Maxis Communications Berhad (Maxis) Telecom Service Provider

The following sample essay is about the telecommunications service provider Maxis Communications Berhad (Maxis). Read the introduction, body and conclusion of the essay, scroll down.

I would like to thank my professor, Dr James Nayagam for his guidance, comments and suggestions. I also gratefully acknowledge research support from Maxis website, Ministry of Energy, Communication & Multimedia, Malaysian Communication and Multimedia Commissions, and Statistics Department.

Maxis Communications Berhad (Maxis) is a mobile focused telecom service provider with fixed line and IDD businesses to support its wireless operations.

It is the number one cellular service provider in Malaysia by quality and quantity of subscribers as well as profitability. The major part of my research on Maxis will focus on its mobile division because this currently comprises the bulk (over 90% of the total revenue) of the company’s operations. The company is well placed within an expanding and stable Malaysian telecommunication market, which should support continued fundamental expansion off an already impressive base. Given what Maxis has already achieved, the company will likely remain one of the foremost Southeast Asian operators.

This paper reviews the performance of Maxis Communications Berhad (Maxis), a mobile focused telecom service provider with fixed line and IDD business to support its wireless operations. It is the number one cellular service provider in Malaysia by quality and quantity of subscribers as well as profitability. The major part of my research on maxis will focus on its mobile division because this currently comprises the bulk of the company’s operations (over 90% of total revenue).

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The review period covers 5 years from 1998 to 2002.

I have organised this paper into three sections to provide a better understanding of Maxis’s survival and its competitive edge in the telecommunication market. The first section explains Michael Potter’s theory on Competitive Strategy. As for the second section, I will analysis the telecommunication industry and the third section will be an analysis on the company’s performance.

The data for this review is obtained from various sources. The data on company’s financial performance is taken from the annual report for the financial year ending 31 December 2002. The information on market shares and regulatory issues is obtained from the Malaysian Communication and Multimedia Commissions and Ministry of Energy, Communication and Multimedia and the population data is from the Statistics department.

COMPANY BACKGROUND

Before I proceed on to the analysis part, I would like to provide a brief description of the company I choose for the assignment. Maxis was incorporated in Malaysia on 19 October 1986 under the name of Binariang Sdn Bhd as a private limited company. The company became a public limited company on 5 September 1997, taking on the name Binariang Berhad. It changed its name again on 12 July 1999 to what is currently known as Maxis Communication Berhad.

In 1993, Maxis obtained telecommunications licences authorising the company to operate on domestic fixed line and mobile networks on a nation wide basis as well as an international gateway facility. Subsequently the company initiated mobile telecommunication operations in August 1995, becoming the first digital phone service to employ GSM technology. Shortly afterwards in 1996, the company launched its domestic and international wire line ventures. Maxis’s rapid progress in telecommunication continued with the earliest rollout of comprehensive WAP services of any operator in the country, as well as the first GPRS and 3G calls in Malaysia. The financial details of Maxis are presented in Appendix 1, 2 ; 3.

SECTION 1 – STRATEGIC FRAMEWORK

An Overview of Michael Potter’s Strategic Framework

A typical approach to strategy revolves around a firm’s ability to achieve a defensible and profitable “strategic position” in its industry. Among the most widely used tools for determining a firm’s strategic position is Michael Potter’s “Five Forces”. This framework allows a firm to assess its position in an industry in terms of the intensity of rivalry among existing players, barriers to entry, the bargaining powers of suppliers and customers, as well as the threat of new entrants.

In Competitive Strategy, Potter provides the organisation with a fresh way of looking at strategising; from the point of industry itself rather than just from the point of view of markets, or of organisational capabilities. Potter argues that in order to examine its capability in the market place, an organisation must choose between three generic strategies: cost leadership – becoming the lowest-cost producer in the market; differentiation – offering something different, extra or special; and focus – achieving dominance in a niche market.

Taken together, these changes constitute a fundamentally new approach to the management of the multi-business enterprises. In today’s telecommunication industry, the only course action which is more dangerous than adopting these changes is ignoring them.

SECTION 2 – INDUSTRY DYNAMIC

Telecommunication Market Structure

Telecommunication services in Malaysia have been traditionally provided on a monopolist basis. Since 1996 Malaysia has adopted a general liberalisation model in order to develop its telecommunication sector. Over the past years, the government has issued licenses to several new operators – each a powerful corporate group. As a result, the industry once monopolised by Telekom Malaysia now has panoply of players offering fixed line and wireless services. Beginning of last year (2002) there were 5 licensed telecommunication companies; Telekom Malaysia, Celcom, Maxis Communication, TIMECel and Digi. The telecommunication operators have since been consolidated into three major players namely Maxis Communication, Telekom Malaysia and Digi.

