Deloitte Report

The approach for CEOs

Deloitte Touche Tohmatsu (DTT) recently came out with a report on the global technology, media and telecommunications (TMT) industry, and the CEOs concerned. It looks at the challenges that TMT executives face or have faced. Express Computer presents the first part of excerpts from the report

As we reach the end of 2005, the TMT industry and its leaders need to take stock, understand the available options, and hone strategies for the next five years. In a way, the industry finds itself in the driver’s seat of the global economy, exerting a level of influence that has never been so strong, and will only get stronger over the next five years.

However, while TMT companies will enjoy unprecedented opportunities through 2010, it is not the time for complacency: the margin for error will thin unremittingly. Through DTT’s work with the world’s leading TMT companies—and dedicated research —TMT practices of DTT’s member firms have identified five of the most critical issues TMT CEOs will face over the next five years.

• Making sense of China and India as suppliers and customers.
• Capitalising on new and improved technologies.
• Knowing who your adversaries are going to be.
• Innovating the business model.
• Creating the next blockbuster.

Know your adversaries

Just over five years ago, common wisdom asserted that the rise of the Internet and e-commerce would imminently and irrevocably change the shape and dynamics of competition in the TMT sector. Yet today, while the Internet continues to grab headlines, traditional incumbent TMT companies remain firmly entrenched and dominant.

So what about the next five years? Newcomers will still threaten the old guard, and it is likely that a few of these will become global TMT titans by 2010. Yet at the same time, the law of increasing returns will continue to apply stubbornly. Big companies will get bigger, and the chasm between the biggest and smallest will probably get wider and deeper.

In the semi-conductor sector, an industry analyst has predicted that within 10 years, 40 percent of players will have left the industry. Moreover, as the big get bigger, their capacity to gobble up new players will increase.

CEOs must understand the threat posed by new entrants, but they should focus as much, if not more attention, on established players, because the single greatest competitive threat may well come from companies that have the size and scope to step into new TMT markets.

Boundaries will blur

The potent source of new competition will come from existing TMT players, and the industry will witness the continued blurring of long-established boundaries between telecom, media and technology—although not all of this will be successful. Technology companies and media firms, in a few instances, are already starting to compete for the attention of the same customers.

Consumer electronics manufacturers and telecommunications operators are selling media content. Music companies are generating revenue from mobile networks. Fixed broadband network operators are developing on-demand television services.

Increasingly ubiquitous bandwidth and connectivity, growing storage capacity, greater processing power and globally-available digital content will enable TMT companies to serve more consumers with a greater number of products and services, on a more frequent basis, with different devices, in various locations, creating enormous rewards for those companies that find the right approach.

TMT CEOs will have to learn how to navigate an increasingly complex competitive environment. Further, as collaboration becomes increa-singly obligatory economics, executives will be differentiated by their ability to identify, form, manage, evolve and dissolve partnerships.

Consolidation is the key

The quantity and scope of TMT mergers and acquisitions will continue to grow. M&A activity will typically be focussed on horizontal rather than vertical integration. At least in the immediate term, the TMT sector should see a continuation of M&A activity that has been increasing at speed since 2004, after a few quiet years following the dotcom crash.

At the time of writing this report in early November 2005, over $200 billion worth of TMT acquisitions had been announced. TMT CEOs should be wary of succumbing to boardroom boredom and ensure that any investments made are carefully evaluated, even if the time-scale for transactions is shortening. While many TMT boards have spent several years focussed on cost-cutting, not acquisitions, they should be careful not to squander hard-earned cash reserves.

Bottom-line matters

It is imperative to devise a winning strategy, but you must understand exactly who you are competing against. And while that may seem trivial, it is actually a significant challenge—particularly in a sector such as TMT where technologies, alliances, market channels and consumer preferences are constantly in flux.

A few points that the report suggests to CEOs are thus:

• Know your real competitors.
• Fight only the battles that need to be fought.
• Be ready and able to partner.
• Focus on differentiation.

TMT CEOs need to monitor the periphery of the business—beyond their traditional competitive boundaries—looking for de-stabilising forces that are likely to produce the major competitors of tomorrow.

Differentiation has always been a key element of TMT strategy, but it will be even more critical in the future and likely to remain one of the potent competitive tools. Many existing TMT markets are deteriorating into price-dominated competition and ultimately commoditisation. Differentiation will become key, and by implication, leading the drive for intelligent differentiation will mark out the successful CEO.

Innovative business model

As in the last five years, most business model innovations will be iterative rather than radical. A key reason for this is that consumers, both business and residential, can only change their behaviour gradually. Despite this, it is likely that some TMT companies will attempt to offer products and services based on markedly different business models.

Over the next five years however, some TMT companies will be misled by hype and a few may make potentially expensive business model decisions that are at least in part driven by speculative and exaggerated comment. TMT CEOs must steer their companies away from the hype and ensure that business model decisions are based on commercial common-sense starting with customer needs and preferences.

CEOs should always remember the fundamental rule that business model innovation should start with customer needs and work backwards. Successful models are a direct response to real customer needs, whereas the majority of failed business models of the dotcom era tended to focus on everything but the customer.

Also, business model innovation can occur anywhere in the extended enterprise, from sales and marketing to supply chain and distribution, and a single change can have far-reaching implications. That is another reason why it is generally better to take small, systematic steps—so each action can be assessed, measured and adjusted to create a resilient model.

But it also means you must have a good idea of what the end-game looks like—before you start. Theodore Levitt famously said, “If you don’t know where you’re going, you might end up somewhere else.” The responsibility of the CEO is to know exactly where the company and its business model are heading—long before the journey begins.

The company that sets the pace of business model innovation for a particular sector generally captures the most value. But that does not mean you need to invent everything from scratch. Although every industry has its own characteristics and peculiarities, the fact is there are few business models that are original: essentially every sector is in the same game of selling a range of products and services.

TMT companies can save time, generate value and accelerate growth by learning from the successes and failures of others. For example,

• From the travel and hospitality industry, identifying different categories of customers and treating them accordingly.
• From the automotive sector, marketing quality, not just price.
• From the retail sector, optimising the supply chain.
• From the financial services sector, customer self-service.

Part II of this report will appear next week