Part 1: Understanding the business
1. Suggest the income streams and costs that may be appropriate to an organisation in your sector.
The main income streams for the telecommunication industry is the revenue achieved through the usage of their services. Originally those services were limited to the provision of telephone communication using landlines. Today, the communication industry has expanded the number of services that it provides into mobile, VoIP, internet and other communication. The majority of the revenue can come from any one of those different services. For example, in 2005 BT had 75% of its revenue coming from their traditional services, but in 2006 this number decreased to 68%. Instead the company received an increased amount of revenue from it’s “New Wave” services, such as networked IT services, broadband, mobility etc. The mobile telecommunications provider such as Vodafone gets the most of its revenue from the tariffs that it charges its customers for using their mobile phones. However, the mobile telecommunication has also expanded into the provision of other services such as messaging and data and information provision.
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The largest cost for any communication company is the maintenance of the business. This cost can consist of staff costs, contractor wages, operational costs etc. Main contributor will depend on the company. For example, BT identifies ‘other operational costs’ as its main contributor to the overall cost of maintaining the business, representing 35%. The ‘other operating costs’ include the cost of supporting the network IT services, maintenance and support of the networks, costs of accommodation and marketing and general overheads (BT, 2007, p. 34).
2. What measures of performance are applicable to the industry?
The majority of the industry has a few fundamental performance measures. The prime measure is the satisfaction of their customers. This is not surprising considering the competitiveness of the industry, the ease with which customers can change providers and the fact that the companies’ profits are based on the volume of customers. The other measures can include the satisfaction of the company’s employees. The industry that is so customer focused tries to provide them with as much human contact as possible (as long as it is profitable). Therefore the industry employs a large volume of employees. Satisfied employs are more likely to make sure that the customers are happy with the service that they are getting, allowing the companies to stay competitive. For example, BT has four performance measures regarding the satisfaction of their employees: employee engagement index, diversity, H&S: loss time injury rate and H&S: sickness and absence rate.
Other performance measures can include: the satisfaction of the suppliers; investment in the community; protection of the environment; digital inclusion and sustaining integrity. In order to measure those performance measures, the company engages a number of internal indices. Some of those indices are much easier to measure, for examples the number of complaints that the company receives, the others are more difficult, such as measuring the integrity of the employees. The majority of the companies employ surveys in order to measure the more difficult quantifiable factors.
3. Construct a Value Chain for a company within the industry.
The value chain has been developed by Michael Porter in 1985. The method divides the organization into the activities that is performs and them links them to the company’s competitive position. Porter (1985) argued that only by separating the organization into its activities and findings the right links will the managers be able to achieve a competitive advantage. The value chain method distinguishes between primary and support activities. Combined, they should lead to a margin, which is equal to the cost of the product subtracted from the price that it is sold to the customer. Model 1 depicts the value chain.
Primary activities in the business are concerned directly with the creation, production and delivery of service and are grouped into inbound logistics, operations, outbound logistics, marketing and sales, and service. The Support activities are there to help the primary activities and they are divided into main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). The support activities are directly linked to the primary activities, and if those links are produced well, then the company will become more efficient and competitive in the market.
The value chain model can be applied to the telecommunication industry. The inbound logistics are the goods and services that the company receives from its suppliers. In the world of telecommunication, this can be the phones (that might be manufactures in China), the cables, the sim cards etc. The ‘operations’ in the original method meant manufacturing of the product. Since telecommunication is already dealing with a finished product, it is the provision of this product that can be named their ‘operation’. For example, provision of the reception, the IT platform that connects people etc. The outbound logistics is the finished product being delivered to the customer. In this case this can be the phone set, the website of the company where the customer can buy their own product etc. Every telecommunication company has their marketing and sales team, that offer services and make customers aware (through advertising) of their services. In the competitive industry such as telecommunication, the firms pay a lot of attention to the right kind of marketing and promotion. If a company releases a new product, the other companies are likely to follow. Therefore the first ‘inventor’ has to capture as much market as possible. Furthermore, due to the competitiveness of the industry, the companies are under pressure to provide the customers with as much as possible, in order to keep them, as finding a new customer is always much more expensive then keeping the old one. The last section of the primary activities is the ‘service’. Service is something that the company provides after the customer has the product. In the telecommunications this means installation of the product into the customers home, helping the customer with every day questions, replacing the product if is gets broken etc.
