This chapter concerned with the environment which DiGi operates in terms of

macro influences, future scenarios and specific forces affecting competition. A firm’s
environment represents all external forces, factors and conditions that exert some degree
of impact on the strategies, decisions and actions taken by the firm (Pitts & Lei, 2000).
Therefore, it is important to understand key variables affecting performance of DiGi and
how DiGi is positioned in terms of such influences.

In this chapter, two types of external environments will be focused which are the
broader macro environment and the industry-specific, competitive environment. In the
first section, key factors and conditions that make up the broader macro environment will
be examined using PEST analysis. Then, in the second section, DiGi’s competitive
environment will be analyzed with the help of Porter’s Five Forces model. Here, the
competitive environment refers to the forces and conditions directly related to the mobile
telecommunication industry which DiGi competes. Lastly, competitor analysis will be
applied to analyze DiGi’s competitive position in the mobile telecommunication market.
Competitor analysis is conducted with the help of primary research to find out the
perceived value by customers in the telecommunication industry. This will help to reveal
where DiGi stand in relation to other organization competing for the same resources, or
customer, as itself.

4.0 The Macro Environment

The macro environment, also known as general environment represents the broad
collection of factors that directly or indirectly influence every firm in every industry. To
identify which macro environmental influences are likely to affect DiGi’s development

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and performance, PEST analysis is applied. It involves identifying the political,

economic, social and technological influences of an organization.

4.0.0 PEST Analysis

A PEST analysis is an analysis of the external macro-environment that affects all

firms within the economy. In other words, it represents the broad collection of factors that
directly or indirectly influence every firm in every industry (Pitts & Lei, 2000). However,
for more specific analysis, only some important variables that have linkages with the
mobile industry will be depicted and discussed below. Although external factors like
political, economic, social and technology are always beyond firm’s control and
sometimes present themselves as threats, this business tools cannot be neglected by firms.
PEST analysis will be utilized by DiGi as a useful way of summarizing the external
environment in which it operates. The external factors will be identified and followed by
consideration on how DiGi could respond to these influences.

Malaysia in Profile

Malaysia, comprising Peninsular Malaysia, Sabah and Sarawak, is strategically

located in the heart of Southeast Asia, one of the world's fastest growing trade and
economic regions (US-ASEAN Business Council, 2003).

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Malaysia, a middle income country, transformed its economy from 1971 through
the late 1990s from relying primarily on the production and export of raw materials, into
one of the world's leading trading nations in electronics and information technology (IT)
goods. This success has been attributed to a development model based on private sector
led growth, with social equity.

Today, utilizing its diverse resource base (energy, raw materials, manufactured
goods and information technology products) and coupled with healthy foreign exchange
reserves and relatively small external debt, Malaysia continues its economic success via
the promotion of both domestic and foreign based growth engines to help Malaysia
achieve its goal of becoming a "developed" nation by the year 2020.

Political/Legal Environment

During the past ten years, Malaysia telecommunications industry has been
evolving from a government run monopoly to a privately owned market depicted by free
competition. Nevertheless, there are still regulatory controls put in place by the
government to protect consumers and to ensure competitive rivalry is conducted in an
ethical and legal manner. For more information and detailed discussion regarding
Malaysia’s telecommunication political and regulatory environment, please refer to
Section.

Economic Environment

Malaysia has one of the most open economies in Southeast Asia, and as a
consequence, it benefits from a greater boost from global growth than many of its
neighbours. In the third quarter of year 2004, Malaysia has experienced GDP growth rate
of 6.8%. This demonstrated that the outlook for country’s economy remain positive for
the coming years. Consumer confidence and spending thus will continue to rise (CEO
Outlook 2005 – Morten Lundal, 2004).

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In addition, consumers in Malaysia are as a whole, generally becoming wealthier

and the purchasing power is quite high. This has encouraged healthy growth of mobile
communication sector. Besides that, telecommunications companies in the past few years
have been performing extremely well in the stock market. For instance, DiGi’s share
price has rose 72% in only one year period.

Social Environment

In year 2004, Malaysia has a population of approximately 23.5 million people

with growth rate of 1.8% (The World Factbook, 2004). Its population is projected to
grow to 29.8 million by the year 2020, according to the United Nations Development
Program.

Consumers in Malaysia are becoming more technologically aware and are

participating in a growing demand for communication and messaging services.
Customers began to realize that mobile phones are a necessity and not a luxury (CEO
Outlook 2005 – Morten Lundal, 2004). To many, it is a convenience and a way of life.
Mobility plays a significant role in most people’s everyday life. This is shown by strong
growth in mobile telecommunications industry recent years and its impressive penetration
rate has also taken everyone by surprise. In the coming year, the growth of the
telecommunications industry is generally forecast to be in the mid teens in terms of
percentage growth (CEO Outlook 2005 – Morten Lundal, 2004).

Another significant lifestyle changes that worth mentioning here is mobile phone
has becoming to be more natural than house phone (fixed line). People want to call
people, not places or houses. This statement is confirmed by a handphone user survey
conducted by Malaysian Communications and Multimedia Commission which revealed
that about 57.5% of handphone users do not have fixed lines at home, and of those who
do, about 50.7% preferred their handphones over fixed-line phone (Handphone Users
Survey, 2004). As a result, the level of communications and connectivity will increase
and become more prevalent.

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Technology

Research and development as well as technological innovations are essential in

the Malaysian government's strategy of sustainable development and knowledge-based
economy, or k-economy. Recognizing these factors, the government has accorded a high
priority to the scientific and the technological development of the country.

Despite the regional economic downturn, the 2000 National Survey of R&D
showed that R&D expenditure reached RM 1671.5m, an increase of 48% over that of
1998, and the highest to date in Malaysia (Facts & Figures, 2004). Three main fields of
research included applied sciences and technologies (RM528.3m), Information,
Computer and Communication Technology (RM382.2m) and Engineering Sciences
(RM300.9m).

The telecommunications industry has been identified as one of the main core
technologies being tapped in the drive to turn Malaysia into a developed nation by 2020.
It is in this context that the industry has undertaken to rapidly build its infrastructure,
develop sophisticated devices and offer exciting products and services (CEO Outlook
2005 – Morten Lundal, 2004).
.

