Dynamic capabilities of firms and competition in Indonesian mobile telecommunication market

Abstract

This paper presents a proposal for a qualitative exploratory research in analyzing dynamic capabilities of competing firms in Indonesian mobile telecommunication market.

Keywords: dynamic capabilities, firms’ competition, mobile telecommunication market

I.Introduction

Competition raised a question about the fitness of strategy and dynamic capability of firms. This paper tries to understand the fitness of firms to survive and win in a competitive environment. A case in point will be the competitive Indonesian cellular or mobile telecommunication market.

Indonesian mobile telecommunication market

Penetration of mobile telecommunication subscription in Indonesia is at 125.36% (year 2013) according to ICT Statistics, ITU (International Telecommunication Union). Although the penetration of mobile-telephone cellular telecommunication is not the highest in the region, Indonesia has the greatest growth rate of penetration as shown in the table 1.

Table 1. Mobile-cellular telephone subscriptions per 100 inhabitants, 2005 – 2013

(source: data from ICT Statistics, ITU; edited by author)

In Indonesia, two cellular telecommunication systems are at place, i.e., Global System for Mobile communication (GSM) and Code Division Multiple Access (CDMA). GSM is a digital technology system that works at frequency 900MHz. To increase the capacity of GSM channel, currently the frequency of 1800MHz is being used. CDMA, on the other hand, is a digital technology system that is used in fixed or mobile communication system. This technology is broadly adopted in North America. CDMA is adopted for its voice clarity and data transfer speed, whereas GSM is for its roaming capability and coverage. (Indonesian Commercial Newsletter, 2011).

There are ten players in the cellular telecommunication industry in Indonesia, i.e., Telkomsel, Excelcomindo (XL), Indosat, Telkom-Flexi, Mobile-8, Bakrie Telecom, Hutchison, Sinarmas Telecom, Natrindo Telepon Seluler, and Sampoerna Telecommunication Cellular. The last four players: Hutchison, Sinarmas Telecom, Natrindo Telepon Seluler, and Sampoerna Telecommunication Cellular were new (Hakim, 2011). Only three of out of ten players have more than 10 percent market share, i.e., Telkomsel, Indosat and Excelcomindo (XL). The market share of main players in Indonesia’s cellular telecommunication market is shown in Figure 1 below.

Figure 1. Market share of main players in Indonesia’s cellular telecommunication market (Hakim, 2011)

Up to 2004, the main players used GSM technology. At 2004, new players with CDMA technology entered the market and had a significant influence on the cellular subscriber’s composition. As the consequence, the market share of three main players got eaten up. At 2006 – 2007, new players increased their shares to 11 percent and 12.7 percent respectively. Even though market concentration changed significantly, the data from ATSI (Asosiasi Penyelenggara Telekomunikasi Seluruh Indonesia) or Indonesia Telecommunication Provider Association revealed that almost half of the subscribers of those three main players (based on GSM) also have CDMA number. The subscribers used GSM-based cellular number to CDMA-based cellular number interchangeably.

The competition heated at 2010. Hutchinson and Natrindo Selular aggressively attacked the market by huge advertising and offering cheaper services and gained 2.2 percent and 0.6 percent of market share respectively. XL and Indosat also did the same strategy and resulted in a severe price war. Even though Telkomsel has the best network coverage and quality, Telkomsel’s market share had been eventually eaten up by this price war by 3.47 percent (Manova, 2011).

Consolidation occurred in Indonesian cellular telecommunication market. In 2014, Excelcomindo acquired Axis Telekom Indonesia (previously known as Natrindo Seluler) to become XL Axiata in GSM segment market. In CDMA segment, merger occurred at 2011 between between PT. Smart Telecom and PT. Mobile 8 Telecom to become PT. Smartfren Telecom.

Despite all that severe competition, based on the recent data from KPPU (Komisi Pengawas Persaingan Usaha) or Business Competition Supervisory Commission, Indonesian cellular market remains basically an oligopoly with three players dominating with 89.05 percent market share. They are Telkomsel with 41.04%, XL Axiata with 26% and Indosat with 22.01% share (KPPU, 2014). Telkomsel as the dominant player maintains her market share despite the competition from another GSM and CDMA operators.

Profile of main players in Indonesian cellular telecommunication market

1. PT. Telekomunikasi Seluler (Telkomsel)

2. PT. XL Axiata

3. PT. Indosat

Research questions

The dominance of three main players despite the competition from new GSM operators and aggressive CDMA-based operators raises a question of their dynamic capabilities in maintaining their competitive advantages. The research questions would be:

1. How are the dynamic capabilities of main players in Indonesian mobile telecommunication market formed?

2. How the internal and external environments (paths and positions of the firm) influence the dynamic capabilities of those firms?

3. How the dynamic capabilities resulted in different competitive advantages among firms (sustained, temporary or parity)?

II.Literature Review

II.1. Dynamic capabilities

Teece et al. (1997:516) defined dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environment”. In formulating strategy for competing in the rapid change in environment and technology, the competitive forces approach represented by Porter’s five forces model is considered to have lack of dynamic view of the business enterprise, whereas game theory approach is most relevant only when the competing firms are closely matched and the strategic alternatives are certain (Teece et al., 1997).

