To advise Telstra on how to generate higher shareholder value, this report will recommend two strategies based on the assessed strengths and opportunities while addressing threats and weaknesses in Telstra’s internal and external environments.
The report begins withanalyzing Telstra’s internal strength and weaknesses as well as opportunities and threats to the business in the external environment. Major opportunities can be identified in the field of social culture, technological, demographic and global with minor threats founded in political and economic segment providing an overall opportunity to the business.
However, it can be argued that there is high competition within the telecommunication industry due to substitute and intensity of rivalry factors hence Telstra should focus on its core competency and provide product differentiation. On the other hand, general economic uncertainty and high levels of competition within the telecommunication industry creates threat to Telstra’s shareholder value generation. Moreover, according to history Telstra has a strong brand reputation in comparison with the other firms in the Australian market thus the position in market competition is enhanced.
Furthermore, the relationship with five major stakeholders of Telstra namely customers, competitors, government, employees and suppliers are discussed. Each stakeholder has individual interest therefore align interests of those parties with generation of shareholder value is important for the growing of business. This report suggests a measurement for each party that Telstra could apply to exam whether the creation of shareholder value has been violated and how could firm achieve collaboration with these stakeholders interest.
To improve customer satisfaction and simplify the business are deem to be the main focuses for Telstra based on the 2011 Telstra Annual Report. The evaluation of each strategy is linked to the SWOT analysis discussed along with the generation of value for shareholders. In addition, cost and benefit analysis and value added analysis would demonstrate the reasons why these two strategies are preferred.Corporate Balanced Scorecard (BSC) outlines how each strategy will be implemented, measured and evaluated. More specifically, the objective and measurement that can take to measure whether the target has been met with a strategy map that illustrates the interaction of four different perspectives of financial, customer, internal business processes and learning and growth. Introduction
Telstra Corporation Ltd (known as Telstra) is the leading telecommunications and media company in Australia. Telstra’s business has been expanding among the most Asia-Pacific region since 1901 and listed on the Australia, New Zealand and New York Stock Exchange. A comprehensive analysis is included in this report, which concentrates on business operations through SWOT analysis in order to outline the key opportunities and threats within the general external environment along with the major strengths and weakness in the internal environment. Afterwards, proper strategic priorities and related implications will be recommended based on SWOT and stakeholder analysis.
Presence of digital divide mitigated through increase in use (Australian Bureau Statistics, 2011) and Telstra Connected Seniors Programme (Annual Report 2012)
Provide wider consumer base and need to maintain relation
Growth in Chinese and Indian Economy
Both Countries’ increasing accountability in World’s Total GDP (Euromonitor, 2010) hence should direct expansion to those countries Major Opportunity
Within the Competitive Environment
Analysed under Porter’s Five Forces Model, threat of new entrants to Telstra can be perceived as low. Firstly, high capital requirements, which is $3410m (Telstra Annual Report 2011, strong brand identity and economies of scale created high barriers to entry into the industry. Additionally, the bargaining power of buyers is low as there are no dominant buyers, and there is no threat of backward integration.
Telstra is engaging with approximately 7000 suppliers each year with total spending of $11 billion (Telstra Corporate Responsibility Report, 2009) supported with comprehensive supplier selection and evaluation processes. During 2008/09, Telstra achieved one of its procurement strategies by reducing total number of vendors over the long term.On the other hand, suppliers’ power in Telstra’s case can be perceived as limited as Telstra seeks world-class suppliers, ascertains the price paid by comparable overseas companies and estimates potential suppliers’ cost structure (Comer
& Beaumont, 2003) and also maintaining freedom to terminate contract without reason due to its dynamic nature (About Telstra – Contractual Terms and Conditions n.d.).
Furthermore, intensity of rivalry among competitors can be perceived as a threat to the telecommunication industry. A major competitor Telstra facing is Optus thatprovides similar mobile plans and services. Slow growing nature of the market heightened the intensity of the competition originated by the need to increase market share through acquiring competitor’s customer. Numerous fixed resources are used along with innumerable contracts signed by customers;therefore exiting cost is high for all businesses within the industry. Moreover, promotion strategies can be imitated effortlessly in this market such as Telstra’s recent attempt of expands 4G coverage area is followed by Optus and Vodafone (Battersby, 2012).
Given the dynamic technology nature within the communication industry, threat of substitute product is relatively high due to the similarity of tasks within businesses in the industry and sources of competition: low price and product differentiation. However, Telstra has looked into providing functions that a substitution could such as e-mail and text messages and has expanded their business to home phone, Internet and TV services to achieve differentiation.
