shah mahmood - afghan economic society · telecommunication market, competition, generic...

Shah Mahmood

The Afghan telecommunication market: “an industrial organization analysis”

Volume | 026 Bochum/Kabul | 2017 www.afghaneconomicsociety.org

The Afghan Telecommunication Market: “An Industrial Organisation Analysis”

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The Afghan Telecommunication Market:

“An Industrial Organisation Analysis”

Shah Mahmood

Keyword list

Telecommunication Market, Competition, Generic Strategies, Cost Leadership, Product

Differentiation, Segmentation, Development.

Abstract

Post-2001 Afghanistan has undergone many changes among them the rapid and almost industrial

scale development of the Afghan Telecommunication Infrastructure. Ever since, the

telecommunication market has become one of the main pillars of Afghanistan’s booming

economy.

The research study tries to find out how telecom companies compete with each other in such an

emerging and relatively new market in a poor country like Afghanistan. The purpose of this study

is to explore the strategies adopted and implemented by telecom companies in both the short and

long-term. The aim is to analyze telecom the competitive performance of telecom companies by

using Michael Porter’s Three Generic Strategies.

Using the theoretical data, the research question presented is based on statistical data of different

telecom companies over several years. The research analyzes the competition between those

national and international companies operating in the Afghan telecommunication market. The

result of this research study shows that that telecom companies have different sets of strategies

at their disposal, which could be applied by them for competitive performance in the Afghan

telecom sector. Each strategy has its own advantages as well as limitations. Some strategies are

more effective and suitable than others at a specific time. The results also reveal how the Afghan

government institutions are playing their role in enabling new and or less powerful companies to

operate in the market. This latter falls in line with one of the main priorities of Afghan government

which is the protection of private investment.

Description of Data

The nature of this research study is explanatory as it aims to understand the mechanism for

competition within the Afghan telecommunication market. There are two types of data being used

in this research, primary and secondary data. This combination of primary and secondary data is

crucial.


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Primary data is gathered from telecom companies, their products available in the market, their

publications, particularly their yearbooks, and their official websites. In addition to that several

interviews were held with employees of telecom companies and questionnaires were designed to

get more insight into telecom companies operations. The questionnaires included both open-

ended questions as well as questions with pre-defined answers.

Secondary data is collected from governmental institutions like Ministry of Communication and

Information technology (MCIT) and other relevant authorities and NGOs which keep track of

development in Afghanistan. In addition to that secondary data relevant for this study is gathered

during the literature review. The information gathered during literature review was relevant for the

future of telecom sector in developing countries as well as its impact on the overall development

of the countries.

It is worth mentioning that gathering information from secondary data proved rather easier than

primary data. It is understandable as the competition within the telecom sector is tough and

withholding data from public or research purpose was no surprise.

Research Question/Theoretical contextualization

This study is undertaken to clarify competition between the companies in Afghanistan’s

telecommunication market. The factors influencing the competition between telecom companies

can be different. The competition can be based on better network coverage, product

differentiation or low costs. Due to rules and regulations of the government to protect the less

powerful companies against the more powerful ones, it is difficult to compete on prices as it can

result in a price war whereby the international companies with big budgets can easily evict other

companies and monopolize the market.

Two main research questions are going to be asked here which will be answered in this paper.

1: Which strategy was applied by companies in order to maximize their profits and increase their

market shares in such an emerging market?

2: Which strategies should be adapted to gain competitive advantage in the long term?

To answer these questions, I will briefly describe the theory of Michael Porter’s Three Generic

Strategies, which will help us deal with our problem and draw some conclusions from our data.

The Three Generic Strategies differ in dimensions and are not necessarily compatible with each

other. In fact all three of Porters Generic Strategies aim to get a leading edge in terms of sales

and shares over your competitors. However, implementing each of these strategies successfully

requires different skills and resources.

