Banzhaf, Johannes and Som, Ashok

Case 22 : Vodafone: Out of Many, One

Banzhaf, Johannes and Som, Ashok, (2009) "Case 22 : Vodafone: Out of Many, One" from Ireland, R.
Duane;Hoskisson,Robert E. & Hitt,Michael A. Hitt., The management of strategy : concepts & cases.
pp.263-279, Mason, Ohio: South-Western Cengage ©

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 Case 22
Vodafone: Out of Many, One1

Johannes Banzhaf, Asok Som

ESSEC Business School

financed a larger sum for the bid, but major shareholders
Abstract had been explicit that anything beyond an offer of $38 bil-
In 2006, Vodafone Group PLC was the worlds largest cell lion would be detrimental to their interests.3 Vodafone’s
phone provider by revenue. Since 1999, Vodafone had offer had forced Cingular to increase its bid from $30 bil-
invested US$270 billion (€225 billion) mostly in stock, lion to $41 billion, meaning that it might take Cingular
building an empire spanning 26 countries. It controlled many years to digest the merger (refer to Exhibit 1 for
cell phone operations in 16 countries and had minor- share prices of Vodafone since 1989). More promising
ity stakes in companies in 10 other countries. This case and cheaper ways to enhance its presence in the world’s
traces the history of Vodafone’s growth and its capability largest economy with a huge growth potential might also
to transform and adapt itself to the dramatically chang- come Vodafone’s way.
ing market environment in the dynamic telecommunica- Sarin knew he could not afford to alienate Vodafone’s
tion sector. The case analyzes Vodafone’s growth through shareholders by pursuing growth at all costs. However,
acquisitions and the subsequent integration of acquired Vodafone’s current hold in the U.S. market (the noncon-
units with a key focus on how it manages to coordinate trolling stake in Verizon Wireless but the only one in the
its businesses on a global scale. United States) was not comforting either. The relation-
Arun Sarin reclined in his seat in a first-class com- ship with the other main shareholder, Verizon, was quite
partment en route to London. The CEO of Vodafone, strained, management had refused to adopt the single
the worlds largest mobile telephone operator, began re- Vodafone brand, and had insisted on using the outdated
flecting on the events of the last few days, in particular American CDMA network standard instead of the group-
Vodafone’s decision to exit the Japanese market by sell- wide GSM/UMTS standard.4
ing Vodafone’s stake in Japan Telecom to Tokyo-based Being the CEO was definitely not an easy job, with
Softbank in a deal valued at $15.4 billion, confirming so many things to consider and the shadow of his larger-
that after the sale the company would return $10.5 billion than-life predecessor Sir Chris Gent looming over him.
to its shareholders. Vodafone had trailed behind NTT But these reasons were exactly why he was being paid
DoCoMo and KDDI since its entry into Japan in 2001, £1.2 million a year as base salary.5
thanks to fickle consumers, the lack of a low-end tier in
the segment, and the challenge of coordinating terminals
and technologies across borders. The time had come to Company Overview: Vodafone
make a hard decision, and Sarin had made it. Group Plc
It was not the first time he had been faced with
In 2005, Vodafone was the leading mobile phone
such a decision. Two years earlier Vodafone had made
operator in the world. It had more than 150 million cus-
© Don Hammond/Design Pics/Corbis

headlines in the financial press with its failed attempt

tomers worldwide in 26 different countries.6 Vodafone
to take over the U.S. mobile operator, AT&T Wireless.
employed approximately 67,000 people around the world
After a long takeover battle, Vodafone’s American rival
and had its headquarters in Newbury, England. Being
Cingular Wireless had offered $41 billion in cash for
AT&T Wireless.2 At the time, Sarin had not been sure listed on the stock exchanges of New York (ticker: VOD),
whether to regret the failed takeover. He could have easily London, and Frankfurt, it boasted a market capitalization

This case was written by Johannes Banzhaf, under the direction of Associate Professor Ashok Som, ESSEC Business School. It is intended to be used as the
basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.The case was compiled from published
sources and generalized experience. © 2005 & 2006, A Som, ESSEC Business School. No part of this publication may be copied, stored, transmitted, reproduced,
or distributed in any form or medium whatsoever without the permission of the copyright owner.

263
 264
Case 22 ● Vodafone: Out of Many, One

of US$165.7 billion7 making it the eleventh most valu- from Racal Electronics and became an independent
able company in the world. In FY2003 it suffered a loss company, with a different name—Vodafone Group Plc—
of US$15.5 billion (on revenues of approximately US$48 which was listed on the London and New York stock ex-
billion). This figure was the result of large write-downs changes. Corporate legend has it that the “founders had
on the goodwill of acquired companies and huge amor- the foresight to realize that people would do more than
tization charges related to the acquisition of other mobile talk over their phones and so created a future-proof name
operators like Mannesmann D2. These charges amounted that would embrace both VOice and DAta mobile com-
to US$18.8 billion.8 In fact, if one excluded these extraor- munication: Vodafone.”12 Due to its early start, it man-
dinary noncash charges, Vodafone was profitable, as indi- aged the largest mobile network in the world by 1987.
cated by its gross margins and its capacity to generate huge In 1992, Vodafone pioneered again when it signed
positive cash flows: The cash flow from operating activities the world’s first international “roaming” agreement with
(before capital expenditure and other outflows) amounted Telecom Finland, allowing Vodafone’s customers to use
to £12.3 billion (approximately US$22.7 billion) in finan- their phone on a different network while still being billed
cial year 2004, while free cash flow exceeded an unbeliev- in their home country. Four years later, Vodafone be-
able £8 billion (US$15.7 billion—refer to Exhibit 2 for an came the first operator in the United Kingdom to offer
overview of Vodafone Group’s financials).9 Vodafone had so-called prepaid packages that do not require the cus-
been consistently paying dividends and had recently an- tomers to sign a long-term contract.
nounced a £3 billion share repurchase program.10 Christopher Gent succeeded Sir Gerald Whent at
the helm of the company on January 1, 1997. Gent was
History of Vodafone11 responsible for shifting Vodafone’s growth strategy from
organic to aggressive external, orchestrating its move to-
The company was formed as Racal Telecom Limited in ward globalization. In the same year, Vodafone’s 100th
1984 as a subsidiary of Racal Electronics Plc, a British roaming agreement was signed.
electronics manufacturing company. It successfully bid In early 1999, Vodafone signed up its 10 millionth
for a private sector U.K. cellular license in 1982 and customer, 5 million of them in the United Kingdom.
hosted the first-ever mobile phone call in the United Vodafone’s growth reached the next level when it suc-
Kingdom in 1985. The customer base stood at 19,000 on cessfully merged with AirTouch Communications Inc.
December 31,1985. of the United States—a $61 billion deal. Vodafone re-
In October 1988, Racal Telecom Ltd. went public by named itself briefly into Vodafone AirTouch and more
offering approximately 20 percent of the company’s stock than doubled its customer base to 31 million custom-
to the public. Three years later, it was fully de-merged ers worldwide (September 1999), having operations in
 265