Within the Business
The first significant strength of Telstra is its Next GTM network, Australia’s largest and fastest national mobile broadband network, with a coverage of more than 99% of the population (About Telstra- Fast Facts, n.d.). Telstra created this capability by combining its intangible resources, innovation with its strong tangible resources such as cables, telemetry devices and etc. This valuable innovation helps Telstra to provide stable and non- substitutable high-speed network to the customer and creates a distinction to Telstra from its competitors. Lastly, it is costly to imitate due to the high technology involved is causally ambiguous hence it acts as a sustainable competitive advantage for Telstra.
Telstra’s high liquidity position in both short and long-term is another strength. Telstra has better current ratio rose from 0.8275 in 2010 to 0.8729 in 2011 and an increase in its quick ratio from 0.7936 to 0.8398 (see Appendix for calculation). With more than 35% of cash and cash equivalents as part its current asset, Telstra will be able to meet its current liability and face its risks without difficulty. Moreover, the increasing debt-equity ratio from 2.0198 to 2.0844 and total debt ratio, from 0.6689 to 0.6758, further indicate the better liquidity and solvency position in the long term.
On the other hand, Telstra’s significant weakness is its weakening brand identity. Its brand value has fallen from $232m to $193m, and has continuously declined in the past 2 years. This could result fromnon-efficient primary activities, marketing and sales, found through the Value Chain Analysis. Telstra Innovation, Products and Marketing segment (TIPM) should be responsible for the promotion and advertising expenses which were reduced from $349m to $334m in 2011 (Telstra Annual Report 2011). Moreover, its higher mobile phone and broadband services prices as opposed to its competitors contributed to this matter.
Secondly, limited growth is another weakness to Telstra. In terms of financial profitability, its profit margin has decreased from 0.1588 to 0.1301 and a fall in return on asset by 0.0146 is recorded in 2011 along with decrease in Return on equity from 0.3029 to 0.2644 (Telstra Annual Report 2011). It is arguable that these decrements are related to the loss of brand identity in the relatively mature and slow developing market.
Customer as Telstra’s largest stakeholder contributes to the company profit by using its services, having low cost and high quality as their major interests. Customers put more emphasise on what they receive and less on company’s financial performance opposing to shareholder value generation since profit can either be generated only through increase in price or lowering cost. Putting more effort into understanding its major customers (individual households, small businesses and major corporations) perspectives could benefit the company in the long term. Continuous monitoringofcustomer value through tools such as surveys can reflect customer satisfaction, interests and potential future profit they bring into the company.
Competitors as a secondary social stakeholder are also highly influential particularly in determining company’s social status and market share. As reported by The University of Technology Sydney (2006), Telstra’s vast competitors ranges from major global telecommunication company such as UK-based Vodafone PLC and Singapore Tel, to small community based internet service providers. Being the strongest carrier in Australia, competitors attempt to continuously imitate Telstra’s strategies in order to beat the market. Rivalry induces pressure of continuous growth of the company aligned with shareholders’ interests by providing outstanding performance to gain greater market share and continually increase company value.
The Australian Government as regulatory authority also plays an important role in the business. Through the NBN scheme, the government has taken measures to reduce Telstra’s monopoly over the telecommunication industry in Australia and may look into implementing additional rules to regulate Telstra such as structural separation, being the major objective of the NBN scheme.The NBN scheme has a critical impact to Telstra’s future and the cancellation to this plan can be advantageous to the business. Telstra currently owning 45% of the Australia’s mobile services market (McDuling, 2012) can be suggested to act as a monopolist in mobile retail services market hence changes to the scheme would increase Telstra’s market shares as opposed to other smaller retail service providers.
Telstra’s global 7,000 Suppliers also play a significant role in maintaining Telstra’s strong network and increasing their market share. Telstra’s supply chain standards highlight their comprehensive supplier selection process to ensure suppliers’ compliance with Telstra’s strategy, company policies and employment condition.On the other hand, Telstra’s management understood the suppliers’ desire to maintain secure and stable relationships and therefore
do so regularly and under monitoring of the vendor managers.
Telstra is currently collaborating with 86000 employees worldwide and has established employment policies, protecting its employees, through unions, employee assistance programs, reward and recognition, and remuneration as well as additional employee incentives including discount, education plan and indigenous package. Conversely, Telstra has performed a significant job cuts due to decreasing amount of sales in the last 12 months and has further received backlash due to its newest plan to further cut back employment in Sydney, Melbourne and Queensland service contact centres, moving the jobs offshore to achieve higher cost savings.
Telstra aim to focus on four strategic priorities: improve customer satisfaction, retain and grow our customer base, simplify the business and invest in new growth businesses (Telstra Annual Report 2010 & 2011).