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4.1 Mobile Telecommunication Market in Malaysia

4.1.0 Overview

The era of the industrialization and information age has made the
telecommunication industry expanded into diversified functionality to support the growth
of technological advancement for better services demanded by any particular nation. In
Malaysia, telecommunication industry is now considered to be prominent due to its
contribution as a tool of technological support for the national development in line with
the national aspirations (Yusof, 1998).

The telecommunications sector in Malaysia is expanding rapidly with the

introduction of the latest services and equipment. Now, Malaysia has one of the more
advanced telecommunications networks in the developing world, utilising modern
technologies such as optic fibres, satellites, wireless transmission, digitalisation and
satellite services.

For the past fifteen years, the telecommunications sector in Malaysia has
undergone significant physical and structural transformation. Between 1985 and 2000,
the country’s telephone penetration rate rose by 540 per cent. Concomitantly, cellular
phone subscriptions have grown very rapidly since the early 1990s. The total number of
cellular phone subscribers in year 1990 stood close to 84,557 (Lee, 2001). However,
recent statistics has indicated that by end of the year 2004, mobile subscribers had
increased to 14.6 million subscribers. Only by last year itself, Malaysia has seen an
additional 3.5 million new users and of those users, 1.55 million were signed up in the
final three months of the year, the highest-ever addition for a quarter since mobile phones
were introduced in the country more than a decade ago (Sidhu, 2005). This has shows
that more than half of the country population, were mobile phone subscribers at the end
of last year.

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With usage at this level, analysts are again expecting the saturation point will be
reached soon. The earlier forecast was for market saturation in two year’s time. Industry
experts say 65% is the benchmark for saturation in Malaysia, although it depends on a lot
of factor including affordability of mobile phones and charges (Sidhu, 2005). This make
the next three years become very critical for mobile operators because after this the rate
of growth will start to slow down. OSK Securities head of research Pankaj Kumar
estimates the mobile subscriber growth rate will be in the low to mid-teens this year.
However, Jeffrey Tan, senior analyst from Avenue Securities has different opinions. He
believes that the contributors in subscriber numbers will be formed by youth and also the
rural areas, where coverage is gradually being expanded.

Malaysia - Mobile Telecommunications Indicators,

1998-2004 (Sources: B.K. Sidhu, 2005, "Surge in Mobile
Phone Users, StarBiz 26 Feb 2005)

16,000 70.0
58.0
14,000 60.0

12,000

Penetration Rate (%)

14,600 50.0
43.9
10,000
Total ('000)

36.9
40.0
11,124
8,000 30.8 9,053
30.0
6,000 21.8 7,385

12.0 20.0
4,000 5,122
9.7
2,000 10.0
2,150 2,717

0 0.0
1998 1999 2000 2001 2002 2003 2004
Year
Total Subscribers ('000)

Penetration Rate (%)

During year 2002, the telecommunication sector has undergone consolidation

with the original 8 players subsequently reduced to 5 telecommunications companies

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competing in the increasingly competitive market (UK Trade and Investment, 2003). The
5 operators are Telekom Malaysia, Celcom, Maxis Communication, TimeCel DotCom
Bhd and DiGi Communications. Further consolidation was seen again during year 2003
and 3 major operators have now emerged with the recent takeover of Celcom by Telekom
Malaysia and the collaboration of Maxis and Time DotCom. DiGi has remained a niche
player on its own.

Consolidation is necessary, as it reduces not just the number of players but also
duplication of resources. Tariff rates have been reduced and international calls cut by 7%
to 67% while national calls beyond 25 km slashed between 23% and 34%. The move by
Maxis to buy TimeCel would allow it to lead in the mobile phone sector, although
Telekom is aiming to become the leader with the Celcom/TM Touch merger. Maxis' 2.5
million users have combined with Time Cel who has over 1 million users. Telekom has
1.2 million and Celcom 2.3 million users. DiGi on their own has 1.4 million users.

In the mobile market, where the total subscriber base reached 14.6 million at the
end of the year 2004, Maxis Communications Bhd has maintained its position with a
market share of 42%, followed by Celcom (M) Bhd with 38% and DiGi.com Bhd with
21%. In terms of Average Revenue per User (ARPU) for year 2004, Maxis scored
RM161 for postpaid and RM61 for prepaid while Celcom in another hand scored only
RM132 for postpaid, while prepaid RM1 higher than Maxis. DiGi, however only
revealed that the company’s blended ARPU is worth RM54. Although, DiGi is the
smallest among the trio of operators in Malaysia’s mobile telecommunication industry,
DiGi

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Malaysia - Mobile Telecommunications

Market Share by End of Year 2004 (Source:
B.K. Sidhu, 2005, "Surge in Mobile Phone
Users", StarBiz 26 Feb 2005)

22%

41%

Maxis
Celcom
37% DiGi

With around fifteen million mobile subscribers in the country, the mobile phone
has become the favourite way for Malaysians to communicate. The market is competitive
with telecommunications companies waging a fierce marketing war to win the hearts and
minds of consumers. New handphones are treated as a reflection of fashion. Although in
its infancy, the text messaging business is booming. Marketers have been swift to
leverage on the SMS popularity to promote their products and services. SMS-based
contests are also on the rise and TV stations are beginning to use SMS to provide a more
interactive platform for their viewers.

4.1.1 Malaysia Telecommunications Regulatory Environment

Prior to year 1987, telecommunication services were provided by Jabatan

Telekom Malaysia (JTM) – a government department under Ministry of Energy,
Telecommunications and Posts (METP). JTM is assigned the role for the regulation of
the telecommunication industry which included enforcement, licensing, tariffs and rates.
However, reforms started in 1983 when the government allowed the private sector to
complement JTM in the supply of terminal equipment such as telephones and
teleprinters. While liberalization was taking place, plans already afoot to privatize JTM.
Privatization was initiated at that time to help to combat JTM’s high debt postion and to

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mobilize new sources of financing to meet the need for growing capital investments in
the telecommunication industry. As a result, by year 1987, Syarikat Telekom Malaysia
(STM) officially took over the operational responsibilities of JTM (Lee, 2001).
Subsequently, the Malaysian government sold 25% of STM’s equity to the public via a
public listing exercise in 1990. Then with the public listing, STM was renamed as
Telekom Malaysia Berhad (TMB).