Ambrosini and Bowman (2009) in their review clarified the confusion about the term ‘dynamic capability’ by explaining that “a dynamic capability is not a capability in RBV sense, a dynamic capability is not a resource. A dynamic capability is a process that impacts upon resources.” They further gave examples of dynamic capabilities from few empirical researches, i.e., R&D, acquisition process, product innovation, absorptive capacity, organizational reconfiguration and resource divestment. The researchers in those empirical studies showed how those processes allow the renewal and reconfiguration of firm’s resources and therefore can be considered as real dynamic capability. However, Ambrosini and Bowman (2009) further argued that some processes such as the ability to sense changing customer needs and competitive threats or identifying opportunities, these are not dynamic capabilities but managerial processes that enable the deployment of dynamic capabilities. According to Teece (2007), they are “the micro foundations of dynamic capabilities”.

Dynamic capabilities are ‘processes’ shaped by ‘positions’ and ‘paths’ (Teece et al., 1997). While ‘processes’ refers to the mechanisms by which the dynamic capabilities are put in use and include coordination, integration and reconfiguration; ‘positions’ relates to internal and external factors. Internal position refers to firm’s assets such as financial, technological and complementary assets, whereas external position refers to the firm facing its institutional environment and market (Ambrosini and Bowman, 2009). As history matters and ‘bygone are rarely bygone’ (Teece et al, 1997), firm’s past and present determine its future, and this is what meant by ‘paths’. Adopted from Ambrosini and Bowman (2009), a framework as the synthesis of their review from dynamic capability literature is presented in Figure 2 below and will be used as the research framework for this exploratory research.

Figure 2. Framework of dynamic capability (adopted from Ambrosini and Bowman, 2009)

Dynamic capabilities impact the firm’s resource base through changes and reconfiguration, which in turn determine the outcome, whether the outcome is sustained or temporary competitive advantage, competitive parity or even failure. Internal environment that includes managers and other complementary organizational resources moderate the value creation process. External environment, on the other hand, influence the linkage between deployment of dynamic capabilities and the outcomes (Ambrosini and Bowman, 2009).

II.2. Dynamic capability of firm and its measurement

Helfat et al. (2007), as cited by Ambrosini and Bowman (2009), suggest the performance of dynamic capabilities should be evaluated by two measures, i.e. evolutionary fitness and technical fitness. Evolutionary fitness refers to “how well the capability enables the firm to make a living by creating, extending or modifying its resource base” which means it measures the firm performance or competitive advantage (Helfat et al., 2007). Technical fitness, on the other hand, denotes to “how effectively a capability performs its intended function when normalized (divided) by its costs”. This technical fitness measures the dynamic capability of one firm may be more or less technically fit than others (Helfat and Peteraf, 2009). They also assert that these measures prevent tautological link between possession of dynamic capability and competitive advantage, since a firm that possess dynamic capability might have poor technical fitness. Even when a firm has high technical fitness, a dynamic capability might not lead to high performance or high evolutionary fitness.

Eisenhardt and Martin (2000) explained that strategic decision making is a dynamic capability because it integrates functional, business and personal expertise to make strategic choices, also new product development is a dynamic capability since it integrates resources where managers and experts combine their skills and expertise to create product and services. Alliancing and acquisition is also identified as dynamic capability since it collects resources by bringing new resources into the firm from external sources (Eisenhardt and Martin, 2000).

II.3. Dynamic capabilities in mobile telecommunication market

Mobile telecommunication market is characterized by relatively stable industry structure in which the players, including buyers, suppliers, customers, competitors and complementers, are well known. Eisenhardt and Martin (2000) categorize this market as moderately dynamic market, where the effective dynamic capabilities rely upon existing knowledge heavily. As shown in several empirical studies, the effective processes in this type of market were characterized by a sequence of problem solving steps and sometimes codified into detailed routine (Fredrickson, 1984; Eisenhardt and Tabrizi, 1995; Pisano, 1995). It is a detailed, linear and analytic process with predictable outcomes (Eisenhardt and Martin 2000).

Whereas in the “high-velocity” market, a term from Eisenhardt and Martin (2000) for highly dynamic market, effective dynamic capabilities are experiential with frequent experimentation and use of multiple alternatives, in a leaning-by-doing mode of process.

Although Indonesian mobile telecommunication market is characterized by relatively stable industry structure, it also shows an intense competition and rapid technological development. Therefore, it might be interesting to assess and analyze the dynamic capabilities of firms in this type of market (refers to position and path of firm in external environment of the framework in Figure 2). This research would like to identify which dynamic capabilities are possessed by three main players in Indonesian mobile telecommunication market, how they are formed and deployed as well as the influence of internal and external environment, as well as the outcome in terms of whether those dynamic capabilities resulted in a competitive or temporary competitive advantage or competitive parity.

II.4. Dynamic capability of firms and competition

While ‘dynamic’ refers to changing environment and ‘capabilities’ highlight the key role of strategic management to adapting and reconfiguring internal and external competences toward changing environment (Teece and Pisano, 1990), this research is meant to investigate how firms reconfigure their capabilities as responses to changing competitive environment in mobile telecommunication industry.