Three Generic Strategies


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Achieving a competitive advantage for firms can be done through differentiating their products or

services from those of their competitors and through lower costs. However, it is easier said than

done. Companies can target a broader group of users or a market segment, which covers a major

part of the market shares. Beside differentiation and lower costs, the firms can also focus on

specific segments of the market. All these strategies aim to get competitive advantage over its

rivals. The strategies introduced by Porter are called generic because they can be applied to

every sort of industry and to organizations of all scales. Porter believes that differentiation can be

as effective as cost leadership. The three generic strategies are alternative, viable approaches to

dealing with competitive forces1.

Cost Leadership Strategy

Cost leadership is one of the two basic strategies of Porters Three Generic Strategies. It has been

one of the most effective and popular strategies since 1970’s. Its main aim is to achieve an overall

cost leadership in an industry or a market by efficiently improving the ways to reduce costs.

Porter writes: “cost leadership requires aggressive constructions of efficient-scale facilities,

vigorous pursuit of cost reduction from experience, tight cost and overhead control, avoidance of

marginal customer account, and cost minimization in area like R&D, service, sale force,

advertising, and so on. A great deal of managerial attention to cost control is necessary to achieve

these aims”2.

Differentiation Strategy

The differentiation strategy is the second basic strategy of Porters Three Generic Strategies. It is

described by Porter as follows: “the second generic strategy is one of the differentiating the

product or services offering of the firm, creating something that is perceived industry wide as

being unique”3. This strategy’s core focus is to make your products or services stand out by better

services to customers and better products performances, making them unique and differentiating

them from your competitors. These extra attributes and features of your products should be

valued and welcomed by the customers. In return, you can try to charge a premium price for your

products and services. Your products will be more attractive than those of your competitors.

Focus Strategy

The third of the Porters Three Generic Strategies is the Focus Strategy. It is described by Porter

as follows: “the final generic strategy is focusing in a particular buyer group, segment of the

1 Michael E. Porter, Competitive Advantage, (New York: The Free Press, 1985), p. 11.

2 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 35-36.



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product line, or a geographic market”4. Focus strategy can also be applied in many forms. The

three generic strategies differ in dimensions. Implementing these strategies successfully requires

different skills and resources. They also imply different organizational arrangements, control

procedures and inventive systems. There are critics of the generic strategies who say that there

is no certain strategy which guarantees competitive advantage for a certain firm. Theorists also

strongly believe that a firm’s character determines the sort of strategy that will prove effective.

Porters generic strategies can be applied best to large and established firms because Porters

analysis is based on multinationals. Porter suggests that once a firm chooses a strategy, it should

implement it consistently while in reality many firms often combine different strategies to be

successful in the market. Porters “stuck in the middle”5 is based on certain US companies who

were unable to compete on global scale. Porters sees the strategies then adapted by those

companies as absolute while theorists nowadays are of the opinion that strategies should not be

treated as absolute.

Generic Strategies and Industry Forces

Industry

Force

Generic Strategy

Cost Leadership Differentiation Focus

Entry

Barriers

Ability to cut price in retaliation deters potential entrants.

Customer loyalty can discourage potential entrants.

Focusing develops core competencies that can act as an entry barrier.

Buyer

Power

Ability to offer lower price to powerful buyer.

Large buyers have less power to negotiate of few close alternatives.

Large buyers have less power to negotiate of few close alternative

Supplier

power

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation, focused firm is better able to pass on supplier price increases.

Threat of

Substitutes

Can use low price to defend against substitutes.

Customer’s become attached to differentiating attributes, reducing threat of substitutes.

Specialized products & core competency protect against substitutes.

Rivalry Better able to compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs

Figure 1: Generic strategies & Industry forces6.

4 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p.38.

5 Y. Datta, A Critique of Porter’s Cost Leadership and Differentiation Strategy, (Kentucky: Northern Kentucky

University, 2009).



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Field research design/ Methods of data gathering

The aim of this study is to examine the Afghan telecommunication market as it operates at present

and to find out how national and international companies compete and operate in Afghanistan’s

booming and rapidly developing economy. It also aims to explore the different strategies being

implemented by telecom companies. This data is the result of questionnaires, interviews,

information gathered from official websites and other sources as explained on Page 2.