Despite fundamental change in regulatory structure in telecommunication industry

brought by privatization, Telekom Malaysia continues a virtual monopoly on fixed phone
services. Nevertheless, as the demand for more efficient telecommunication mounted
rapidly, Malaysia issued a National Telecommunications Policy (NTP) in 1994 to prepare
the industry for a continuing change through 2020. The government’s original intent was
to liberalize the industry by introducing healthy and orderly competition in order to
achieve efficiency and to provide excellent and quality service. This policy has changed
for the monopolistic telecommunication industry, principally Telekom Malaysia, to
ensure that the country would have the telecommunication infrastructure necessary for
making Malaysia a regional hub for international business.

Later in year 1998, the Malaysian Government restructured the Ministry of

Energy, Telecommunications, and Post (METP) into the Ministry of Energy,
Communications and Multimedia (MECM). A major reason for this restructuring
exercise was to bring the regulatory structure in line with technological developments, in
particular, the convergence in communications and multimedia industries. Concurrent
with this restructuring exercise, a new regulatory authority for the sector, the Malaysian
Communications and Multimedia Commission (MCMC), was formed (Lee, 2001).
MCMC is in charged with regulating the converging industries of broadcasting, IT and
telecommunications in accordance with the national policy objectives set out in the
Communications and Multimedia Act 1998. The introduction of the Communications and
Multimedia Act (CMA 1998) which came into effect on 1 April 1999 repealed the
Telecommunications Act 1950 and the Broadcasting Act, 1988 and heralded a new
regulatory environment for the telecommunications industry in Malaysia, providing a

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modern, flexible structure for tapping into new market opportunities. Under the Act,
regulatory activities are classified into four key areas: economic regulation, consumer
protection, technical regulation and social regulation (Lee, 2001).

Key Functions Objectives

Economic Regulation Industry players must have incentives to invest, innovate and
interconnect for the benefit of end users. There should also be
incentives to encourage the export of services.
Consumer Protection Consumers have rights to high quality service that are reliable,
easily accessible and affordable from the service provider of
their choice.
Technical Regulation Networks and services must be inter-operable, safe secure,
reliable and guarantee the integrity of services delivered.
Social Regulation Content developers must have incentives to invest and innovate
in applications and services that promote Malaysian culture,
identity and values.

4.1.2 Regulating Authority

Under the present regulatory framework, the Minister of Energy,

Communications and Multimedia is the most influential institution. The Minister makes
all key decisions pertaining to regulatory policies. The Malaysian Communications and
Multimedia Commission (MCMC) provides policy recommendations to the Minister and
is responsible for the enforcement of regulatory policies and legislation (the CMA 1998).
In the case of the issuance of licenses, MCMC administers the application and renewal
process, makes recommendations but still the final decision is up to the Minister.
There is also a greater role for public participation in the present regulatory
framework. The CMA 1998 provides for the conduct of public inquiries by the MCMC

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on regulatory matters. The MCMC has used this avenue to solicit opinions from operators
during the process of drafting regulatory policies (e.g. Access List Determination).
Typically, discussion papers are published on MCMC’s website
(http://www.cmc.gov.my) and the public is invited to submit their views within a given
period (at least 45 days).

The CMA 1998 also allows for the setup of an Appeal Tribunal to review MCMC
decisions and direction when the need to do so arises. Another avenue for public
participation is the establishment of industry forums that act as a consultative body to the
MCMC in important issues such as access code, consumer code, content code and
technical code. Thus far, two industry forums have been established namely the
Consumer Forum and the Content Forum (Lee, 2001).

Minister of Energy,
Communications
and Multimedia

Directions Recommendations

Malaysian
Appeal Communications Industry
Tribunal and Multimedia Forums
Commission
Referral (MCMC) Liaison

Regulation Enforcement

Industry Operators

The Current Regulatory Framework for the

Telecommunications Industry in Malaysia

4.1.3 Technology

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A basic understanding of the mobile telecommunications technological

development is important when analyzing the structural changes within the
telecommunication industry.

To start off, a mobile telephone is basically a radio transmitter and radio receiver
in one. The mobile telephone switchers handle the communication over the mobile
network and look after the transition to the fixed telephone network. The communications
between the mobile telephones and mobile telephone switchers takes place via radio base
stations, which can be found on high buildings, specially designed masts or on other
highly elevated locations (Mölleryd, 1999).

Mobile communications systems are referred to as first, second or third generation

systems, or as commonly used, 1G, 2G or 3G. The first generation systems were
introduced in the beginning of the 1980’s and the second generation systems were
introduced in the beginning of the 1990’s. Data transmission rates of second generation
systems used to be limited to low speeds (9.6 kbit/s in GSM). But they are now being or
have been enhanced by features such as GPRS - General Packet Radio Service and
EDGE - Enhanced Data Rated for Global (instead of "Global", originally: GSM)
Evolution that will allow higher data rates (about 100 kbit/s). GPRS is specifically
designed to support enhanced services, changing from the existing circuit-switched
model to a packet based one (like internet) (Gruber & Hoenicke, 2000).

UMTS (Universal Mobile Telecommunications System) is a term for the systems,

standards and specifications to be used in the third generation mobile communications
systems. Third generation systems are being developed that will dramatically increase
data rates to 384 kbit/s. This will be achieved by switching to a new air interface and by
allocating additional spectrum (Gruber & Hoenicke). The technical possibility to increase
transmission capacity will allow in the future to increase the range of services that can be
offered, in particular data. So far, mobile telecommunications networks have essentially
carried voice traffic. While data services are available in GSM, their capacity is very

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limited and few applications have emerged to drive demand. Examples of possible
service applications in the UMTS networks are video conferencing, internet access,
electronic commerce, location services and the ability catch up on information such as
stock quotes or the weather (Yanis & Block, 2000).

In Malaysia, MCMC has arranged a beauty contest in July 2002 to distribute 3G

license for building and running the UMTS networks. The winners are Maxis and
Telekom Malaysia while DiGi, having recently launched EDGE, is most likely to opt for
the mobile virtual network operator (MVNO) route. Telekom Malaysia began its 3G pilot
project in July 2003. Commercial rollout is expected in year 2004. Some of the 3G
services would include billing, messaging and application and content-related services.
TMB will spend RM 4.3 billion over 15 years. Maxis, through its subsidiary, UMTS
began its pilot service early year 2004. Maxis announced it will spend RM 3.5 billion
over the next 10 years for its 3G services (UK Trade and Investment, 2003).