Case 22 ● Vodafone: Out of Many, One

24 countries across five continents.13 In the late 1990s In a move that sent Shockwaves through corporate
and the early new millenium, stock markets were steer- Germany in 1999, Vodafone launched a €100 billion
ing toward a bubble, with “mobile” being the latest hype takeover bid for Mannesmann in order to get hold of its
and insane sums being paid for mobile operators and D2 mobile phone business, the private market leader in
the licenses to operate mobile networks. At the end of Germany. A bitter struggle for Mannesmann’s indepen-
November 1999, the company had a market capitaliza- dence ensued, but finally the board of Mannesmann gave
tion of approximately £90 billion. Vodafone’s North in and the deal was closed in 2000: €190 billion paid in
American branch was integrated into a new entity stocks made it Germany’s largest takeover ever.15 The cus-
branded Verizon Wireless together with Bell Atlantic’s tomer base was once again doubled and Vodafone found
mobile business, with Vodafone retaining a 45 percent itself among the 10 largest companies in the world in terms
stake in the new venture. Verizon Wireless was the larg- of market capitalization. The mobile telephony boom
est mobile phone operator in 2003 in a fragmented North reached its peak and former national providers (such
American market (36 million customers, 24% market as Deutsche Telekom, France Telecom, Telefonica) em-
share as of September 30, 2003).14 barked on a buying binge that brought them on the verge
 266

of bankruptcy, when the bubble finally burst (Deutsche market strategies. Most of the companies like Hutchison,
Case 22 ● Vodafone: Out of Many, One

Telekom shares fell from more than €100 to €15). Mannesmann, Airtouch started much smaller, like a start-
The year 2001 saw a consolidation and restructuring up, did not have any history as an operator and the par-
within Vodafone, which reported 82.9 million customers ent company was usually a trading company. Vodafone
for the financial year ending March 31,2001. It grew at a acquired Mannesmann, Airtouch and the rest of the small
somewhat slower pace than in previous years, about half players. FT acquired Orange. Docomo was restructured
of it generated by internal growth and the other half by back into NTT.
acquisitions (e.g., acquiring Ireland’s Eircell and increas- Unlike many of its competitors, Vodafone used shares
ing its stake in Spanish AirTel Movil to 91.7%). However, for its acquisitions. This practice might be one of the rea-
slower growth still meant that Vodafone had added ap- sons why Vodafone emerged from the telecom crisis rela-
proximately 20 million customers by the end of the year tively early and could concentrate on growth again, while
2002. At that time, the company board announced that virtually all of its competitors were still occupied in trying
the Indian-born American Arun Sarin would take over to reduce their debt burden (Deutsche Telekom, France
the CEO position on July 30, 2003. Telecom, MM02, KPN, etc.).16 However, Vodafone’s
No large scale acquisitions took place in 2002 and shares had shown only lackluster performance in prior
2003, but instead a host of smaller deals and partnership months, which meant that Vodafone increasingly had
agreements were made. In February 2004, Vodafone’s bid to use hard cash to increase its holdings in subsidiaries
for AT&T Wireless in the United States failed against a or for new acquisitions. Because Vodafone did not want
higher offer by Cingular, clearly indicating that Vodafone to compromise its good credit ratings (by industry stan-
had all but renounced its growth ambitions. dards) under any circumstances, it slowed down on ac-
quisitions and focused on internal growth for the preced-
ing two years (refer to Exhibit 3 for Vodafone’s strategic
Growth at Vodafone intent).
Traditionally growth at Vodafone was by acquisitions Vodafone had acquired other businesses along with
rather than organic. It had a track record in takeovers the mobile phone business as in the case of Japan Telecom
and their subsequent successful integration, Germany’s and Mannesmann, where it got ownership of fixed line
Mannesmann being the most prominent example. operations. Vodafone had been always explicit in its con-
Branded as “Vodafone Germany,” Mannesmann was centration on its core business of mobile telecommunica-
the group’s most profitable venture (in terms of EBIT, tions. Usually it started looking for potential buyers for
which surpassed £2 billion in 2003) and its largest the other business. In the words of Alan Harper, Group
subsidiary. On the mobile telephony acquisition strategy, Strategy and Business Integration Director,
Alan Harper, Group Strategy and Business Integration
We had been always mobile focused. In 1995, when I
Director, commented,
joined Vodafone, it was mobile focused. It has a turnover
In the past 10 years there had been a sea of change in the of £8 billion, it was the third largest mobile operator in the
evolution of the telecommunication industry. The rule in UK and had 80% business in the UK. Today, in 2005, we
this industry has been “Hunt or Be Hunted” The strat- are still mobile focused, with a turnover of £100 billion,
egy of the global players had been mobile-centric, multi- biggest in the world and only 10% in the UK

.
 267

Vodafone balanced its investment options by taking instill an entrepreneurial spirit inside Vodafone Group

