OPEN LEARNING CENTRE IN ASSOCIATION WITH UNIVERSITY OF GLOUCESTERSHIRE (CMDP) Course Module Environment of a Manager Cohort G3 Name Barbara Chinzunza Lecturer Stanlake Hove Word Count 2950 Due Date 12/12/2011 Table of Contents 0. 0 Executive Summary3 1. 0 Introduction5 1. 1 Vision, Mission Statement and Objectives5 2. 0 TPS Environment5 2. 1 Macro Environment6 2. 1. 1Political6 2. 1. 2Economic7 . 1. 3Technological8 2. 1. 4Social8 2. 2 Industry9 2. 2. 1Substitutes10 2. 2. 2Threat of Entry10 2. 2. 3Buyers11 2. 2. 4Competitive Rivalry11 2. 2. 5The sixth force – Complementators11 2. 2. 6Criticisms of the Five Forces Model12 2. 3 The organisation12 2. 3. 1 SWOT (Strengths, weaknesses, opportunities and threats) Analysis12 2. 4 Current Strategic Position14 2. 4. 1. E-V-R (environment- values- resources) Congruence14 2. 4. 2The consciously incompetent organization15 2. 4. 3 Strategic Drift16 2. 4. Boston Consulting Group (BCG) growth/share matrix17 2. 4. 4Criticism of the BCG growth/share matrix18 2. 5 Repositioning for TPS18 2. 5. 1 Recruitment of experienced and competent resources18 2. 5. 2 Development of new products to suit the buyers needs18 2. 5. 3 MNOs should reduce physical cards in the market18 2. 5. 4 Develop Partnerships with till suppliers18 2. 5. 5 Aggressively look for business for hardware repairs. 18 2. 5. 6 Reduce cost base on software development18 3. 0Conclusion19 4. 0References20 0. 0 Executive Summary
Transaction Payment Solutions (TPS) was founded in Zimbabwe in 1992. TPS’ core business is the provision of electronic funds transfer (EFT) solutions for the African market. TPS is part of the UK-based Liquid Telecom Group and has its head office in Port Louis, Mauritius. In line with its growth strategy, TPS has opened support offices in Mauritius, South Africa Botswana, Zambia and Kenya. TPS serves more than 20 financial institutions in more than 10 African countries, where we have deployed in excess of 10,000 Point of Sale (POS) erminals. TPS is a: * Reseller for Postilion for Africa since 1998. Postilion International Limited is a global payment software company that delivers integrated payment processing and self service banking solutions. * VeriFone International Partner for Africa since 1992. VeriFone is the worldwide market leader in providing secure electronic transaction solutions-including hardware, software and services for debit, credit, cheque and smart cards in over 100 countries of the world. * Ingenico Partner for Africa since 2003.
Ingenico offers end to end solutions incorporating hardware, software, and services that can be adapted for integration into new secure transaction payment solutions. This document seeks to give a clear picture of the environmental forces that are affecting the TPS. Different frameworks have been used to do the analysis and they include the following techniques: * PESTEL * SWOT * BCG * EVR * Porter’s five forces model. The definition of each technique is explained in the body of the document. Each technique was critically analyzed to highlight its strength and weaknesses.
After the application of the above techniques; strategic gaps were identified and recommendations were made. Scope The scope of this document is limited to TPS’ customer in Zimbabwe and one business unit of POS terminals is discussed. This business unit consists of the following services and products: * Terminal sales * Software Development and Licenses * Airtime sales * hardware repairs * 1. 0 Introduction TPS is an ISO 9001:2008 certified organisation that has got its Vision , mission statement and objectives clearly stated as highlighted below. 1. Vision, Mission Statement and Objectives Vision To be a leading player in providing innovative transaction delivery and payment solutions Mission Statement We promise to deliver the transaction payment solutions and professional services that bring your customers closer to you. Objectives * To ensure customer satisfaction is a key influencer in all the activities that are part of TPS’ value chain. * To provide consistently high quality products and professional services that surpasses customer expectations and meets regulatory requirements. 2. 0 TPS Environment
TPS does not operate in a vacuum; it operates in an environment where there are internal and external forces that determine the profitability of an organization. Hussey (1998, p. 70) states that “Strategic management seeks, as one of its aims, to relate the company to its environment, and to identify in advance the threats and opportunities which environmental change brings”. The framework for analyzing the environment can be divided into four categories: * Macro environment, * Industry, * Competitors, * The organisation(Johnson, Scholes and Whittington ,2008)
Figure 1: Source : Exploring Corporate Strategy by Johnson G. , Scholes K. , and Whittington R. (2008) 2. 1 Macro Environment The macro environment consists of broad environmental factors that impact to a greater or lesser extent on almost all organisations; the PESTEL framework can be used to identify how future trends in the political, economic, social, technological, environmental (‘green’) and legal environments might affect these organisations (Johnson, Scholes and Whittington ,2008). The following analysis shows the application of PESTEL framework on TPS. 2. 1. 1 Political Botten and McManus (1999, p. 5) said “within the context of a global economy, the power which is the government will set the climate for business and for business confidence”. In so many instances the government has failed to place competitive advantage at the core of their policies and this has affected the operations of companies (Appleby 1994). The uncertainty shadowing the implementation of the Indigenisation and Empowerment Regulations has made it impossible for the company’s shareholders to inject capital into the business as they play a “wait and see” game until there is clarity on the implementation of the policy.