Capacity
Functionality

384kbit/s UMT
S

EDG
E
100kbit/s
GPR
S

9.6kbit/s

GSM

1998 2000 2002

From GSM to UMTS

4.2 The Competitive Environment

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4.2.0 Porter’s Five Forces

In addition to macro environmental forces, DiGi must also deal with more
immediate competitive environment which includes the key forces that affect the
attractiveness of the mobile telecommunication industry. Industry attractiveness refers to
the potential for profitability that result from competing in that industry. Each industry’s
attractiveness is a direct function of the interaction of various environmental forces that
determine the nature of competition.

Threat of New Entrants

One of the most important entry barriers that present in the mobile
telecommunication industry in Malaysia is the requirement of a license for operating a
mobile network. The reason behind this is that an operator needs a frequency band for
radio transmission. The frequency spectrum is a scarce resource and the government has
to regulate the usage of the spectrum by issuing licenses for using a specific frequency
band. The scarceness of frequency spectrum limits the number of network operators in a
specific geographical market.

Due to the licensing regulations, there are only two ways to enter the market for
mobile network operations. An interested company can either wait until the government
issues additional licenses, or acquire a company with a license. On 31 st July 2002,
Malaysian Communications and Multimedia Commission (MCMC) has issued two new
licenses for the third generation of mobile network operations. As a result, companies
who are interested to enter this market, acquisition might be the only option for time
being.

Although acquisition into an industry does not create a new entity, Porter (1980)
noted that it should still be viewed as entry because companies that diversify into the
industry through acquisition often use their resources to cause a shake-up. However,
currently in mobile telecommunication market in Malaysia that just undergone merger

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during year 2003, there are no signs of any companies who are interested to acquire any
incumbent operator.

Besides that, a large amount of capital is required to enter this industry. Large
financial resources are required both for building the mobile network and capturing
market share from incumbent operators. The need for large investments becomes a
barrier of entry as it increases the risk and limits the pool of likely entrants.

Product differentiation is another factor that limits entry into the mobile
telecommunication industry in Malaysia. Differentiation creates a barrier to entry by
forcing new entrants to spend heavily to overcome existing customer loyalties. In
addition, brand identity of products and services offered by existing firms in the market
can serve as another entry barrier. New entrants are expected to encounter significant
difficulties in building up brand identity, since to do so they must commit substantial
resources over along period of time. Moreover, such investments in building a brand
name are particularly risky since they have no salvage value if entry fails.

The threat of new entrants does not only come from new licenses and acquisitions
of incumbent operators. It is possible to operate a mobile service without necessarily
owning the radio infrastructure through operating a mobile virtual network. Under the
3G spectrum assignment process in Malaysia, the assignees are required to sell capacity
at competitive prices to other players in order to optimize the nation's network (Press
Releases, 2002). This presents a clear opportunity for other new entrants to purchase
capacity as an MVNO to enter to this market.

Besides that, potential entrants will be expecting aggressive and massive

retaliation by the incumbent operators if they plan to enter the market. Among the
incumbent operators, there are established operators which have a firm commitment to
the industry and also companies with substantial resources to fight back. All these factors
signal the likelihood of a strong retaliation to entry and hence shut out new entrants.

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All these sum up to a competitive force, due to the threat of new entrants, of weak
strength.

The Nature of Rivalry in the Industry

In the mobile operator industry in Malaysia, the rivalry is exceptionally intense in

this market. According to the research unit of Avenue Securities in its latest report on the
telecommunications sector, cellular penetration in Malaysia has hit 58% by end-2004
compared to forecast 50%. This represented a steep 31% increased in subscriber numbers
to 14.6 million from last year's 11.1 million (B.K. Sidhu, 2005)

Based on the statistics, the growth of mobile operator industry in Malaysia can be
characterized as strong. However, analyst believed that there is still room for the industry
to record double-digit growth over the next two years until penetration hits 65%, mostly
likely in 2007. As for current situation, mobile telecommunication market in Malaysia is
positioned under the life cycle – shakeout (Please refer to the life cycle model below).
Users in this stage mostly tend to be very selective in their purchase. As for competitive
conditions, the industry will be witnessing price-cutting for volume. This is true as
operators are lowered the price for prepaid starter kit and also call charges, which results
in price war. Another condition in this stage is the shakeout of weakest competitor
(Johnson & Scholes, 2002). Both TimeCell and TM Touch are no longer in the industry
due to merger with another two giant operators. All these are the characteristics in the
“shakeout” life cycle. Based on the usage at this level, the saturation point would be
reached soon. In maturity stage, operators will need to fight to maintain share as users
tend to be saturated. Realizing this, rivals are fighting fiercely for market share before
saturation point where the industry growth slows down.

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Development Growth Shakeout Saturation Decline

Now 2007

The Malaysia Mobile Telecommunication Industry Life Cycle

Model (Source: Johnson & Scholes, 2002)

Besides that, the formation of a leaner industry structure due to consolidation of

five main players down to three during the year 2002, saw keener and more intense
competition. The merger has caused each resulting entity had a competitive advantage
brought about by the combined spectrum of the merging companies.

Another factor that contributes to the intense rivalry is the high fixed costs
involved in network operations. High fixed costs generally create strong pressures for all
firms to fill capacity, which often lead to rapidly escalating price-cutting when excess
capacity is present (Porter, 1980). This is also the case for the mobile industry in
Malaysia. The network capacity is often augmented in large increments and this results in
a latent excess capacity. The capacity is augmented when the capacity level is reached
and thus the overcapacity remains.

The competitive force due to rivalry among existing competitors is classified as

strong.

Threat of Substitutes

There are no direct substitute products with the current level of technology. One
potential substitute is the wireless LAN (local area network) supported by VoIP (Voice

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over Internet Protocol). A wireless LAN is a computer network covering a geographically

bounded area, for instance, a building. Connected to the network there are several access
points with radio transmitters. Mobile units, such as laptops, PDAs and, in the future,
mobile phones, communicate with the access point and are thus connected to the Internet.
By a fully developed VoIP technology, the mobile units can be used for voice
transmission as well as data transmission.