III.Hypotheses

1. Each main player in Indonesian mobile telecommunication market possesses different dynamic capabilities which are moderated by its internal positions and paths.

2. The outcome of dynamic capability of each firm is different and moderated by its external positions and paths.

Qualitative exploratory research that delves into routine and processes of firms in this research would allow detailed information about how dynamic capabilities of respective firm are formed and how they are deployed, as well as the influence of internal and external environment (positions and paths).

IV. Methodology

Empirical studies in dynamic capabilities remain relatively rare (Pablo et al, 2007). Few empirical studies are mainly quantitative research studies and by and large describe broad organizational processes instead of detailed, micro mechanism of how dynamic capabilities ‘work’ (Ambrosini and Bowman, 2009). Hence, Lockett and Thompson (2001) suggested that “it may be necessary to sacrifice some of the generality of quantitative investigation for a more qualitative attention to detail”.

This research proposal is meant to undertake a qualitative field investigation towards smaller sample studies (few main players in Indonesian mobile telecommunication market) to understand the firm-specific resources, changes of those resources as an adaptation processes to maintain the competitive advantages and the context how those resources were created or renewed based on the framework of dynamic capability in Figure 2. It is worth it to note, however, that this type of study is typically demanding in terms of funding, access to firms and analysis as well as time consuming (Ambrosini and Bowman, 2009). The research focus will be on scrutinizing the dynamic capabilities of three main players (Telkomsel, XL Axiata and Indosat) and the measurement of dynamic capability will be taken in terms of technical fitness and evolutionary fitness of respective firms.

The dynamic capabilities of each firm that relevant in this research to be scrutinized are (1) new product development and (2) alliancing and acquisition. The performative aspect (Feldman and Pentland, 2003) of the routine, how new product development and alliancing in practice, would be investigated to understand the important differences among firms. Together with the difference in supporting processes and assets, it is expected to find significant in the new product development and alliancing/acquisition capabilities.

In conducting the qualitative research, the observation to some concrete activities will be conducted to see how and why these activities could be linked to strategic outcomes. By taking this micro approach, I expect that some concrete evidences of what dynamic capabilities in a firm look like, how they are formed and deployed and in what context.

V. Expected Results and Potential Contribution

The qualitative approach of this research tries to delve into detailed routines and resources of three main players and their changes over time. It is expected that this will reveal the dynamic capabilities possessed and deployed by each firm to survive, grow and maintain their competitive advantages (evolutionary fitness). External factors and path dependence was an important phenomenon in the dynamic capability as shown empirically by Madhoc and Osegowitsch (2000), where country of origin shapes firms’ experience, knowledge and capabilities as it was shown in the emergence of US biotech industry as the combination of links between universities and industry, governmental support, venture capital and entrepreneurship.

This qualitative research would delve deep into Indonesian firm’s routines and processes and therefore is also expected to be able to explain how Indonesian context as a developing country might shape and affect the dynamic capabilities of Indonesian mobile telecommunication firms. This Indonesian context as developing country might reveal different result compared to what have already existed in the dynamic capability literature since most of the empirical researches were undertaken in the developed country context.

As admitted by Helfat and Peteraf (2009), dynamic capability “as field of inquiry is still in its infancy; the work remains mostly conceptual and focused on foundational level issues”. Therefore, last but not least, this research is expected to be able to provide an empirical support to this exciting field of research.

VI. Reference

1. Hakim, A.R. (2011). Profil dan peran sector telekomunikasi di Indonesia. Indonesian University.

2. KPPU website (http://www.kppu.go.id/id/blog/2014/03/kppu-menyetujui-akuisisi-saham-pt-axis-telekom-indonesia-oleh-pt-xl-axiata-tbk/)

3. ITU website (http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx)

4. Manova, Y. (2011) (http://www.komudata.co.id/2011/06/mengamati-pertarungan-operator-seluler.html)

5. Indonesian Commercial Newsletter, 2011 (http://www.datacon.co.id/Telekomunikasi-2011Industri.html)

6. Teece, D.J., and Pisano, G. (1994). The dynamic capabilities of firms: an introduction. Industrial and Corporate Change, Vol. 3, No.2, pp. 537-556.

7. Teece, D.J., Pisano, G., and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, Vo. 18, No. 7, pp. 509-533.

8. McCarthy, I.P., and Tan, Y.K. (2000). Manufacturing competitiveness and fitness landscape theory. Journal of Material Processing Technology 107, pp. 347-352.

9. Ambrosini, V. and Bowman, C. (2009). What a dynamic capabilities are and are they a useful construct in strategic management? International Journal of Management Reviews, Vol. 11, Issue 1, pp. 29-49.

10. McCarthy, I.P. (2004). Manufacturing strategy: understanding the fitness landscape. International Journal of Operations and Production Management, Vol. 24, No.2, pp. 124-150.

11. Madhoc, A. and Osegowitsch, T. (2000). The international biotechnology industry: a dynamic capability perspective. Journal of International Business Studies, 31, 325-335.