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Shah Mahmood
The Afghan telecommunication market: “an industrial organization analysis”
Volume | 026 Bochum/Kabul | 2017 www.afghaneconomicsociety.org
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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The Afghan Telecommunication Market:
“An Industrial Organisation Analysis”
Shah Mahmood
Keyword list
Telecommunication Market, Competition, Generic Strategies, Cost Leadership, Product
Differentiation, Segmentation, Development.
Abstract
Post-2001 Afghanistan has undergone many changes among them the rapid and almost industrial
scale development of the Afghan Telecommunication Infrastructure. Ever since, the
telecommunication market has become one of the main pillars of Afghanistan’s booming
economy.
The research study tries to find out how telecom companies compete with each other in such an
emerging and relatively new market in a poor country like Afghanistan. The purpose of this study
is to explore the strategies adopted and implemented by telecom companies in both the short and
long-term. The aim is to analyze telecom the competitive performance of telecom companies by
using Michael Porter’s Three Generic Strategies.
Using the theoretical data, the research question presented is based on statistical data of different
telecom companies over several years. The research analyzes the competition between those
national and international companies operating in the Afghan telecommunication market. The
result of this research study shows that that telecom companies have different sets of strategies
at their disposal, which could be applied by them for competitive performance in the Afghan
telecom sector. Each strategy has its own advantages as well as limitations. Some strategies are
more effective and suitable than others at a specific time. The results also reveal how the Afghan
government institutions are playing their role in enabling new and or less powerful companies to
operate in the market. This latter falls in line with one of the main priorities of Afghan government
which is the protection of private investment.
Description of Data
The nature of this research study is explanatory as it aims to understand the mechanism for
competition within the Afghan telecommunication market. There are two types of data being used
in this research, primary and secondary data. This combination of primary and secondary data is
crucial.
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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Primary data is gathered from telecom companies, their products available in the market, their
publications, particularly their yearbooks, and their official websites. In addition to that several
interviews were held with employees of telecom companies and questionnaires were designed to
get more insight into telecom companies operations. The questionnaires included both open-
ended questions as well as questions with pre-defined answers.
Secondary data is collected from governmental institutions like Ministry of Communication and
Information technology (MCIT) and other relevant authorities and NGOs which keep track of
development in Afghanistan. In addition to that secondary data relevant for this study is gathered
during the literature review. The information gathered during literature review was relevant for the
future of telecom sector in developing countries as well as its impact on the overall development
of the countries.
It is worth mentioning that gathering information from secondary data proved rather easier than
primary data. It is understandable as the competition within the telecom sector is tough and
withholding data from public or research purpose was no surprise.
Research Question/Theoretical contextualization
This study is undertaken to clarify competition between the companies in Afghanistan’s
telecommunication market. The factors influencing the competition between telecom companies
can be different. The competition can be based on better network coverage, product
differentiation or low costs. Due to rules and regulations of the government to protect the less
powerful companies against the more powerful ones, it is difficult to compete on prices as it can
result in a price war whereby the international companies with big budgets can easily evict other
companies and monopolize the market.
Two main research questions are going to be asked here which will be answered in this paper.
1: Which strategy was applied by companies in order to maximize their profits and increase their
market shares in such an emerging market?
2: Which strategies should be adapted to gain competitive advantage in the long term?
To answer these questions, I will briefly describe the theory of Michael Porter’s Three Generic
Strategies, which will help us deal with our problem and draw some conclusions from our data.
The Three Generic Strategies differ in dimensions and are not necessarily compatible with each
other. In fact all three of Porters Generic Strategies aim to get a leading edge in terms of sales
and shares over your competitors. However, implementing each of these strategies successfully
requires different skills and resources.
Three Generic Strategies
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Achieving a competitive advantage for firms can be done through differentiating their products or
services from those of their competitors and through lower costs. However, it is easier said than
done. Companies can target a broader group of users or a market segment, which covers a major
part of the market shares. Beside differentiation and lower costs, the firms can also focus on
specific segments of the market. All these strategies aim to get competitive advantage over its
rivals. The strategies introduced by Porter are called generic because they can be applied to
every sort of industry and to organizations of all scales. Porter believes that differentiation can be
as effective as cost leadership. The three generic strategies are alternative, viable approaches to
dealing with competitive forces1.
Cost Leadership Strategy
Cost leadership is one of the two basic strategies of Porters Three Generic Strategies. It has been
one of the most effective and popular strategies since 1970’s. Its main aim is to achieve an overall
cost leadership in an industry or a market by efficiently improving the ways to reduce costs.
Porter writes: “cost leadership requires aggressive constructions of efficient-scale facilities,
vigorous pursuit of cost reduction from experience, tight cost and overhead control, avoidance of
marginal customer account, and cost minimization in area like R&D, service, sale force,
advertising, and so on. A great deal of managerial attention to cost control is necessary to achieve
these aims”2.