The advantage of wireless LAN over mobile cellular systems is a higher data
transmission rate. The initial investment is a low as one can set up a wireless LAN in a
single building. Therefore a company does not have to rollout an entire network with the
supporting infrastructure. There is no need for a license either as the wireless LAN
technology operates in the free ISM band or a frequency band specifically dedicated for
the wireless LAN technology. The drawback with this technology is the short-range
coverage, the lack of solution of roaming and the lack of dominant standard. The
technology has to be developed further and a standard must be set. After that, the
technology has a potential to take over a major part of all indoor data communication and
even parts of voice communication (Jonas Stahlbage, 2000).

However, the wireless LAN technology is still won’t be a threat to the mobile
operator industry in the next few years. Thus, the competitive force due to the threat of
substitute products can be classified as weak.

Bargaining Power of Buyers

Different buyer groups within the mobile telecommunication industry in Malaysia

have differences in their bargaining power. A common way to segment this market in
Malaysia is to divide the subscribers into the following segments:
Ultra-demanding customers: mainly are postpaid users which encompasses
business people, including a significant number of self-employed entrepreneurs
such as traders, salespeople, insurance agents, and building contractors.

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Leisure users: consider their mobile phones essential to improving their quality of
life. They're looking for a service that reflects their own values, offers freedom of
choice, and provides flexibility, all at an affordable price. Many are younger
users. They can be belonging to postpaid or prepaid group.
Casual users: this group is less mobile than the first two groups. Having mobile
phones gives them convenience and peace of mind. Casual users are very
sensitive to price and will tolerate a lower network quality than the other two
groups because their need is for very basic voice communication service at very
low prices. Most of them use prepaid services.

The price sensitivity of a customer, and thus its bargaining power, is higher if the
costs of mobile services represent a significant fraction of the customer's total costs
(Jonas Stahlbage, 2000). Hence, this does not apply to the ultra-demanding customers as
they have a relatively high income which contributes to higher total living expenses. On
the other hand, the leisure users have a lower income but a high usage and therefore they
have a stronger bargaining power than the ultra-demanding customers have. The casual
users have less usage and the cost fraction is less. However, they are still very sensitive to
price and there are other factors influencing the bargaining power of the buyers. If the
product, mobile voice transmission service, is unimportant to the quality of the buyers’
life, the buyers tend to be more sensitive to price (Jonas Stahlbage, 2000). This applies to
the casual users but not to the other segments.

One factor that increases the bargaining power for all segments is the low
switching costs that the buyers face. In the mobile industry in Malaysia, the subscribers
are a bit reluctant to change operator, as they unable to retain their current mobile
number. However, operators have come out with new ideas or services to attract
competitors’ customers. For example, Maxis provide additional services to help new
subscriber who has change operator to inform friends and families in the phone book
about his/her new mobile number. This is one of the measures to lower down the
switching cost. Some operators are even offering special promotions to customers
currently using another operator in order to reduce the switching costs further.

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At the contrast, there are also ways for the operators to increase the switching
costs. Some operators offer loyalty programs that entitle the customer to additional
airtime, higher rebates on handsets and other bonuses.

The degree of standardization and undifferentiated of the product also influence

the customers’ bargaining power. The basic service, voice transmission, is standardized
and same for all operators. However, the value-added services offered by the operators
increase the degree of differentiation. A higher usage of value-added services implies a
lower bargaining power. The usage of the value-added services is different among the
segments and therefore the degree of standardization influences the segments’ bargaining
power differently.

The segments have also different levels of sophistication in terms of demand and
knowledge about the available options and offers. A high degree of sophistication implies
a stronger bargaining power. The value-added services are also related to switching cost
as it takes some energy to learn how to use them and some are personalized. If a customer
wants to change operator he would have to learn again. This factor affects the three
segments differently depending on the extent the customers use the value-added services.
The ultra-demanding segment is the most affected segment whereas the casual user
segment is at the least.

Besides that, regardless of segments, buyers are now increasingly knowledgeable

about available options and offers by mobile operators and have sufficient information to
evaluate competitive offerings, therefore their bargaining powers grows.

The above discussion adds up in a strong bargaining power of the buyers in

general, which definitely threatens the profitability of the mobile operators. There are
differences in the bargaining power among the segments where the ultra-demanding
customers have the weakest bargaining power and the leisure users have the strongest.

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Bargaining Power of Suppliers

Suppliers in this telecommunications industry are equipment and infrastructure

suppliers such as Motorola, Siemens and others. In the current stage of
telecommunications industry, as there are temporarily no threatening substitutes to the
network technologies and therefore the suppliers’ product is an important input in the
operators industry. Besides that, the differences in the vendors’ offers in terms of
financial support, service and competence increases the bargaining power of the
suppliers. Their power is often enhanced by an intimate cooperation with the operator and
this increases the switching costs for the operators.

However, suppliers in this case are less concentrated than buyers- the mobile
operators. Therefore, they are not in a better bargaining position over prices. Besides that,
the equipment is quite standardized due to the interoperability requirements. Therefore,
the operators can play the equipment vendors against each other in order to get the best
deal. Besides that, the importance of the operators as customers is the most important
factor that has decreases the suppliers’ bargaining power. The suppliers’ fortunes are
closely tied to the operators and this makes them less prone to exert power (Jonas
Stahlbage, 2000).

All of this sum up to a bargaining power of suppliers of medium strength.

Structural Profile

From the above discussion can be summarized in the following table:

Competitive Force Strength
Threat of New Entrants Weak
Intensity of Rivalry among Existing Competitors Strong
Threat of Substitutes Weak
Bargaining Power of Buyers Strong

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Bargaining Power of Suppliers Medium

The intensity of internal rivalry and the strong bargaining power of buyers are
limiting the potential profits in the industry. What concerning the mobile operators the
most is the market saturation forecasted in two years time. At the present, mobile
penetration rate has reached 58%, where 14.6 million people out of population 25 million
are active mobile phone user. However, the low threat of entry and the low pressure from
substitute products leave room for several competitors, pursuing different strategies.
Threat of New  Licensing Regulation
Entrants  Capital Requirements
 Product Differentiation
 Brand Identity
 Mobile Virtual Network
 Supplier Concentration (MVNO)
 Switching Costs  Promise of Aggressive
 Presence of Substitute Retaliation
Input

Bargaining Power Bargaining Power

of Suppliers of Buyers
Rivalry among Existing
Firms
 Rivals: Maxis, Celcom  Price Sensitivity
 Industry Growth  Switching Costs
 Industry Structure  Product Differences
 Fixed Cost  Level of Sophistication
In Terms of Options
and Offers
 Buyer Information

 Wireless LAN Threat of Substitute

Supported By VoIP Products or Services

Porter’s Five Forces Model (Source: Competitive

Strategy by Michael E. Porter, 1980)

Competitor Analysis

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After analyzing the forces that drive industry wide proof profitability, attention
will be focused on DiGi’s competitive position in terms of how it stands in relation to
other organization which competing for the same resources or customer. This maybe
done in a number of ways, but in this case, DiGi’s competitive position will be identified
by analyzing perceived value by customers in the telecommunication industry.

