“Managing A Diversity Of Competencies: Leading Edge In Competitiveness”
By Manuel V. Pangilinan
Chairman of the Board
Plenary # 2 Address
The 5th Map International CEO Conference
Wednesday, 11th October 2006, 9:30 A.M.
Rizal Ballroom, Makati Shangri-La Hotel
Makati City
Salutation
Ms Mary Kissel, M/A/P president Ms Evelyn Singson, chairman of this year’s conference committee Mr. Franco Del Rosario – distinguished guests, ladies and gentlemen. Thank you for the kind invitation to be with you this morning.
The topic at hand today is “managing a diversity of competencies to achieve competitive excellence.” It is a prescription that applies equally well to business and to government. To business, the goals are profit and customer satisfaction. And to government, economic prosperity and welfare of people. Let me treat this subject first, in light of our experience at PLDT and second, in the strategic context of PLDT’s own future.
Introduction
Let me turn you back to a day in December 1998, just after First Pacific had concluded its investment in PLDT, and shortly after I assumed office as PLDT President and CEO. I had a meeting then with a major international bank and, for the first time in my entire professional life, I had to tell a lender that Piltel was in default with respect to certain of its loan covenants, and will soon be in payment default under its loan agreement. Piltel was one of several unpleasant surprises we encountered after assuming management of PLDT.
At the same time, we were just beginning to become alive to the other daunting risks that lie ahead, suggested mainly by the threat of the cellular business, to PLDT’s traditional voice business. PLDT eight years ago was preponderantly a landline voice enterprise, with an organization that was big, fat, and slow. It behaved with the complacency of a monopolist, and possessed a bureaucracy and culture not too different from government’s.
That said, PLDT possessed considerable, inherent strengths – not least being its significant market leadership, a rich and extensive infrastructure, and sizeable economies of scale. But the strength intrinsic to its size was precisely its weakness. That’s because the industry was changing extremely rapidly, and the core business of fixed line voice was swiftly being eroded by new businesses driven by emerging technologies.
Articulating what PLDT’s future should be, and how PLDT ought to respond to competitive hazards, were uppermost in our minds then. In addition, our anxieties revolved around what resources and competencies were required – and changes critically needed – to shape that future. Finally, we were focused on the execution risk – a risk higher than crafting the plan itself.
Our defining vision for PLDT centered upon the creation of a converged and integrated telecoms conglomerate offering a full and diverse range of products and services – voice, data, and video – the so-called triple play – delivered by multiple and rich infrastructures – a nationwide, fiber-optic backbone, wired, cellular, VSATS, satellite, cable television, even terrestrial television.
First Pacific had invested in Smart Communications in 1992, six years before we acquired PLDT in 1998. But we had a broader vision for our telecoms business in the Philippines. We needed an extensive landline component to enhance Smart’s competitive strength. And the final piece of this integrated model was an Internet company – eventually, this became ePLDT, which started operations in 2001.
Finally, we knew the kind of culture we wanted to build – a company that was effective, aggressive and ruthless. “Ruthless” companies excelled at nurturing their customer base, expanding market share, and finding new paths to growth through innovation. It goes without saying that these “ruthless” companies are not “ruthless” ethically. In fact, they are just the opposite. They are operationally excellent – merciless at executing on product development and innovation, cost management, customer service and customer relationship management.
PLDT’s path to competitiveness
So what did we do to compose PLDT’s new future, and enhance its competitiveness?
We crafted an agenda that was transforming in nature, with an eye on a single goal: the reinvention of PLDT.
Our transformation agenda had two parts:
First, redefine our future, consistent with the vision of a unified, yet diverse, telecoms company. Second, identify which new businesses should be developed or acquired, that could add value to our existing core business.
When the naturalist Charles Darwin wrote of life on the Galapagos Islands in 1842, he noted an unusual specie of birds – called finches – that had adapted to its environment to survive. These finches now looked and acted differently from its original European cousins. For one, they developed elongated beaks that their European equivalent did not, so that they could eat the local food. The evidence that a specie had re-constructed itself to survive and prosper in a new environment became the cornerstone of Darwin’s Theory of Evolution. In the world of telecoms, a similar evolution is taking place. Out of the turbulence in today’s world, new environmental conditions are emerging, forcing companies to redefine themselves in order to endure. PLDT is no exception to this phenomenon.
In fact, we conduct our business in a Darwinian landscape – we believe that no privilege attaches to the most successful player. Instead, we are driven to innovate continually, in order to maintain our competitive advantage. But there is a hidden risk to this: the better companies become at innovation the more inertia they acquire – meaning, the harder it becomes to produce the next generation of innovative products and services.