Several policy initiatives have been implemented to foster competition in the industry, including those that are relevant to the determination of boundaries between competitive and monopolistic market, licensing of new entries, monitoring performance and maintaining sustainable competition in the market. The key to this development trend is to enhance liberalisation efforts that have been taken by the government to allow for private participation in this sector. In addition to the liberalisation, the role of the telecommunication regulator shifted from Jabatan Telekom Malaysia to The Malaysian Communications and Multimedia Commissions (MCMC). Formed on 1 November 1998, the MCMC assumed responsibility for the regulation of the communications and multimedia sector. The commission comes under the purview of the Ministry of Energy, Communication and Multimedia.

Malaysia’s step forward in this area is part of an overall adjustment to revitalise the policy aims and objectives of Vision 2020, and it represents a statement of importance which telecommunication is to play in economic and social development.

Mobile Market

The Malaysia cellular market has grown by leaps and bounds in recent years, posting 15%, 39%, 74%, 44% and 21% growth per year through 1998 to 2002 to reach 9.1 million subscribers by end 2002, implying about 38% penetration in the market. The recent strength is largely due to the popularisation of economical pre-paid services within the market as well as falling costs for handsets and a recovery in economic factors. The subscriber growth data is provided in the table below.

Though the percentage of growth seems to be reducing, there is still room for the market to expand. Various factors including income bands, geographical and the age factor of the Malaysian population is seem to support this growth of the mobile market from its existing level. Middle to high income classes within the Malaysian population have a proven affordability track record and this class comprises the majority of the country’s population. Current market is focused in the Klang Valley, which is the core of the industry. Geographically most areas outside Klang Valley are relatively untapped. Adding to the fact that 43% of the Malaysian population is aged under 20years, this 43% represents 10.2 million people. This not only augurs well for the future subscription growth but also more importantly, enhances the prospects for data and value added services.

We should also not ignore the importance of mobile phones purchased under corporate accounts, a phenomenon that is becoming increasingly prevalent at even the lowest rungs of the corporate ladder. In fact, it is not uncommon in Malaysia to see workers with low incomes, such as drivers, supplied with mobile phone because it improves their accessibility to their employers for jobs that requires mobility.

Mobile Market Competitiveness

The mobile market seems to be overcrowded, with a total of 5 players. This has since changed and the numbers have currently been reduced to three. In 2003, two mergers took place: Telekom Malaysia bought Celcom and Maxis took over TIMECel. Though the numbers are reduced there is still strong competition among the three. Despite occasional price cutting from smaller players, overall competition has not been as fierce as feared following complete mobile sector deregulation in 2002. IT seems that the Malaysian operators have practised co-operation. This is quite evident when market leader Maxis and TRI have not resorted to the cut price wars which the net effect has been controlled competition. Market fundamentals have been held up despite attempts by upstart from Telekom and Time to break into the market competitive pricing. Competition is very much presented in the mobile market, but the level of competitiveness varies.

There are a number of reasons:

* Branding takes more importance than price for the customer. In Malaysia, brand perception has a much, if not more, impact on consumer choice than pricing. Being aware of this part, companies have played along by placing a greater emphasis on branding rather than pure price competition.

* Efforts by the main operators to avoid pure price competition. In line with the consumer response in Malaysia, the operators have focused mainly on branding, along with packaging and various promotions. This has kept prices opaque and prevented pure price competition from materialising, even though the market has been completely liberalised for almost three years.

* Sizeable industry growth has allowed operators to expand the scope of the operations without restoring to aggressive pricing tactics. The pie has been expanding at a pace that has allowed operators to behave better than in other markets where growth has become a zero-sum game.

An established co-operation between operators as well as the Malaysian consumer behavioural of preference for brand and services over price should keep the overall price stable. Furthermore, the consolidation in the mobile market could further improve the competitive landscape.

Macro Perspective

Macro issues play an important part in any industry. It has a direct impact on the country growth which would influence the market of any industry. Therefore it is only proper to discuss the macro issues that influence the market.

After a slowdown in 2001 in line with other regional economics, Malaysia posted a strong GDP growth of 4.1% in 2002 and expected to achieve the growth target of 4.5% in 2003. These rates imply a stronger growth which boosts the general population income that influences the spending power.