Under the support activities the first factor is ‘procurement’. The procurement department in the telecommunications industry are people who buy all of the inbound logistics into the company. This department will be in charge of agreeing the best deal with the suppliers of the product and making sure that the product is of high quality. Technology development is an extremely important element in the telecommunications industry, which allows them to gain a competitive advantage. The technology development in this method can also include customer relationship management activities, and not be limited purely to the innovation. Human resource management is a vital part in this method as those people are responsible to the satisfaction of the employees, which can be achieved through remuneration, training and development, bonuses and other HR strategies.
The above mentioned would be the base for the value chain. However, it should be noted that the majority of the companies in the telecommunications industry are multi-national corporations. They provide a large number of products to their customers world wide. Furthermore, the components of their services may come from a wide range of suppliers, for example the plastic for the phone will come from Russia, the phone will be constructed in China and painted in India. Due to their size, the majority of the companies have already established the most productive and available route of producing, maintaining and providing the service. Therefore, the value chain would be a lot more complicated with both the primary and support activities. Furthermore, the margin may also come from a wide range of sources, such as mergers and acquisition, investment in stock markets etc.
4. Construct a Value System for the industry.
The value system was also introduced by M. Porter (1985). It represents the link between the value chains of different ‘market customers’. For example, it will link the value chain of the suppliers to the value chain of the company to the value chain of the channel and then to the value chain of the customer. The supplier value chain for the telecommunications industry can include the suppliers of the physical products, such as phones and sim cards from the supplier value chain; provision of the telephone connection and services in the company value chain; services provided by the third party distributors (such as Yahoo!) in the channel chain and a wide range of customers buying the products (for example businesses, individuals and other telecommunication companies).
5. What are the environmental factors that may influence the industry?
Most of the large organizations today are environmentally friendly, and have special strategies to maintain this position. For example, BT is one of the largest consumers of electricity in the UK (BT, 2007, p. 3). In order to reduce the damage to the environment, the company has adopted the majority of the environmentally-friendly electricity sources, such as wind generation, solar and hydroelectric energy generation. The telecommunications industry face a number of environmental risks that can damage their profitability. For example, global warming increases the number of storms and floods that are occurring around the world. In turn, this damages the telecommunications’ infrastructure and can cost the industry billions of pounds. Moreover, by damaging the environment, the costs of the primary products can increase (e.g. electricity). Since the telecommunications industry relies on a wide range of products outside of their own services, an increase in the cost of primary products, such as electricity, is likely to have a negative effect on their profits.
Part 2: Evaluating Company Resources
1. How well is the present strategy working?
“Group Strategy’s principal role is to help the BT Group maximize long term value for shareholders. This involves ensuring that the BT Group can sustain competitiveness in all its markets” (BT, 2007, Group Strategy). The financial results for the 2006 showed that the company has strengthened its position in the market. It had increased its revenue by 6% to £19,514m, provided its customers with both the income and investment growth, by increasing the share price by 8% and dividend pay out by 14% in one year (BT Annual report, 2007, p. 2).
Since their share price has gone up over the year, it can be argued that the company’s strategy has worked. Furthermore, BT has also subdivided their strategy aim into a number of objectives, namely:
“to pursue profitable growth in new wave markets
to maximise the return from our traditional business
to transform our networks, systems and services for the twenty-first century
to create long-term partnerships with our customers” (BT, 2007, Annual Report, p. 4).
The “new wave” activities (networked IT services, broadband and mobility) growth has been overachieved by 50% by the company in 2006 (BT, 2007, Annual Report, p. 4). The company has also asked all of their existing customer to swap to the subscription-based packages. They have achieved 67% customer base being swapped to the subscription, which has also overachieved their target. The transfer of all of the services onto the 21C (twenty-first century IP technology) has not been completed yet. Finally, BT has achieved an increase of 3% in their customer satisfaction table, which also brought them closer to their long term goal. Therefore it can be argued that BT’s strategy has been successful.
2. What are their resource strengths and weaknesses?
BT’s resource strength is their brand and strong reputation, that is recognized world wide. Their strong brand allows them to form stronger relationships with their customers (stakeholders, customers, suppliers, employees). BT’s reputation of reliability, consistency and effectiveness allows them to keep their customers and increase their customer base. Furthermore, BT provides a wide range of services that are in line with the latest technology, such as IP phone calls and are often a market leader in the industry.