The data used for this research is of two kinds: primary and secondary data. This combination of

primary and secondary data is of utmost necessity in order to answer my questions. I designed

several questionnaires that I used for data gathering while visiting the telecom companies. I also

conducted interviews with the employees of the telecom companies in order to gain some inside

information about how they operate.

However, telecom companies were reluctant to share their data. Despite this limitation, I have

obtained data from the interviews with the officials of the different telecom companies and from

their websites. Their websites and yearbooks in particular have produced very interesting insights.

I have also collected their different products, which are being used in the market.

The secondary data regarding other issues related to the telecommunication market has been

collected from different sources. During my literature review, I studied various books discussing

developments and policies in telecommunications in the near future; how they impacted

developing countries and how the gap between the developing countries and the digitalization

could be reduced within a short frame of time.

My major source for secondary data regarding the Afghan telecommunications industry was the

Ministry of Communication and Information Technology of Afghanistan (MCIT). This ministry is

the major source of information and statistics regarding the industry. Besides, Icollected data from

different documents made available by NGOs and other organizations which are currently

operating in Afghanistan.

As the information had to be collected from different companies, it was important to keep the

questions clear and precise. The questions were related to geographical places, target groups

and markets, providing additional services, product availability, pricing policy and the scale of the

employees and structure of the organization. To avoid any potential miscommunication due to the

number of questions or their open-ended nature, I made a small list of questions and sometimes

provided the interviewee the possibility to choose between a number of pre-defined answers.

Certain questions were not answered during the interview or the interviewer was referred to the

company’s website. Some of the answers about their revenues were kept secret due to

company’s policy. The data about revenues is valid and reliable as it is based on the development

of the Afghan telecom market in the recent years.


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Results

As the political and social rebuilding of the country proceeds following years of war and civil

unrest, Afghanistan has been busy putting new national telecommunications infrastructure in

place. It began its telecom reconstruction program in June 2002 following a grand assembly

known as the Loya Jirga. Afghan Wireless Communication (AWCC) was the first GSM network

provider in Afghanistan. It can also be seen as the pioneer of the telecom companies in the Afghan

market. The other major impact on telecommunications in Afghanistan came with the introduction

and expansion of the GSM services.

The launch of a second mobile service, Telecom Development Company Afghanistan Ltd., which

operated under the brand name Roshan, boosted the telecom market further and a strong

subscriber growth followed. With its aggressive marketing campaign, it also ended the monopoly

of AWCC in the telecommunication market and created job opportunities for locals and nationals7.

At the time of Roshan’s entry in the telecom market the price per minute was extremely high and

calls could only be made from four big cities (see Figure 2). AWCC had fewer subscribers due to

its high costs in the previous year, but it started to attract customers at an extraordinary rate in

2003.

Roshan entered the market with the concept of market penetration. Porter says that the company

has to hold on to a particular strategy in order to make it successful. Nevertheless, at that time

only the market penetration was not enough to be successful in the long term because the

competitors were catching up with lower prices and the advantage of low cost leadership will be

lost. Roshan was able to keep the lowest price until early 2004.

Figure 2: The prices

of national calls

(Afs/min)8 started

dropping after Roshan

entered the market in

2003.

7WhartonSchool of the University Pennsylvania, An industry on the Line: Telecommunication in Afghanistan,

March 2009, P. 1.

8MCIT, Summery of Achievements in the Year 1386 (21 March 2007 – 20 March 2008), P. 4.

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By then AWCC had caught up with reduced prices and the price competition was no longer an

appropriate strategy. According to Porter 9 this low cost leadership is a demanding approach and

can easily be imitated by other competitors.

