Business Risk Analysis For Telstra Corporation Limited: Understanding Entity, Industry, And External Factors

Part 1: Nature of Entity

Part 1 – Understanding Nature of the entity

Matters that you may consider when obtaining an understanding of the nature of theentity include:

• Business operations
• Investments and investment activities
• Financing and financing activities
• Financial reporting practices 

Part 2 - Understanding the Industry

a) Industry size
b) Industry growth
c) Industry supply chain
d) Major players
e) Market shares of Industry players
f) Critical success factors
g) Major threats

Part 3 – Understanding the legal environment

Relevant regulatory factors include the regulatory environment. The regulatory environment encompasses, among other matters, the applicable financial reporting framework and the legal and political environment. 

Part 4 – Understanding external environmental factors

a) PEST analysis
b) SWOT analysis
c) Porter’s five forces analysis
d) other external factors affecting the entity that you may consider include the general economic conditions, interest rates and availability of financing, and inflation or currency revaluation. 

Part 5 – Understand objectives, strategies and Assessing Business Risks

a) Industry developments (a potential related business risk might be, for example, that the entity does not have the personnel or expertise to deal with the changes in the industry).

b) New products and services (a potential related business risk might be, for example, that there is increased product liability).

c) Expansion of the business (a potential related business risk might be, for example, that the demand has not been accurately estimated).

d) New accounting requirements (a potential related business risk might be, forexample, incomplete or improper implementation, or increased costs).

e) Regulatory requirements (a potential related business risk might be, for example, that there is increased legal exposure).

f) Current and prospective financing requirements (a potential related business risk might be, for example, the loss of financing due to the entity’s inability to meet requirements).

g) Use of IT (a potential related business risk might be, for example, that systems and processes are incompatible).

Part 6 – Performing Analytical Procedures to understand Entity’s Performance

You are also required to perform analytical procedures (ratio analysis) on the selected company for 3 years and compare those ratios across time, and to industry data or a major competitor. 

Part 7 – Understand management and Governance

a) Communication and enforcement of integrity and ethical values – These are essential elements that influence the effectiveness of the design, administration and monitoring of controls.

b) Commitment to competence – Matters such as management’s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge.

c) Participation by those charged with governance – Attributes of those charged with governance such as:

• Their independence from management.
• Their experience and stature.
• The extent of their involvement and the information they receive, and the scrutiny of activities.
• The appropriateness of their actions, including the degree to which difficult questions are raised and pursued with management, and their interaction with internal and external auditorsd) Management’s philosophy and operating style – Characteristics such as management’s:

• Approach to taking and managing business risks.
• Attitudes and actions toward financial reporting.
• Attitudes toward information processing and accounting functions and personnel.

e) Organisational structure – The framework within which an entity’s activities for achieving its objectives are planned, executed, controlled, and reviewed.

f) Assignment of authority and responsibility – Matters such as how authority and responsibility for operating activities are assigned and how reporting relationships and authorisation hierarchies are established.

g) Human resource policies and practices – Policies and practices that relate to, for example, recruitment, orientation, training, evaluation, counselling, promotion,
compensation, and remedial actions.

In the twenty-first centuries, development in business organizations is a major topic. It can be seen that businesses all over the world are growing and developing in a fast pace. In this situation, it needs to be mentioned that the businesses all over the world are confronting with different kinds of internal as well as external business environmental factors that are causing various business risks (Hitt, Ireland and Hoskisson 2012). Thus, it is responsibility of organizational managers to take into account all these internal as well as external business environmental factors at the time to develop the risk mitigation strategies of the companies. This particular process leads to the thorough analysis and evaluation of all the major business risks factors. The present study takes an honest attempt to analyze and evaluate various risk factors of the Australian telecommunication industry. Telstra Corporation Limited is considered for this report. Telstra is the leading telecommunication and technology company of Australia catering the telecommunication needs of the Australians. There are several steps of this report. This report takes into account the company analysis of Telstra along with the telecommunication industry analysis. In order to measure the effects of external as well as internal environmental factors, three major tools are used; they are PEST analysis, SWOT analysis and Porter’s Five Forces analysis. In order to measure the financial performance of Telstra, some major ratios are taken into consideration. These are the major parts of this report.

