1 Introduction
AutoFone was established almost twenty years ago at the beginning of the mobile telephone boom. It was formed by
a dynamic Chief Executive Officer (CEO) who still remains a major shareholder of the company.
AutoFone brought two new concepts to the market. Firstly, it established retail shops where customers could go and
handle the products and discuss mobile phone options with trained sales people. Before AutoFone, all mobile
telephones were sold through the customer directly contacting the telephone network provider (like conventional home
land line services) and were generally aimed at business rather than leisure users. Secondly, AutoFone sold products
and services from all the four major network providers licensed by the government to provide telecommunications
services in the country. Previously, customers could only choose products and services from within one network
provider’s range. AutoFone allowed customers to choose products and services across the range of the four providers
and reflected this in the company’s motto ‘ethical advice: the customer’s choice’.
In 1990, AutoFone signed a thirty-year supply contract with each provider. Although, in retrospect, these deals were
on commercially favourable terms for AutoFone, the network providers were happy to agree these deals because none
of them believed that mobile telephones could be successfully sold through retail shops. However, speaking in 2003,
the managing director of one of the networks suggested ‘that AutoFone had got away with incredible profit margins’
when they signed the deals in 1990. The four network providers themselves had re-signed twenty-five year licence
deals with the government in 1995. Under the terms of these deals, licences will be restricted to the four current
providers until their renewal date of 2020.
Retail shops Division
AutoFone currently has 415 shops around the country. To reduce costs most shops are on the edge of (but not in)
the main shopping area of the town they serve. It is usual for AutoFone to sign a fifty-year shop lease in return for
low initial annual rental and a rent-free period at the start of the lease while the company fits out the shop to reflect
AutoFone’s corporate image. In 1997, AutoFone floated on the country’s stock market to assist the funding of further
shops and so continue its organic growth. The national coverage of its shops, the publicity generated by its CEO and
a successful television advertising campaign culminated, in 2005, with it being rated by consumers as one of the top
20 brands in the country.
The CEO of AutoFone established the retail shops along, in his words, ‘entrepreneurial lines’. He regards each shop
as an independent business, having to achieve a profit target but without being closely monitored within these targets.
He believes that the company is ‘about providing opportunity to its employees, providing them with autonomy and
responsibility to achieve their goals. It is not about monitoring them every hour of the day, stifling creativity and
enthusiasm.’ To support this approach, sales staff are given a relatively low basic salary with a substantial element of
profit-related pay linked to the profit targets of the shop. Commission is also paid to sales staff who successfully sell
mobile phone insurance to the customer. Each shop is relatively small, usually employing three or four people.
In recent years the CEO has been increasingly involved in television, sports promotion and charity work. At AutoFone
he has established a strategic planning committee of senior headquarters managers to develop and implement the
company’s business strategy. This committee includes the two longest serving board directors. The strategy still
continues to have at its heart the central business idea of giving independent and impartial advice to customers so
that they can choose the best equipment and network for their needs.
Marketplace trends
Since AutoFone’s arrival into the market, two significant trends have emerged:
(i) The licensed network providers have opened their own retail stores, usually in city centres. AutoFone has reacted
to the opening of these shops by stressing AutoFone’s independence and impartiality. Only at AutoFone can
impartial advice be received on all four competing networks and their supporting services. The CEO now refers
to this as ‘our central business idea’ and, as well as being core to their strategy, it is heavily emphasised in all
their promotional material.
(ii) Mobile phones have become more sophisticated. Many now offer integrated cameras, mp3 players, web
browsers and e-mail facilities. AutoFone offers these products in both its shops and through its Internet operation.
Mobile phones are either purchased outright or provided on monthly contracts. The minimum contract period
with the network provider is usually twelve months.
2
AutoFone has itself established its own Internet division, AFDirect, as a separate division within the group. It has also
established an insurance division (AFInsure) offering insurance to cover loss or damage to mobile phones purchased
from the company. Revenue earned from each division, analysed by the age of the customer, is shown in table 1.
Table 1: Analysis of AutoFone Sales: 2007 (all figures in $m)
Age of customer
Under 15 15–25 26–40 41–60 Over 60 Total
Division AutoFone retail shops 5 90 60 120 65 340
AFDirect 0 15 20 8 2 45
Total sales of mobile phones 385
AFInsure 0 1 3 7 3 14
Group total 399
Analysts agree that growth in the mobile phone business is slowing down and this is supported by the figures given
in table 2 showing revenue from sales (both retail and Internet) for AutoFone and its competitors, the four licensed
network providers, for the period 2003–2007.
