Introduction: Company Profile
The telecommunication industry is one of the fastest-growing industries in the world. Nigerian government’s deregulation of the telecommunication industry has attracted foreign direct investment valued at $35 billion (Hieu & Nwachukwu, 2019, p. 35). According to Hieu and Nwachukwu (2019, p. 35), mobile operators in Nigeria contribute approximately $8.3 billion to Nigerian’s economy. MTN Nigeria is one of the leading companies in the telecommunication industry.
Since its inception in Nigeria, the company has grown and expanded its services to at least thirty-six Nigerian states within the last sixteen years. It is the market leader in the country, accounting for 37.89% of the total market share, while its main competitor, Globacom, has a market share of about 25.78% (Hieu & Nwachukwu, 2019, p. 36). The company’s product and service offerings include voice and data services, internet products, broadband, and mobile products. The company needs to be agile and innovative to meet customers’ demands to achieve its vision.
Strategic Issue
Managers deal with dynamic changes in their business environment through strategic management and financial, predictive, and strategic planning. Strategic management refers to the management decisions and actions directed toward building a company’s capacity to deliver value to customers and stakeholders (Fuertes et al., 2020). The process starts with environmental scanning to identify positive and negative features within a business’s internal and external environment. This approach explores market changes in customer demands, pricing models, technology, competition, and regulations to identify business issues.
Various techniques and tools, including PESTEL, SWOT, and Porter’s five analyses, can be used to evaluate and identify the internal and external issues affecting business operations. These tools can, therefore, be used to determine the potential problems affecting MTN Nigeria. Common challenges in MTN’s operations include the company’s regulatory incompliance, frequent internet service disruption, low customer retention capability, declining revenue growth, rising operational costs, and increased price competition (Ekekwe, 2017; Hieu & Nwachukwu, 2019). The researchers critically analyzed the company’s internal and external environment to identify these issues.
Out of the six identified problems, high operational costs can be considered the most crucial strategic issue affecting MTN. Abedin et al. (2015) define a strategic issue as any development, trend, or event that can potentially affect the current or future direction of organizational strategy. MTN’s rising costs have considerably impacted its current pricing strategy. Since its inception in Nigeria, MTN has been a market leader providing quality services at low prices. A study conducted by Kadiri and Lawal (2019) showed that the organization offered the second-best billing system after Visafone in Nigeria. However, during the last fiscal year, the enterprise raised its prices to deal with its internal economic crises. Since the company had to change its price strategy to deal with rising costs, this report identifies that MTN’s rising costs are a crucial strategic issue.
A second definitive feature of a strategic issue is that it needs a significant number of resources. MTN Nigeria spends a substantial amount of its revenues to manage its costs. The company expenses in 2020 increased from N776.66bn to N920.05bn, accounting for an 18.46% increase in costs (“MTN profits,” 2021, para. 2).
The expenses that significantly increased the company’s cost include Interconnect costs, depreciation of property and equipment cost, and network operating cost, which contributed 12.22%, 16.33%, and 33.75% to the total costs, respectively (“MTN profits,” 2021, para. 6). Presumably, the organization’s debts have increased significantly due to the rising expenses. The enterprise’s debts increased from N412.54 billion to N521.15 billion in the last fiscal year (“MTN profits,” 2021, para 8). In this light, it is logical to argue that the company’s costs require a significant amount of its revenues (resources) to be effectively managed; therefore, it is strategic.
The third feature that typifies strategic issues is that they have to be future-oriented and have multifunctional consequences. This paper provides a detailed evaluation of how these aspects relate to MTN’s identified strategic problem and the strategic issue’s impact on the firm’s competitive performance. However, it is worth mentioning that the costs can affect normal business operations. An organization’s cost management framework lays the foundation for its business practices, determines its customer delivery function, and helps distinguish the support activities needed by the enterprise to deliver customer value. It involves planning the actual costs of a corporation’s activities through resource planning, cost estimation, budgeting, and cost control.
Any changes in the internal and external environment will lead to changes in cost management practices. The company’s management will need to change the exploitation of internal resources and capabilities to become sustainable. According to Abedin et al. (2015), strategic issues require consideration of the company’s external environment. In other words, a strategic problem might emanate in response to managers’ diagnosis of the external environment. This issue, as demonstrated in the next section, stems from the company’s external environment. A company’s costs influence how it allocates resources and responds to external opportunities. Additionally, effective cost management can increase shareholder value and help the company mitigate adverse effects by generating profits from revenues.
Source of the Strategic Issue
As indicated earlier, the substantial increase in operational costs is among the most crucial strategic issues impacting MTN. According to MTN’s chief finance officer (C.E.O), Modupe Kadri, the company’s goal was to cut down its debts by half during the first quarter of the 2021 fiscal year (Ohuocha, 2021). However, the enterprise managed to minimize its arrears during the final quarter of the last fiscal year (“MTN profits,” 2021).