On the fiscal policy, Malaysia has had a strong track record and was one of the few Asian economics that did not turn to IMF for assistance during the Asian Financial crisis. The fiscal policies implemented by the government have provided stability in the market. The country’s foreign reserves are up to over US $32.5 billion and are able to support almost six months of import. Total government debt represents 38% of the GDP, which is at a manageable level. Politically, Malaysia is also very stable and do not expect major changes with the change of guards in October 2002.

Therefore, from a macro perspective, Malaysia’s strong GDP growth trend and stable fiscal and political health had and will continually improve the affordability and consumer confidence.

SECTION 3 – COMPANY’S DYNAMICS

Maxis’s vision “To be the most preferred and successful communication group” (Annual financial report for the financial year ending 31 December 2003) has been the driving force that propelled Maxis into the number one position in the mobile market. Maxis is not only the leading market share of subscribers, but also one with the highest profit on a wide range of operating measures. The key achievements of Maxis over the last five years (1998 to 2002) have been a direct consequence of management excellence and no accident. I believe strong branding has underpinned the company’s success and built up its competitive advantage. Its market leading position for mobile telecommunication in Malaysia is primarily attributable to the following competitive strengths.

Market Leader

Maxis obtained its licences to operate mobile, fixed and international gateway services in 1993, but commenced mobile services only in 1995, long after TRI (which operators a cellular service branded Celcom) was well established. Maxis’s operational strategies fully leveraged the Malaysian market’s robust growth trends to build up its subscriber base even though it was initially competing with more limited resources. The company move from a latecomer position to overtake its more established competitors, finally seizing top market shares in 2001. The company leads in market share for both post-paid and pre-paid mobile services, earnings, revenues and on pretty much any other operational benchmark that one can use to compute the company and its peers. Refer to the chart below for details.

Source: The Malaysian Communication and Multimedia Commission

From just 18% in 1997, Maxis’s market share has risen to 31% in 2001. Maxis has posted the largest gains compared against its competitors. Also notable is Maxis’s track record in achieving a leadership position in both post-paid and pre-paid services with a market share of 38% and 32% respectively. Unlike operators such as Digi, which are skewed largely towards one segment of the market, Maxis’s base is strong on both fronts.

Highest quality subscriber base

Even more impressive than the sheer market share numbers that Maxis has acquired is the high quality of subscriber base it has garnered. In most markets, rapid expansion of market share has involved a sacrifice of subscriber quality and increased price-cutting, but not in Maxis’a case. That was the case when the Malaysian mobile sector was completely liberalised in August 2000. In the immediate aftermath, there was significant price undercutting by industry laggards such as Time and Telekom in a bid to improve market share. Rather than compete on pricing, Maxis retaliated with innovative competitive strategies and subscriber incentives. It focused on segmenting the market and rewarding greater usage. Furthermore, I believe that Maxis’s successful avoidance of direct price competition has had beneficial impact on the market as a whole by limiting and thus minimising the impact of price competition. Maxis’s provisioning for bad debts (about 1.6% of the company’s revenue) is the lowest among the operators in Malaysia, reflecting its high quality subscriber’s base.

Profitability

The combination of top market share, higher revenue generating customer base and high operational standards has meant that Maxis has done extremely well in profitability. Moving from loss of over RM300 million in 1998, Maxis’s earnings are now starting to reflect management’s prudence during the Asian financial crisis. As revenue picked up and efficiencies started from a greater economic scale; its net profit rose 173% in 2000 to RM358 million. Net profit rose another 165% in 2002 to RM950 million. The company’s Return on Equity (ROE) rose from -106.3% in 1998 to 39.4% in 2002, reflecting its effectiveness in the utilisation of capital. This resulted in a solid balance sheet and cash flow profile that I believe will be maintained. Cash flow continues to improve the company’s financial strength resulting in ample resources to fund its capital expenditure obligations.

Effective premium branding

Maxis’s ability to turn its brand into a competitive advantage is a result of a focus on creating a premium perception in consumers’ mind. Maxis understood the importance of branding. Through out the currency crisis of 1997 to 1999 when most of its competitors were cutting back on advertising and product promotion, Maxis continued to invest heavily in its brand. It was involved in sponsorship such as the premiere film “Lord of the Rings” and lately in “Disney on Ice”. It is through aggressive campaigning that Maxis has made a name for itself as “The Ultimate Brand” in today’s mobile phone service industry.

