Introduction
The aim of this paper is to present a strategic audit report of du. Du is one of the telecommunications companies operating in the United Arab Emirates. The telecommunications operator specializes in the delivery of the Internet mobile and wire phone services across the country (Du, 2015). Du owns and more than 3, 000 authorized dealers and 56 stores in the United Arab Emirates (Du, 2015).
The paper will present Porter’s 5 forces analysis focusing on the following elements: the threat of new entrants, the power of suppliers, the force of buyers, the threat of substitutes, and competition (Du, 2015). SWOT analysis is an essential component of a strategic audit report. Therefore, the paper also includes the following SWOT analyses: External Factor Analysis Summary (EFAS), Internal Factor Analysis (IFAS), and Strategic Factor Analysis Summary (SFAS). Moreover, the strategic audit report presents the Capital Asset Pricing Model (CAPM) and recommendations for the company.
Performance and Mission
According to the 2015 annual report of du, the company’s total revenues amounted to AED 12. 34 billion (Du, 2015). It constitutes an increase of 0.8 percent since the previous year (Du, 2015). Moreover, in 2015, the company managed to increase mobile data revenues showing a growth of 7.3 percent since 2014 (Du, 2015). In 2015, the total mobile data revenues along with fixed-line revenues were more than AED 5 billion (Du, 2015). Strong EBITDA allowed the company to achieve “growth of 7.7% to AED 5.42 billion from AED 5.03 billion in 2014” (Du, 2015, p. 10). As a result of great financial performance, du increased its dividend payment in 2015 to AED 0.43 per share (Du, 2015).
The company is an integrated telecommunications service provider whose mission is to “extend beyond communication services” and “contribute towards a positive national transformation in both the Emirates’ people and environment” (Du, n.d., para. 1).
Porter’s 5 Forces Analysis
Porter’s 5 forces analysis is a strategic instrument that helps to gain a better understanding of power distribution in a business situation. This tool will be helpful in the evaluation of the competitive intensity, which is essential for determining the attractiveness of the industry. The following forces operating on both micro and macro levels will be used for the analysis: the threat of new entrants, the power of suppliers, the force of buyers, threat of substitutes, and competition (Du, 2015).
The threat of New Entrants
The telecommunications industry is associated with a low level of threat from new entrants. It has to do with the fact that entering this business is a capital-intensive endeavor. Therefore, the necessity to own a telecom license serves as a significant barrier to entry. It is not easy to become a contender in this industry because a successful player has to possess specialized knowledge and expertise as well as operating and management skills.
Moreover, fledging telecom operators are not supported by capital markets that are significantly slowing down the pace of entry. Furthermore, potential entrants are faced with another barrier presented by the Telecoms Regulatory Authority (TRA) that makes it necessary for new players to apply for regulatory approval and licensing (Cherrayil, 2015). Therefore, the telecommunications industry in Dubai is only presented by two companies: du and Etisalat.
Power of Suppliers
The power of suppliers in the telecommunications industry is low. Even though the necessity to own telecommunications equipment such as base transceiver stations, optical fiber, and multiplexers among others makes operators fairly vulnerable to the bargaining power of suppliers, there are many producers of such hardware (Cherrayil, 2015). Therefore, the presence of a significant number of major suppliers of large equipment dilutes their bargaining power. The key manufacturers of telecommunications hardware include, but not limited to Huawei Technologies, Ericsson, Cisco Systems, Nokia Networks, and ZTE Corporation (Cherrayil, 2015). The size and scope of operations of du allow the company to have bargain deals with its suppliers.
Power of Buyers
The power of buyers in the telecommunications industry is low because there are only two companies that work in Dubai. Telephone and Internet services do not substantially differ between the two operators; therefore, customers are not presented with too much choice. Moreover, taking into consideration the fact that most people treat telecommunications services as a commodity, it can be argued that they are not interested in wielding their bargaining power. Even though switching costs for residential customers are relatively low, they usually use the services of one operator for many years without seeking better services (Cherrayil, 2015).
Threat of Substitutes
The threat of substitutes is relatively high in the industry. The availability of services offered by non-conventional telecommunications industries such as Cable TV and satellite operators poses substantial substitution threats. The cable companies, increasingly offer their customers broadband Internet services using direct lines in their homes. Moreover, railway and utility companies are “laying miles of high-capacity telecom network alongside their own track and pipeline assets” (Investopedia, n.d., para. 9).
Competitive Rivalry
Competition in the industry is low. The industry is presented by only two players: du and Etisalat (Cherrayil, 2015). Moreover, natural barriers to entry prevent the escalation of competitive rivalry. The completion between the two operators revolves around efforts to dissuade their customers from using substitute services by offering them lower prices. Furthermore, Etisalat and du are under pressure to remain innovative in order to lure their clients with more services.
SWOT Analysis
External Factor Analysis Summary (EFAS)
Table 1 presents EFAS for du. EFAS performance indicates that the company does not respond well to the key external factors.
Table 1. EFAS for du.
Internal Factor Analysis Summary (IFAS)
Table 2 shows IFAS for du. IFAS performance suggests that the company is responding well to the key internal factors.
Table 2. IFAS for du.
Strategic Factor Analysis Summary (SFAS)
Table 3 presents SFAS for du. An overall SFAS score is indicative of the fact that the company has a high degree of responsiveness to the internal and external factors presented in EFAS and IFAS analyses.
Table 3. SFAS for du.
Capital Asset Pricing Model
CAPM =Rf + B (Rm – Rf)
Rf (10Y Treasury bond) = 2.64%
Rm (S&P 2016 Returns) = 9%
Beta (Company Financials, Bloomberg) = 1.231
CAPM = 2.64% + 1.231 (9% – 2.64%)
CAPM =24.6%
Recommendations
Du is operating in the market which is characterized by significant substitution threat. Therefore, in order to retain its existing customers and to gain a competitive advantage, the company has to consider expanding its service package. Moreover, du has to increase its operational efficiency in order to tackle issues with managing global operations.
Conclusion
The paper has shown that du is favorably positioned on the market. The company’s state of operations and its underlying strategy allow it to have a high degree of responsiveness to factors in external and internal environments. Porter’s 5 forces analysis showed that du is not open to a significant level of competitive intensity. Therefore, the current state of the industry, as well as a high degree of responsiveness, are conducive to expanding du’s operations.
References
Cherrayil, N. K. (2015). UAE telecoms sector revenues rise 12.32% last year. Gulf News. Web.
Du. (2015). Annual report 2015. Web.
Du. (n.d.). Company overview. Web.
Investopedia. (n.d.). The industry handbook: The telecommunications industry. Web.