MTN Nigeria’s debt-to-equity ratio reduced from 27.46% in 2019 to 26.54% in 2020 (“MTN profits,” 2021, para. 3). ProShare Research attributed the reduction in the debt-to-equity ratio to the enterprise’s profit and equity (“MTN profits,” 2021). Generally, having a low debt-to-equity ratio is desirable because it improves creditors’ favorability towards the company.
Three major strategies are used to lower a firm’s debt-to-equity ratio: increase revenues, inventory management, and debt restructuring: MTN Nigeria settled on increasing revenues by adjusting prices. Increasing revenues can be achieved by reducing costs, increasing sales, or raising prices to generate revenues (Gallo, 2017). High prices improve a company’s profitability by increasing sales revenues. The organization can then use the extra revenues generated from the profit margins to finance its debts.
While the company’s costs were rising, its local market yields were at their historic low. This is evidenced in Proshare Research’s report, which revealed that although MTN’s profits were increasing, the company’s marketplace yields were strained (“MTN profits,” 2021). This observation implies that the surge in MTN’s profits did not arise from cost reductions. Although anecdotal, MTN Nigeria’s price strategy has increased the company’s profitability. The true motivations behind the price increase are not known. The company could have raised its prices to address its rising costs to increase its market valuation.
The company’s decision to raise prices to deal with cost increases highlights the importance of the governance board in strategic management. The company’s website shows its governance structure consists of several board committees that conduct internal and external auditing to determine its operations, strategic talent review, and sourcing (“MTN Group,” n.d.). From its governance structure’s analysis, it is clear that the board makes all strategic decisions. Unfortunately, the above-mentioned governance structure has been ascribed to most multinational companies’ unsuccessful nature.
For example, Procter and Gamble (P&G) realized that its corporate structure was the primary reason behind its consistently low sales revenues despite implementing various strategies to boost sales. The organization realized that its centralized governance model and corporate structure created unnecessary complexities and bureaucracy.
Like P &G, MTN Nigeria has a centralized organizational structure, meaning that the parent company coordinates business activities and transfers resources and capabilities to its subsidiaries. The resource-based theory asserts that a company can exploit its internal resources to build a competitive advantage (Adeoti et al., 2017). The theory maintains that companies must seek a cost leadership strategy in all business aspects and activities to achieve a competitive advantage. However, this approach limits the decision-making power of subsidiaries’ managers and their ability to respond to the local market in real-time (Dyer et al., 2020).
According to Malfait et al. (2017), the board is expected to provide direction but not manage the company. The board at MTN Group in Nigeria monitors the developments outside and inside the organization, evaluates management actions, proposals, and actions, and specifies the strategic choices that define the company’s course of direction.
The continuum of the board of governance emerges from a “phantom” – knowing nothing about the organization but being highly engaged in decision-making and modification of the company mission and visions. The company has a very active strategic committee that performs internal and external analyses to identify strategic issues and develop solutions to address them. From the above analysis, it can be deduced that the company uses a classical management approach, typified by the following elements: centralized leadership, emphasis on productivity, profit maximization, and select-few or single-person decision making. Under the classical management approach, a business’ control is held by a select few who impose exclusive control over the direction and decisions the company implements.
An example of how the company has used revenues to boost its market valuation involves its stock prices. The company was initially listed on the Nigerian Stock Exchange (NSE) with ordinary shares of 20,354,513,050, which was estimated to cost $0.25 per share (“MTN profits,” 2021, para. 2). Today, the company, MTN Group, has approximately two trillion in shares. Before its NSE listing, MTN released an earnings report for the first quarter of 2019, advertising its revenues and before and after-tax returns. According to ProShare Research’s report, showcasing these numbers attracted investors, leading to an increase in the firm’s share from $0.25 per share to ($0.44) by May 2019 (“MTN profits,” 2021).
Strategy formulation is a complex process involving identifying, interpreting, and tackling business problems with company resources. The strategic decision-making process is characterized by complexities that emanate from conflicting interests and the independent board’s diversity (Johnson et al., 2017). Stakeholders’ role in governance boards is that they supply the board with information that can influence the board’s strategic influence, especially if the information is well-captured (De Wit & Meyer, 2010). Because the firm’s committee makes all strategic decisions, it can be surmised that the stakeholders are indirectly involved in decision-making by supplying the board with information.
Political behaviors will likely influence the board’s decision-making because MTN’s board members need to own significant stocks to become part of the company’s structure. According to MTN Group (n.d.), board members are nominated, and it is a requirement that they have considerable stocks at the company. Additionally, it is a condition that the board composition is representative of different stakeholder groups to increase diversity. Therefore, naturally, every board member has different needs and represents diverse groups, resulting in competing demands. It is typical for stakeholders to have personal interests and ambitions.
An example of conflicting demands is when one group supports the need to maximize profits while the other endorses the significance of creating consumer value. For example, the board could have decided that reducing the costs was a business priority rather than creating customer value, hence raising prices. Contrary to this practice, the stakeholder theory asserts that a firm can create value when the needs of its most important stakeholders are met in a win-win fashion (Mori, 2010). The core assumption underlying political behaviors is that since organizations are made of stakeholders with competing demands, decision-making will be based on the preferences of individuals with the most powerful influence (Mori, 2010). This point implies that the proposals that get the most votes will determine the company’s strategic direction.