Differentiation Strategy
The differentiation strategy is the second basic strategy of Porters Three Generic Strategies. It is
described by Porter as follows: “the second generic strategy is one of the differentiating the
product or services offering of the firm, creating something that is perceived industry wide as
being unique”3. This strategy’s core focus is to make your products or services stand out by better
services to customers and better products performances, making them unique and differentiating
them from your competitors. These extra attributes and features of your products should be
valued and welcomed by the customers. In return, you can try to charge a premium price for your
products and services. Your products will be more attractive than those of your competitors.
Focus Strategy
The third of the Porters Three Generic Strategies is the Focus Strategy. It is described by Porter
as follows: “the final generic strategy is focusing in a particular buyer group, segment of the
1 Michael E. Porter, Competitive Advantage, (New York: The Free Press, 1985), p. 11.
2 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 35-36.
3 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 37-38.
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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product line, or a geographic market”4. Focus strategy can also be applied in many forms. The
three generic strategies differ in dimensions. Implementing these strategies successfully requires
different skills and resources. They also imply different organizational arrangements, control
procedures and inventive systems. There are critics of the generic strategies who say that there
is no certain strategy which guarantees competitive advantage for a certain firm. Theorists also
strongly believe that a firm’s character determines the sort of strategy that will prove effective.
Porters generic strategies can be applied best to large and established firms because Porters
analysis is based on multinationals. Porter suggests that once a firm chooses a strategy, it should
implement it consistently while in reality many firms often combine different strategies to be
successful in the market. Porters “stuck in the middle”5 is based on certain US companies who
were unable to compete on global scale. Porters sees the strategies then adapted by those
companies as absolute while theorists nowadays are of the opinion that strategies should not be
treated as absolute.
Generic Strategies and Industry Forces
Industry
Force
Generic Strategy
Cost Leadership Differentiation Focus
Entry
Barriers
Ability to cut price in retaliation deters potential entrants.
Customer loyalty can discourage potential entrants.
Focusing develops core competencies that can act as an entry barrier.
Buyer
Power
Ability to offer lower price to powerful buyer.
Large buyers have less power to negotiate of few close alternatives.
Large buyers have less power to negotiate of few close alternative
Supplier
power
Better insulated from powerful suppliers.
Better able to pass on supplier price increases to customers.
Suppliers have power because of low volumes, but a differentiation, focused firm is better able to pass on supplier price increases.
Threat of
Substitutes
Can use low price to defend against substitutes.
Customer’s become attached to differentiating attributes, reducing threat of substitutes.
Specialized products & core competency protect against substitutes.
Rivalry Better able to compete on price.
Brand loyalty to keep customers from rivals.
Rivals cannot meet differentiation-focused customer needs
Figure 1: Generic strategies & Industry forces6.
4 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p.38.
5 Y. Datta, A Critique of Porter’s Cost Leadership and Differentiation Strategy, (Kentucky: Northern Kentucky
University, 2009).
6 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 40-41.
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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Field research design/ Methods of data gathering
The aim of this study is to examine the Afghan telecommunication market as it operates at present
and to find out how national and international companies compete and operate in Afghanistan’s
booming and rapidly developing economy. It also aims to explore the different strategies being
implemented by telecom companies. This data is the result of questionnaires, interviews,
information gathered from official websites and other sources as explained on Page 2.
The data used for this research is of two kinds: primary and secondary data. This combination of
primary and secondary data is of utmost necessity in order to answer my questions. I designed
several questionnaires that I used for data gathering while visiting the telecom companies. I also
conducted interviews with the employees of the telecom companies in order to gain some inside
information about how they operate.
However, telecom companies were reluctant to share their data. Despite this limitation, I have
obtained data from the interviews with the officials of the different telecom companies and from
their websites. Their websites and yearbooks in particular have produced very interesting insights.
I have also collected their different products, which are being used in the market.
The secondary data regarding other issues related to the telecommunication market has been
collected from different sources. During my literature review, I studied various books discussing
developments and policies in telecommunications in the near future; how they impacted
developing countries and how the gap between the developing countries and the digitalization
could be reduced within a short frame of time.
My major source for secondary data regarding the Afghan telecommunications industry was the
Ministry of Communication and Information Technology of Afghanistan (MCIT). This ministry is
the major source of information and statistics regarding the industry. Besides, Icollected data from
different documents made available by NGOs and other organizations which are currently
operating in Afghanistan.
As the information had to be collected from different companies, it was important to keep the
questions clear and precise. The questions were related to geographical places, target groups
and markets, providing additional services, product availability, pricing policy and the scale of the
employees and structure of the organization. To avoid any potential miscommunication due to the
number of questions or their open-ended nature, I made a small list of questions and sometimes
provided the interviewee the possibility to choose between a number of pre-defined answers.