Table 2: Market Analysis (all figures in $m) of sales of mobile phones
Company 2007 2006 2005 2004 2003
AutoFone 385 377 367 340 320
NetAG 350 348 345 340 305
09Net 390 388 380 365 350
PhoneLine 315 315 315 305 300
NetConnex 295 295 294 290 285
Total 1,735 1,723 1,701 1,640 1,560
However, while the AFDirect and AFInsure divisions are prospering, there are increasing problems in the retail shops
division. Profitability has been declining over the last few years (see table 3) and this has had a demoralising effect
on shop employees. One shop manager commented, in his exit interview, that the profit targets were unattainable in
the current market. ‘They might have been appropriate in 1997, but they are not in 2007.’ Staff are particularly
demoralised by spending time explaining a particular product to a customer who then leaves the shop and buys the
product cheaper on the Internet. They have to wait for it to be delivered (usually two or three days) but they are
prepared to do this to gain the lower prices offered by the direct Internet-based companies, including AFDirect. It is
also increasingly common for customers who have bought from AFDirect to take their phones to AutoFone’s retail
shops for support and service. This activity is not recognised in the shop employee’s reward package.
AutoFone’s central city branch
Despite the overall decline in the profitability of the shops, one branch has continually met or exceeded its profitability
targets and is held up by the CEO as an example of best practice – proof that the company’s approach to mobile phone
selling can still be profitably applied. This is the central city branch in one of the country’s most prosperous cities.
The CEO arranged for three members of the strategic planning committee to visit the shop, posing as customers, to
investigate the reasons for the shop’s success. They found the staff very friendly and helpful. However, they also found
that they were guided towards products and services which had higher profit margins. Further investigation showed
this always to be the case and so customers were sold products which were profitable to the shop, rather than those
best suited to the customer’s needs. On receiving this information, AutoFone’s board concluded that this was unethical
as it compromised their central business idea which stressed impartial advice to guide the ‘customer’s choice’. The
manager of the shop was reprimanded and asked to adhere to company policy. He resigned soon afterwards, followed
by his two assistants. The shop is currently run by temporary staff and profitability has significantly dropped.
Future strategy
The two longest serving directors on the strategic planning committee are increasingly concerned about the company’s
decline in profitability (see table 3). They have written an internal paper suggesting that the retail division should be
sold off and that AutoFone should re-position itself as an on-line retailer of phones. They believe that the retail shops
business model is no longer appropriate. They argue that a company concentrating solely on Internet sales and
insurance would be a ‘smaller but more profitable and focused’ business. The CEO is strongly opposed to this
suggestion because it was the shop-based approach to selling mobile phones that formed the original business model
of the company. He has a strong emotional attachment to the retail business. The two directors claim that this
attachment is clouding his judgement and hence he is unable to see the logic of an ‘economically justifiable exit from
the retail business’.
3 [P.T.O.
Table 3: Extracted Financial Information for AutoFone (retail shops division only)
Extracted Financial Information (all figures in $m)
Extracted from the Balance Sheet
2007 2006 2005 2004 2003
Total non-current assets 143 140 134 128 123
Current assets:
Inventories 345 340 335 320 298
Trade receivables 1,386 1,258 1,216 1,174 1,120
Cash and cash equivalents 345 375 390 400 414
Total current assets 2,076 1,973 1,941 1,894 1,832
Total assets 2,219 2,113 2,075 2,022 1,955
Total shareholder’s equity 150 155 160 165 169
Non-current liabilities:
Interest bearing long-term loans 55 50 45 40 35
Other provisions 16 15 13 13 10
Total non-current liabilities 71 65 58 53 45
Total current liabilities 1,998 1,893 1,857 1,804 1,741
Total equity and liabilities 2,219 2,113 2,075 2,022 1,955
Extracted from the Income Statement
2007 2006 2005 2004 2003
Revenue 340 337 332 320 305
Cost of Sales 250 252 230 220 205
Gross Profit 90 85 102 100 100
Wages & Salaries 39 38 37 35 33
Other expenses 40 38 35 30 30
Interest payable 4 4 3 3 3
Total 83 80 75 68 66
Net Profit before tax 7 5 27 32 34
Tax 2 3 5 4 4
Net Profit after tax 5 2 22 28 30
Extracted from annual reports
Number of employees 1,400 1,375 1,325 1,300 1,275
4
Required:
(a) Using an appropriate model or models, analyse the competitive environment of AutoFone’s retail shops
division.
Note: requirement (a) includes 2 professional marks. (20 marks)
(b) AutoFone’s CEO is anxious to develop a rational and well argued case for retaining the retail shops division.
Write a briefing paper for the CEO to submit to the strategy planning committee explaining why the retail
shops division should continue to form a key part of AutoFone’s future strategy.
Note: requirement (b) includes 3 professional marks. (15 marks)
(c) The AutoFone retail shops division faces problems in remaining faithful to the original business idea of offering
impartial advice to customers and developing an appropriate rewards system for its staff.
Evaluate what changes the AutoFone retail sales division should consider making to both its business idea
and its rewards system. (15 marks)
(50 marks)

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