We have identified four main causes of this industry turbulence. First is technology – for example, the technology that allows telephone calls to be placed over the internet at near zero cost. Second is the emergence of a new, low-cost business model enabled by a variety of versatile and cost-effective technologies coming together at the same time. A third cause is government deregulation that has opened wide the doors to more competition. Fourth and finally, the Internet, which is changing industry after industry, from recorded music to securities trading.
But my sense is that there are more instances of companies which fail, rather than succeed. That’s because the task of business re-invention is simply demanding. Most managers have never done the work of redefinition before, and much risk is involved. The low success rate of redefinition is due less to unskilled management; it is simply inherent in the complexity of the task.
But the instances of success I’ve seen suggest a few instructive caveats:
1. Redefine your core business with a clear vision and a set of strategic imperatives which the management team buys into.
2. Establish a common point of view on which disruptive technologies might play out and, in that light, what positioning in the market place provides you with the greatest competitive advantage.
3. Balance the need for integration of new businesses into the original core, with the imperative for speed to execute.
4. Overinvest in management competencies and management processes at the start of your re-invention program.
Adjacency strategy: building on our competency strengths
The second part of our transformation agenda deals with building new businesses which can protect and enhance PLDT’s core business. This is our “adjacency strategy.”
Another CEO from the distant past – Alexander the great – ruled – you might even say managed – the largest area of the known earth ever conquered by a single individual. And although Alexander may not have been everyone’s idea of the model CEO, he amassed an amazing kingdom in fewer than four years, covering over four thousand miles by foot – from Mount Olympus in Greece to Mount Everest in the Himalayas. But did Alexander create lasting value? Probably not. Because just a few years after his death, his empire dissolved and the captured territories slipped away.
Alexander’s problem was neither inadequate resources nor poor execution. After all, he was never defeated in all of his battles. It was the absence of a long-term plan, combined with the inability to consolidate his exceptionally outstanding short-term gains, that caused his empire’s rapid disintegration.
Indeed, the selection of new business adjacencies is the decision that most often triggers a new burst of profitable growth, if you get it right, or distraction and stagnation, when you get it wrong. Embodied in this decision is a fundamental tension between maintaining the core business on the one hand, and expanding into adjacencies, on the other. The way a company resolves this tension ultimately determines the sustainability of its growth.
So far, PLDT has been substantially successful in its adjacency strategy. From a landline telephony provider only eight years ago, we’re now a diversified technology conglomerate. Our two cellular companies – Smart and a resurrected Piltel – contribute a significant proportion of PLDT’s consolidated profits and cash flows. In both instances, we set out to do more than just compete. We went to work and created a new cellular market in the Philippines. Smart’s success in expanding its market share arose from bold moves it undertook in 1993 and then again in 1999, on developing the larger mass market and, as well, by focusing on segmenting that market by creating the appropriate brands and campaigns for each segment.
ePLDT, which commenced commercial operations only four years ago, is already profitable, and is one of the largest contact service centers in the country. We have had notable failures however, like our inability to complete an investment in GMA-7 five years ago. Channel 7 is now the country’s leading television station. And the merger of our Home Cable with Sky Cable has regrettably yet to see the light of a profitable day.
However, being a conglomerate brings with it the blessings and burdens of diversity. The diversity and richness of our network infrastructure produces the advantage of offering a bigger bouquet of products and services – but the disadvantage of complexity in running and maintaining it. Diversity also refers to people – who will have different, sometimes conflicting skills, outlook, and experience. We’ve assembled teams of managers, engineers and marketers for our different businesses, and put them together to achieve the benefits of an integrated network and a convergent business model. But we now face the formidable task of unifying these different management teams – employed in accordance with the legal formats of PLDT, Smart, Piltel, ePLDT and their many subsidiaries and affiliates – into a cohesive unit. This cohesion became particularly acute when we began to offer bundled products and services.
Our future
In less than three months, we will complete the year 2006. If there are no adverse developments for the balance of this year, PLDT is likely to report another record breaking year of profitability.
In the face of these prospectively sanguine results are a number of strategic challenges that lie ahead of us.
Let me describe to you how our future is likely to look:
First, landline revenues will be under pressure from competing wireless platforms and from the internet, both of which will offer more affordable means of voice communication;
Second, as wireless penetration rate rises, the growth of wireless revenues will moderate. Thus, Smart’s and Piltel’s revenues would grow at rates lower than in previous, as we mine deeper into the lower economic strata of our society.