The above-mentioned political behaviors are subject to bias because the voices of members with substantial stocks have more weight than stakeholders. This approach is contrary to the rationality dimension, which occurs when strategic decisions are guided by information gathered from stakeholders (Mori, 2010). In this case, decision-makers attempt to be inclusive and exhaustive in making strategic decisions. Known objectives guide the decision-making processes, and board members collect business and stakeholder information to develop a set of strategic options.
Impact of the Identified Strategic Issue
A strategy delineates the method through which a company will achieve its mission and objectives to remain competitive. There are three main types of strategy: corporate, business, and functional strategy. The corporate procedure determines the direction of the company and management practices; the business strategy determines the activities and methods to acquire a competitive advantage in the market. Lastly, a functional approach maximizes the productivity of organizational resources and assets. The governance board mainly determines the corporate strategies – the top management creates policies that align with the corporate strategy, while middle-level managers develop department-specific plans for business-related strategies.
This study already demonstrates that the company’s cost changed the organizational strategy. Price is a business strategy that aims to give a company a competitive advantage in the market (Godfrey, 2016). Many companies choose to compete on prices to attract customers. However, MTN Nigeria’s price strategy reduces its competitive capability in the market. A study conducted by Nazari et al. (2014) demonstrated that price fairness perception is the foundation of customer loyalty and satisfaction.
When clients perceive a company’s prices unfairly, they spread negative information about the company or engage in behaviors that will harm the seller’s reputation. Nazari et al. (2014) also note that the perspective of price fairness does not relate to demand and supply concepts; instead, clients create these perceptions based on assumptions of how much profits a company generates from those prices. Negative views may affect a firm’s brand image, which is one of its essential resources.
The issue also has strategic implications because it can influence the firm’s market position. Michael porter hypothesized that a company’s attractiveness could be determined by five main factors: rivalry intensity, entry barriers, the threat of product/service substitution, buyers’ bargaining power, and suppliers’ bargaining power (Mintzberg et al., 2009, p. 100). From Porter’s perspective, MTN price increase makes the company unattractive due to the following reasons:
The telecommunication industry in Nigeria is very competitive, with many companies competing based on prices. The price competition can mainly be attributed to the fact that most telecommunication companies have the same product and service offerings, meaning that MTN’s products/services have no unique offering (Godfrey, 2016). In cases where value is low, price because deterministic, and the firm offering lower prices gains more customers. A study by Hieu and Nwachukwu (2019) revealed that one of MTN Nigeria’s weaknesses is poor connectivity. This finding indicates that MTN increased its prices without value addition to customers, essentially making it unattractive.
During the company’s initial years in Nigeria, customers had low bargaining power because there was little competition in the market in terms of quality. Its main competitor’s service was the Nigerian External Telecommunication (NET), characterized by unfriendly customer service, old equipment, and congested lines. MTN services were a breath of fresh air for customers because they provided better services and low prices. However, companies such as Celtel and Globacom entered the market with a similar offering, thereby increasing competition and customers’ bargaining power.
Voice and internet services became undifferentiated, making price the critical differentiating factor. What makes their price strategy even more threatening is that the switching costs in the telecommunication industry are low. A study conducted by Kadiri and Lawal (2019) revealed that the cost of acquiring telecommunication services is low; thus, when customers do not get a fair price for a service/product, they shift to other service providers. Customers can quickly shift from one service provider to another because buying a new SIM card is all the customers need.
As mentioned, the company’s offerings are not unique in the market; thus, the threat of substitution is high. Competitors, including new market entrants, can provide the company’s offerings at lower prices. Taken together, these factors can make the company susceptible to competition, thereby increasing its likelihood of losing its competitive advantage and market position. Another factor that renders MTN’s pricing approach a poor strategic decision is a fact that it is incoherent with its vision and mission. MTN’s mission statement in Nigeria is “to make our customers live a whole lot brighter,” while its vision statement is “to lead the delivery of a bold, new, digital world to our customers” (“MTN Group,” n.d.). This mission and vision signal the company’s commitment to ensuring its operations are customer-centric. The company’s current price strategy increase does not align with this pledge. The organization decided to deal with its financial situation by raising prices without offering any value to customers to justify the raise. This strategy is not customer-centric; thus, it is incoherent with the company’s vision.
Conclusion and Recommendation
The strategic issue affecting MTN Nigeria is its high operational costs. These costs take significant resources from the company, forcing it to change its pricing strategy to manage its expenses. These adjustments negatively affect the company’s competitive capability and brand image, making it susceptible to losing its market position. In line with the resource-based theory, the company should adopt the best-cost strategy. Using this approach, MTN Nigeria can create value for consumers but still have lower prices than their competitors. The company should also redesign its centralized structure and encourage regional decision-making power to allow effective responses to local problems.
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