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Saudi Telecom Diversification Strategy

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Institution
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Introduction

STC (Saudi Telecom Company) is a state-owned telecommunication firm founded in

1998 with head offices in Riyadh, Saudi Arabia (Barakat Consulting, 2020). In Gulf and North

African region, Saudi Telecom is among the biggest telecommunication companies. Saudi

Telecom provides extensive product variety, including broadband, internet network (3G and 4G)

services, pre-paid airtime (Barakat Consulting, 2020). As of date, Saudi Telecom has a team of

roughly 17,000 people (Barakat Consulting, 2020). Throughout its history, Saudi Telecom

focuses on exceeding customers’ expectations. Its vision is “to emerge a world-class leader in

providing innovative digital services (Barakat Consulting, 2020). In the telecommunication

industry, Saudi Telecom is among the well-diversified industry. Diversification is an essential

strategy to spread risk and reduce risk exposure. Before diversification, a company uses three fit

tests, including attractiveness, cost, and better-off, to determine feasibility in pursuing new

markets or products. This paper analyzes the diversification strategy at Saudi Telecom and its

reasons. Undeniably, Saudi Telecom uses a right fit consistent with its corporate strategy to

create positive synergies, reduce risk exposure, and create a promising future for the industry.

1. Primary Reasons Prompting Saudi Telecom to Pursue Diversification

Saudi Telecom is pursuing a diversification strategy for a wide range of reasons. Part of

the company’s diversification plan is to ensure optimal future financial performance.

Undeniably, Saudi Telecom is focused on creating maximum value to shareholders by creating

additional corporate resilience, enabling sustained growth (Forbes, n.d.). In the foreseeable

future, Saudi Telecom expects to make substantial investments in technological advancements

and entry into new markets to sustain its preeminent position in the market. 
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The drastic trends, including seismic shifts in consumer expectation, unprecedented

competition, and deregulation in the telecommunication industry, also prompt Saudi Telecom to

pursue an aggressive diversifications strategy (Forbes, n.d.). New trends have dual effects,

including opportunities and challenges. For example, the unprecedented competition and

heightened consumer expectations compel Saudi Telecom to invest in a smart diversification

strategy to beat the competition and optimize customer satisfaction. 

Market deregulation is another example of an external factor favoring diversification.

Currently, the political and regulatory climate is conducive for deregulation as the Saudi

government seeks to diversify its economy. Along with other Gulf countries dependent on oil,

Saudi Arabia is on a mission to diversify and improve economic resilience against gradual

shocks in the oil sector. Recently, the Saudi government unveiled an ambitious plan to

modernize and diversify the economy (Forbes, n.d.). Therefore, diversifying Saudi Telecom

enjoys political goodwill and an opportunity to strengthen its revenue sustainability.

Furthermore, telecommunications constitute a significant player in modernization and

technological advancements. Therefore, Saudi’s plans to modernize will rely significantly on

telecommunications companies. As the biggest and government-owned technology company,

Saudi Telecom will reap big in the government’s modernization efforts.   

Developing new technological capabilities is another primary reason Saudi Telecom

pursues a diversification strategy (Syuzeva & Zheltenkov, 2021). Like other telecommunications

companies, Saudi Telecom is thirsty for contemporary and modern technical capabilities,

including providing 5G internet services to customers (Le, 2019). Acquiring new capabilities is

part of the strategy to improve the strategic and sustainable advantage in a firm (Syuzeva &

Zheltenkov, 2021). Without investing in the latest technologies, Saudi Telecom may lose its
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competitive edge in the aggressive market. Therefore, this reflects the vitality of investing in the

new technological capabilities. 

Economies of scale are also a major reason for diversifying at Saudi Telecom. Notably,

economies of scale arise when a company uses the same fixed costs to generate more outcomes.

Many telecommunication companies, including Saudi Telecom, creates economies of scale using

restructuring options, including joint ventures and acquisitions or mergers (Syuzeva &

Zheltenkov, 2021). Economies of scale strengthen cost leadership by allowing a company to

incur lower operating costs and generate more income.

Growth is also part of the major reasons Saudi Telecom pursues a diversification strategy.

Undoubtedly, heightened competition in the home market compels Saudi Telecom to seek

growth elsewhere (Forbes, n.d.). As a result, the company aims at tapping more markets within

and outside the Gulf region. 