Organised distribution channel

In addition to effective advertising, Maxis’s brand strength has also been built by quality distribution channel. The Network Management Centre, its distribution channel has been awarded the ISO 9002 certification for its services. Maxis has since developed a loyal dealer network over the years due to timely payments and consistency. Over time, this has made Maxis the operator of choice for independent dealers, in turn improving the hold of the brand on consumers. The company has so far appointed 36 of its more productive dealers as Maxis Authorised Service Agents, carrying only Maxis products. Partnerships have also been established, under which distribution is outsourced to select distributors who in turn deal directly with the dealers. This minimises the required resources from Maxis’s standpoint and yet ensures a seamless reach to a broader customer base in a highly efficient manner. Besides this, the company sells its product through a network of Maxis centres in selected high-penetration areas, such as fast moving consumer goods (FMCG) outlets and even banks/ATM.

Segmented Marketing

With strong distribution and marketing network in place, Maxis took the next step in customising the marketing effort into segments to achieve optimal results. Not wanting to affect the perception of the high end “Maxis” brand for post paid users; the company launched another brand, “Hotlink”, for its pre-paid service.

Here, the company has segmented its marketing efforts further within the post-paid and pre-paid markets. On the post-paid side, the company has broken the market down between business and consumer segments while customer care, distribution, etc. are varied to cater to each segment’s specialised needs. Post-paid customers who qualify for the company’s “MOC Elite” programme, for example, get exclusive access to the company’s priority centres and counters much in the same way that business class air travellers have their own express counters for convenience. As for the pre-paid, the company targets the younger group and budget-conscious customers, yet at the same time portraying a premium image, either through pricing and innovation. Pre-paid is marketed through its traditional agents and FMGC outlets, giving them more widespread presence. This is quite evident in most of the mobile phone outlets that sell Maxis products.

Innovative Products

Maxis’s products are clearly among the most innovative in Malaysia. Particularly on the post-paid side, the company has four packages that are creatively structured compared with others that are available in the marketplace. The “Maxis family package” is an excellent example of the company’s innovations. Under this package, subscribers can sign on supplementary members within the same family and they are awarded a significant discount on monthly access and calls made among them. Here the company is able to broaden its customer reach while minimising on acquisition cost and reduce credit risk at the same time. The latest product launched, known as “m-style^3”, bundle voice, data and other value added services into one fixed price plan. This product is targeted at the young professionals aged between 25 and 35. However, it will not affect the business and high-income users who are already benefiting from their existing service and excellent care that comes with it.

Maxis was the first in Malaysia to launch the WAP services, first to trail GPRS, first to offer roaming services, one of the few operators that have readily available tri-band phones for corporate clients travelling overseas and the first to launch the mobile lifestyle package. These innovative services made Maxis the choice for most mobile phone users.

Delivery of Quality Services

Once the customer is drawn in through robust distribution, segmented marketing and innovative products, the company creates a sense of continual efforts made in battering its services through connivance of payment, innovative products, usage discount for high users etc. This high level of service has paid off not only in terms of subscriber numbers, but also in terms of profitability (revenue and profit has been on the increase since 1999) because consumers have been willing to pay more for the services. Superior customer service was a Malaysian consumer need that was not being adequately met by the market. Maxis management identified this need and catered to it.

Integral to the company’s delivery of quality customer service has been the up keeping of its network. To maintain its premium image, the company has been investing significantly in building and micro cell coverage and will continue to do so. The company has been upgrading its spectrum to increase network coverage and this has since been enhanced further with the purchase of TIMECel.

Besides upgrading the network system, Maxis also continues to introduce ways of rewarding their existing customers. This is especially targeted at its higher-end users and is part of the core strategy to retain customers of high value, which will help the company to retain its premium image as well as revenue. Such measures include “Advantage Savings” rebates, the “Maxis One Club” and “Bounslink”, to name a few. Under these programme customers are given various rebates, discount and free services. One of them is the “Maxis One Club”, where membership is extended by way of invitation only. In this programme customers are offered a wide range of services; from dry-cleaning, giving free tickets to the cinema to exclusive facilities at various hotels and restaurants.

Strong Management Team

I believe Maxis’s success in creating brands that dominate the market throughout a range product segments is due to the strength of management. Maxis’s professional team comprises of a wealth of experience from various specialised backgrounds ranging from the IT to consumer sectors. The company has an ideal blend of local and foreign management, with 7 of the 11 members of the senior management team having more than 15 years of experience at leading multinational companies such as IBM, Shell and Motorola, to name a few.