BT had a large number of weaknesses a few years ago: it was loosing the DSL market share to every competitor in the market, it had a shrinking market share in the fixed line services and sometimes it was not up to speed with the innovative technology. However, the new market strategy has proved very beneficial to the company. The company was the first in the IDSL provision in the UK market in 2006; its market share is growing and it is transferring most of its services onto the 21C technology (BT, 2007, Annual Report). Although introduction of 21C will be beneficial to BT in the future, it can have a negative impact on the profits in the short run. Furthermore, does BT think far enough?
There are a wide range of external risks that BT group faces. From the social aspect, they can be divided into: supply chain working conditions and outsourcing. The ‘supply chain working conditions’ risks arises from the wide range of services that BT buys from across the world. The company is committed to following the Universal Declaration of Human Rights and International Labour Organisation rules. The main risk of breaching those rules is that the company may be faced with a large number of law suits and loose its reputation. In turn, reputation is one of the most valuable assets of the company, as it has a positive correlation with the number of customers that sign up and stay with BT. The group deals with this risk by asking all of the suppliers to fill in the ‘Risk assessment questionnaire’, which it then examines and decides if it should deal with the named supplier (BT, 2007, Human Rights and Suppliers).
BT has outsourced a number of operations such as human resource contracts, pensions, recruitment and training, as well as finance, accounting and payroll (BT, 2007, Outsourcing). The risk arises when the company tries to get the cheapest service and ends up making a very expensive mistake. For example, the BT can loose control of the quality of the service that the outsourced functions provide; or the outsourced departments may make a financial mistake, that will lead to wrong internal decisions within a company.
3. What are the external opportunities and threats facing them?
There are also a number of factors that can be quite threatening to BT. The change in the environment, where natural catastrophes can destroy BT’s infrastructure, have already been discussed. The collapse of the stock market can also have a negative effect on the company, as BT invests some of its money in the stock market. Furthermore, an innovative product, such as WoIP being introduced by another major competitor, will strongly harm BT’s profits (since all of the phone calls can be free, without relying on the internet). The economic and political decisions can also affect the profitability of the company. For example, if the interest rates rise sharply in the UK, the disposable income of the customers will decrease. In turn, the customers may reduce their usage of the BT’s services or swap to cheaper providers. Moreover, since BT has global presence, large looses in one of the countries may put a lot of pressure on the rest of the Group to ‘bail out’ the damaged company, which can negatively affect the profits. As has been mentioned above, there is also an issue of reputation. Loss of reputation due to the external factors can strongly affect company’s profitability. Furthermore, mobile phone providers also represent a threat, since they undercut the prices and the majority of the customers find mobiles an effective way to communicate.
However, there are also a wide range of opportunities available to BT externally. For example, the technology progress has been very rapid over the last few years, which means that BT can take advantage of this to gain extra customers. The IP voice communication will also allow BT to gain more customers worldwide, as there will not be legal barriers of the contract. More and more people are getting to know how to use the internet. Since BT is moving towards making their phone calls through the internet rather then fixed lines, this means that BT will have an opportunity to deal with a larger customer base. Finally, BT has a good reputation, capitalization and brand that it can use to expand into a wide range of those products.
4. How strong is their competitive position?
BT’s competitive position can be seen from two perspectives: in the UK and worldwide. In the UK, BT has a very strong competitive position, since it is the largest communication provider in the country (BT, 2007, Annual Report, p. 7). Worldwide the situation is a bit different (see Table 2).