While penetrating new geographical markets comes with enormous costs, penetration

brings massive and regular profits to the business. Product variety improvement is also a major

diversification strategy at Saudi Telecom (Le, 2019). New product introduction is a strategy to

capture new markets and improve customer attention. Saudi Telecom seeks to strengthen its

product success by offering a diverse product range (Le, 2019). Widening the product variety can

absorb shocks arising from the decline in the market for one or few product lines.

2. Diversification Mode or Modes Adopted by Saudi Telecom

Saudi Telecom is among many companies using multiple diversification modes to

achieve their objectives, including optimal financial performance, growth, and customer

satisfaction. Part of the diversification strategy is the joint alliances. Recently, Saudi Telecom

struck a $1.8 billion deal with STC in soccer broadcast to expand its customer base and meet
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emerging customer expectations (Forbes, n.d.). In addition, Saudi Telecom partnered with digital

technology leaders, including Huawei, Cisco, Nokia, and Erickson, to develop a 5G network in

its quest to provide a super-high-speed internet network and connectivity (Forbes, n.d.). Strategic

partnership with these players offers mutual benefits for all partners. The digital leaders acquire a

gateway to the Saudi Arabian market, while Saudi Telecom gains competencies to offer high-

speed internet connection to the customers. The company partnerships may transform Saudi

Telecom into a world-class telecommunication company.

Entry into the new markets is another classic strategy Saudi Telecom uses in diversifying.

Market saturation in the home market with the entry of foreign companies, including Du,

Etisalat, Zain, and Vodafone in Saudi Arabia, encourages Saudi Telecom to enter into other

countries (Forbes, n.d.). Currently, the Gulf and North Africa are the major markets that Saudi

Telecom seeks to enter. In addition, the company aims to expand into other fast-growing

markets, including India, Vietnam, and Malaysia. 

Product development is another effective strategy that Saudi Telecom uses in diversifying

its markets. Regularly, Saudi Telecom invests in the research and development of innovations or

products. Through research and development, Saudi Telecom is suitable for developing and

selling new products or services. In addition, investing in new services and products increases

the product variety, allowing a firm to generate more sales.

3.Pros and Cons of Diversification for the Company

Diversification at Saudi Telecom has many bright sides and downsides. On the bright

side, risk reduction is the primary benefit of investing in diversification. A company reduces its

exposure to risks by investing in diversification (Orlando et al., 2018). Using a diversification

strategy, Saudi Telecom reduces its over-reliance on few products and a single market. Saudi
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Telecom reduces this risk by adding new products and entering new markets. The diversification

strategy helps Saudi Telecom to expand in the right direction. According to Grant (2019),

companies that fail to add new customers into the business are bound to fail. Therefore, this

shows why diversification is so beneficial and healthy to a company.

Economies of scope are also another advantage of Saudi Telecom’s diversification

strategy. According to Grant (2019), economies of scope arise when a company uses existing

resources for multiple activities to save costs because the expenses would be more than if it runs

activities independently. In economies of scope, businesses can shade tangible resources,

including distribution systems, information systems, research facilities, and sales teams,

eliminating duplication (Burlacu, Gutu, & Matei, 2018). In its joint partnership, Saudi Telecom

shares critical and tangible resources with its partners. The strategic partners also allow Saudi

Telecom to share talents, technologies, and functional capabilities, including product

development and marketing. According to Grant (2019), economies of scope reduce operating

costs in a business. Diversification by Saudi Telecom into cable TV by offering broadcasting

services of a football league. Here, the company succeeds in spreading the costs over many

services and products in a market. Another way Saudi Telecom diversifies the costs is by

centralizing most operations, including legal, finance, marketing, and human resource functions,

in the central place at the company headquarters in Riyadh (Barakat Consulting, 2020).

Therefore, this explains the attractive benefits of pursuing a diversification strategy in the

market.

Organizational intangible resources also play a critical role in the diversification of Saudi

Telecom. For example, the strong brand reputation of Saudi Telecom in the Saudi Arabian

market provides a perfect opportunity for it to expand into new markets. According to Grant
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(2019), a strong brand reputation is necessary to extend into additional business lines at low

marginal costs. Organizational capabilities are also part of the critical advantage exploited in

diversification efforts (Burlacu et al., 2018). For example, the distinct capabilities in providing

telecommunication services and equipment also give the firm an edge to diversify into new areas

(Barakat Consulting, 2020). Strategically. Saudi Telecom combines products of distinct

capabilities to develop and products of diverse functionalities.