Case 22 ● Vodafone: Out of Many, One

its time to ensure a good investment and disinvestment companies, and in this respect we do not behave as a tra-
option. For example, it sold Japan Telecom’s fixed line op- ditional telephone company. Since we differ from being
erations in 2003 for ¥261.3 billion (£1.4 billion)17 while it a traditional company, the cultural alignment of people
reinforced its long-term commitment to Japan in 2005 by working for Vodafone is a key issue in sustaining this
making a further investment of up to £2.6 billion. Arun challenger and entrepreneurial mind-set. To focus on this
Sarin pointed out, cultural alignment, we give autonomy to the local entity
Our transactions in Japan will simplify the structure, confirm and reiterate that the local entity did not join a global
our commitment to the Japanese marketplace, and enable us company like IBM or HP. The local entity has to work in
to deliver on the changes needed to improve our position. a matrix structure and keep alive the “challenger mind-
set” on fixed line telephony and other incumbents, chal-
Arcor was not divested and was still part of Vodafone lenge the status quo every day, and evolve by being local
Germany as of 2005. Arcor might even serve as a stra- entrepreneurs.
tegic weapon to cannibalize on incumbent Deutsche
Telekom’s profitable fixed line business.18
Since mid-2001, Vodafone had entered into arrange- Branding, Identity, and Pricing
ments with other network operators in countries where it After a successful bid for a takeover target, Vodafone
did not hold any equity stake. Under the terms of so-called followed a diverse strategy in terms of branding, creat-
Partner Network Agreements, Vodafone cooperated with ing its identity and its own pricing models. Alan Harper
its counterparts in the development and marketing of explained,
global services under dual brand logos. By 2003, Vodafone
had extended its reach into 11 other countries, thus estab- We play different models of creating Vodafone’s identity
lishing a first foothold in these markets.19 Such an agree- in the market. Which way we adapt depends on a num-
ment was a classic win-win situation: Vodafone not only ber of factors and considerations, such as the strength of
gained new market insight with little risk, but at the same the local brand, the prevalent company culture and the
time was able to assess the quality of the partner in or- general fit between Vodafone’s processes and the acquired
der to identify possible takeover targets, while the partner business’ processes. But frankly, at the end of the day, it
benefited from Vodafone’s unique marketing and techno- comes down to a question of management judgment. For
logical capabilities. example, in New Zealand when we acquired Bellsouth,
Vodafone’s acquisition strategy always followed we changed Bellsouth almost overnight to Vodafone New
a similar pattern: First, the number one or two player Zealand. Similarly in Portugal, we undertook an overnight
within a national market was identified, while it carefully integration of Telecel to Vodafone Portugal. Telecel trans-
avoided acquiring the incumbent mobile operator that formed into Vodafone Portugal and became challenger to
was linked to the state-owned telecom monopoly (like the traditional PTT. Whereas in Italy, when we acquired
T-Mobile, which was the mobile division of Deutsche Omnitel, it took us 2.5years to change Omnitel to Omnitel
Telekom, or Orange, a business unit of France Telecom). Vodafone. Onmitel colours were Green and White and
It seems that Vodafone feared a bureaucratic inertia of we could not change it to Vodafone Red immediately. It
these organizations, and would rather focus on more was because Omnitel had a strong brand image, very well
flexible, entrepreneurially minded challengers (with known and we had to be very cautious during the transi-
Mannesmann’s D2 once again being a good example, or tion. The market would never have accepted it. The same
France’s SFR) that would challenge the incumbents in was the case with DT in Germany.
different local markets. Referring to this strategy Alan
Harper explained, The management judgment of fast or slow rebrand-
ing turned on the customer and organizational re-
Our vision has been to leverage scale and scope benefits, sponse of the acquired market and acquired company.
reduce response time in the market, and ensure effective Usually the national brand was kept alive for some
delivery to customers. This we have achieved by collecting time until the dust of the takeover battle had settled.
or acquiring national (operational) companies and gave Vodafone then carefully launched its phased rebrand-
them a mission of a “challenger company” in each of the
ing campaign to bring the new subsidiary under the
national markets. For example, Vodafone with SFR is a
“Vodafone” umbrella. Usually, they added “Vodafone”
challenger to France Telecom in France, Vodafone UK is
to the original corporate brand. To better coordinate
a challenger to British Telecom in the UK, and Vodafone
these branding efforts, Vodafone appointed David
Germany a challenger to Deutsch Telecom in Germany.
Haines, a former Coca-Cola manager, as global brand
Together with this challenger mind-set, we nurture and
director.20 Davin Haines explained,
 268

For example “D2” became “D2 Vodafone.” Within a We have rededicated ourselves to delighting our customers
Case 22 ● Vodafone: Out of Many, One

