Organization Analysis: AT&T Corporation

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Introduction

An analysis of organization is essential in informing the management on the weaknesses and threats that have the potential of hurting the realization of the objectives. Thus, the management is capable of determining the strategic actions to employ to resolve the weaknesses and cushion the threats from jeopardizing its primary goals. Similarly, the understanding of the firm’s strengths and opportunities through effective analysis help the management in building on the strengths and exploiting the opportunities available to promote its performance in a competitive market. Accordingly, an intensive analysis of the AT&T Incorporation has been conducted to enhance the position of the diverse stakeholders. The analysis of the AT&T Incorporation has been undertaken by reflecting on four dimensions of financial analysis, external analysis, internal analysis, and the strategies analysis.

Financial Analysis

The financial analysis of an organization is instrumental in assessing its capability of enhancing the wealth of the stakeholders. The financial analysis shows the potential of a firm to generate earnings and sustain its operations comfortably. The financial position and performance of an organization affects its relationship with the suppliers, creditors, employees, and the consumers due to the impression it gives in sustaining their interests in the future. An organization experiencing positive and expanding financial health has the effect of sending a positive message to the interested stakeholders in their relationship. In contrast, an organization experiencing poor financial performance sends negative signal to the stakeholders that can influence their decision to terminate their relationship with the organization, which has detrimental impacts. Accordingly, the financial analysis of the AT&T Incorporation has been undertaken to understand its financial health status. The financial analysis has been undertaken by utilizing the financial ratios reflected in the table below. The financial ratios have been derived from the financial statements attached in the appendix. Similarly, a comparison with a competitor namely the Verizon Communications Incorporation has been considered in the analysis. The financial ratios employed in the analysis of the organization focus on the liquidity, solvency, profitability, and efficiency position of the organization in the last two financial years.

Financial ratios 2016 2015 Verizon Communications Incorporation (Competitor)
Profit margin = net income/ sales revenue 7.92% 9.09% 10.42%
Return on equity = net income/ equity capital 10.56% 12.77% 67.0%
Return on assets = net income/ total assets 3.22% 3.84% 5.37%
Current ratio = current assets/ current liabilities 0.76 0.75 0.87
Quick ratio = immediate current assets/ current liabilities 0.45 0.45 0.67
Debt-equity ratio = total debt/ total equity 0.92 0.97 4.68
Interest coverage ratio = EBIT/ interest expense 5.04 6.02 5.80
Receivable turnover ratio = sales revenue/ receivables 9.83 9.45 8.14
Inventory turnover ratio = cost of goods sold/ average inventory 8.68 9.12 41.91
Asset turnover = sales revenue/ total assets 0.41 0.42 1.50

Source (Morning-Star 1).

The profit margin, return on equity, and the return on assets financial ratios reflected in the table above measures the profitability of the AT&T Incorporation in the two financial years under the focus (Brigham and Houston 79). A close reflection on the trend of the three financial ratios indicates that the profitability of the AT&T Incorporation is on a declining trend. The profit margin ratio that measures the proportion of the net income generated from the sales revenue has declined to 7.92% in 2016 from the 9.09% in 2015. Even though the profit margin in the two years indicate the organization generated profit from the sales revenue generated, the trend of the profit margin indicates the profitability of the company is declining (Brigham and Houston 77). Equally, the return on equity ratio that measures the return the shareholders should expect from the capital they have invested in the organization has declined from 12.77% in 2016 to 10.56% in 2015. Similarly, the return on assets that measures the profit generated from each dollar of the assets utilized by the organization has experienced a declining trend (Brigham and Houston 79). Accordingly, the three profitability financial ratios indicate that the profitability of the AT&T Incorporation is under the threat of turning to losses in the future, if the trend continues.

Moreover, a comparison with one its close peers in the industry indicates the AT&T Incorporation profitability is poor. The three profitability ratios of the Verizon Corporation are higher compared to that of the AT&T Incorporation 2016 financial year. The extent of the profitability ratios of the AT&T Incorporation to be lower compared to that of its competitor is an indication its financial performance is less competitive in the industry.

The current ratio and the quick ratio reflected in the financial ratios table assess the liquidity financial position of the AT&T Incorporation in the two financial years. The liquidity financial position of an organization is critical in determining its relationship with the suppliers since it indicates its capability of settling its short-term financial obligations promptly (Brigham and Houston 82). The current ratio has shown an increasing trend while the quick ratio has remained constant in the two financial years. The current ratio measures the capability of a firm in settling its current financial liabilities using the current assets while the quick ratio uses the immediate current assets to assess the liquidity position of an organization. Even though the current ratio of the organization has increased in the last two years while the quick ratio has remained constant, their values indicate the company cannot cover the current financial liabilities sufficiently. Indeed, the recommended current ratio is a ratio of 2:1, which means the organization has $2 of current assets covering each dollar of the current financial obligations (Brigham and Houston 82).