Another advantage of using diversification is that it creates economies from internalizing

transactions. For example, through diversification, Saudi Telecom avoids external transactions

by operating internal and external capital markets (Barakat Consulting, 2020). In addition,

diversification provides better information on the external markets.

The elimination of the cyclical nature, including growths and slowdowns, is also a major

reason for diversifying. Naturally, economies grow or slow down, especially when people

change their spending habits. In a tight economic situation, people are likely to slow down

product purchases (Grant, 2019). For instance, in the telecommunication industry, people may

slow down the purchase of telecommunication equipment in an industry. Diversification also

enables a portfolio weather economic cycles to maintain a firm’s financial stability when

products or services are down or up.

Maximization of the underutilized resources is another advantage for using a

diversification strategy. Naturally, investments do not perform as they should. By implementing

the right strategy, the results will show that they performed in the right strategy. Saudi Telecom

can liquidate an underperforming portfolio (Burlacu et al., 2018. After liquidation, a company

can place such assets into diversified components without a proven track record. As a result, this

allows a company to grow and generate more money in a business.

Another advantage of diversification is that it provides an avenue for Saudi Telecom to

exit businesses in decline. After exiting such businesses, the company relieves assets and

resources, including people, technology, and financial capital used for such resources, to other

business areas with promising potential (Barakat Consulting, 2020). Naturally, industries start

declining once they reach maturity and saturation stage. Without navigating potential growth

areas, companies lose their popularity and market success. Strategically, diversification enables a

firm to move away from the businesses that are in financial decline to new businesses enjoying

substantial growth and diversification. As a result, this allows a firm to survive regardless of the

financial decline in an industry.

However, diversification has various shortcomings to Saudi Telecom. Part of the major

shortcomings of diversification is that it attracts new competencies and resources (Grant, 2019).

For example, entry into the new markets and developing innovations require the company to

spend enormous resources. Sometimes, the company redirects financial and human resources to

the new markets and areas of product development.

Another setback with diversification is that a company cannot respond quickly and easily

to market changes. Failure to quickly respond to the underlying market challenges may help

leaders to business losses in a company (Grant, 2019). Notably, the major reason for this is that a

business may be overstretched in the market, limiting its effectiveness to respond in the market.

Therefore, the failure to respond to the market situations is an issue that investors should

consider in their diversification efforts. As a result, the focus of operations shifts, limiting

innovation. 

Another setback is that diversification increases complexity in businesses (Orlando et al.,

2018). For example, the many business ventures that a company may open or the new product
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lines increase business complexity. In addition, the joint partnership also increases the business

complexity and creates two centers of power (Burlacu et al., 2018. Therefore, this may

undermine the harmonious relationship between the business ventures. Complexity in business

activities is a major shortcoming likely to face the business in an industry. 

4. Diversification Tests

Michael Porter introduced three diversification tests serving as essential pillars of

diversification strategy. The first pillar is the attractiveness test (Galpin, 2019). In this pillar, a

company ensures that its diversification strategy focuses on attractive market segments and

industries. Unless the market is attractive, it is not worth it for a company to diversify (Syuzeva

& Zheltenkov, 2021). In most cases, the attractiveness test is the leading driver of diversification.

Creatively, Saudi Telecom considers the market attractiveness in its diversification strategy.

One aspect that exhibits that Saudi Telecom prioritizes market attractiveness in its

diversification is entry into the fast-growing markets, including Turkey, Kuwaiti, India, China,

Malaysia, Vietnam, Egypt, South Africa, and Bahrain (Barakat Consulting, 2020). Entry into the

fast-growing countries provides an opportunity to maximize profitability. In addition, Saudi

Telecom’s venture into TV broadcasting, live-streaming, and 5G and 4G internet networks are

also attractive business segments to diversify the revenue sources. The above services and

products enjoy strong market demand, reflecting their market attractiveness. Other areas

enjoying strong growth and demand potential are cable TV and transmission circuits (Barakat

Consulting, 2020). Saudi Telecom also established a strong position in IT, real estate, and media

content, which enjoys strong and promising growth potential in the industry.