Market Penetration & Product Differentiation

In late 2005 two mobile licenses were awarded one to INVESTCOM/Alokozai consortium and the

other to UAE’s Etisalat. The former launched its connection 'Areeba Afghanistan' in July, 2006

and the later in August 2007. Market penetration and product differentiation were easy and

effective strategies for Areeba to use in order to enter the market. The easiest way for a new

player is to encourage a price drop rather than an increase to subscribers. Areeba not only made

use of the price drop but also of a limited product differentiation compared to its predecessors

and adding value-added services. The price penetration (lowest prices) proved to be a strong

competitive strategy for the short term in order to gain market shares.

The Strategy of Market Segmentation and Differentiation

In mid 2008, the coverage area for networks in remote areas were enlarged and improved and

all four companies were active in nearly every part of the country. Meanwhile Roshan focused on

segmentation and product differentiation. This segmentation strategy provided Roshan with the

upper hand over AWCC in the market in the 3rd quarter of 2008. This indicates that focusing on

segmentation was the right kind of strategy for Roshan to become the market leader again. In

2008 another very well-known international company and a partner of Areeba International, MTN,

took over Areeba Afghanistan. Its entry to the telecommunication market introduced new

technologies and it used the penetration pricing strategy for international calls within the rules and

regulations frame of ATRA. According to what Porter says about drawing advantages from

newcomers who are introducing new technology to customers10, Etisalat, AWCC and Roshan

easily benefited from the subscriber’s new awareness of the technology (see Figure 3).

9Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 35-36.



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Figure 3: All Operators subscribers (2002 to 2008)

The Strategy of Market Segmentation and Subscribers Growth

One explanation for Etisalat’s rapid growth in that period is that Etisalat was a newcomer and

introduced new technology to the market. It made significant capital investment in order to

promote its brand and create awareness for its connection. It possessed a more modern network

than Roshan and AWCC. Its better coverage and network were preferred by the customers in the

big cities.

The feedback from Etisalat and MTN is less than from Roshan and AWCC. They possess small

distribution and service centers located mainly in the major cities. The customer services provided

by MTN and Etisalat are limited. The second major limitation for Etisalat and MTN is that they

operate only in major cities while customer service providers of Roshan and AWCC also cover

the rural areas.

According to the network effect theory, it is better to connect to a large network than to a small

network. As a result, new and existing subscribers chose the larger network. Besides enlarged

coverage, Roshan also has local and independent distribution channels in the remote areas and

in cities, plus a high number of retailers, direct sales and customer touch points. Due to tough

competition mobile penetration rate increased tremendously (see Figure 4).

0

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AWCC

Roshan

MTN

Etisalat


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But the most important aspect of Roshan’s explosive growth was their focus on market

segmentation, product differentiation, streamlined tariff structure and innovative services thereby

increasing customer awareness about new and different products. All these factors gave Roshan

the advantage to maintain its lead despite competition from international companies. Its

combination of segmentation, product innovation and differentiation seems to be a pretty unique

and successful marketing strategy which the other operators could not match.

The Afghan telecom market has developed from a rather one-sided market to a multidimensional

market with different categories of users and products. Nearly a quarter of the total mobile

subscribers have multiple SIM cards of different companies, switching between them according

to the service the specific company provides. Customers can choose between different operators

and the quality of service they get becomes an important factor. At present, customer satisfaction

becomes one of the major factors for operators. Loyalty has become another key factor for the

operators. The operator with large and better network coverage and differentiated product offers

will benefit most.

Discussion & Conclusion

The telecom companies in Afghanistan have different ways of competing. The competition can

be based on better network coverage, product differentiation or low costs. To that end, the

telecom companies often apply a combination of strategies rather than relying upon a single one.

Single strategies are implemented for a short period only.

In 2002 AWCC was the only operator and therefore the market had a monopolistic structure. The

entry of Roshan in 2003 put an end to AWCC’s monopoly and reduced the prices for connections

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Mobile Penetration Rate per 100 Inhabitants

Figure 4: Increase in mobile penetration rate per 100 inhabitants (2002 to Q1 2009)1.