year, Vodafone modified the logo to its typical red color because we believe this is the foundation for our continued
and changed the order of company name, for example success. We recognise that every customer interaction pro-
“D2 Vodafone” to “Vodafone D2.” During the last phase, vides another opportunity to win loyalty and that’s why we
the original “national” name was eliminated completely continue to raise standards on the quality of customer care
and only the global brand and logo remained. This pro- in our call centres and our stores and the quality of our
cess could take more than two years and usually passed networks. Key to delighting our customers is our ability to
almost unnoticed by the customers, who got accustomed deliver superior voice and data services according to differ-
to the new logo due to the extensive branding cam- ing customer needs.
paigns, often in conjunction with the launch of a new
Vodafone was not immune to the pricing policies
global product (like Vodafone’s Mobile Connect Card,
of its competitors, which meant that it lowered its tar-
enabling e-mailing and Internet access via a laptop and
iffs whenever the price differential became too great
the mobile network) or service (e.g., Vodafone live! mo-
and the new subscriber market share dropped below
bile Internet portal). Following this pattern, Vodafone
a critical level. Given its size and healthy finances, it
Omnitel in Italy and J-Phone Vodafone in Japan be-
could usually weather price wars and simply waited
came a single brand in May 2003 and October 2003,
until the aggressive player lost its thrust. Appendix I
respectively.21
explores in some detail the role of fixed costs and their
Vodafone launched its first truly global communica- impact on pricing in the mobile telecommunication
tions campaign in the beginning of August 2001 to re- market.
inforce its brand awareness and a global brand identity.
Arun Sarin reiterated,
Throughout the past few years, Vodafone has done a ter- Integrating to One Vodafone
rific job of building brand awareness as we have moved Vodafone realized that real business integration extends
toward a single global brand. Beyond brand awareness, we far beyond having a single brand. Critics had pointed out
want people to understand that the Vodafone name repre- that establishing a global brand and logo is among the
sents great service, great value and great innovation. When easier tasks of managing a multinational corporation.
our name becomes synonymous with these attributes we Alan Harper stressed,
will achieve brand preference and expect to see our market
share climb as a result. The careful re-branding policy not only targeted custom-
ers, but also tried to address the needs and concerns of
Across all media, a homogenous corporate brand and the employees. The employees had to adjust to the fact
identity was communicated including the slogan “How that though they were “national challengers with an
are you?” and introduced the inverted comma as logo. instilled entrepreneurial spirit” they were also part of
To keep in sync with Vodafone’s global aspirations, the the family of the global Vodafone Corporation based in
group selected two globally recognized brands: It spon- Newbury, England. It was perceived that most employ-
sored the Manchester United Football Club and the ees were proud of having contributed to the success of
Ferrari Formula 1 team to improve awareness and per- challenging the incumbent operator and were reluctant
ception of the brand. In addition, it supported its brand to be incorporated into a larger corporation that they
by individual sponsorship contracts and other marketing perceived as “distant”
communication programs at the local level. According to
a Vodafone statement, After the heady days of Chris Gent and the acqui-
sitions by the dozen, Arun Sarin had to find innova-
An audit of the first year of sponsorship of Scuderia Ferrari tive ways to integrate “a disparate group of national
reveals that the sponsorship had outperformed all of the operations” into one company. Arun Sarin recognized
annual targets set internally by Vodafone and helped es- that winning over the hearts of the employees and
tablish exceptional global brand awareness.22 achieving cultural alignment was perhaps the “biggest
Being number one or number two in most mar- challenge of all.” An analyst of Merrill Lynch praised
kets23 it had entered, Vodafone never used “low prices” Arun Sarin as “smart” and “strategically as good as it
to attract new customers. Instead, it focused on creating gets.”24 Sarin seemed to be a good fit for this extraor-
and marketing new value-added services that enticed dinary task ahead, as he was described as “an operat-
customers to sign up with Vodafone, even if it implied ing man rather than a dealmaker” and “the archetypal
paying not the lowest rates available. According to Arun international executive.”25 The portrait of Sarin went
Sarin, on like this:
 269

Born and brought up in India, but now an American Italian, one South African, and one Swede (see Exhibit 4(a)

Case 22 ● Vodafone: Out of Many, One

citizen, Mr Sarin’s background was an asset. There might and (b)).
seem to be a certain irony in putting an Indian-American At the annual general meeting in July 2003, Sarin em-
in charge of the world’s biggest mobile-phone operator, phasized the need to benefit from economies of scale and
each of these countries had made a mess of introducing scope. In June 2004, Arun Sarin redefined,
wireless telecoms. But Vodafone was a British company
At Vodafone, everything we do furthers our desire to cre-
that aspired to be a true multinational. It had large opera-
ate mobile connections for individuals, businesses and
tions in Germany, where it bought Mannesmann in 2000,
communities. Our Vision is to be the world’s mobile com-
in Italy and in Japan. To put another Brit into the top job
munications leader and we’re delighted by the prospects
might have bred resentment. [ . . .] The son of a well-to-do
for the future of our industry. Our commitment to this in-
Indian military officer, he went to a military boarding-
dustry is underlined by our company values, which state
school, but his mother encouraged him not to follow his
that everything we do is driven by our passion for cus-
father’s career. Instead, he took an engineering degree at
tomers, our people, results and the world around us. . . .
the Indian Institute of Technology, the country’s equivalent
Operating in 26 markets (together with Partner Networks
of MIT. From there he went to the University of California
in a further 14 countries, with approximately 151.8 mil-
at Berkeley on a scholarship, to earn a further degree in
lion registered customers, and approximately 398.5 mil-
engineering and a MBA. He had lived in America ever
lion total venture customers) puts us in an enviable posi-
since. The main remnants of his origins were an Indian
tion to leverage our global scale and scope. . . . Another
wife (whom he met at Berkeley), a touch of an accent and
competitive advantage is our leadership position on cost
a passion for cricket, which he shares with Sir Chris [Gent,
and time to market. From network services to sales, and
his predecessor].26
marketing to customer care and billing, we have many
Sarin, however, was not the only director on varied systems in use across the business. With strong co-
Vodafone’s board with a distinct international back- operation between our various operating companies we
ground. As a result of Vodafone’s past acquisitions and can achieve further savings.
their pragmatic integration into the group, many skilled
To coordinate, restructure, and integrate its various
foreign (non-British) managers had been retained and
systems across 26 countries, Vodafone launched its “One
had since joined the board, including two Germans, one
Vodafone” initiative that aimed to boost annual pretax
 270
Case 22 ● Vodafone: Out of Many, One