The perceived political instability has made it difficult for the organisation to negotiate for good credit terms from international suppliers. Zimbabwe’s Country Risk Grade is extremely high and international suppliers give the organisation 7 day credit despite the volumes of terminal that it purchases annually. The Monetary Policy Statement (2011) noted that, as at 30 June 2011, 19 out of 25 operational banking institutions (excluding POSB) were in compliance with the prescribed minimum capital requirements.
The issue of bank capitalisation has left some of the banks (which are our customers), with no budgets for POS terminals. 2. 1. 2 Economic Economic conditions refer to how easy or how difficult it is to be successful and profitable at any time because they affect both capital availability and cost and demand (Thompson and Martin, 2005). Some of the economic factors include business cycles and exchange rates (Appelby, 1994). In the 2012 National budget (2011) it was noted that over the last 35 months, developments in the financial sector have been progressing upwards, with the deposit base now estimated at US$3. billion by end of September 2011. However, estimation show that over US$2 billion remains outside the formal banking system. TPS acquires transaction through the formal systems which are Point of Sale (POS) and Automated Teller Machines (ATMs), so, for as long as business is being conducted outside of the formal structures there is a negative impact on automated channels such as the POS. The prevailing liquidity constraints being faced by the country has really exposed the organisation to an increase of debtors defaulting on payments.
This has been noted by the numbers of debtors who were written off in the 2011 financial year(TPS Annual report,2011) 2. 1. 3 Technological Thompson and Martin (2005, p. 168) said “technological breakthroughs can create new industries which might prove a threat to existing organisations whose products or services might be rendered redundant. ” In 2011 we have seen banks coming up with new technologies in order to bring convenience for their customers. Such innovations include mobile and internet banking; these technologies have an adverse effect on airtime sales.
Poor network communication infrastructure in Zimbabwe has remained a challenge and this has affected the rollout of POS terminals in remote areas. 90% of TPS’ terminals are deployed in Harare and this leaves all the other towns with no other means of transaction except the informal structures. Supermarkets such as OK Zimbabwe Limited (OK) are coming with their own shopping cards (ShopEasy) which they acquire through their own systems. The POS technology is constantly advancing and this puts a lot of strain on TPS’s research and development budget.
Each time there is a new product the company has to invest in training and software development so that it meets the current technologies. 2. 1. 4 Social Social and demographic changes often appear over a long period of time but their impacts are likely to far outweigh the result of political factors in the long term (Botten and McManus, 1999). In the 2012 National budget(2011) it was highlighted that three mobile service providers share close to 8. 1 million subscribers, up from 7. 7 million last year. This increase in subscribers has got a positive impact on the airtime sales 2. Industry TPS is operating in the EFT industry and it mainly provides transaction payment solutions to Financial Institutions (FIs). Johnson, Scholes and Whittington (2008, p. 64) defines “an industry as a group of firms producing the same principal product or, more broadly, a group of firms producing products that are close substitutes for each other”. Managers in any organisation should understand the competitive forces in their industry or sector since these will determine the attractiveness of that industry, the Porter’s five forces framework helps identify the attractiveness of an ndustry or sector in terms of competitive forces. This framework is illustrated below: Threat of new entrants POTENTIAL ENTRANTS [Regional EFT companies] Bargaining power of Bargaining power of Suppliers buyers BUYERS [Banks, Individuals, Retail chains] SUPPLIERS [Ingenico, VeriFone, Econet, Netone, Telecel] INDUSTRY COMPETITORS [Local and Regional EFT companies] Threat of substitute SUBSTITUTES [Mobile, SMS and Internet banking, Till, Physical airtime cards] Products/services Figure 2.
Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Porter M. E. (1980) 2. 2. 1 Substitutes Johnson, Scholes and Whittington (2008, p. 64) defined substitutes as products or services that offer a similar benefit to an industry’s products or services, but by a different process. Substitutes are a potential threat and their impact should be systematically analysed to ensure that customers do not end up abandoning their usual services for the substitutes. TPS’ business is currently faced with the following substitutes: * Physical airtime recharge cards
Most end users are used to buying physical cards from the street vendors and this has impacted on the growth of electronic airtime sales. Statistics from Econet show that the physical cards accounts for 96% of total monthly airtime sales. * Tills The biggest supermarkets (OK, TM) now prefer to integrate the retail system, EFT application and the airtime system on the till. This requirement has eliminated the requirement for terminals because the till can provide the same functionalities without compromising quality. * SMS, Mobile and Internet banking
The availability of these products has an impact on airtime sales. 2. 2. 2 Threat of Entry Porter (1980, p. 7) has argued that the threat into an industry depends on the barriers that will be present in an industry. TPS is currently facing threat from regional and local competitors that want to penetrate the EFT industry. Johnson, Scholes and Whittington (2008, p. 64) also highlight that barriers to entry come from experience curve effects. The level of capital requirements, training and experience required to invest in an EFT business are high this makes very difficult for many companies to enter this business.
TPS has exclusive rights to distribute Ingenico products in Southern Africa except South Africa. 2. 2. 3 Buyers Johnson, Scholes and Whittington (2008, p. 64) argue that where buyers can easily switch between one supplier or another, they have a strong bargaining power and can squeeze suppliers who are desperate for their business The cost associated with buying terminals and software is very high and this makes it very expensive for FIs to switch from our product to another. 2. 2. 4 Competitive Rivalry
Dess, Lumpkin and Taylor (2004, p. 55) said rivalry among existing competitors takes the form of “jockeying for position”. Competitors use tactics like price and good customer services to stay ahead of the other rivalries. The EFT business has huge investment costs and hence there are few players in this business. The customer base is small and this makes this industry very competitive as rivalries seek to out-skill each other with more robust and secure systems. 2. 2. 5 The sixth force – Complementators
Some analysts argue for a ‘sixth force’, organisations that are known as complementators; these complementors are players from whom customers buy complementary products that are worth more together than separately (Johnson, Scholes and Whittington, 2008). EFT companies that sell switching solutions like CR2 complement our business because for our terminals to work we need it to connect to their system. It’s important for TPS to work closely with these complementators so that together we can provide better value for the customers.
More than 80% of the deployed terminals use General packet radio service (GPRS) connections to connect to the banking infrastructure; the GPRS service is provided by Econet and Telecel. Econet used to be the only operator that used to provide this service and their GPRS charges were very high. With the introduction of Telecel GPRS; Econet has relaxed their GPRS costs and this has reduced TPS’ cost base. 2. 2. 6 Criticisms of the Five Forces Model
The model is not dynamic, whereas, the competitive environment in practice is constantly changing and these changes are not shown in the model (Lynch, 2000). The framework ignores the human resource aspect of any strategy; issues such as the people skills and country culture are essential in any strategy formulation (Lynch, 2000). Despite all these criticism the approach for this document is that the Porter’s model provides a structured framework for addressing the forces that are affecting the success or failure of an organisation. 2. 3 The organisation 2. 3. SWOT (Strengths, weaknesses, opportunities and threats) Analysis An evaluation of an organization’s strength and weakness in relationship to environmental opportunities and threats is generally referred to as a SWOT analysis. A SWOT analysis is a basic tool for analyzing firm and industry conditions (Dess, Lumpkin and Taylor, 2004). Thompson and Martin (2005, p. 194) went on to say that the “SWOT should not be seen as a list of absolute strengths and weaknesses seen from an internal perspective; rather, the evaluation should consider the strengths and weakness in relation to the needs of the environment and in relation to competition. The following table applies the SWOT framework on TPS: StrengthsTerminalsMore than 2000 terminals deployed all over ZimbabweExperienceOver 18years of experience in the transaction payment industry. State of the art hardware repairs workshopProducts and QualityIngenico and VeriFone are the leading terminal providers in the world. TPS is an ISO 9001: 2008 certified organization TPS has a good reputationHelpdesk SystemsA helpdesk system which provides support from 7am-6pm, 365 days. WeaknessesTerminalsTerminals old and require constant maintenanceTerminal spare parts not readily available Human ResourceKey resource shortage leading to organisation relying on one or two resourceUnmotivated staffNo individual objectivesSystems Airtime/ Voucher system not very reliableSuppliersPoor existing links with Ingenico, Telecel and NetoneHigh Software development costsFinancial problems| OpportunitiesBanksBusiness in most banks has improved resulting in requirement for more terminals SuppliersExisting strong links with VeriFone and EconetGovernmentGovernment making effort to increase tourismReserve bank making efforts to increase plastic money usageIncrease in mobile subscribers| ThreatsAirtimeGrowing influx of airtime vendorsCompetitorsRegional EFT companies also coming to Zimbabwe with low cost terminals.