Certain questions were not answered during the interview or the interviewer was referred to the
company’s website. Some of the answers about their revenues were kept secret due to
company’s policy. The data about revenues is valid and reliable as it is based on the development
of the Afghan telecom market in the recent years.
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Results
As the political and social rebuilding of the country proceeds following years of war and civil
unrest, Afghanistan has been busy putting new national telecommunications infrastructure in
place. It began its telecom reconstruction program in June 2002 following a grand assembly
known as the Loya Jirga. Afghan Wireless Communication (AWCC) was the first GSM network
provider in Afghanistan. It can also be seen as the pioneer of the telecom companies in the Afghan
market. The other major impact on telecommunications in Afghanistan came with the introduction
and expansion of the GSM services.
The launch of a second mobile service, Telecom Development Company Afghanistan Ltd., which
operated under the brand name Roshan, boosted the telecom market further and a strong
subscriber growth followed. With its aggressive marketing campaign, it also ended the monopoly
of AWCC in the telecommunication market and created job opportunities for locals and nationals7.
At the time of Roshan’s entry in the telecom market the price per minute was extremely high and
calls could only be made from four big cities (see Figure 2). AWCC had fewer subscribers due to
its high costs in the previous year, but it started to attract customers at an extraordinary rate in
2003.
Roshan entered the market with the concept of market penetration. Porter says that the company
has to hold on to a particular strategy in order to make it successful. Nevertheless, at that time
only the market penetration was not enough to be successful in the long term because the
competitors were catching up with lower prices and the advantage of low cost leadership will be
lost. Roshan was able to keep the lowest price until early 2004.
Figure 2: The prices
of national calls
(Afs/min)8 started
dropping after Roshan
entered the market in
2003.
7WhartonSchool of the University Pennsylvania, An industry on the Line: Telecommunication in Afghanistan,
March 2009, P. 1.
8MCIT, Summery of Achievements in the Year 1386 (21 March 2007 – 20 March 2008), P. 4.
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By then AWCC had caught up with reduced prices and the price competition was no longer an
appropriate strategy. According to Porter 9 this low cost leadership is a demanding approach and
can easily be imitated by other competitors.
Market Penetration & Product Differentiation
In late 2005 two mobile licenses were awarded one to INVESTCOM/Alokozai consortium and the
other to UAE’s Etisalat. The former launched its connection 'Areeba Afghanistan' in July, 2006
and the later in August 2007. Market penetration and product differentiation were easy and
effective strategies for Areeba to use in order to enter the market. The easiest way for a new
player is to encourage a price drop rather than an increase to subscribers. Areeba not only made
use of the price drop but also of a limited product differentiation compared to its predecessors
and adding value-added services. The price penetration (lowest prices) proved to be a strong
competitive strategy for the short term in order to gain market shares.
The Strategy of Market Segmentation and Differentiation
In mid 2008, the coverage area for networks in remote areas were enlarged and improved and
all four companies were active in nearly every part of the country. Meanwhile Roshan focused on
segmentation and product differentiation. This segmentation strategy provided Roshan with the
upper hand over AWCC in the market in the 3rd quarter of 2008. This indicates that focusing on
segmentation was the right kind of strategy for Roshan to become the market leader again. In
2008 another very well-known international company and a partner of Areeba International, MTN,
took over Areeba Afghanistan. Its entry to the telecommunication market introduced new
technologies and it used the penetration pricing strategy for international calls within the rules and
regulations frame of ATRA. According to what Porter says about drawing advantages from
newcomers who are introducing new technology to customers10, Etisalat, AWCC and Roshan
easily benefited from the subscriber’s new awareness of the technology (see Figure 3).
9Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 35-36.
10 Michael E. Porter, Competitive Strategy, (New York: The Free Press, 1980), p. 37-38.
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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Figure 3: All Operators subscribers (2002 to 2008)
The Strategy of Market Segmentation and Subscribers Growth
One explanation for Etisalat’s rapid growth in that period is that Etisalat was a newcomer and
introduced new technology to the market. It made significant capital investment in order to
promote its brand and create awareness for its connection. It possessed a more modern network
than Roshan and AWCC. Its better coverage and network were preferred by the customers in the
big cities.
The feedback from Etisalat and MTN is less than from Roshan and AWCC. They possess small
distribution and service centers located mainly in the major cities. The customer services provided
by MTN and Etisalat are limited. The second major limitation for Etisalat and MTN is that they
operate only in major cities while customer service providers of Roshan and AWCC also cover
the rural areas.