The deficient liquidity position of the AT&T Incorporation reflected by the two financial ratios have the effect of hindering a smooth relationship with the suppliers of the essential, inventories due to the constrained capability of honoring its short-term obligations timely. The difficulty the organization may face in persuading the suppliers to supply the inventories on credit has a detrimental effect on the operations of the AT&T Incorporation since it can force slowdowns due to lack of the essential inputs. Similarly, the current ratio and the quick ratio of its closest rival the Verizon Communication Incorporation are higher compared to that of the AT&T Incorporation. The lower liquidity position of the AT&T Incorporation compared to its rival in the industry means it is performing poorly in the industry. Consequently, the liquidity financial position of the AT&T Incorporation signals a negative impact on the running of the organization into the future. The debt-equity ratio and the interest times-coverage ratio involved in the table above measures the financial solvency position of the AT&T Incorporation.

The debt-equity ratio indicates the proportion of the debt capital compared to the equity capital that has been employed in the organization’s capital structure. In contrast, the interest times-coverage ratio indicates the extent to which the organization can service the interest expenses using the earnings before interest and taxes (EBIT) (Brigham and Houston 81). Thus, the debt-equity ratio in the two financial years indicates the level of the debt financing is quite close to that of the equity financing but is declining. On the other hand, the interest times-coverage ratio results indicate the capacity of using its EBIT to settle the interest expenses is low and declining. The high leverage level reflected by the debt financing been employed by the AT&T Incorporation poses a financial risk to the organization due to the financial pressure it will face in the future repaying the principal loan and the interests.

This financial pressure has the potential of pushing it to financial distress, which will jeopardize its operational performance and competitiveness (Brigham and Houston 81). Equally, the low and declining interest times-coverage ratio of the organization poses a financial risk of denying its possibility of sourcing funds to finance its investment opportunities in the market. The financiers will demand higher cost of the capital in granting the loans, which will be unfavorable to the organization in realizing its operational goals and objectives in the future. However, the debt-equity ratio of its competitor the Verizon Communications Incorporation indicates the AT&T Incorporation is doing better at its current debt position. The debt-equity ratio of the Verizon Communications indicates its debt is 4.68 times compared to that of the equity capital. In contrast, the debt-equity ratio of the AT&T Incorporation indicates its debt capital is 0.92 more compared to that of the equity capital. Thus, the AT&T Incorporation solvency position is better compared to that of its competitor in the industry.

Finally, the receivable turnover, inventory turnover, and the asset turnover ratios have helped in reflecting on the financial management efficiency of the organization in the last two financial years. The receivable turnover helps in assessing the efficiency of the organization in collecting the sales that have been on credit to the actual cash sales. The inventory turnover ratio measures the efficiency of the organization to turn the inventories to sales revenue. Similarly, the asset turnover ratio measures the efficiency of the organization to generate revenue from the operational assets utilized (Brigham and Houston 85).

Accordingly, the receivable turnover ratio trend of the AT&T Incorporation in 2015 to 2016 indicates the efficiency of the organization in collecting receivables is on an increasing trend. This financial trend is essential in promoting the liquidity position of the firm due to the availability of the cash to settle the immediate financial needs. In contrast, the inventory turnover trend indicates the efficiency of the organization in realizing sales is declining. The decline efficiency of realizing sales from the available opportunities exposes the organization to revenue generation decrease that will hurt its profitability in the future. The asset turnover ratio also, depicts negative and declining utilization of the assets in generating the sales revenue. The asset turnover ratio in the two financial years is below one and declining.

The low asset turnover ratio implies that the organization is not generating equal revenue for every value of the assets been utilized in its operations (Brigham and Houston 85). Furthermore, the value of the revenue from each dollar of the assets is declining, which has the potential of causing the organization to suffer financial losses in the future. Consequently, the financial analysis of the AT&T Incorporation paints a grey position in maximizing the wealth of the shareholders in the future. The relatively poor financial performance and position of the AT&T Incorporation means its capability of generating earnings on behalf of the shareholders is under threat. Additionally, the inventory turnover ratio and the asset turnover ratio of the Verizon Communications Incorporation are better compared to that of the AT&T Incorporation. This comparative position means that AT&T Incorporation has a lower potential of generating earnings compared to that of its rival due to its enhanced efficiency position. Consequently, there is urgent need for effective strategies to be deployed to help in reenergizing the capability of the organization to generate high earnings in the future.

