that some students had been abusing the plan. Hence, elimination of DiGi Prepaid™ Campus is a better solution for both DiGi and fellow students. RAISE photovoltaic (PV) solar powered mobile base station site: DiGi began to install solar panels to their base station in 2009 under DiGi Deep Green (Corporate Social Responsibility - CSR) effort. It was an initiative to improve energy efficiency across all aspects of DiGi network operations. PV might induce high capital investment but it provides great savings in long run. According to European Photovoltaic Industry Association (EPIA), the cost to generate electric from PV is expected to fall 8% annually. Besides, DiGi Deep Green had gain them acknowledgement and praises from various parties. Hence, for good image and future lower operation cost, DiGi should raise the numbers of their photovoltaic (PV) solar powered mobile base station site. concept store equip with Simbioz system23: DiGi was the 1st company in SEA to deploy Simbioz FT-57 system. Then, by investing  RM3 million, DiGi launch a concept store equip with Simbioz system (DiGi360°) in November 2008 to provide customers24 with personalised services (phone accessories, data services – content downloads, games and internet browsing etc) which promise to bring the DiGi experience to a new level. The store in SohoKL, Solaris, Mon‟t Kiara served as an experimental platform to try out which service concept works best before implementation in customer service centres nationwide (eg no queuing). Within DiGi360°, there are small and huge multisensory interactive screen everywhere for customers to browse DiGi offers and features (showcase their CSR, Music Mixer where customers can have fun creating their own music and Picture Capture Moment where customers can take a picture using integrated cameras and print out a copy to take home as a token) or play interactive game as if there are in the movie Minority Report (refer the combo photos next page). 22 23

24

since July 2010, DiGi Prepaid™ Campus plan is no longer available for new subscription next-generation technologies such as artificial vision, gestural tracking and Windows Presentation Framework to encourage fun interaction and enable two way dialogues with users which can be seen in the movie Minority Report target market: expatriates, young professionals and enterprise business (especially postpaid) 50

With the success and sophisticated technology of DiGi360° since 2008 (and also enough testing), it is recommended that DiGi raise/open more concept store nationwide. memorable marketing campaigns of Yellow Coverage Fellow (YCF)25: The YCF campaign was first introduced in end 2006. It success was beyond DiGi wildest expectations and had achieved a near cult following26. Besides that, YCF campaigns had garnered recognition at Asian Marketing Effectiveness (AME) awards, which is the only international marketing awards in Asia which judged primarily on the measuring impact of advertising campaigns on the clients‟ business. DiGi won Gold27 for “Most Effective Use of Advertising in Asia” and Silver for “Best Idea” category. As competitors had not reach where DiGi is at with YCF, it is wise for DiGi to raise memorable marketing campaigns of YCF.

25

26

27

chronology of campaigns: YCF (DiGi had expanded its network coverage), Getting Stronger (Military Style Bootcamp) and Almost (there are areas where DiGi is not quite there yet) 85% approval rating from public with young kids to granny love and can relate to YCF and the jingle “I will follow you”. There are also lots of request for YCF to make guest appearance at events. Malaysia 1st ever gold 51

REDUCE DiGi Ambassadors: DiGi had realized on the lack of involvement of their DiGi Ambassadors as effective marketing tools. Hence, it is wiser to reduce the number of DiGi Ambassadors and channel the cost28 to be switch to sponsoring educational program instead. Through sponsoring, DiGi can be strengthen and embedded in the mind of students, indirectly influencing them to subscribe to DiGi in the future. fees to replace standard SIM card with Micro SIM29: The „replacement‟ of standard SIM card with Micro SIM is actually done by cutting the edge of the original card. While consumers can easily DIY with scissors, special tools in the market or help from mobile accessories shops (open market); many opt for telcos‟ service. Instead of doing it free of charge (FOC) , telcos charge consumers (refer table below). This practice irks consumers. Therefore, it is better for DiGi to further reduce the fees to replace standard SIM card with Micro SIM or offer it FOC. Charges for Micro SIM Replacement RM 20 DiGi RM 25 Maxis RM 10 Celcom RM 5 Open Market Telco

concert sponsor for “B-grade30” SEA artistes: Over the years, DiGi had been sponsoring concert for a mixture of “A and B-grade” global artistes. While it is applausive to support local acts or less popular entertainers, Malaysian youth are demanding for “A-grade” or world class music. So, DiGi should reduce concert sponsor for “B-grade” SEA artistes.

