Tag (SQ): Competitive forces

1 Ace Telecom Limited
Case study: Ace Telecom Limited
Introduction
Ace Telecom Ltd. is a well-established company which is providing telecommunications services both nationally and internationally. Its business has been concerned with telephone calls, the provision of telephone lines and equipment, and private telecommunication networks. Ace Telecom Ltd. has supplemented these services recently by offering mobile phone, which is an expanding market worldwide.
The company maintains a diverse customer base, including residential users, multinational companies, government agencies and public sector organisations. The company handles approximately 100,000 million calls each working day, and employs nearly 140 personnel.

Strategic development
The Chairman of Ace Telecom Ltd. stated within its latest Annual Report that there were three main areas in which the company aimed to develop in order to remain a world leader in the telecommunications market. He believes that the three main growth areas reflect the evolving nature of the telecommunications market and will provide the scope for development.
The areas in which development is planned are:

• expansion of the telecommunications business in the national and overseas markets, both by the company acting on its own and through partnership arrangements with other suppliers
• diversification into television and multi-media services, providing the hardware to permit telephone shopping from home and broadcasting services
• extension of the joint ventures and strategic alliances which have already been established with companies in Central Africa.
  The Chairman explained that the company is intent on becoming a world leader in communications. This will be achieved through maintaining its focus on long-term development by improving its services to customers, developing high quality up-to-date products and being innovative, flexible and market-driven. His aim is to deliver a world-class service at competitive cost.

Financial information
The following comparative statistics show extracts from the company’s financial performance in its national telecommunications market over the last two years:

The company estimates its cost of capital to be approximately 18%.
The Chairman expressed satisfaction with the increase in turnover and stated that cost efficiencies were now being generated following the completion of a staff reduction programme. This would assist the company in achieving a target return on capital employed (ROCE) of 20% in this market over the next three years.

Business opportunities
The Chief Executive of Ace Telecom Ltd. has stated that the major opportunities for the company lie in the following areas:

• encouraging greater use of the telephone
• provision of advanced services, and research and development into new technology, including the internet and systems integration
• the increasing freedom from government control of worldwide telecommunication services.
  An extensive television and poster advertising campaign has been used by the company. This was in order to penetrate further the residential market segment by encouraging greater use of the telephone with various charging incentives being offered to residential customers.
  To further the objective of increasing long-term shareholder value, the company is actively considering an investment of AC₵200 million in each of the next three years in new technology and quality improvements in its national market. Because of its specialist technical nature, the investment is not expected to have any residual value at the end of the three-year period.
  Following the investment, the directors of Ace Telecom Ltd. believe that its rate of profit before interest and tax to turnover in its national telecommunications market will remain constant. This rate will be at the same level as last year for each of the three years of the investment.

Markets and competition
The company is currently experiencing an erosion of its market share and faces increasingly strong competition in the mobile phone market. While Ace Telecom Ltd. is the leader in its national market, with an 85% share of the telecommunications business, it has experienced a reduced demand for the supply of residential lines in the last five years as competition has increased.
The market for the supply of equipment in the national telecommunications market is perceived to be static. The investment of AC₵200 million in each of the next three years is estimated to increase Ace Telecom Ltd.’s share of this market to a level of 95%. The full improvement of 10% is expected to be received by Ace Telecom Ltd. next year, and its market share will then remain at this level for the full three-year period. It is anticipated that unless further investment is made after the three-year period, Ace Telecom Ltd.’s market share will revert to its current level as a consequence of the expected competitive response.

Industry regulation
The government has established an industry regulatory organisation to promote competition and deter anti-competitive behaviour.
As a result of the activities of the regulator and aggressive pricing strategies, it is anticipated that charges to customers will remain constant for the full three-year period of the new investment.
All cash flows can be assumed to occur at the end of the year to which they relate. The cash flows and discount rate are in real terms.

Future outlook
The business still remains under family control, but the board is considering an expansion programme for which the family would need to raise AC₵200 million in equity or debt finance. One of the possible risks of expansion lies in the fact that the market for fixed telephone lines is falling. New income is being generated by expanding the product range to include mobile money transfer. The key to profit growth for Ace Telecom is the ability to generate sales growth, but the company recognizes that it faces stiff competition from large telecom companies in respect of the prices charged.
In planning its future, Ace Telecom is advised to look carefully at a number of external factors which may affect the business including government economic policy. In recent months the following information has been published in respect of key economic data.
(i) Bank base rate has been reduced from 22% to 20%, and the forecast is for a further 0.5% reduction within six months.
(ii) The annual rate of inflation is now 12%, down from 14% in the previous quarter, and 16% 12 months ago. No further falls in the rate are expected over the medium term.
(iii) Personal and corporate tax rates are expected to remain unchanged for at least twelve months.

Required:
(a) Explain the nature of the political, economic, social, and technological forces which will influence Ace Telecom Ltd. in developing its business and increasing its market share.
(b) Apply Ansoff’s Product/Market Growth matrix to assess the extent of the potential market development opportunities available to Ace Telecom Ltd.
(c) Explain the relevance of each of the items of economic data listed in the case to Ace Telecom Ltd.
(d) Explain whether Ace Telecom should continue with its expansion plans. Clearly justify your argument for or against the expansion.
(e) Outline FOUR (4) methods whereby Ace Telecom Ltd can obtain quotation for its share on the Accra Stock Exchange.