Case Study: How to build a low-cost brand

The story
Bharti Airtel was founded in 1995 in order to enter the mobile phone market opened up by India’s deregulation of telecommunications. It was aimed at rural and poor families who had no access to phone services and, with an average per capita income of $2 a day, little likelihood of getting it.

The company hoped to offer prices as low as 1 cent a minute to encourage maximum possible take-up.

The challenge
Bharti Airtel realised by 2002 that it faced a conflict between the capital demands of a traditional telecoms company and the needs of its customers. As founder Sunil Bharti Mittal recalls: “On one hand, we invest billions of dollars. On the other hand, we sell at very low prices. If we had to offer the lowest prices in the world, then we needed to have the lowest cost in the world.”

The strategy
Its solution was to create a collaborative process that transformed its economics of innovation and operation. The company undertook the following steps:
◎ The design, construction and operation of the network was outsourced to Ericsson and Nokia. Bharti Airtel would take ownership of the network assets in the form of incremental capacity on a when-needed basis. Buying service capacity – rather than hardware – gave the vendors an incentive to build the most efficient network.
◎ All IT was outsourced to IBM, paying the company a percentage of its revenue each quarter. This gave IBM an incentive to help Bharti Airtel grow.
◎ Call-centre activities associated with customer service were outsourced.
◎ Access to more than 100,000 relay towers was shared with other mobile providers rather than build its own. The company opted to work with two rivals in order to share investment and operating costs for certain assets.
◎ Looking ahead, Bharti Airtel realised it would need to open new customer accounts and recharge phones with prepaid minutes in more than 5,000 towns and 400,000 villages across India.

Instead of attempting to set up its own stores, the company outsourced distribution services to local entrepreneurs, most of whom were already running shops selling soap, shampoo and other household necessities. Their knowledge and credibility helped Bharti Airtel to build and establish a trusted brand among millions of customers.

Making these choices left the company free to focus its in-house capabilities on financial management, regulatory issues, branding and marketing.

However, one missing element was the appropriate metrics to guide planning and implementation. Management initially relied on the standard industry measure of average revenue per user, but in its low-price market this was unhelpful because it emphasised gross sales over capital efficiency and cost.

The company decided it needed to achieve the “lowest per-minute costs” in the industry so, instead, it focused on measuring per-minute margins. In support, it developed a dashboard that tracked gross revenue, operating efficiency and ratio of revenue to capital expenditures.

The results
Bharti Airtel is among the world’s top five mobile phone services and operates in 20 countries. It has created a subscriber base in India of more than 185m without actually building or operating a network. It offered extremely low prices yet it earned a return on assets and equity over many years that was twice that of other global mobile phone operators.

The lessons
Bharti Airtel’s growth strategy shows that:
◎ You can use relationships to gain new capabilities, flexibility and capital efficiency.
◎ You don’t have to remain tied to standard industry practices and metrics.
◎ You should not lock yourself into an ethos of core competences: you can source the best.
◎ You don’t have to own it to brand it.
- Financial Times, Jan 14. 2013