CREATE new Data Services product (Huawei portable wireless router): DiGi had bring to Malaysians Huawei portable wireless router – MiFi (Mobile WiFi Device) that can have 5 different WiFi (eg combination: iPad, iPod Touch, iPhone, Blackberry and laptop or netbook) enabled devices to connect to the Internet simultaneously. Non customers might be attracted to MiFi or on the lookout for other new creation of Data Services product by DiGi in the future. ease of customer to be rewarded (BonusLink points): Since July 2010, DiGi partnered BonusKad Loyalty Sdn Bhd to enable DiGi subscribers can collect BonusLink Points based on monthly usage bill for postpaid mobile and broadband. This expands the scope of the point accumulation system for customers beyond using DiGi's services. Non customers might be lure switch the DiGi to collect more BonusLink points or wait until DiGi create some other appealing ways that ease customer to be rewarded.

28

29 30

DiGi did not reveal exact figures but lump sum of payments for provisions (customer loyalty program and employees benefits) in their cash flow shows an upward trend from 2005 – 2009 use in Iphone 4s and iPad deem to be “B-grade” by youths (eg Tata Young and Denise Ho) 52

9.0

Introduction to BCG Matrix

Since DiGi operates through 2 business lines (voice and data services), the BCG Matrix will be use to analyze 4 (prepaid and postpaid, fixed telephony, smartphones and mobile/wireless broadband) among its numerous strategic business units (SBU) or product lines. BCG Matrix is a portfolio planning model developed by Bruce Henderson of Boston Consulting Group in 1968, based on the product life cycle theory (refer figure below).

A typical BCG Matrix look like this: (CASH TO INVEST)

(CASH FROM REVENUE)

II

I

III

I V

53

9.1

DiGi BCG Matrix

The following BCG matrix classified 4 DiGi‟s SBU (prepaid and postpaid, fixed telephony, smartphones and mobile/wireless broadband) into 4 quadrants (Question Marks, Stars, Cash Cows and Dogs):

9.2

DiGi BCG Matrix Justifications and Strategies

This section justifies on DiGi BCG Matrix by quadrant and also looks at possible strategies to handle the respective SBU. QUESTION MARKS: MOBILE/WIRELESS BROADBAND (DATA SERVICES)  relative market share: LOW  as highlighted before, DiGi was having the smallest market share in 2009 (refer pie chart on the right)  the market is also getting crowded with many new entries in 2010 such as Time dotCom, YTL, U Mobile and Tune Talk

Source: Starbiz, November 30, 2009  market growth rate: HIGH  rising penetration rate of broadband subscribers (per 100 householders) (Source: Ministry of Finance, 2010) 4th Quarter of 2009 = 31.7% 1st Quarter of 2010 = 34.5% 2nd Quarter of 2010 = 37.5% 54

 strong Malaysian government support through National Broadband Initiative (NBI) which aims to achieve 50% Malaysian household (both wired and wireless mobile) broadband penetration by the end of 2010  challenge for DiGi  increase mobile/wireless market share quickly so that it might become Stars and eventual Cash Cows or it will become Dogs  strategies  invest  RM350 million for mobile broadband expansion as part of its plans to improve its infrastructure  market penetration: increase customer rewards and provide consistent good services to existing customers - plenty of offerings and outdoor gathering in “hot buttons” of youth lifestyle areas (gaming, sports, music, movie, TV show, internet, weather forecast, games etc) - various monthly broadband (business solutions) depending on size and budget of business entity - BonusLink points based on monthly usage bill for postpaid broadband subscribers  market development: build CBC for rural communities in various areas in Malaysia (Sarawak, Johor, Melaka, Kelantan, Terengganu and Pahang)  product development: bring to Malaysians Huawei portable wireless router – MiFi (Mobile WiFi Device) that can have 5 different WiFi (eg combination: iPad, iPod Touch, iPhone, Blackberry and laptop or netbook) enabled devices to connect to the Internet simultaneously STARS: SMARTPHONES (DATA SERVICES)  relative market share: HIGH  no exact figures disclose but relatively, DiGi is having a high market share for smartphones as they are selling Malaysian favourites (refer pie chart and table below): RIM‟s Blackberry, Apple‟s Iphone and Google‟s open-source Android operating system phones such as Samsung Galaxy S, HTC Legend, HTC Desire, Sony Ericsson Xperia 10 and Motorola Milestones, amongst others Smartphone Blackberry Iphone Samsung33 Android