operating profit by £2.5 billion by FY2008.27 Alan Harper to Exhibit 5]. We still operate in a matrix format. What
explained in detail: One Vodafone tries to achieve is to simplify the integra-
tion issues in terms of brand strength and integrating local
We are in a period when we are integrating our company.
culture and processes. We centralize all our marketing
With acquisitions all over the world, one of our challenges
efforts, branding and product development. Technology
is to integrate seamlessly not only technology (which by the
is standardized. Network design (switching, radio) are
way is more or less similar across the world) but people.
coordinated. Best practices are benchmarked by Advance
And this is a key part of the Branding Evolution that we
Services such as service platforms and portals (Vodafone
had witnessed. The challenge of this restructuring program
Live!). Knowledge is shared via the HQ, HR, strategy, and
is to balance the need of coordination and synergies while
Marketing departments, through lateral processes, includ-
encouraging local initiatives.
ing our governance processes. We keep and encourage
The One Vodafone program is a business integration ac-
local initiatives such as customer services, sales, network
tivity and we are in the process of “gradual integration of our
billing, and IT systems. We are trying to incorporate the
business architecture!’ For example, we are running down a
best of all the cultures to the maximum extent possible and
real-time billing system to an integrated system for 28mn cus-
in this way we tried to transform Vodafone UK into a new
tomers. It is a very difficult task if one tries to understand the
Vodafone.
billing system of mobile telephones. Under the One Vodafone,
there are currently 8 programs, Networks (design and supply One Vodafone was clearly communicated across
procurement, coordination, and consolidation initiatives), the company via the Internet, intranet, different train-
IT (design, back office, billings, ERP/HR, operations—data ing programs as well as a monthly employee maga-
centre processes), Service platforms, Roaming (mappingfoot- zine called “Vodafone life! The global magazine for all
prints), Customer (next practice services), Handset portfo- Vodafone people.” The HR department prepared special
lio, MNC accounts, Retailing (one won’t believe, we are the “initiation” training programs to acquaint new employ-
eighth largest retailer in the world taking together our stores ees to the Vodafone way, labeled the “Vodafone footstep,”
that are owned or franchised).... We are trying to integrate which included its vision and values (see Exhibit 6) and
national operating units across footprints and trying to lever- the “Ten Business Principles.”28 On translating the vision
age scale and scope while trying to retain the local autonomy and values alongside changes in structure and systems,
and responsiveness of our challenger national units. Vodafone witnessed revamping of people processes
within the organization. Commenting on employees,
Alan Harper agreed that implementation of “One
Arun Sarin explained,
Vodafone” is a challenge. He explained,
As the business expands and the environment around us
To implement One Vodafone, we have undertaken a
evolves, it is crucial for us to develop, recruit and retain the
change in organizational structure of the Group [refer
 273

people that will lead us into this new world. We are working the development of the Group’s business offerings. This

Case 22 ● Vodafone: Out of Many, One

hard to make sure our employees have the right skills and work included the continued development of technical
knowledge to anticipate our customers’ needs. We are iden- specifications, creation and management of global con-
tifying new ways to share the best of what we do on a global tracts with suppliers as well as testing of terminals.33
basis. We continue to reap the benefits of a motivated team It was committed to provide underlying terminal and
with a strong customer service culture, which will help earn platform technologies on a global basis. Within the mo-
a reputation for Vodafone that is second to none. bile phone industry, a shift of power away from handset
makers (Nokia, Siemens, Ericsson, etc.) could be ob-
The HR Department had set up a fast-track career
served. Global operators such as Vodafone had increas-
path (the Global Leadership Programme, GLP) for high-
ingly succeeded in forcing the producers to offer specially
potential managers, rotating them across business func-
designed and branded products: the thriving Vodafone
tions and countries and equipping them with crucial
live! multimedia service was launched on Sharp GX-10
multicultural skills.
handsets, exclusively manufactured and branded for
Despite the integration and standardization efforts,
Vodafone.34 If this trend persisted, Vodafone would be the
the corporate headquarters had to ensure a certain level
first to benefit from its huge purchasing power and could
of independence for individual country subsidiaries to
even force Nokia (which had an almost 40 percent world
take into account differing business models and customer
market share) to cater more toward Vodafone’s needs.35
expectations. For example, 48 percent of Vodafone’s cus-
Vodafone could also use its unrivalled clout when negoti-
tomers in Germany had a contract, while this kind of
ating with network equipment suppliers (such as Alcatel,
long-term commitment to an operator was almost un-
Nokia, Siemens, etc.) to squeeze their margins.
heard of in Italy (92 percent were prepaid customers).29
Peter Bamford was appointed chief marketing offi-
To orchestrate the move toward greater coordination
cer and head of the Group Marketing department, which
as well as to identify and disseminate best practices, the
was in charge of
group created two new central functions, Group Marketing
(to drive revenue growth), and Group Technology and “providing leadership and coordination across the full
Business Integration (to drive cost and scale benefits).30 range of marketing and commercial activities including
Communicating Vodafone’s new focus on integrating the brand, product development, content management, part-
bits and pieces resulting from past acquisitions was clearly ner networks and global accounts.”36
a top management task. The Integration and Operations
Committee was instituted, staffed with members of the For Vodafone, the question was how customers could
executive board and chaired by Arun Sarin himself. This derive a benefit from Vodafone’s increasingly global reach,
committee was responsible for “setting operational plans, ultimately driving top-line growth. Alan Harper
budgets and forecasts, product and service development, explains,
customer segmentation, managing delivery of multi- We are a technology and sales & distribution group fo-
market propositions and managing shared resources” cused on local companies winning market share against in-
across geographies.31 Alan Harper, who had been heading cumbents in respective countries. We do not develop tech-
the group strategy department at Vodafone since 2000, nology but we are users of technology. Technology is devel-
saw his job title changed to Group Strategy and Business oped by companies such as Nokia, Ericksson, Nortel. We
Integration Director. Simultaneously, Vodafone restruc- buy their technology—and technology evolution in our sec-
tured itself at the corporate level to include the two new tor is more or less standard, it evolves, grows without major
functions, which directly reported to the group’s COO, differentiations and after a period of time it is standardized.
Julian Horn-Smith. Now the challenge is how best we can leverage using and in-
Thomas Geitner was appointed head of the new unit tegrating the technology across our companies.... With the
Group Technology & Business Integration as chief tech- evolution and growth of our company we are today more of
nology officer. a company that prides itself in the differentiation of services
The purpose of Group Technology will be to lead the imple- that we bring to our customers. We are still 100 percent
mentation of a standardized architecture for business pro- sales driven but we are much more customer centric and
cesses, information technology and network systems. This customer service oriented and take pride in understanding
will support the next generation of products and services and customer needs as we graduate to offering our customers
the critical role of introducing and operating 3G the next best service and focusing on customer delight (e.g.,
capacity.32 Amazon). We now execute much better and it is because of
the reason of the shift in our competencies.
A key focus of the Group Technology activities were
the management and control of group-wide projects Vodafone started creating service offerings and prod-
in relation to the ongoing rollout of “third generation” uct packages directly leveraging Vodafone’s network and
(3G) networks, the enhancement of Vodafone live! and delivering tangible value to customers. For example, it
 274

created a tariff option that enabled customers to seam- choose to pay Vodafone either in cash or stock, although
Case 22 ● Vodafone: Out of Many, One

