Instructions and the case study are attached. Please read the case carefully and synthesis the information and be sophisticated in your analysis. Demonstrate your skills
Competitive advantage is critical for any company anticipating success and competitiveness in its industry. For Omnitel, the focus on customer service was the anticipated competitive advantage, which would differ from its main competitor, Telecom Italia Mobile (TIM). The competitor provides impersonal services, and customers wait for long hours to receive benefits, have their queries answered, or problems resolved. To be different, Omnitel marketed itself as a customer-friendly choice using staff who would serve customers effectively and respond to their queries and concerns within the shortest time possible. The company conducted a market study, which affirmed satisfaction with Omnitel’s services and dissatisfaction with TIM’s customer service. Customers affirmed that they liked how Omnitel’s staff respond to their requests. Besides, the company anticipated getting an average churn rate (a cost driver in the telecom industry) of between 10 and 15%. The cost advantage would emanate from reducing the churn rate, hence, operational cost to achieve market efficiency. The savings from reducing the operational cost will be useful for growth and expansion goals. Finally, Omnitel would create an agile and market-sensitive alternative in the market to reduce the power of monopoly.
Omnitel failed to perform as expected since by May 1996, it had only 4% market share and attracted 180,000 customers. The company’s market share was not improving regardless of the customers’ view of its services as satisfying. According to Users and Prospects (exhibits 6 & 7) in the case study services ranked 6 of 8 and 6 of 7 in relative importance. Other dimensions in the study were activation charges, call tariffs, monthly fees, and special tariffs, which clients viewed as a tax. Besides, Omnitel failed to differentiate itself from the competitor regarding its pricing structure and distribution network. The vision of Omnitel was to make a cell phone similar to the wristwatch as opposed to TIM’s ‘Status Symbol’ strategy. While the company wanted to change the game, it was the same model as TIM, which made it impossible to appeal to the customers differently to gain a huge market share.
Omnitel’s management should comprehend economics to ensure profitable operations. According to the economics of LIBERO, the company would eliminate monthly fee; one-time Lit. 10,000 set-up charges; no Handset subsidiaries and no increase in dealer incentives. Besides those areas, the company would also use tariffs of Lit. 1,595/195 for peak/off-peak, which would be a rise of 4.7%/14.7% over the previous rate structure. Nonetheless, the elimination of monthly fee of Lit. 10,000 meant that the subscriber-based revenue would reduce by Lit. 3,427 (90,835 verses. 84,262). The company would experience a loss in revenue unless it increases its subscriber base by 6,800 subscribers (3.8%). In addition, Bona anticipated expenditure of Lit. 40 billion on an ad campaign, which means that the company would have to grow its subscriber base by 36,700 to offset the cost. The firm would have to increase its subscribers to 223500 (24%) to cover the loss of revenue and cost of the ad campaign. The goal is attainable considering the anticipated growth in subscriber base in Italy to more than 8 million by 1998.
Companies in Europe incentive their customers to change to a new more advanced handset upon expiry of their contract. First, the cell phone market revolves rapidly, which explains the churn rates in the region. The highest rates are in the United Kingdom (28%) and Sweden (20.5%), the two of which provide subsidiaries to their customers. While those with the lowest, such as Finland (12), do not. Secondly, the churn rate increases in areas, such as the UK and Finland, where dealers are incentivized to poach customers. Thirdly, competition increased through liberalization of the telecom market. Fourthly, the cost of switching customers could be relatively low or high incentives to change. Finally, the industry provides considerably undifferentiated products, which minimizes brand loyalty as competitors replicate tariff models.
Considering the use of LIBERO economics, the churn rate for Omnitel will most likely reduce while that of TIM will increase. Omnitel will target customers who want to avoid unnecessary costs and fees and dissatisfied with the services of TIM. As new customers come and the company retains the current ones, the churn rate will most likely drop. Besides, the company will use an aggressive advertising campaign to attract new customers and grow market penetration. Since the denominator (average customers) will rise above the numerator (lost customers), in Italy, the churn rate will most potentially decline rapidly. Nonetheless, if TIM creates a new strategy to counter the LIBERO, it might pouch customers from Omnitel and increase its churn rate once again.
Consumer research plays a vital role since it shows the company what customers need depending on the segment. For example, the Omnitel findings could reveal the segment that is interested in the fee elimination and the one interested in effective customer service. Since Omnitel desires to gain a more significant market share than TIM, the research provides details about the differentiation strategies that it could use to gain more customers and reduce the churn rate. The research will also provide information regarding the relative strength of the competitor to counter their strategy. Since Omnitel failed during the initial years due to replication of TIM’s model, the findings of the study should indicate what the company needs to do differently.
The LIBERO model could lead to a price war with TIM, which is its direct competitor. However, the management could avoid the war through segmentation and pricing innovation. Since Bona and Della Valle understands the current pricing strategy that TIM uses, it is easy to avoid replicating the structure to have its own innovative pricing strategy. Market segmentation would help the company to target differently using focused or targeted prices for each market segment. Considering that the company is using the LIBERO model, it should have a differentiated pricing strategy to achieve market penetration and build customer loyalty.
If I were Fabrizio Bona, I would make critical changes to LIBERO to make it more profitable and competitive for the company. Instead of eliminating the monthly fee and charging full price for a cell phone, I would offer a subsidized handset and have customers sign a fixed contract for a monthly fee. The change will help the company to have a fixed income for the period of the contract and eliminate the possible price war with TIM. The change will also increase the firm’s customer base by building customer loyalty. The company will grow its revenue gradually by having customers for an extended period to achieve competitiveness and productivity.