31 32 33

Telco Maxis, Celcom31, DiGi Maxis, DiGi32 Maxis, DiGi Maxis, Celcom, DiGi

largest BlackBerry seller in SEA (2008) 3 years contract with Apple to sell iPhones in Malaysia in 2008, Samsung (8GB variant) was #1 smartphone in Malaysia with 14.6% market share 55

 smartphones had contributed to the DiGi fast-growing mobile Internet market34

 market growth rate: HIGH  percentage ownership of smartphones is still low but popularity is rising rapidly35  the potential market for mobile Internet (through smartphones) is large as there are  31 million36 mobile phones in use in Malaysia (more than 10x the estimated number of laptops and netbooks owners) as of 2nd Quarter of 2010  in 2009, mobile internet accounted for  25% of industry revenue growth  rising penetration rate of cellular phone subscribers (per 100 householders) (Source: Ministry of Finance, 2010) 4th Quarter of 2009 = 106.2% 1st Quarter of 2010 = 107.1% 2nd Quarter of 2010 = 108.8%  challenge for DiGi  maintain or strengthen dominant positions of smartphones as Stars because it is DiGi best long run opportunities for growth and profitability plus growing it into Cash Cows  strategies  market penetration: increase customer rewards and provide consistent good services to existing customers - various data-centric packages to cater to the growing number of mobile Internet (smartphone) users - reduce fees to replace standard SIM card with Micro SIM  market development: aggressively push sales of smartphones - encourage other service provider smartphone to switch to DiGi many rate plans while retaining the original number at no extra cost (DiGi is absorbing it)

34

35 36

include casual surfers (unlimited access via handsets for RM5/day) and prepaid Internet card users (inserted into modem for access via PC and laptops) composition of data revenue in 2nd Quarter of 2010 = 65% SMS, 22% mobile internet and 13% others (Source: Asia Analytica Sdn Bhd) Asia Analytica Sdn Bhd, 2010 31,456 million subscribers in 2nd Quarter of 2010 (Ministry of Finance)

SIM

56

- invest RM100 million over the next 3 years in Perak and Sarawak to expand its mobile internet services footprint beyond 5 key market centres (Klang Valley, Penang, Kota Kinabalu, Ipoh and Kuching)  product development: joint venture with handheld mobile providers to include latest technologies and internet function into mobile CASH COWS: PREPAID AND POSTPAID (VOICE SERVICES)  relative market share: HIGH  DiGi market share for prepaid and postpaid is relatively high up to 2 nd Quarter of 2010 (refer pie chart below)  however, DiGi do not disclose exact figures for its prepaid and postpaid subscribers (voice services) but lump it together with broadband customers (refer bar chart below)

Source: Asia Analytica Sdn Bhd  market growth rate: LOW  the phenomenon on declining voice revenue is an occurrence worldwide but it is expected to remain as the main revenue earner (MCMC, 2007)  mobile voice revenue is expected to grow by 6% annually until 2013 (IDC, 2009)  challenge for DiGi  maintain prepaid and postpaid strong position for as long as possible as Cash Cows since it was yesterday‟s Stars to finance mobile/wireless broadband (Question Marks) and smartphones (Stars)  strategies  product development - maintaining prepaid and improving postpaid momentum by offering handset bundles - DG Family™ package allows combining prepaid and postpaid as supplementary line - Happy prepaid37 east coast edition (Kelantan and Terengganu) targeting value seekers that mainly use their mobiles to just make calls and SMS  retrenchment - eliminate DiGi Prepaid™ Campus package - eliminate paper billing for postpaid subscribers 37

