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“Divide and Conquer!”
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“Divide and Conquer!”

Do you control your costs or do they control you?

The global telecommunications industry has reached a more mature life cycle stage. Many countries have decided to deregulate their telecommunications markets inviting increased competition and lower prices to the benefit of consumers. Nevertheless telecommunications operators still need to work hard on marketing differentiation and more effective cost management to fight adverse profit and cash flow trends. This article outlines how cost management has evolved in the last years and shows a method that is well on its way to become an accepted practice for many telecommunications operators.

The intensity and effectiveness of cost management, in any market, typically correlates with the level of liberalization and maturity. Why? Well, as we know from Michael Porter and ­colleagues, liberalized markets open the door for more competitors, all driven by the idea of creating financial wealth for their shareholders. In order to create wealth, every competitor will seek to gain more market share to the detriment of the others by offering more and better services at ever decreasing unit prices. As the industry matures, the average industry margin will shrink and force the least powerful competitors to exit the market or create a new market. As a result, the more liberal and mature a market is, the more important it is for market competitors to understand their costs and their ability to manage them.

Cost management in the telecommunications industry has become more important in recent times

The telecommunications industry is no exception to that rule. However, for a number of reasons the industry has only become more liberal and mature in the last decade or so. First, the ­telecommunications industry has seen stricter regulations and stronger state interventionism for a much longer ­period than most other industries since communications services are thought of as very sensitive by most governments. Second, despite governmental efforts at increasing the level of competition, many markets are split up by only two or three competitors who are very cautious not to start a price war. Third, the industry is very resource-intensive and thus blocks many players without adequate financial support from entering the industry. “Lighter” business models have long been prevented as regulatory initiatives have not gone far enough (e.g. Local Loop Unbundling). Fourth, the technical and regulatory ­nature of the telecommunications industry has delayed the strong ­international competitive influence as is typical in other industries. Fifth, some parts of the telecommunications industry are fairly young and are only now entering a more mature life cycle stage (e.g. mobile phone business). For precisely these reasons, the role of cost management in the telecommunications industry has become more important in recent times.

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