Third, the onset of broadband products, services, applications and solutions will raise consolidated revenues for PLDT in the coming years by double digits.
Fourth, our call centers and business process outsourcing units will together form a significant portion of consolidated profits for PLDT. Together with broadband, they are the fastest growing revenue generators of PLDT.
It is our aim to make broadband access widely available in both our fixed and mobile networks. The historical core of PLDT’s business has been access. Connectivity was our game. In the future, it will increasingly become: connectivity plus – meaning connectivity plus value added services. The reason for this is simple: connectivity will eventually become a commodity. And our competitive advantage will increasingly come from value added services, not just a dial tone.
We also worked to improve our physical strengths. We’re now shifting our core network from circuit-switches to packet-switch technologies. Our move to Internet Protocol-based systems on this Next Generation Network or NGN will give us the flexibility to offer a wide array of innovative products and services at lower cost.
Another new business on the horizon is video on the cellular phone. Mobile TV is a boom business waiting to happen. The elements for its success are content, delivery and pricing. Today more than 120 mobile operators around the world offer mobile TV services.
People recognize many opportunities for mobile TV viewing – on the train or bus, while waiting for an appointment, during breaks at school or work, and even while lying on the beach. Users can catch up with missed episodes of their favorite TV programs and keep track with sporting events while out and about.
Consumers are also keen in interactivity such as voting, providing feedback or commenting on programs. This mobile “return” channel not only enables this level of interactivity, it also creates opportunities for other interactive services, such as shopping via mobile TV.
Innovation – necessity and virtue
The virtue, if not also necessity, of reinventing, transforming, remaking oneself rests on our passion for innovation. A colleague of mine once told me that nothing focuses the mind more than the constant sight of a competitor who wants to wipe you off the map.
We believe that the best way you will thrive in a competitive environment is by innovating.
How do we manage this? It’s quite simple. We engage people who can create the best products and services. You’d be surprised how hard people work at PLDT and Smart. They work nights, weekends, and holidays, sometimes not seeing their families for protracted periods, to check that a product offering is just right in some corner of our business, or to ensure that whatever service we’re presenting is the best it can be. Our people care, and that is directly reflected in our financial performance.
We’ve developed a culture and a system that encourages innovation. That system works because there is no system.
Innovation comes from our people meeting up in hallways or calling each other at midnight with a new idea. Or someone starts shooting holes in how we’ve been thinking about a problem. It’s the ad hoc meetings of six people over coffee called by someone who thinks he has figured out the coolest new text offering ever, and wants to know what other people think of the idea.
It also comes from saying no to a thousand things to make sure we don’t get on the wrong track, or are trying to do too much. It’s only by saying no that we can concentrate on the things that really matter!
Heretofore, innovation dealt mostly with technology. Today, you need more than technology – you need competencies – in people, in processes, in organizational skills built for efficiency, and motivating them for creativity and for growth.
Conclusion
Before closing, let me just say that it is important that we expand our perspective from the board room to the broader domain of people welfare. After all, the standard by which a business should be measured is, in the first instance, the profits it produces and, in the final case, by how it leads in effecting the changes necessary to enhance welfare and well-being.
Economic development involves something more than economic growth. Development means growth plus change. This qualitative difference is likely to appear in the improved performance of the factors of production, in the enhanced techniques of production, and in the better management of our environment. It must also appear in the development of stronger institutions and a change in attitudes and values. It is nothing less than what the economist Gunnar Myrdal described as the “upward movement of the entire social system.”
In his book, “The Elusive Quest Of Growth,” Bill Easterly wrote that right after World War II, economists began their audacious quest to discover the means by which poor countries could become rich. Indeed, if this ambitious quest were successful, it would be one of mankind’s great intellectual triumphs.
Like the ancient questors, economists since time immemorial have tried to find that Holy Grail, the Golden Fleece – which will transform the poor, to be rich. The panaceas ranged from industrialization to export-led growth, from foreign aid to foreign direct investments to debt forgiveness, and from fostering education to controlling population growth. Not one of these precious solutions has delivered on the promise.
Easterly’s response was that the problem was not the failure of economics, but the failure to apply in practical terms the principles of economics. He wrote – “people do what they get paid to do; what they don’t get paid to do, they don’t do.” Or put another way, “people respond to incentives; all the rest is commentary.”
To find our way out of poverty into prosperity, we must remind ourselves that people do what they get paid to do. More importantly, we should remember that behind the quest for growth are the sufferings and joys and stories of real people. It is for them that we in business have taken this quest for growth. It should not be a sad story for this country – but a hopeful one indeed!
Thank you, and all the best to this conference.