Second, the entry cost is another diversification test. In the entry test, companies focus on

ensuring that the entry cost is sustainable and does not eat all the profit margins (Galpin, 2019).
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If the cost is so high that the company may not sustain, it is not worth diversifying. Higher than

sustainable costs threaten the firm’s survival in the long term (Syuzeva & Zheltenkov, 2021).

Therefore, this explains why a company should consider the cost factor before they pursue a

diversification strategy. 

In the entry cost test, Saudi Telecom considers the potential profitability of new markets,

services, or products. Creatively, Saudi Telecom expands into geographical markets with little or

no market saturation. Undeniably, the telecommunication industry in developed markets is

saturated. Therefore, developing countries are the alternative growth markets. In developing

countries, Saudi Telecom incurs low marketing and branding expenses (Forbes, n.d.).

Competition is also lower in developing markets, reducing the entry costs. Therefore, this

explains Saudi Telecom’s decision to enter emerging countries. 

Third, the better off test is another diversification strategy that lets a company diversify

into the key markets to improve its popularity and market success. In this test, a company

ensures that its business will gain a competitive edge (Galpin, 2019). Diversification needs to

create positive synergies in sharing key capabilities and assets, including technologies, people,

and finances, in their diversification efforts.

In better-off tests, Saudi Telecom pursues joint ventures and alliances to develop new

competencies and share resources for mutual advantage (Galpin, 2019). Indisputably, strategic

alliances between Saudi Telecom and top digital companies, including Nokia, Huawei, and

Cisco, have mutual benefits mentioned here. For example, Saudi Telecom gains competencies to

provide 4G and 5G network services in the Gulf region and North Africa (Forbes, n.d.).

Continuous product development also seeks to make Saudi Telecon a better-off in the

telecommunication industry. Regularly, Saudi Telecom invests in research and development to

unveil innovations, including movie streaming services in the key market. Therefore, this allows

Saudi Telecom to weather the market challenges and improve its growth. 

Conclusion

Diversification has a strong link to the corporate strategy in a related business venture.

Ultimately, diversification at Saudi Telecom is about creating positive synergies and reducing

risk exposure to the firm by absorbing market shocks that may affect one business area.

Diversification through joint alliances at Saudi Telecom allows the transfer and sharing of

resources and core capabilities to cultivate a sustained strategic advantage. In diversification,

companies, including Saudi Telecom, use three interrelated tests to determine the strategic

attractiveness. All these tests inform the strategic attractiveness and competitiveness.

Diversification allows Saudi Telecom to absorb risks and create positive synergies for its

business.
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References

Barakat Consulting. (2020). Saudi Telecom Company SWOT and PESTLE.

https://www.swotandpestle.com/saudi-telecom-company/

Burlacu, S., Gutu, C., & Matei, F. O. (2018). Globalization–pros and cons. Calitatea, 19(S1),

122-125. https://www.researchgate.net/profile/Sorin-Burlacu-

2/publication/324212575_Globalization_-

_Pros_and_cons/links/5d1a071e92851cf4405a6ba3/Globalization-Pros-and-cons.pdf

Forbes. (n.d.). Saudi Telecom Company. https://s3.us-east-2.amazonaws.com/brightline-

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Galpin, T. (2019). Strategy beyond the business unit level: corporate parenting in focus. Journal

of Business Strategy. https://doi.org/10.1108/JBS-01-2018-0011

Grant, R. M. (2019). Contemporary strategy analysis: Text and cases edition. John Wiley &

Sons.

Le, H. (2019). Literature review on diversification strategy, enterprise core competence and

enterprise performance. American Journal of Industrial and Business Management, 9(1),

91-108. DOI: 10.4236/ajibm.2019.91008  

Orlando, B., Renzi, A., Sancetta, G., & Cucari, N. (2018). How does firm diversification impact

innovation?. Technology Analysis & Strategic Management, 30(4), 391-404.

https://doi.org/10.1080/09537325.2017.1313405
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Syuzeva, O., & Zheltenkov, A. (2021). Problems of choosing strategies for diversifying

companies. In E3S Web of Conferences (Vol. 284, p. 07014). EDP Sciences.

https://doi.org/10.1051/e3sconf/202128407014