Considering Telstra’s major threats of intense rivalry and substitute as well as declining brand identity, improving customer satisfaction will be a suitable strategy to focus on as it will provide Telstra with competitive advantage, product differentiation and improve its image and simultaneously grow our customer base. Secondly, addressing the threat of GFC resulting in need of decreased cost resulting limited growth, simplifying its business will be a suitable strategy to Telstra as it will lead to cost savings achievement hence providing the ability to decrease price and increase profit, enhancing growth. Furthermore, GFC also causes investing in new growth business to be less desirable to focus due to the need to ensure availability of free cash flow leaving the previous 2 strategies to be the focus of the company.
Improving customer satisfaction involves means to increase the value they received from maintaining of relationship and improving service provision as well as providing meaningful customer experience to build up customer loyalty in the future. This will lead to increase in quality of supply evaluation and requirement to the suppliers also requiring greater attention from management of staff performance as well as possible training need. It is also of Government’s interest that customers receive compensating value to the price their paid. Competitors will look into providing similar improvements due to the intensity of competition hence Telstra should always be innovative.
Cost is an important issue that can directly affect profit. Decrease of Telstra profit from $4076m to $3250m although increase of sales revenue is recorded in 2009 to 2011 implies that shareholders’ value has not been maximized and hence Telstra’s operation should be re-analyzed and simplified to reduce these costs. Company’s management team will need to maintain and continuously improve organization structure, which may lead to job retrenchments, triggering employee dissatisfaction.
In order to save on costs, contracts with inefficient suppliers may be terminated giving threat to suppliers however better relationship can be maintained with more efficient ones. Simplification of Telstra’s business will further improve efficiency of customer after sales service and hence increase customer value. Furthermore, it is of the Government’s interest for Telstra to undergo structural separation through the NBN project, helping the government to save money on infrastructure.
It is important to acknowledge the long term benefit of implementing these strategies in the long term to increase company revenue and profit growth hence maximizing shareholder value as opposed to the prior implementation costs. Furthermore, Telstra has strengths in their internal environment to implement both of these strategies. Firstly, through Telstra’s liquidity position for both short and long-term, which will enable Telstra to cover the costs to implement the projects such as the redundancy charges increase of $224m (Telstra Annual Report 2011) to simplify its business. Secondly, being the largest telecommunication company in Australia, Telstra is experienced and is supported by capable employees both in customer service as well as managing company structures. These suggest the feasibility of both strategies.
Improve Customer Satisfaction
Telstra has achieved considerable improvement from being the top complained telecommunication service in 2010 (Byrnes, 2010) to being the only to experience decrease in the number of complaints in its industry (Foo, 2011). In 2012, Telstra has implementation of mobile usage alerts as a response to the major complaint area, over-usage charges (TIO, 2011) and other services to provide easy access to the customers (Telstra’s Annual Report 2012) proves ability to identify, timely response and resolve customer complaints represent Telstra’s ability to provide service quality.
According to Naumann, another factor to enhance customer value is price (1995). “Handset subsidies are expected to decrease by as much as 20 per cent in the next six months, while the most heavily-discounted contracts have disappeared.” (Battersby, 2012). Although the prior was aimed at growing customer base, Telstra should still look into providing the most affordable service considering the impact of current economic conditions to customer’s spending especially with its image being one of the most expensive mobile service providers.
In order to achieve this Telstra might need to focus on increasing customer usage as its mean of gaining profit. This may not necessarily result in lower operating profit from the benefit of bulk buying, but the lowering cost of capital also achieves its other strategy to enlarge customer base. Increasing usage will not require high investment in fixed capital and can provide sustainable growth to the business, giving rise to shareholder value (Rappaport’s Shareholder Value Analysis). At the same time, this could be beneficial to other stakeholders such as suppliers due to the increase in need of their service and also the ability to decrease the retention rate of its employee and management and will benefit Telstra’s competitiveness.
Simplify the Business
The objective to this strategy is to decrease time by focusing on necessary value adding activities and eliminating the unnecessary activities, leading to decrease in cost. Its current implementation involves moving major activities online, streamlining corporate centre functions and centralising business functions (Telstra Annual Report 2012).
As a result, “Telstra has now cut and off-shored more than 2000 call centre and back-of-office jobs in the past 18 months” (Bingemann, 2012) increasing the redundancy cost to Telstra’s expenses for past years. Instead of doing so, Telstra should look into increasing efficiency of each personnel. One way to achieving this is through retraining staff, enabling them to do multiple related business functions, such as Telemarketing and After sales customer service. This will provide more physical capital in terms of equipments and also more human capital to a department without increasing cost of capital, eliminating employee “bludge” time and increase capabilities. Further profit margin will increasewith reduction in cost thus increasing shareholder value. Strategy Map