a mobile virtual network operator (MVNO) under DiGi rivaling Tune Talk 57

DOG: FIXED TELEPHONY (VOICE SERVICES)  relative market share: LOW  DiGi was having tiny market share in 2009 (refer pie chart on the right)  market growth rate: LOW  almost stagnant penetration rate of fixed line telephone subscribers (per 100 householders) (Source: Ministry of Finance, 2010) 4th Quarter of 2009 = 43.9% 1st Quarter of 2010 = 44.0% 2nd Quarter of 2010 = 44.0%  fixed-line voice revenue is expected to decline 4% annually until 2013 (IDC, 2009)  challenge for DiGi  avoid or maintain fixed line telephony which is weak internal and externally as Dogs Cash if there is some profit since expensive turn-around plans usually do not help  strategies  retrenchment - eliminate fixed line telephony - continuously provide payphones and household fixed lines as part of obligation to provide access to basic telephony communications in rural community districts designated to DiGi under Universal Service Provision (USP) 38

38

up to 2009, DiGi provided 200 payphones and 5000 household fixed lines to 7 USP districts 58

10.0

Introduction to Strategic Implementation Action Plan

The greatest strategic plans are useless carried out properly. An action plan will define how DiGi get to where they want to go (the steps required to reach their strategic goals). The framework of DiGi‟s Strategic Implementation Action Plan is as such: strategic decision  strategic objectives  functional action  tactical action plan  resources required  timeline  personnel responsible  personnel accountable.

10.1

DiGi Strategic Implementation Action Plan

Vision to be seen as stars in excellent customer experience by enhancing communications to improve customers' quality of life, at home, work and play Mission 1. Provide customers specific solutions to meet individual needs for communications, connectivity, and access to information and security; 2. Provide an environment where our employees can grow and be fulfilled; 3. Provide superior returns to shareholders; and 4. Contribute to improving life in Malaysia. STRATEGIC DECISION Strategic decision derived from SWOT, SPACE and BCG methods is product development – joint venture with handheld mobile providers to include latest technologies and internet function into mobile. Through product development, at the end of its strategic action, DiGi will be able to increase its subscribers‟ growth and revenue by banking on Data Services (mobile internet). STRATEGIC OBJECTIVES More specifically, strategic objectives are: 1. market positioning: at least defend DiGi current market share and remain as #3 2. innovation: development of new Data Services goods and services 3. human resources: selection and development of employees to implement the strategic decision 4. physical resources: adequate/healthy stock (inventory) of smartphones etc 5. financial and profit: adequate capital and healthy profit plus growth TIMELINE This particular strategic decision will be implemented in a long term basis – 3 years (1st Quarter of 2010 to 1st Quarter of 2013). For detail timeline (using workings days), refer Gantt Chart next page. FUNCTIONAL ACTION, TACTICAL ACTION PLAN, REQUIRED RESOURCES AND PERSONNEL ACCOUNTABLE/RESPONSIBLE The subsequent tables in Page 60 – 63 matches each strategic objective with related functional departments/committee involved, detail activities and efforts that should be done to achieve the objectives and required resources (money/year, people, equipment) and personnel accountable/responsible. 59

60

Strategic Objectives

Functional Action

Tactical Action Plan



marketing market standing40

 

  

MIS

39 40 41

Required Resources39  money/year: advertising and aggressively push sales of Malaysian favourites promotion budget = smartphones: RIM‟s Blackberry, Apple‟s Iphone RM 600,000 and Google‟s open-source Android operating  people: trained, aggressive system phones such as Samsung Galaxy S, HTC sales and service Legend, HTC Desire, Sony Ericsson Xperia 10 and personnel/dealers41 at DiGi Motorola Milestones, amongst others centres, concept store open Android apps for wider array of phones (DiGi360°) and service encourage other service provider users (mobile, counters; inhouse/outsource smartphone) to switch to DiGi many rate plans advertising and promotion while retaining the original number at no extra team cost (DiGi is absorbing it)  equipment: hassle free reduce fees to replace standard SIM card with switch to DiGi technology, Micro SIM SIM card cutter, Point of raise memorable marketing campaigns of YCF Sales (POS) ease customer to be rewarded (BonusLink points)

 money/year: MIS budget  liaise with R&D and marketing = RM 400,000  ensure updated, adequate information and user  people: competent web friendly website developer, technicians,  ensure error free new offerings (eg SMS for programmers, engineers insurance, collect and redeem BonusLink points  equipment: reliable, error etc) and hassle free technology;  eliminate paper billing to offer e-billing for all e-billing technology customers