lessly roam the globe, on a special per minute rate, on Vodafone had a right on a minimum cash sum of US$7.5
the same network, without having to worry about high billion.40
interconnection fees or differing technical standards. A Some observers questioned the idea of selling Verizon
new unit within Group Marketing was created to develop and buying another operator, because Verizon Wireless
and market services specifically tailored to the needs of was the most successful and profitable one—why swap “a
global coordination, such as seamless wireless access to minority stake in a very good operator for a controlling
corporate IT systems and special rates for international stake in a less good one?”41
calls on the network. Such a global service offering could In France, Vodafone was in an equally uncomfortable
clearly serve as a differentiating factor to competitors position. It shared ownership of Cegetel, the parent com-
that could not match Vodafone’s global footprint. pany of France’s number two mobile phone business SFR
(35 percent market share with 13.3 million customers),
with Vivendi having the majority stake in the venture. On
Woes in the United States and France March 31,2003, Vodafone’s ownership interest in SFR was
There were still two nagging issues for Arun Sarin: approximately 43.9 percent, comprising a direct holding
Vodafone’s 45 percent stake in Verizon Wireless and of 20 percent in SFR and an indirect holding through its
the unresolved issues about control in Frances SFR, for stake in Cegetel.42 Commenting on Vodafone’s struggle
which Vodafone had been at loggerheads with Vivendi with Vivendi about SFR, an analyst at Global Equities
for several years now. Vodafone was far from happy SA joked: “We have a saying: small minority sharehold-
about these minority stakes, because it did not fit with its ings for little idiots; big minority shareholdings for big
single-brand, “One Vodafone” strategy. idiots.”43
In the United States, Vodafone customers still could Even though Vodafone managers had a certain say
not use their cell phones on the Verizon Wireless net- about the operations and strategy of SFR (SFR launched
work, because it operated under a different standard. It the co-branded multimedia services of Vodafone live!),
was indicated that this situation was likely to continue Vivendi continued to refuse to sell SFR to Vodafone.
well into the era of 3G, because Verizon planned to adopt Several talks between Sarin and Fourtou, the CEO of
an incompatible standard.37 Without a single technologi- Vivendi, had not yielded any results, and Vivendi’s
cal platform and a uniform brand, Vodafone could ex- true strategic intentions with SFR remained unclear.44
tract little value from its American venture (except the The remaining 56 percent stake in SFR was valued at
cash dividend of $1 billion a year it received from it).38 roughly £8 billion ($13 billion).45 After Vivendi declined
After the failed bid for AT&T Wireless, Vodafone had Vodafone’s offer for SFR in 2002, Vodafone issued a state-
several options at its disposal, all of them with their own ment claiming that it was “a long-term investor in Cegetel
pros and cons. and SFR” and that it “looks forward to continuing its suc-
Probably the most obvious option would be to take cessful partnership with Vivendi.”46
over Verizon (the parent company of Verizon Wireless) “France is a very simple market for us,” noted Alan
completely, including its fixed line business, in order to Harper in April 2005. “We know the market, we know
force them to adopt Vodafone standards. It was deemed the business model and we know the management of SFR,
likely that such a bid could escalate to a US$150 billion which takes part in routine Vodafone management meet-
hostile takeover battle, a figure that might be too large ings” Pugnaciously, he added, “The natural home of SFR
even for juggernaut Vodafone.39 Verizon’s management is Vodafone. We are a very patient company.”
clearly was not willing to cede the wireless operations to
Vodafone, but dreamed of becoming the single owner of It remains to be seen whether Vivendi wants to keep
Verizon Wireless itself. its cash cow or if it was simply trying to push the price in
Alternatively, Vodafone could buy another operator this cat-and-mouse game.
outright. But regulatory constraints would require it to
sell its stake in Verizon Wireless first, because it was pro-
hibited from owning more than a 20 percent stake in two Challenges Ahead
competing operators at once. Under the current agree- Arun Sarin knew that his job would not become unin-
ment with Verizon, Vodafone held a put option, which teresting anytime soon, as many challenges lay ahead!
allowed it to sell some of the shareholding each year at Certainly, Vodafone was the largest player in the indus-
a fixed price to Verizon. If Vodafone decided to exercise try, but being active in 26 countries out of 200 in the
this option, it had to do so by July 2006 in order to re- world left a lot of room to grow. As he closed his eyes
alize a maximum value of US$20 billion. Verizon could and thought of Vodafone’s global footprint, instantly he
 275

was reminded that Vodafone was not present in Latin a very promising start in Germany with good sales of