To obtain data regarding the dimensions of strategy valued most by telecommunications

customer in Malaysia, a research has been conducted via questionnaire to 100 mobile
users from the three mobile providers – Maxis, Celcom and DiGi. Graph above shows the
characteristics of mobile services that customers valued, arranged by their importance to
customer and also how different competitors are profiled against the dimensions which
has been identified.

Perceived Value by Customer in the Mobile

Rating Telecommunications Industry in Malaysia

5.00

4.00

3.00

2.00

1.00

0.00
n ty ce es n
ti
o
al
i ge vi rg i o es
ta u er
a r ot ic
u Q e ha v
ov S C
ro
m er
ep rk r l S
R o C e al P d
d tw al m C /
de
n e ic st
o t Maxis
ra N p
h u u
n ad
B ra C co e-
g is u Celcom
eo D al
G V
l
fu DiGi
se
U
Most Important <--------------------------------------> Less Important

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From the results of the graph, brand reputation is considered the most important
strategy that valued most by mobile users. This followed by network quality in terms of
clarity of the network, geographical coverage, customer service, call charges, discount
and promotion and lastly useful value-added services such as GPRS, MMS and others.
Maxis has built a very strong brand reputation as oppose to its competitors. Taken from a
interview between InfoComm Review with Dato' Jamaludin bin Ibrahim, CEO of Maxis,
Dato Jamal has revealed that right from the beginning, the company has focused carefully
on building a premium brand and on achieving quality in everything, from network to
services, products, and people. This strategy has certainly led Maxis to become number
one mobile service provider in Malaysia.

Celcom in the other hand, possess the most comprehensive network coverage
covering 95% of the populated areas in Malaysia (CEO Outlook 2005 – Datuk Ramli
Abbas, 2004). This is agreed by most of the Celcom users in which Celcom scored the
highest among the operators in terms of network quality and geographical coverage.

According to the graph above, it is clear that the strengths which DiGi possess are
not the dimensions valued most by customers. In recent years, DiGi has built its business
through price cutting – to woo a bigger share of the prepaid market segment. However,
DiGi also realized that this strategy can easily be copied by other competitors.
Consequently, it started to focus on marketing and re-branding. DiGi’s effort on branding
for past few years has paid off. Tan from Avenue Securities says that people see Maxis as
the market leader, followed by DiGi and then Celcom, when in fact among three, DiGi
has the smallest market share (Tee, 2004).

Besides that, DiGi is very good at introducing value-added services. Its micro-
reload and all these things enable it to reposition itself in the consumer’s mind. Yet, DiGi
is still lack of network coverage, which is not good as others. Network quality and
geographical coverage are important strategies in order to be competitive in the industry.

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Thus, DiGi is currently increased its spending to enhance its network availability, quality
and reliability so that a level playing field is created.

Nevertheless, customer service cannot be ignored at all. DiGi need to consider on

building customer service because in today’s environment, service quality is likely to
create the necessary competitive advantage by being an effective differentiating factor
(Pierce, 1999). Delivering quality service is certainly an essential ingredient for
establishing and maintaining a loyal and profitable customer base in order to survive in
this highly competitive market.
4.3 Resources, Competences and Strategic Capability

4.3.0 Critical Success Factor Analysis

Critical success factors are those things that must go right if the objectives are to
be achieved (Edwards, Ward & Bytheway, 1995). This analysis serves as the basis for an
initial planning process to focus information systems on competitive issues and as
assessment of the progress of the proposed systems and how they are meeting
competitive objectives.

Results obtained from questionnaire 2 (see Chapter 3.8 for more information
about the survey) has revealed the dimension of strategy being valued most of mobile
customers. It shown that top in the list is brand reputation, followed by network quality,
geographical coverage, customer service, call charges, discount and promotion and lastly
useful value-added services. Each of these critical success factors, arrange by its
importance will be explained below:

Brand Reputation. Brand reputation serves as an important source of competitive

advantage in telecommunication industry since the level of service offered are intangible
and consumers have a great need to overcome perceptions of risk (Bharadwaj et al.,
1993). DiGi’s growth in last two years is generally resulted by aggressive re-branding

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activities. DiGi brand has been rebuilt into one that provides quality products that are not
only innovative but affordable and practical, coupled with reliable service.

Network Quality. Mobile users admitted that they actually do concern about the clarity
of line when using the mobile phones. Excellent network quality performance would
guarantee no missing words or “ping pong” sound (EESAT, 2002).

Geographical Coverage. Geographical coverage is another factor that need emphasized

on. At the moment, DiGi is the weakest among the mobile operators to provide network
coverage. However, Morten Lundal, DiGi’s chief executive says that coverage will not be
an issue as a competitive tool from year 2006 (DiGi May Double Spending to Boost
Coverage, 2004). This is because DiGi will double its expenditure in year 2005 to boost
coverage.

Customer Service. Very often, mobile operators have ignored the importance of
customer support as a competitive strategy or even competitive advantage. Survey
conducted in this project has shown that customer do valued operators who can provide
quality customer service. Telecommunications companies not only need to take care of
its call center and distribution outlets, online electronic service cannot be neglected too.

Call Charges. DiGi is leading the pack in terms of pricing. Its strategy is to widen access
by making mobile phone ownership more affordable. To achieve that, DiGi has offer 1
sen per SMS, 15 sen per minute call charges and 10 sen per MMS to its subscriber.
However, other players in the field has retaliate DiGi’s move. Currently, Maxis is
offering 3 sen per SMS while Celcom is offering 2 sen per SMS. This strategy is
certainly not applicable in long term perspectives as continuous price war will hurt the
three mobile operators in terms of slow growth in revenue despite the increase in number
of subscribers.

Discount / Promotion. There are all kinds of promotional activities conduct by the
mobile operators. Maxis, for instance, giving movie tickets away to its customer.