Table 2: BT’s competitive position worldwide
BT
T
Pvt1
VZ
Industry
Market Cap:
47.23B
232.84B
N/A
105.08B
6.51B
Employees:
104,400
302,000
143,251
N/A
12.52K
Qtrly Rev Growth (yoy):
5.00%
23.10%
N/A
31.80%
3.80%
Revenue (ttm):
38.76B
63.06B
5.62B1
88.14B
4.02B
Gross Margin (ttm):
84.08%
56.99%
N/A
60.33%
65.54%
EBITDA (ttm):
11.00B
22.88B
N/A
29.53B
1.67B
Oper Margins (ttm):
13.31%
16.87%
N/A
16.13%
15.46%
Net Income (ttm):
5.38B
7.36B
304.40M1
5.48B
402.77M
EPS (ttm):
6.35
1.887
N/A
2.12
1.55
P/E (ttm):
8.98
19.76
N/A
17.03
15.1
PEG (5 yr expected):
2.17
1.51
N/A
3.08
1.64
P/S (ttm):
1.24
3.67
N/A
1.21
1.61
Source: Yahoo! Finance
Where:
T= AT&T Inc
Pvt1 = Cable and Wireless plc
VZ = Verizon Communication Inc
Industry = Telecom Services – Foreign
As can be seen, BT has a small capitalization value compared to its closest direct competitors in the telecommunication market. However, its value is still nearly 7 times the size of the average market capitalization of the industry. The revenue growth has also been poor compared to the largest competitors, and hardy exceeds the industry average. However, despite the low capitalization, the net income of BT is very close to that of the other companies, which indicates that the company is efficient.
5. What is your assessment of the culture within the company? Will it be supportive to change or not?
BT has a strong set of values within the company. Those values build the culture of the company. Furthermore, judging from the amount of information that is available of their website, it can be assumed that BT is very good at informing all of its employees of any changes that are taking place in the organization. The employees rarely welcome change or restructuring, however over the years it has been shown that good and frequent communication with the employees will allow the company to implement the changes much more easily. Therefore, the BT’s employees are likely to be supportive of the changes that BT makes.
Part 3: Strategy and Competitive Advantage
1. Review the generic strategies. Which would be suitable – cost advantage, differentiation or focusing on a niche market?
Given the 3 generic strategies: cost advantage, differentiation or focusing on a niche market, BT is more likely to go for differentiation. This opinion is based on the existing strategy that the BT is adopting. BT provides a wide range of services. It could go for a niche market if it will have an opportunity to keep the rest of the products. For example, at the moment it’s transferring most of its services onto 21C platform. This will allow BT customers to use internet for communication. Although most of the large telecommunications companies have not done that, there are a number of companies that have already dominated this market e.g. Skype.
BT could also go the cost advantage, as the telecommunication industry is becoming more and more price competitive. However, as with any industry, price wars can not last forever. Considering that BT used to be a state monopoly and therefore has an advantage of the largest customer base, it has decided to provide quality to the customers rather then quantity. Furthermore, since BT is launching the large transferal of its technology onto the 21C base, it is unlikely to go for a cost advantage this year. Instead, it will provide its customers with high quality innovative products, that will be cheap once they launch (internet communication is free).
This leaves differentiation. As has been discussed above, BT has chosen a number of strategies that will differentiate it from its competitors, such as the 21C platform, direct and clear communication with the customers, emphasis on the good treatment of its employees and innovative products.
2. Looking into the future, how may the company seek to achieve cost competitiveness?
Achieving cost competitiveness is the aim of every company in the world. Cost competitiveness can be achieved through economies of scale and scope, as well as synergies. BT is a very large company and therefore has a stronger negotiation power with its suppliers. The suppliers might be willing to provide BT with lower prices for their products, since BT is likely to order large volumes of products. Economically, as the company gets bigger, the cost of production of one more unit of a good or service decreases (marginal cost). Therefore, as BT expands it will be able to decrease the cost of the production. However, the economic theory also states that this decrease in marginal cost will eventually reach a point where the company will enter the diseconomies of scale (the marginal cost will start to increase). In order to avoid that, BT has expanded globally, rather then just within the UK.
BT can also reduce costs through the economies of scope – the production of a wider range of goods. The marginal costs will decrease because certain fixed costs will be shared between the products. For example, the IP platform that BT is using will not only be used to generate revenue from the phone calls, but will also be used for the provision of video messaging services. Later on, if BT decides to bring out another product, it will be able to use this IT platform without the need of building a new one.
BT can achieve synergies between its businesses. BT operates 4 separate businesses: BT retail, BT wholesale, BT Global services and Openreach. There are a large number of synergies between all of those companies, for example HR, finance and accounting services. Furthermore, if BT decides to acquire another company in the future, it is likely to use the existing synergies to create even more synergies with the new company in the future. Furthermore, there are a large number of other cost cutting exercises that the company can do in the future to achieve cost competitiveness, such as restructuring, selling some parts of its business that are no longer useful to it and increasing efficiency internally.