According to the network effect theory, it is better to connect to a large network than to a small
network. As a result, new and existing subscribers chose the larger network. Besides enlarged
coverage, Roshan also has local and independent distribution channels in the remote areas and
in cities, plus a high number of retailers, direct sales and customer touch points. Due to tough
competition mobile penetration rate increased tremendously (see Figure 4).
0
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Roshan
MTN
Etisalat
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But the most important aspect of Roshan’s explosive growth was their focus on market
segmentation, product differentiation, streamlined tariff structure and innovative services thereby
increasing customer awareness about new and different products. All these factors gave Roshan
the advantage to maintain its lead despite competition from international companies. Its
combination of segmentation, product innovation and differentiation seems to be a pretty unique
and successful marketing strategy which the other operators could not match.
The Afghan telecom market has developed from a rather one-sided market to a multidimensional
market with different categories of users and products. Nearly a quarter of the total mobile
subscribers have multiple SIM cards of different companies, switching between them according
to the service the specific company provides. Customers can choose between different operators
and the quality of service they get becomes an important factor. At present, customer satisfaction
becomes one of the major factors for operators. Loyalty has become another key factor for the
operators. The operator with large and better network coverage and differentiated product offers
will benefit most.
Discussion & Conclusion
The telecom companies in Afghanistan have different ways of competing. The competition can
be based on better network coverage, product differentiation or low costs. To that end, the
telecom companies often apply a combination of strategies rather than relying upon a single one.
Single strategies are implemented for a short period only.
In 2002 AWCC was the only operator and therefore the market had a monopolistic structure. The
entry of Roshan in 2003 put an end to AWCC’s monopoly and reduced the prices for connections
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Mobile Penetration Rate per 100 Inhabitants
Figure 4: Increase in mobile penetration rate per 100 inhabitants (2002 to Q1 2009)1.
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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significantly. Their strategy of a low price penetration was successful for a while until AWCC
caught up with the prices. Porter’s cost-leadership strategy is applicable to Roshan’s marketing
at that time. Roshan’s low price penetration in 2003 resulted in achieving the market share of
more than 40 % of the subscribers in a short period. However low price penetration in emerging
markets does have its limitations. It can only be successful if applied for a short period of time in
order to get the competitive advantage or a higher percentage of market shares. Both GSM
providers became aware of this fact and tried to make the market into a duopoly through signing
certain agreements.
Areeba’s entry in 2006 ended the duopoly of AWCC and Roshan and reduced the prices of
national and international calls. However, the price reduction for international calls was far greater
than for domestic calls. They also differentiated the market by introducing new products. Then
Areeba applied a strategy based on low prices and product differentiation. They implemented this
combination of strategies successfully and gained a huge part of the market shares. This low-
pricing strategy was earlier applied by Roshan in 2003 and it had worked for them as well. The
competition between the GSM service providers at that moment was fierce.
Entry of Etisalat reduced the prices of international calls and differentiated the market further. The
service and coverage quality became attractive for the subscribers. The other operators followed
and easily caught up with Etisalat’s new approach. Etisalat became the fastest growing operator
in the market. However, with more than 20 different products in the market, the differentiation was
more or less completed so the strategy of differentiation could no longer guarantee a success in
the market.
Roshan was well aware of this fact and it focused on segmentation of the market. This
segmentation resulted in different categories of products and within those categories different
product packages. This strategy of segmentation gave Roshan room for substantial growth in
subscribers. They became the market leader by a huge margin. Beside the segmentation strategy
Roshan also focused on certain products for mass use such as M-Paisa. Youth and women were
and are the other focus points of Roshan’s future planning. Within their categories of products,
they offered different data services for business and corporate sector.
A strategy based on segmentation might be successful for a period of 5 to 10 years but it would
not guarantee a healthy competitive position in the long term. The Afghan market has a limited
capacity when it comes to segmentation. In a few years’ time, the market will be fully segmented
and operators will be imitating each other’s segmentation strategy.
The operators have used different strategies in combination with other factors such as innovative
products, improving network coverage, increasing service points and introducing new products
and technology. However, the main strategy, complemented by the above-mentioned factors, was
The Afghan Telecommunication Market: “An Industrial Organisation Analysis”
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the differentiation strategy, meaning the telecom companies have moved on from a product-
centric to customer-centric approaches.
Because of the government rules and regulations designed to protect the less powerful
companies against the more powerful ones, it is difficult to compete on prices as it can result in a
price war whereby the international companies with big budgets can easily evict other companies
and monopolize the market.
Considering the combination of different strategies being used in the past seven years, we can
argue that Porter’s assumption that only one strategy can be successful at a time does not always
hold. The analysis above does confirm that only one strategy can be successful at a given time
such as Roshan’s low pricing strategy in 2003. But to succeed in the long term a combination of
the generic strategies should be used. By staying with one strategy it would be very difficult to
catch up with the dynamics of the telecommunication market. A combination of strategies is the
key to the future.
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