The company’s pole position in the Malaysia telecom sector, its place among Malaysian corporate as well as its impressive profitability track record demonstrates the company’s strong management capabilities. The fact is that the current management team has built Maxis into a regional operator in just over six years, despite entering the market five years behind Celcom. Thus, in addition to surviving and thriving in a competitive environment, the management has proven its ability to weather significant macroeconomic and telecom market shock well. The company came through the currency crisis without losing focus on its long-term goals and it was at this time that the company embarked on the development of the “Maxis” brand. This has been a key contribution to the company’s rise to prominence.

Synergy with sister companies

Behind the placement of the talented group of managers that has achieved so much is the strategic execution by the backing of its main shareholder. Maxis has benefited from its association with the Usaha Tegas Group (UT) of Malaysia. UT’s investment portfolio in Malaysia consists of a variety of companies including media and broadcasting, leisure, property and power in addition to telecommunication. In addition to formulating the key components of the Maxis strategy, UT has also allowed Maxis to leverage off its sister companies to significantly improve its market standing. For example, Tanjong operates one of the largest cinema networks in Malaysia in addition to being one of the four forecasting operators in the country. Through these cinemas, Maxis offers its loyal customers various rewards such as free or discounted movie tickets. Astro, which also falls under UT, is the country’s dominant pay-view TV operator and owns and controls a large chunk of radio programming.

Working together, the two companies have complemented each other effectively. In addition to the advertising benefits for Maxis’s products via Astro’s hold on media, Maxis provides stock quotes via SMS using software developed by Astro. The two companies also cooperate on sponsoring concerts (and other events) and on the development of practical data applications for customers. Jointly these companies are able to reach a reaching broader population base through co-branding. Because of the synergy with sister companies, Maxis is far bettered positioned than any of its competitors. I believe that the relationships that Maxis enjoys with the UT group will help it to sustain its competitive advantages.

Strategic Partnership

Maxis has also established alliance with other major players in this region. One of such alliance is the launch of the “World’s First & Largest Wireless Broadband Alliance” together with four other major telecommunication companies; Korea Telecom, China Netcom, StarHub and Telstar. Through this alliance, Maxis has broadened his network channel to the international arena, which would also make Maxis a regional player.

With the acquisition of TIMECel in 2003, Maxis is placed in a prime position to capture a significant portion of high value customers. The additional network coverage will certainly enhance the service quality to its existing and new customer base. Maxis will be able to increase its network capacity and thereby allow it to further optimise network design especially in urban areas.

AWARDS ACHIEVED BY MAXIS

Maxis has achieved many awards for the past years. Last year, 2002 it has won 16 awards. They are:

•  Outstanding small companies award by FORBES 2002
•  Most popular choice Telecommunication Service Provider
•  The 4th Best Asian GSM Carrier
•  No. 1 Telco in Malaysia ; No.2 in terms of corporate governance among public listed companies in Malaysia
•  Malaysia’s No.1- High Quality Services/Products, Innovative in responding to Customers Needs & Companies Others try to Emulate
•  Rated Best Counter Service Management by Ministry of Energy, Communication & Multimedia
•  Call Centre of year
•  Malaysia No.1 – Best Corporate Strategy, Best Operational Efficiency & No. 2 Overall Best Managed Company.
•  Best Newly listed company in Malaysia
•  Best IPO – Finance Asia
•  Voted as the Best IPO deal
•  Equity Capital Markets Poll Best Asia Pacific IPO
•  Leader in Corporate Governance Malaysia
•  Malaysia Equity Issue of the Year
•  Equity Deal of the Year
•  Best Equity Deal

CONCLUSION

Maxis provide an excellent example through its continuous improvement in the face of extensive local and global competition. Staying ahead of the field means the company can never afford to stand still. In the case of Maxis, it never stopped planning its next strategy (which is quite evident from the company’s achievements in the last 5 years). The company achieved its leading position through a clear strategy of developing premium brands, emphasising high network quality and customer services, and introducing innovative services and products.

With its recent acquisition of TIMECel and its strategic alliances with the major regional telecommunication players, Maxis will continue to gain the lion’s share of the network market addition. This would also allow Maxis to compete more effectively in a consolidated industry as well as in the international arena and to deploy network capital expenditure more efficiently.