Personnel Personnel Responsible Accountable  customer and  Albern Murty channels (Head, Marketing) marketing  Chan Nam Kiong department (Head, Customer (sales and and Channels services Marketing) personnel/ Dealers, advertising and promotion team)  outsource advertising agencies, PR/event management house  MIS  Ole Martin department Gunhildsbu (web (Chief Technology developer, Officer) technicians, programmers, engineers)

overall budget = RM 2.3 million per year at least defend DiGi current market share and remain as #3 prepaid and postpaid

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Strategic Objectives

Functional Action

R&D

Innovation42

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Tactical Action Plan  joint R&D for new Data Services goods and services  copy and create Huawei portable wireless router – MiFi (Mobile WiFi Device) that can have 5 different WiFi (eg combination: iPad, iPod Touch, iPhone, Blackberry and laptop or netbook) enabled devices to connect to the Internet simultaneously  4G testing/trial

 talk with handheld mobile providers for joint ventures  tie up with Apple Inc for the rights to distribute iPhone 3G, 3Gs and 4s  offer BlackBerry® solution with help from Research in Motion (RIM) to business entity  partnership with bank, cloth retailer and insurance companies  partnering HSBC Credit Card and Guess to lure potential iPhone owner with iDiGi Plan through 24-months Easy Payment Plan plus a free GUESS management iPhone casing  partnering Citibank to allows subscribers to transfer funds via SMS up to RM5,000 from Malaysia to Indonesia, Bangladesh and the Philippines in a secure manner – direct debit to their local banks in the beneficiary's country or cash pick-up at designated agents  partnering AIG to entitled subscribers with  3 months‟ tenure Personal Accident Insurance coverage via SMS activation

     

Required Resources Money/year: R&D budget = RM 400,000 people: trained and new researchers equipment: lab apparatus, computers and new technology money/year: budget = RM 300,000 people: trained negotiator equipment: reliable, error and hassle free technology

Personnel Responsible  trained and new researchers

Personnel Accountable  Head, R&D

 strategy and news business department

 Noelle Tan (Head, Strategy and New Business)

development of new Data Services goods and services

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Strategic Objectives

human resources43

Functional Action

Tactical Action Plan

HR

 ensure enough and competent employees for all functional efforts to implement the strategic decision  new recruitment (if needed), job rotation or transfer  training on new needed skills

 

  

physical resources44

financial and profit

43 44

operation

 warehouse clearing of iPhone 3Gs stock before launching of 4s  ensure adequate/healthy inventory of all offered smartphones and its accessories

 ensure and raise capital for (if needed) fees of LTE/4G spectrum  liaise with marketing to decide on pricing finance and decision on all new Data Services goods and accounting services  keep track on overall budget allocation, usage and profit



  

Required Personnel Personnel Resources Responsible Accountable money/year: HR  HR  Suriahni Abdul budget = RM 200,000 Development Hamid Team (Head, HR, people: trained recruiters, (recruiters, Development and competent HR personnel, competent HR Members, DiGi internal/external trainers on personnel, Management new needed skills internal/external Team) equipment: training trainers) materials  operation money/year:  Head, Operation operation budget department = RM 200,000 (purchasers, storekeepers, people: trained supply chain QC/QA, lorry personnel (purchasers, drivers) storekeepers, QC/QA, lorry drivers) equipment: QC/QA smartphone defect tracing tools, suitable inventory software (eg ERP/Oracle) that enable FIFO for smartphones money/year: accounts and  accounts and  Stefan Carlsson finance budget finance (Chief Financial = RM 200,000 department Officer) (accountants, people: accountants, bookkeepers, bookkeepers, data entries data entries) equipment: suitable accounting software

selection and development of employees to implement the strategic decision adequate/healthy stock (inventory) of smartphones etc