External Analysis

The external analysis has been conducted to understand the environment under which the AT&T Incorporations compete in offering its services. One of the dimension of the external analysis is the understanding of the stakeholders with the possibility of affecting or been affected by the decisions of the organization (Gamble, Thompson and Peteraf 112). Thus, a stakeholders’ analysis targeting the employees, suppliers, and the government has been conducted of the AT&T Incorporations. The employees of the organization are critical stakeholders in its success due to the production role they play. Thus, the employees have a significant power in influencing the success of the projects and strategies of the organization since they are directly involved in the implementation process.

The significant power of the employees in determining the success of the organization’s initiatives means the management should work closely with the employees in resolving the fears and difficulties they face, which is instrumental in enhancing their morale. Equally, the customers of the AT&T organization possess substantial bargaining power in influencing the price of the services. The enhanced bargaining power of the customers is because of the multiple providers of the communication services available in the market, which gives them the choice of shifting (Hitt, Ireland and Hoskisson 348). Thus, the management should work in building a close relationship with the customers to protect their loyal customers from shifting to the competitors. Similarly, the government agencies involved in the regulation of the communication service control substantial power in the operations of the AT&T organization. The government agencies have the power of introducing rules and regulations with adverse effects on the operations of the organization (Hitt, Ireland and Hoskisson 348). Consequently, the stakeholders’ analysis depict that AT&T Corporation operates in a disadvantaged environment of controlling the stakeholders’ actions.

The threats and opportunities the AT&T Corporation faces in its operation is another essential reflection of its external environment. One of the opportunities the AT&T Company can exploit is undertaking acquisition of the small and emerging communication firms operating in the domestic market. The acquisition of the small and emerging firms in the market has the benefit of enabling AT&T Corporation to eliminate the threat posed by the new entrants and substitutes in the market (Gamble, Thompson and Peteraf 117). This opportunity will be realized since the acquisition will influence the consolidation of the small firms by the major firms operating in the market. Another opportunity the AT&C Corporation can use is expanding to the emerging markets. The emerging markets in Asia, Africa, and South American offer unexploited opportunity the company can penetrate to offer its services. The penetration to the emerging markets has the opportunity of lessening the industry rivalry (Gamble, Thompson and Peteraf 129).

The industry rivalry will be reduced if the organization decides to expand its operations across the emerging markets since it will expand its market coverage of generating revenue compared to the current domestic market, which will reduce competition pressure of sales realization (Hill and Jones 67). Moreover, the growth of the wireless communication is another vital opportunity the organization can undertake by collaborating with manufacturers of the communication devices. The partnership will help the organization in reducing the bargaining power of the suppliers since it will need less accessory materials to connect the customers from the suppliers. Thus, the firm will have the opportunity of minimizing operation costs by negotiating for a discount price from the suppliers. Furthermore, the advent and growth of the 4G technology is another opportunity the organization can utilize to enhance its operational capability. The 4G technology gives the AT&T Company the opportunity of providing the communication services to the consumers efficiently and at low cost. Thus, the bargaining power of the customers forcing the organization to lower its prices will be accommodated due to the minimized operational costs (Hill and Jones 71).

Nevertheless, some threats in the industry have the potential of hurting the welfare of the AT&T Corporation. The emerging telecommunication technologies are one of the threats the AT&T Company has to contend due to the new competition front it poses. The emergence of new technologies is giving room to the threat of the substitute communication methods that is widening the customers’ choice of the service to use. The availability of alternative communication mediums increases the bargaining power of the consumers against the service providers (Hitt, Ireland and Hoskisson 51). Another threat the AT&T Company faces is the intensifying price competition in the industry. The entrance of new communication firms in the market has forced the firms to lower their prices significantly, which is affecting the profit maximization adversely in the market.

Internal Analysis

The internal analysis of the AT&T Incorporation has been conducted to evaluate its internal strengths and weaknesses. The complementary services and products of the broad portfolio is one of the major strengths of the AT&T Corporation due to the capability it gives in reaching the market through diversified offerings. The diversification of the products and services offered by the organization is vital in enhancing its revenue sourcing (Gamble, Thompson and Peteraf 34). The capability of the organizations network capacity that has been reinforced by a fiber optic and 3G-network connectivity is another crucial strength of the organization.

The enhanced network capacity of the AT&T Incorporation has gives it the capability of offering its services efficiently, which is essential in attracting consumers and reducing operational costs. Similarly, the strong financial reserve of the company is a critical internal strength. The financial muscle of the organization gives it the capability of financing its research and development initiatives that are critical in promoting innovation and creativity in the organization (Brigham and Houston 21). Moreover, the talented and creative workforce of the organization is an important strength due to the instrumental role they play in ensuring the services provided to the consumers are of high quality.