Case 22 ● Vodafone: Out of Many, One

America and in many African countries. Then there was mobile connect cards, might shift the focus of the whole
the Middle East. Vast untapped markets lay ahead with industry away from networks to content. Revenue from
todays mobile penetration of about 1.7 billion, of which voice traffic was flat or even declining due to competing
Vodafone has about 3.5 million. In five years it shall be technologies such as Internet calling that was funda-
2.5 billion, only half of worlds population! And there was mentally changing the telecom industry. Sarin knew
his native country, India, where he invested US$1.5 bil- that most of the growth would have to come from new
lion to buy a 10 percent stake in Bharti Tele-Ventures, data services. Competitors had also begun to get their
the largest mobile operator in the country. Countries feet on the ground again, with rumors about a merger
of Eastern Europe, many of which had recently entered between MMO2’s German operations (02 Germany)
the European Union (EU), should definitely become and KPN’s E-Plus.
Vodafone’s home turf: Vodafone had just announced Nokia had just presented its first WiFi-powered
that it would be willing to invest up to US$18 billion phone that did not need the traditional mobile network
on acquisitions in Russia and other Eastern European but a wireless LAN hotspot. If this technology should
countries.47 The 2005 acquisition of the mobile opera- ever become popular, it would undermine Vodafone’s
tors MobiFon (Romania) and Oskar (Czech Republic) current business model and could turn billions of fixed
was certainly just the first step in enlarging Vodafone’s assets into worthless electronic scrap.50
footprint.48 Not to mention China. The sheer size of the At the beginning of 2006, Arun Sarin made some
market was awe-inspiring. Vodafone’s strategic partner, tough decisions. He faced up to slowing growth in his
China Mobile, alone had more than 150 million custom- core market by unveiling an impairment charge of £23
ers, but Vodafone only had a minuscule 3.27 percent billion to £28 billion ($40 billion to $49 billion) and ex-
stake in the company.49 For Vodafone, according to Alan ited the Japanese market by selling its stake to Tokyo-
Harper, this stake served as a: based Softbank in a deal valued at $15.4 billion and con-
strategic foothold in a very important market with a rela- firmed that after the sale it would return $10.5 billion
tively small scale investment. China Mobile is the fastest to its shareholders. Vodafone had trailed behind NTT
growing mobile company in the world today, connecting DoCoMo and KDDI since its entry in 2001 in Japan, due
about 2-3 million customers a month. It has 70% of the to fickle consumers, the lack of a low-end tier in the seg-
Chinese market share. Vodafone clearly understands that ment, and the challenge of coordinating terminals and
China Mobile can never become Vodafone China. That technologies across borders. He managed to tighten his
is a reality due to investment options and quasi-political grip on the company and put down a boardroom revolt
situation of Chinese mobile telephony market. Knowing all that had questioned his leadership. He not only won a
this we still invested in China mobile because we feel that public expression of support from Lord Ian MacLaurin,
we learn everyday from China Mobile and our intention the company’s board chair, but he also forced out Sir
is to have regular knowledge flow between Vodafone and Christopher Gent, the honorary life president and for-
China Mobile. This is because our strategy is to make the mer chief executive.
technology standardized so that the learning between us is Arun Sarin thought Vodafone could have the best
much faster.... Our investment in China mobile is through of two worlds. Now was the time to combine Vodafone’s
China Mobile HK. We have a clear exit strategy with liquid superior skills in acquiring companies with best-of-
assets, if our investment does not do well in the future. If breed business integration and operational capabilities.
it does well, we might think of increasing our foothold but He could ensure Vodafone’s exceptional profitability for
not to a sizeable extent. We are happy to have a foothold in many years to come by keeping Vodafone a wireless com-
one of the largest and fastest growing markets of the world, pany to the core and also use innovations such as broad-
with our investment we have an insider position, we have band wireless technology known as WiMAX, to offer
a position of influence with the operator, with the Chinese new services. It was now up to him to shape Vodafone’s
government, we have seat on the board, we have regular future.
dialogue and our interest is to make China use the same
technology as ours so that we can benefit from the scale Appendix I
and scope.
The Economics of the Mobile Phone
At the same, significant business risks lurked in all Market: The Role of Fixed Costs
markets and Arun Sarin was well aware of them. In 2006,
the merger of AT&T with Bellsouth Corp. put pressure The mobile phone market was characterized by extremely
on Verizon Wireless to buy off Vodafone and force it to high fixed costs. The setting up of a nationwide net-
exit the U.S. market. The introduction of 3G, which had work could require significant investments running into
 276

billions of euros.51 Usually, an operator did not have the

Case 22 ● Vodafone: Out of Many, One

choice to offer network coverage limited to metropolitan

areas (which would dramatically reduce the scale of ini-
tial investment required), either because of regulations
prohibiting such a selective offer, or simply because
national coverage was a key success factor for literally
“mobile” customers.
In some countries, the licenses to operate using a
certain bandwidth cost as much as €8 billion (the re-
cord price each operator in Germany paid for its UMTS
license to the government), adding huge financing
charges to the already existing fixed costs.52 However,
once capacity is installed, the cost of an additional cus-
tomer using the network is virtually zero, and every
euro of revenue adds to the companies’ bottom line. An
installed and running network provides a foundation
for reaching very high operating margins. Vodafone,
for example, estimates that once the initial investments
had been made, less than 10 percent of revenues were
needed to maintain the network.53 Even the marketing
campaigns benefited from the economies of scale: The
larger an operator’s customer base, the lower its per-user
cost of such advertising efforts.
Much of the costs described here were not only fixed,
but also sunk, further aggravating the problem of price
pressure. The investment into network could hardly
be sold to anybody else (because of differing techno-
logical standards) and hence the initial cost was “sunk.”
Companies realized that they could not undo their de- at about 80 percent (e.g., Germany: 74%) in most mature
cision to invest, because the infrastructure was already markets. With new customers becoming increasingly
there. Therefore, it is rational for companies to act as if rare (refer to Exhibit 8 for customers by country of
their initial investment was zero. Vodafone), operators were constantly searching for new
The existence of high fixed costs explained the peri- sources of revenues and had introduced text messaging
odic price wars that had driven prices down ever since and other basic value-added services, such as download-
mobile telecommunications started. Some operators had able ringtones and logos.55 The standard measure in the
begun offering free calls or flat rates during the weekend industry to gauge the quality of the customer base was
(when capacity utilization was at the lowest). Usually, it the average revenue per user (ARPU).56
was the smaller operators and the new market entrants As the new 3G networks (third generation, enabling
who offered lower prices to reach as quickly as possible high-speed data transmission) go online, available ca-
a critical mass. In Germany, one of the largest markets pacity will take another quantum leap with unpredict-
for mobile telephony with more than 60 million custom- able consequences for pricing. There seems to be prom-
ers and a high population density, the threshold for an ising opportunities to concentrate on the huge market
acceptable return on investment was estimated to be for fixed line telephony. Not surprisingly, there was a
about 20 percent of the total market share, which had clear relation between the per minute price of a call and
neither been attained by 02 (a subsidiary of MMO2) nor the average amount of cell phone usage. Conversely,
by E-Plus (KPN). there was no relation between the ARPU and the av-
The economics of the market necessitated no more than erage price per minute charged, which indicated that
three or four operators in a country (refer to Exhibit 7). customers substituted their fixed line minutes with
In Germany, Mobilcom and Quam never reached the cell phone minutes whenever a price drop occurred. In
critical size and had to exit the market in 2003 and 2002, other words, the increased quantity usually compen-
respectively, writing off their individual investments of sated the operator for the lower revenue per minute
€8 billion each in 3G licenses.54 (refer to Exhibit 9).
Growth for a mobile phone company had so far Another key performance indicator that had at-
mainly come from increased penetration, which stood tracted management attention in recent years was the
 278
Case 22 ● Vodafone: Out of Many, One

so-called “churn rate,” a percentage of the customer base on marketing and handset subsidies to attract new
being lost to competitors each year. In competitive mar- customers and to retain the old ones. Customer acqui-
kets with high handset subsidies, churn rates of opera- sition costs easily exceeded €100 per new customer or
tors could be anywhere between 19 percent (Germany) made up to 12.4 percent of service revenue (figure for
and 30 percent (UK).57 In other words, on average after Vodafone Germany).58 If an operator added low-value
three to five years, an operator had churned its entire customers (i.e., those with a low monthly ARPU), it
customer base! These churn rates carried high costs for could take many months until the operator could break
the operators, because they had to spend heavily mainly even on a customer.