3. Suggest ways that information technology and information systems can be used to exploit external opportunities and defend against threats facing the company?
Information technology (IT) is strongly linked to the information systems (IS) in telecommunication industry. BT is successfully using both to capture new opportunities in the market, as has been discussed previously. However, as the whole industry is moving towards VoIP, BT could use its existing information systems to move a step further – provide WoIP services. VoIP requires internet in order to use free voice calls, while WoIP allows a customer to use free voice calls without internet. In turn, by using the IT and IS BT can capture a larger share of the market not only in the UK but also worldwide. Furthermore, BT has enough capitalization and IT in order to compete with the mobile phone providers. It can expand to provide those services. Efficient IT and IS will allow BT to connect people cheaply around the world, where the customers will not need to worry where they are resident.
BT is very much aware of the external threats that it faces. IT and IS will not be able to defend BT from the environmental risks. However, some of the social risks can be eliminated. For example, the outsourced functions of finance and accounting can be checked electronically first, by setting up an appropriate IT system. The work can then be send to Britain for checking. Furthermore, although BT can not control the stock markets, it can certainly install a number of IT systems that will allow it to prevent a large loss of money, for example by using Technical Analysis systems. By making sure that all of BT’s IT and IS systems work efficiently, the company will reduce the risk of losing its reputation.
4. Analyse the current core competencies of the company.
The current core competencies of the company is professionalism, integrity, straightforwardness and team work. All of those competencies are built into their core values. Furthermore, by achieving those competencies as a business the company will be able to achieve its overall aim – bring value to the shareholders. Competencies are often measures on the internal scale of the company, which makes it difficult to analyze for the outsider. However, the companies achievements and the strategy for the future work reflect those competencies. It is in the interest of the company to retain professionalism and integrity towards the customers and employees, if it want to keep both groups. Straightforwardness is a good differentiator of the company, as this allows better communication with the customer, and therefore contribute towards building a loyal customer base. The team work, in turn, will allow the company to achieve its performance targets.
5. Apply a SWOT matrix to the analysis carried out in Activity 2 to gain an understanding of how the strengths and weaknesses of the company may be considered, together with the opportunities and threats that exist, to determine a set of strategic options for the company.
SWOT Analysis
(S)trengths
(O)pportunities
Stable and increasing share price
Strong financial results
Strong brand
Good reputation
Worldwide Reach
Market leader in the UK
Large customer base
Increasing number of customers that will use the IP platform
Further expansion into the world market
Use of capital to expand into ‘products of the future’
(W)eaknesses
(T)hreats
Lack of innovative products
Sometimes overprices products which leads to loss of the market share (DSL)
Weak global market presence
Supply chain working conditions Outsourcing
Loss of reputation
Environment
Stock market crash
Recession
Mobile phone users
BT is the largest fixed-line provider of communication in the UK. Since BT used to be a state monopoly it has a very large number of customers. However, since its privatization, despite a strong competition not only from the new fixed-line providers by also from the mobile phone providers, BT still has a very strong market presence in the UK. This indicates that BT has built a certain customer loyalty, which can be added to its strengths. As the communication market matures, new technology and opportunities are entering the industry. The most recent innovation, that remains a threat to the most fixed-line providers is the building of the IP platforms. The IP platforms allows the customers to speak to each other for free by using their internet. BT has been extremely proactive and has built the platform. Since the majority of its customers are still using fixed lines for communication, in order to the customers to start using the new products, BT should communicate the instruction on how to use the products very clearly. Furthermore, it should also inform the customers of the new products available. Strategically, BT should be able to connect the majority of its customers, since it will be cheaper to them to use the platform. The next move would be to make sure that all of the ‘voices of the customer’ are heard, as with any new systems there will be a number a faults. BT should then implement all of the changes that it has decided on. Since the price of the communication will decrease, the BT will be able to make higher revenue through an increasing number of customers that will start using the service and through the sale of other goods and services that it provides through the new platform. Therefore, BT should start making a good marketing plan of how to sell their new products.
The number of customers available to BT is likely to increase over time, as more people are connecting to the internet. This is a great opportunity for BT to increase its world market share. Considering that BT is not the first company to implement this, a large number of customers have already been captured. The BT can use
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