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11.0

Introduction to Strategic Evaluation – Balanced Scorecard

The last part of this paper use Balanced Scorecard, which is an important strategy-evaluation tool to evaluate DiGi vision, mission and strategy from 4 perspectives: financial performance, customer knowledge, internal business processes and learning and growth. 11.1 DiGi Balanced Scorecard/Strategy Map The figure below shows the Strategy Map (Kaplan and Norton, 2004) that will be use to illustrate DiGi Balanced Scorecard:

FINANCIAL PERSPECTIVE long-term shareholder value:  align to DiGi‟s mission #3 – provide superior returns to shareholders  indicators: % of dividend, productivity strategy (attained targeted production):  indicator: improve cost structure45  indicator: increase asset utilization (especially on new property, plant, equipment and intangible assets purchased annually to generate sales)

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expenses that DiGi must take into account for its product/services (eg transaction costs, sunk costs, marginal costs and fixed costs) formula of cost structure = ratio of fixed costs to variable costs

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growth strategy:  expand revenue opportunities – is 4G testing/trial successful?  enhance customer value (eg reduce fees to replace standard SIM card with Micro SIM, ease customer to be rewarded – BonusLink points)  indicator: % of attained target sales CUSTOMER PERSPECTIVE indicators to measure outcomes of DiGi strategy plus customer value proposition:  price – affordable at market price?  quality – on par with competitors (no of customer complain, frequency of repair etc)?  availability – short lead time for pre-order of smartphones?  selection – are there myriad of prepaid and postpaid plans with option to switch to DiGi?  functionality – on par with competitors‟ product?  service – friendly and knowledgeable sales and service personnel/dealers at DiGi centres, concept store (DiGi360°) and service counters (index of impoliteness)? – new features and services increase value add to customer (% of market share)?  partnerships – successful joint ventures with mobile handheld mobile providers to include latest technologies and internet function into mobile?  branding – is YCF campaign effective (generating sales)? – is YCF still acceptable and love by Malaysians (there are still lots of request for YCF to make guest appearance at events)? INTERNAL PERSPECTIVE operations management process:  supply, distribution and risk management – ensure adequate/healthy inventory of all offered smartphones and its accessories  produce (through R&D and MIS) on supporting features of smartphones  indicators: on time delivery, short lead time for pre-order of smartphones, reliable, error and hassle free technology, effectiveness of job, efficiency of business processes customers management process:  select, acquire, retain and grow the right target customers  indicator: % of market share innovation process:  R&D to locate opportunity identification (ID) before design/develop new innovation and successful launch it into the market  indicators: time from new product/services conceptualization to commercialization, break-even time, % of sales from new product/services, no of new products/services launch, % of customer complain (quality) regulatory and social process:  environment – no of photovoltaic (PV) solar powered mobile base station site? – success switch rate to e-billing?  safety and health – how successful in lowering carbon footprint (no of staff carpooling to work)?  employment – staff turnover rate? – staff job‟s satisfaction?  community – high and visibility of CSR effort (DiGi Deep Green) effort (% of praise from customer/non-customers, industry players and staffs)?

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LEARNING AND GROWTH PERSPECTIVE human capital: improve moral and motivation of staffs through adequate manpower (new recruits if needed), job rotation or transfer plus suitable training on new needed skills information capital: acquire, storing and distribute latest information on telecommunication (especially smartphones) to staffs organization capital:  company culture – open communication (no of suggestion from all level)?  leadership – leading at all level (average no of times each employee leads ad-hoc projects annually)?  alignment – are each department KPI align to DiGi vision, mission, long term objectives and strategy (annual review)?  teamwork – are teamwork highly encourage and develop (no of team building events, cross-functional teams etc)?

11.2

DiGi Balanced Scorecard/Strategy Map Cause and Effect Relationships

Finally, the figure below summarizes DiGi Balanced Scorecard/Stategy Map cause and effect relationships by connecting arrows:

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