Notes
1. Out of many, One comes from Latin £ Pluribus Unum, signifying the
harnessing of global scale and scope synergies of OneVodafone. 6. Source: Corporate website http://www.vodafone.com/, data current
2. The scenario described herein was fictional. However, all data relating as of December 31, 2003.
to the AT&TWireless deal was factual. Financial Times Deutschland, 7. Source: Yahoo! Finance, http://finance.yahoo.com, March 13, 2004.
February 17, 2004, http://www.ftd.de 8. Annual Report 2003, available at http://www.vodafone.com.
3. Financial Times Deutschland, February 12, 2004, http://www.ftd.de 9. Interim Results for the Six Months to 30 September 2003, published
4. Financial Times Deutschland, February 17, 2004, http://www.ftd.de November 18, 2003: available at http://www.vodafone.com.
5. Equal to Christopher Gent’s compensation as reported in the 10 ompany Annual Report 2004.
Company Annual Report 2003. This figure does not include stock 11. Source:This historic overview follows information provided at http://
options and performance-based pay. www.vodafone.com/, accessed on March 5, 2004.
12. http://www.vodafone.com.
 279

13 Reportedly, Sir Gent closed the deal with AirTouch via his cell phone 2002/2003, equivalent to 11 % of Vodafone’s free cash flow. This

Case 22 ● Vodafone: Out of Many, One

from Australia, where he was watching a game of cricket. The arrangement expires in April 2005.
Independent (London), January 17 1999: “Vodafone’s boss realises 39. Where Does Vodafone Turn Now? Business Week Online;
longheld ambition with the acquisition of AirTouch.” February 18, 2004
14 Financial Times Deutschland, February 17 2004, http://www.ftd.de 40. Keeping pole position, Total Telecom Magazine, August 2003.
15 A chronology of the takeover battle was provided at http://www 41. Bob House of Adventis, a consultancy, quoted in: Vodafone’s
.managermagazin.de/unternehmen/artikel/0,2828,242161- dilemma. The Economist, Feb 12, 2004.
2,00.html. 42. Annual Report 2003.
16 A New Voice atVodafone, The Economist; August 2, 2003, Vol. 368. 43. Laurent Balcon quoted in: Keeping pole position, TotalTelecom
17 Interim Results for the Six Months to 30 September 2003, published Magazine, August 2003.
November 18, 2003; available at http://www.vodafone.com 44. Clear as mud: Vodafone versus Vivendi, The Economist,
18 Vodafone Starts Wireline Attack, First in Germany, Dow Jones December 7 2002.
International News; March 10, 2005. 45. Euromoney, Nov 2003, Vol. 34 Issue 415.
19 Ibid. 46. Clear as mud: Vodafone versus Vivendi, The Economist,
20 Keeping pole position, Total Telecom Magazine, August 2003. December 7, 2002.
21 Ibid. 47. www.Vwd.de Vereinigte Wirtschaftsdienste GmbH, February 26,
22 www.vodafone.com. 2004.
23 With Australia and Japan being notable exceptions. 48. According to a Vodafone press release on March 15, 2005, the Group
24 Quoted in “Vodafone dominance tipped to keep rolling,” Utility Week, paid approximately US$3.5bn in cash for the transaction and thus
January 31, 2003. could add 6.7 m customers.
25 A new Voice at Vodafone, The Economist, August 2, 2003, Vol. 368. 49. Annual Report 2004, p. 8.
26 Ibid. 50. Nokia takes leap into Wi-Fi Phones, Wall Street Journal Europe,
27 Presentation to analysts and investors on September 27 2004, February 23, 2004.
available at http://www.vodafone.com. 51. Vodafone for example had £24.1 bn as gross fixed assets in its
28. http://www.vodafone.de and http://www.vodafone.com. balance sheet, 83% of which were accounted for by network
29. Ibid, p. 8. infrastructure. Annual Report 2003, p. 90.
30. Press release on June 23, 2003, available at http://www.vodafone 52. Vodafone prescht im Rennen urn UMTS-Einführung vor, Handelsblatt,
.com. February 13/14, 2004.
31. http://www.vodafone.com. 53. Annual Report 2003, p. 94.
32. Ibid. 54. Vodafone prescht im Rennen urn UMTS-Einführung vor, Handelsblatt,
33. Interim Results for the Six Months to 30 September 2003, p. 16. February 13/14, 2004.
34. According to the “ Key Performance Indicators” for the quarter ended 55. In some instances, these new services already generate up to 20%
December 31, 2003; released on January 28, 2004; available at of revenues. Ibid.
www.vodafone.com, Vodafone live! had over 4.5 million customers in 56. For example, Vodafone’s ARPU in the UK was £297 and 312€ in
15 countries as of November 13, 2003. Germany for the year, according to the Interim Results for the
35. Keeping pole position, TotalTelecom Magazine, August 2003. Six Months Ended September 30, 2003; available at http://www
36. Ibid. .vodafone.com.
37. A new Voice at Vodafone, The Economist; August 2, 2003, Vol. 368. 57. Data for Vodafone, which can be considered as representative for the
38. Where Does Vodafone Turn Now? Business Week Online; February industry. Ibid.
18, 2004. Keeping pole position, TotalTelecom Magazine, August 58. Ibid.
2003, quotes £564 million as cash dividend in financial year