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significantly. Their strategy of a low price penetration was successful for a while until AWCC

caught up with the prices. Porter’s cost-leadership strategy is applicable to Roshan’s marketing

at that time. Roshan’s low price penetration in 2003 resulted in achieving the market share of

more than 40 % of the subscribers in a short period. However low price penetration in emerging

markets does have its limitations. It can only be successful if applied for a short period of time in

order to get the competitive advantage or a higher percentage of market shares. Both GSM

providers became aware of this fact and tried to make the market into a duopoly through signing

certain agreements.

Areeba’s entry in 2006 ended the duopoly of AWCC and Roshan and reduced the prices of

national and international calls. However, the price reduction for international calls was far greater

than for domestic calls. They also differentiated the market by introducing new products. Then

Areeba applied a strategy based on low prices and product differentiation. They implemented this

combination of strategies successfully and gained a huge part of the market shares. This low-

pricing strategy was earlier applied by Roshan in 2003 and it had worked for them as well. The

competition between the GSM service providers at that moment was fierce.

Entry of Etisalat reduced the prices of international calls and differentiated the market further. The

service and coverage quality became attractive for the subscribers. The other operators followed

and easily caught up with Etisalat’s new approach. Etisalat became the fastest growing operator

in the market. However, with more than 20 different products in the market, the differentiation was

more or less completed so the strategy of differentiation could no longer guarantee a success in

the market.

Roshan was well aware of this fact and it focused on segmentation of the market. This

segmentation resulted in different categories of products and within those categories different

product packages. This strategy of segmentation gave Roshan room for substantial growth in

subscribers. They became the market leader by a huge margin. Beside the segmentation strategy

Roshan also focused on certain products for mass use such as M-Paisa. Youth and women were

and are the other focus points of Roshan’s future planning. Within their categories of products,

they offered different data services for business and corporate sector.

A strategy based on segmentation might be successful for a period of 5 to 10 years but it would

not guarantee a healthy competitive position in the long term. The Afghan market has a limited

capacity when it comes to segmentation. In a few years’ time, the market will be fully segmented

and operators will be imitating each other’s segmentation strategy.

The operators have used different strategies in combination with other factors such as innovative

products, improving network coverage, increasing service points and introducing new products

and technology. However, the main strategy, complemented by the above-mentioned factors, was


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the differentiation strategy, meaning the telecom companies have moved on from a product-

centric to customer-centric approaches.

Because of the government rules and regulations designed to protect the less powerful

companies against the more powerful ones, it is difficult to compete on prices as it can result in a

price war whereby the international companies with big budgets can easily evict other companies

and monopolize the market.

Considering the combination of different strategies being used in the past seven years, we can

argue that Porter’s assumption that only one strategy can be successful at a time does not always

hold. The analysis above does confirm that only one strategy can be successful at a given time

such as Roshan’s low pricing strategy in 2003. But to succeed in the long term a combination of

the generic strategies should be used. By staying with one strategy it would be very difficult to

catch up with the dynamics of the telecommunication market. A combination of strategies is the

key to the future.


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References

Communications, M. o. (2003). Telecommunications and Intrenet Policy. Kabul: Ministry of

Communications

Communications, M. o. (2005). Telecommunications Services Regulations Act. Kabul:

Telecommunication Regulatory Board.

Datta, Y. (2009). A Critique of Porter's Cost Leadership And Differentiation Strategy. Kentucky:

Northern Kentucky University.

MCIT, telecommunications Services Regulation Act, February 2006.

Porter, M. (1980). Competitive Advantage.New York: Free Press.

Porter, M. (1985). Competitive Strategy.New York: Free Press.

Porter, M. (1996). What is strategey? Harvard Business Review.

Sangin, A. (2008). Summary of Achievements in the Year 1386 ( 21 March 2007-20 March 2008).

Kabul: Ministry of Communications and Information Technology.

Team, G.-A. (2006). State of Telecommunication and Internet in Afghanistan. Kabul: Ministy of

Telecommunication and Information Technology.

Yin, R.K. (1994), Case study research: Design and methods. Thousand Oaks, SAGE

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