However, the flexibility problem of the AT&T Company of adapting to the volatile wireless division has been a major internal weakness. The inflexibility has been exposing the organization to nimble competitors in the industry in providing the wireless services, which hurts its attractiveness and revenue generation (Hitt, Ireland and Hoskisson 372). Similarly, the huge obligations the firm faces from the past business unit spin-offs is a critical weakness. The inability of the management to settle the obligations completely hinders its operations due to the contractual limitations from these business units. Furthermore, the high level of the debt capital is another vital weakness faced by the organization due to the high financial obligations it poses on its assets (Brigham and Houston 89). The obligation has the effect of limiting the extent to which the organization can undertake new activities due to the agreement it has entered with the lenders on safe operations to protect their claim against the company. Thus, these internal weaknesses pose a hindrance to effective operations of the organization in maximizing value creation.

Moreover, the value chain analysis has been conducted to enhance the understanding of the AT&T internal environment. The value chain analysis of the organization has been conducted by utilizing the Porter’s value chain approach reflected in the diagram below.

Source (Porter 112).

A reflection on the value chain of the AT&T Corporation depicts it is geared towards the differentiation competitive advantage. The differentiation competitive advantage entails the creation of a unique product that differentiates the firm’s product from that of the competitors (Porter 109). The differentiation value creation at the AT&T Company is reflected by the huge investment it has deployed in its technology support activity. The investment at the technology development has been focused at enhancing the technical excellence at the operations, outbound logistics, and at the service activities. The technical excellence given the priority in the technology support activity demonstrates the company aims at generating services that are superior compared to that of the competitors in the industry (Porter 115). Thus, the internal value chain of the organization is led by the competitive advantage objective.

Firm’s Strategy vs. Competitors Strategy

The current strategy of the AT&T Corporation is to expand its operations internationally to increase its market coverage.  The international market expansion strategy involves opening new operations in the foreign countries instead of focusing on the local market. This business strategy of the AT&T Company has been witnessed by the latest move it has taken in expanding its operations in Latino America and Middle East. In contrast, the business strategy of the Verizon Communications that is a close competitor of the AT&T Company is to broaden its wireless business in the U.S market. The Verizon Communications has shown the business strategy of concentrating on the wireless operations through its recent decision to take full control of the Verizon Wireless by acquiring 45% Vodafone stake in the company.

The international business expansion strategy that has been adopted by the AT&T Company has advantages and disadvantages. One of the advantages of the current business strategy by the AT&T Incorporation is the diversification of the operations, which enhances the revenue sourcing (Hitt, Ireland and Hoskisson 78). The diversification of the markets increases the opportunities of sourcing revenue while cushioning the potential of experiencing revenue decline in one market. In addition, the strategy has the advantage of enhancing the capability of sourcing for the raw materials and cheap labor force by expanding to new markets. This opportunity will enable the organization to reduce the operational costs. However, the strategy has the disadvantage of exposing the organization to political, legal, environmental, and social risks from the diverse international markets that can affect its operations adversely (Hitt, Ireland and Hoskisson 82).

Strategic Recommendations and Potential Implementation Constraints and Alternatives

Owing to the need of promoting the operational competitiveness and capability of the AT&T Incorporation, some strategies have been recommended. Accordingly, the management of the AT&T should consider undertaking merger and acquisition strategy, outsourcing some operations, venturing into the emerging economies, and diversifying its operations. The implementation of these strategies can have significant influence on the functions of the organizations. Indeed, the operations activity in the value chain will be enhanced with the merger and acquisition strategy due to the enhanced operational capacity that will be inherited from the acquired firm. Equally, the decision to diversify to other business operations such as investing in T.V has the effect of influencing the marketing function since it will enhance its capability of exposing its products and reaching millions of the customers under its broadcasting platform.

The strategy of expanding to the emerging markets globally is one of the optimal strategies that should be considered by the management of the AT&T Incorporation. This strategy is highly recommendable due to the opportunity it gives the organization to expand the revenue generation sources from the current saturated domestic market. Moreover, the decision to expand internationally gives the organization the opportunity of managing its operational costs due to less competition costs and available of affordable labor force (Hitt, Ireland and Hoskisson 79). However, this strategy has the potential of been constrained by budget constraint and market barriers in the foreign countries. The availability of the financial resources to finance the business expansion internationally may limit the realization of the strategy. Equally, the laws and regulations in the foreign markets might be restrictive to the entry of the organization. The financial constraint can be resolved by issuing shares to raise capital or through bond. Similarly, the market barriers can be countered by merging with local communication in the local market to gain entry.

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