Telstra Corporation Limited is one of the major telecommunication companies of Australia. The company was founded in 1975 and its headquarter is in Melbourne, Australia. The major products of Telstra are fixed line and mobile telephony; internet and data services; network services, Pay TV and others. Telstra operates majorly in Australia, but it has global presence (telstra.com.au 2017). From the 2016 annual report of Telstra, it can be seen that Telstra has published well-developed Balance Sheet and Cash Flow Statement. From the 2016 balance sheet of Telstra, it can be seen that the amount of total current assets is higher than the total current liabilities. This aspect is a good indicator of the strong liquidity position of Telstra. Apart from this, it can be seen that the total amount of non-current liabilities is more than total amount of equity. This is an indicator of the firm’s large dependency on term loans instead of equity (telstra.com.au 2017). From the 2016 cash flow statements of Telstra, it can be seen that Telstra has some specific financing activities; they are income from borrowings, payments of the borrowings, repayments of leases, buy-back of shares, purchase of shares, payments of financial costs and others. Cash flow from investing activities includes payments of PPE and intangible assets (telstra.com.au 2017). As per the disclosing activities of Telstra, it needs to be mentioned that the financial reports of Telstra is prepared on the basis of Australian Corporation Act 2001. Telstra also follows the guiding principles of Australian Accounting Standard Board (AASB) (telstra.com.au 2017). It needs to be mentioned that Telstra is also known for its Corporate Social Responsibility (CSR) activities. In Telstra, Community Relation Group of Corporate Relations is responsible for the management of CSR activities. The CSR activities of Telstra covers wide areas like the community, environment, workplace and marketplace (telstra.com.au 2017).

Part 2: Industry Analysis

Australian telecommunication industry is one of the major industries in the country. Due to increased competition and saturated nature, the growth rate of Australian telecommunication industry is very low. In the year 2016, the growth rate of the Australian telecommunication industry is 0.1%. In addition, the total amount of revenue in 2016 was AUS $43 billion. More than 2042 businesses operate in the Australian telecommunication industry. In addition, around 50,000 people are employed in the Australian telecommunication industry (ibisworld.com.au 2017).    

Figure 1: Market Share of Australian Telecommunication Industry

(Source: ibisworld.com.au 2017)

From the above figure, it can be seen that most of the market share in the Australian telecommunication industry is for Telstra. Thus, it can be seen that Telstra is dominating the Australian telecommunication market as it is holding almost 50% market share. However, it has been forecasted that there will be moderate growth in the Australian telecommunication industry in the near future. From the above graph, it can be seen that the major players in the Australian telecommunication industry are Telstra, Optus, Vodafone and others (budde.com.au 2017).

The 2016 annual report of Telstra includes the basis of predation of the financial reports of the companies. In this particular section, it is mentioned that the basis of preparation of the annual reports of Telstra is Australian Corporation Act 2001. Apart from this, Telstra also follows the principles and guidelines of Australian Accounting Standard Board (AASB). In this regard, one of the major aspects that need to mentioned is that at the time of the preparation of financial reports, Telstra complies with the principles of International Financial Reporting Standards (IFRS). In addition, Telstra provides the interpretation of their financial reprints based on the principles of International Accounting Standard Board (IASB).

In the recent years, it has been noticed in Australia that there has been a decreases in the unemployment rate. As per the latest statistics, it can be noticed that the unemployment rate decreased from 5.7% in June to 5.6% in July, 2017 (abs.gov.au 2017). This decrease in unemployment is a positive sign for Australian economy. In this particular situation, Telstra has an important role to play in the reduction of the unemployment rate of Australia as Telstra has been employing large number of Australians as a part of their employment strategy (theguardian.com 2017).