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Discount and promotion are marketing activities to gain awareness, attract new customers
and also part of the branding approach. If this strategy is utilized well, companies can
increased their subscriber base and enhance ARPU.

Value Added Services. DiGi believes that new innovative enhancements will spur
further growth (Foo, 2005). Consequently, DiGi has constantly rolled out new, exciting
and innovative features such as data services to attract more subscribers with the aim of
capturing larger slice of market share. Yet, this strategy must be monitor carefully.
Customer’s requirement and needs must take into consideration first and these new
products or services must be ensure that they meet users’ requirement. This is because,
users need innovative products and services that suits their requirement, not new products
and services that they don’t need them at all.

4.3.1 SWOT Analysis

A SWOT analysis can be a useful way to summarize the relationship between key
environmental influences, the strategic capability of DiGi and hence the agenda for
developing new strategies (Johnson & Scholes, 1999). The aim is to identify the extent to
which the current strengths and weaknesses are relevant to, and capable of, dealing with
the changes taking place in the business environment.

Strengths

Undivided customer focus and attention. This is one of the key strengths that DiGi
owns. DiGi unfailing to put efforts into learning about customer, understand what they
need and want and then give them simple, user friendly products and services to meet
these needs.

Product and Service Innovation. DiGi is also well known for its consistent market-
leading product and service innovation. For example, DiGi has become the first cellular

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player in the region to launch enhance voice based SMS dubbed BubbleTalk and also
LifeLogger, a platform for subscribers to submit messages and photos on the internet
through MMS. Its strategy is to regularly roll out new, exciting, innovative products, as
well as to provide enhanced features to its products to attract more subscribers (Voice
Messaging Boost for DiGi, 2005). DiGi’s effort of harnessing the power of innovation
has reflected in being ranked second as a company that is innovative in responding to
customer’s needs in the Eastern Economic Review’s annual company survey, the Review
200: Asia’s Leading Companies.

Good Branding. Due to its innovative marketing strategies and product launches, DiGi’s
brand appeal has accelerated in the past few years. From a customer standpoint, people
see Maxis as the market leader followed by DiGi and then Celcom, when in fact among
the three, DiGi has the smallest market share.

Leverage On Telenor’s Resources and Competence. Telenor is the largest provider of

telecommunications services in Norway, and has substantial international mobile
operations (About Telenor, 2004). Telenor Mobile has interests in 12 mobile operators in
12 countries which included Norway, Ukraine, Hungary and others. With its experience
in international mobile services, Telenor is capable to provide an injection of fresh ideas
into DiGi from a global perspective. In addition, with Telenor’s global connection,
DiGi’s internal product development will be enhanced and to be on par with international
standards. DiGi also has the opportunity to share wealth of competency with Telenor
subsidiaries globally. (CEO Outlook 2005 – Morten Lundal, 2004).

Leader in Prepaid Market. DiGi currently take a leadership role in setting the pace in
the prepaid market. It is the first to launch prepaid services and until now it still is
number one in prepaid segment. Prepaid users accounted for 70% of total mobile
subscribers in Malaysia

Weaknesses

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Revenue Concentrated in Prepaid Segment. According to Tee (2004) in her report

“DiGi Sets A New Bar”, 95% of DiGi’s subscribers are prepaid users. DiGi tend to place
a lot of attention on prepaid customers by constantly rolling out creative and innovative
prepaid based products and services. However, average revenue per user (ARPU) for
prepaid are much lesser postpaid. High concentration in prepaid than postpaid will cause
revenue to be lesser.

Small Sized Compared to Competitors. DiGi is known as country’s smallest cellular

player. Compared to Celcom and Maxis who have deep pockets, DiGi have to spend
money and energy wisely and there is certainly no room for mistakes. Being “small” is
certainly a major disadvantage.

Opportunities

Growing Demand for Data-Enhanced Service. Mobile technology has catapulted from
plain voice-based services to more advanced data–enhanced services. Users have
therefore become more demanding of quality of voice and data-enhanced services (CEO
Outlook 2005 – Morten Lundal, 2004).

Malaysia are approaching a trend where mobile devices meet the tremendous resources of
the internet, creating a new dimension in communications. The convergence of IT and
mobile technologies on mobile devices offers customer seamless and uninterrupted
connection to services and content independent of place, time and pace. (CEO Outlook
2005 – Morten Lundal, 2004).

Changes from a regulatory perspective. We will probably see the introduction of many
new industry policy statements such as the emergence of number portability and the
general code of practice. This will tear down the barriers that restrict mobile customers
from enjoying mobile services the fullest, thus positively affecting market movement
(CEO Outlook 2005 – Morten Lundal, 2004).

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Threats

Consolidation of Two Major Industry Players. The consolidation of two industry

player – TMTouch and TimeCell has results in leaner industry structure. The combined
spectrum of merging companies, definitely hurt DiGi in the long run. Now, the mobile
telecommunications landscape in Malaysia can be viewed as dynamic and competitive
with three ambitious players.

Market Saturation. Industry analysts are expecting the saturation point for mobile
telecommunication industry will be around these two years. Morten Lundal, chief
operating officer of DiGi agreed to the industry forecast, says that he was cautious about
the prospects of the industry in coming years. The higher growth experienced year 2004
could indicate the industry was edging closer towards maturity (Sidek Kamiso, 2005). He
believes the mobile phone penetration rate has reached 65% and that the market would
likely mature as the rate gets closer to 75%.

Rolled out of 3G Services. Another interesting trend in the mobile industry is the rolled
out of 3G services. For time being, only DiGi and Celcom have opted for 3G licenses.
DiGi in other hand planned to become Mobile Virtual Network Operator (MVNO).

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4.3.2 Value Network

To describe and analyze a telecommunication company like DiGi by using value

chain model deemed to be inappropriate and does not really fit the reality of its industry
sector. Difficulties have been encountered in categorizing activities and drawing useful
conclusions about strategy because DiGi fundamentally create value for its customer in a
different way that value chain actually describes.

Recently, Øystein Fjeldstad and Charles Stabell of the Norwegian School of

Management identified two new models and so propose a set of three business models for
producing and delivering value to customers: value chains, value shops and value
networks. (Note that this is not the same as the recent popular usage of the term ‘value
network’ to denote a group of companies, each specialising in one piece of the value
chain, and linked together in a virtual way to create and deliver products and services.)
Differentiation between these three value configurations is important because each
utilises a different set of core activities to create and deliver distinct forms of value to
customers, and so has different priorities in its management agenda.