SupermarketsMost Supermarkets are moving to integrated systems End users do not have confidence in the banking sector| 2. 4 Current Strategic Position 2. 4. 1. E-V-R (environment- values- resources) Congruence “There is an overlap between the environment (key success factors) and resources (competencies and capabilities), and the organisation is committed to sustaining this overlap with strategic change initiatives. The E-V-R analysis provides a straight forward framework for assessing the organisation’s existing strategies and strategic needs. It is crystal clear at a conceptual level what organisations have to achieve and sustain strategically. ” (Thompson and Martin, 2005, p 125) The concept of E-V-R congruence is illustrated below: Environment Resources
Strengths and Opportunities and Weaknesses Threats Values Leadership and Culture Fugure 3 : Source: Strategic Management : Awareness and change by J. Thompson and F. Martin (2005) This is the positioning that an organisation should focus on attaining so that they can enjoy a good market share and profitability. Based on the SWOT analysis and the PESTEL framework that was applied on TPS, the organisation is currently positioned in two scenarios: 2. 4. 2The consciously incompetent organization Resources Environment Values Leadership and Culture Fugure 4 : Source: Strategic Management : Awareness and change by J. Thompson and F. Martin (2005)
Thompson and Martin (2005, p 125) explained that a “consciously incompetent organisation is aware of the needs of success in its market place, and managers appreciate the importance of satisfying its customers but it is simply not achieving the desired level of service”. TPS is mainly in this position because of the following gaps: * Key resource shortage, leading to projects taking too long to complete. * Unavailability of spare parts to repair terminals When there are limited resources an organisation becomes more reactive instead of being proactive. 2. 4. 3 Strategic Drift Environment Resources Values Fugure 5 : Source: Strategic Management : Awareness and change by J. Thompson and F. Martin (2005)
In a strategic drift an organisation is internally cohesive but simply loses touch with the external environment (Thompson and Martin, 2005) . TPS is mainly in this position because of the following gaps: * There are so many changes in the Zimbabwean market but TPS has not developed any new products to meet these requirements. Such requirements include chip cards, till integration systems, solutions for the unbanked market. * Based on the customer satisfaction survey that was conducted in 2010 most of our customers believe that TPS’ products are expensive and are looking for solutions elsewhere. 2. 4. 4Boston Consulting Group (BCG) growth/share matrix
Plotting the BCG matrix helps an organization to come up with strategic alternatives for the different units and also to develop priorities for allocation of resources (Dess, Lumpkin and Taylor, 2004). The 4 products to be plotted are: * Airtime sales * Hardware repairs * Terminals sales * Software development and licenses | | | | | | High| Industry growth rate| High| STARSSoftware development and licensesTerminal Sales| PROBLEM CHILD Hardware repairs| | Low| CASH COWS| DOGS Airtime Sales| High Low Relative Market Share Fugure 6 : Source: Adapted from Corporate Strategy by R. Lynch (2005) Lynch (2000, p. 131) said that “the general strategy is to take cash from the cash cows to fund the stars”.
The stars have long term growth potential and should continue to be capitalised. Cash may also be invested in some of the problem children to turn them into stars in this instance hardware repairs. The dogs often present an organisation with the most difficult strategic decisions on whether they should be kept or sold (Lynch 2000). Airtime is currently in the dog section and should move to cash cows if MNOs assist in reducing physical cards distribution. However, if the MNOs fail to assist in growing airtime market share, it may stay in the dog section because it’s a value added product to the payment solution. TPS should not commit too many resources to the dog. 2. 4. 4Criticism of the BCG growth/share matrix
The BCG matrix is done using only two variables and this a clear weakness; if the BCG is used in isolation one can actually come up with incorrect recommendations (Lynch 2000). However, for the purpose of this document it gives a basic framework to understand the business units in an organisation and identify strategic gaps. 2. 5 Repositioning for TPS Below are recommendations to fill in the strategic gaps identified above: 2. 5. 1 Recruitment of experienced and competent resources To ensure that we deliver projects timely we need to recruit more staff. Recruitment is required especially for the products in the star quadrant. Meanwhile the organisation can take resource from the dog quadrant. 2. 5. 2 Development of new products to suit the buyers needs 2. 5. MNOs should reduce physical cards in the market TPS needs to negotiate with MNOs to reduce the distribution of physical cards. The agreements should be put in signed contracts. Without support from the MNO the sales for electronic airtime will not improve. 2. 5. 4 Develop Partnerships with till suppliers TPS should work on developing partnerships with till supplier; this will facilitate development of EFT application for the tills. 2. 5. 5 Aggressively look for business for hardware repairs. 2. 5. 6 Reduce cost base on software development Most of our POS applications are outsourced and training local resources will reduce the cost base significantly. . 0Conclusion The recommendations suggested above will definitely help the organisation in improving its profitability and strategic position. However the issue of financial challenges may affect the implementation for some of the suggested solutions. Without too many competitors TPS is really operating a profitable business and should continuously scan the environment to ensure that there is no strategic drift. 4. 0
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