As contrary to value chains that compete in production economy, where the

emphasis is on selling as many products as possible with the highest possible margins to
the right customer segments, DiGi compete in a network economy, where value is created
by linking customers together through the contract set and infrastructure. A Value
Network company competes on the size of its network, the degree to which the nodes
(mostly, customers) have exchanges with each other, and the types of exchanges that can
be organised. In other words, the value network company competes by balancing scope
of network with the range of services (Fjeldstad & Andersen, 2003). Their focus is on
providing services, managing relationships and operating the network infrastructure.

Value network has primary and secondary activities too. What makes value chain
and value network different is value network has “Promotion and Contract Management”,
“Service Provisioning” and “Infrastructure Operation” as primary activities. These

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activities are performed and developed parallel – without sequence between actions. The
primary activities are shown below:

Promotion and Contract Management recruits members and manages contracts that
determine member privileges and obligations, e.g. size of credit lines, or bandwidth and
the cost associated with use (Foundation Strategic Innovation Report, 1998). DiGi offers
different plans, cater for different customer needs. Customers who reluctant to pay for
access fees, registration fees and deposit and can choose prepaid plan; those who favour
subscription can choose either DiGi’s horizon premier or horizon optimum from the
postpaid plans. Business and SMI customers can sign up for DiGi’s discover business
solution plan which offer different price plans. All activities that manage pricing
structures, subscription plans, advertising and promotion are under promotion and
contract management.

Service Provisioning involves connecting people in the network and then collecting
payment from them for connecting them. It assists customers in making the exchange, be
it of money, information or goods (Fjeldstad & Andersen, 2003). DiGi bills its
subscription plan’s customer by measuring customers’ use of the network capacity in
terms of volume and time. Prepaid customer can check their balance by calling DiGi
customer service or other options. To reload, prepaid customers can use DiGi’s reload
coupon, using Talktime Transfer service or visit any store which display “Flexi e-load”
sign.

Infrastructure Operation maintains access points and basic capacity. In order for
mobile phones to send and receive calls, the mobile phone system requires a transmission
network which consists of a series of base station which equipped with its own radio
antenna. These base stations or can be known as towers come in a variety of shapes and
sizes (Indramalar, 2005). Telecommunication companies such as DiGi required to build
and maintain base stations. Besides that, DiGi also need to decide whether to build as
many base stations in rural and remote areas as in cities due to its low population density.

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On the other hand, secondary activities in value network are the same with other
two models. Secondary activities in DiGi involve:

Firm Infrastructure includes activities such as finance, accounting, legal affairs,

information systems and payroll. In a regulated environment in which DiGi operates,
legal department is as critical to success as other primary activities. Understanding
legislation and government regulations is just as important as pricing new subscription
plan.

Human Resource Management involves hiring, training and supervising personnel who
responsible for promotion and contract management, service provisioning and
infrastructure operation. DiGi always ensure adequate training is provided to its customer
support staff in order to offer a consistently high standard of service delivery.

Technology Development includes research and development to deliver wider ranges of

services to DiGi’s customer and also expansion activities to cover more underserved
areas in Malaysia. With technology development, DiGi has introduced Malaysia's first
high speed mobile network in the Klang Valley, offering Enhanced Data Rates for GSM
Evolution (EDGE) enabled 3G products and services, allowing customers to enjoy
advanced mobile communications' technology.

Procurement refers to purchasing the necessary inputs, resources or components to

mediate exchanges between customers and managing relationships with them. The main
telecommunication equipment which is vital to the mobile network is radio antennas.
Antennas ensure signals can be sent and receive from mobile phones in order to connect
with local phone network.
This Value Network serves as a tool to aid DiGi to understand how value is
created in the company and to better understand this changed world. According to
Fjeldstad and Stabell (1998), companies under value network must excel at matching
customers and multiplying connections between them. Therefore, the management

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agenda for DiGi to stay competitive in the market is to focus on such imperatives as
utilising the network infrastructure fully, maintaining the exclusivity of the network,
devising innovative service provisioning and pricing, assessing long-term value of
customers and identifying clusters and connections between customers and network
layers. Below describe more about what DiGi currently doing or has to do in order to
create value.

Who to bring into the network (and remove from) to enhance its value?
DiGi must understand how its customers add value to each other, and identify which
customers to bring in to the network and which to exclude. Profitable customers are those
that are more connected than others, in other words, those who utilize the additional
services provided such as EDGE, GPRS, Friend Finder and others. By recruit these
“connected” customers, barrier that network effects represent in the initial roll out of a
new service will be overcome because it makes service valuable earlier than it would
otherwise be (Fjeldstad & Andersen, 2003).

Who are the good users of the network and how to encourage them to use the network
more?
Optimising utilisation of the network infrastructure is a key economic imperative,
achieved by both building scale and encouraging the right type of usage (Foundation
Strategic Innovation Report, 1998). Therefore, to encourage good use of the network,
DiGi has offer cheap rates to encourage off-peak calls.

How to identify new opportunities for value-added exchanges between customers?

A crucial opportunity for networks to increase revenue is to move beyond generic
exchanges between customers and identify unique opportunities to bring them together or
to increase the value of their exchanges (Foundation Strategic Innovation Report, 1998).
To gain this vital knowledge, DiGi must monitor and understand customer behaviour.

Who else is each customer connected to and how to exploit that?

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The more network companies know about the relationships between customers and their
network usage patterns, the more easily they can find opportunities to add new value.
DiGi has introduced Friends and Family to offers special discounts to customers calling
the numbers they dial most often. DiGi’s customer can now enjoy 1 sen per SMS and 15
sen per minute calls to those members under “Friends and Family”.

What services can ride on the network?

DiGi understand the fact that the more services add to their networks, the more value it
has for customers. Hence, DiGi has been innovative all this while by creating new
features and new services to attract and retain customers. Examples of services are
LifeLogger, Friend Finder, BubbleTalk and others.

Infrastructure

Human Resource Management

Technology Development

Procurement

Network Promotion and

Contract Management

Service Provisioning

Infrastructure
Operation

Value Network (Source: Configuring Value for

Competitive Advantage by Fjeldstad and Stabell, 1998)

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