Figure 2: Inflation rate of Australia

(Source: tradingeconomics.com 2017)

From the above figure, it can be seen that there has been a decrease in inflation in July 2017 from January 2017 that is from 2.1 to 1.9 (rba.gov.au 2017). In this situation, Telstra plays a crucial part in decreasing the inflation rate. It can be seen that Telstra reduces the price of their products and as Telstra is the market leader, all the other companies in Australian in the telecommunication industry reduces their product prices. This total process leads to the reduction in the rate of inflation in Australia.      

The analysis of external environment helps to measure the effects of external environmental factors on the business operations. Three major tools for the analysis of external environmental analysis are PEST Analysis, Porter’s Five Force Analysis and SWOT Analysis. The application of all these three tools for Telstra is shown below:

Part 3: Legal Environment

The factors in PEST analysis is shown below:

Figure 3: Factors in PEST Analysis

(Source: Ho 2014)

Political Factors: Government regulation is a major issue in the telecommunication industry of Australia as change in the telecommunication regulations can be seen frequently. Thus, Telstra has to comply with all these issues frequently. Sometime these government regulations affect the business operation of Telstra. However, in overall basis, the political condition of Australia stable that supports the business activities of Telstra (Marsh and Miller 2012).

Economical Factors: Some of the major economical factors that affect the business operation of Telstar are rate of interest, inflation rate and huge amount of taxes. In addition, the worldwide economic crisis is also affecting the business operations of Telstra. For Telstra, it is expensive for them to set towers and resources in the rural areas. There is an increase need for the required resources for Telstra as they are a growing company. However, increase in the disposal income of Australians is helping Telstra to maximize their revenues (McLean 2012).

Social Factors: There is a limited growth opportunity for Telstra as it is difficult for the telecommunication companies to expand in rural areas. Customers are left with very few options while taking the services of mobile, internet and television packages. However, it can be seen that different types of telecommunication products are becoming the part of the daily live of people. This particular aspect leads to the high demand of telecommunication products in Australia (Board 2012).

Technological Factors: The Australian telecommunication industry largely depends on the advancements of technologies. It can be seen that the telecommunication industries are using fiver wires over copper wares in order to provide better services. With the assistance of advanced technologies, Telstra has become able to provide their customers with more convenient services and products like voicemail, caller ID and others (Jasa et al. 2012).

The factors in Porter’s Five Forces are shown below:

Figure 4: Porter’s Five Forces Analysis

(Source: Baum 2013)

Existing Rivalry: The Australian telecommunication industry is growing is a slow rate as a result of increased competition among the existing firms. Some of the major competitors of Telstra are Spark New Zealand, Vodafone, Optus and others. Still, in this situation, Telstra has been able to hold the dominant position in Australian market with effective business strategies (E. Dobbs 2014).  

Threat of New Entrants: Even after the deregulation of Australian telecommunication market, new companies still have to face entry barriers. With the help of advanced technology and Research & Development projects, Telstra has been able to establish reputation in the market. Thus, the new companies have to bear large set up costs initially. Thus, it can be said that this treat is low for Telstra.

Bargaining Power of Buyers: There is not any product differentiation between the products of Telstra and other companies. In addition, the switching cost from one seller to another is not high. All these aspects create pressure on the existing telecommunication companies. Thus, it can be understood that the buyers of the Australian telecommunication industry have power for bargaining and thus, this risk is high for Telstra (E. Dobbs 2014).  

Part 4: External Environmental Factors

Bargaining Power of Suppliers: In the telecommunication industry of Australia, Telstra is considered as the largest service suppliers and network as its control over the large share of the customer base. It can be seen that Telstra has massive dominance over the telecommunication market of Australia. In addition, the dominance market of Telstra remains stable in every situation. Thus, it can be said the risk is low in case of supplier’s power.

Threat of Substitutes: There are not any substitutes of the telecommunication products. It needs to be mentioned that advanced technology and increased competition have reduced the profitability margin for Telstra and other telecommunication companies. In addition, decline in the price range can also be seen. Thus, it can be said that this risk is medium here.

The SWOT analysis of Telstra is done below:

Strengths

· Dominant market position is a major strength of Telstra. Telstra is the largest GSM and 3G UMTS mobile network provider. · Strategic differentiation is strength of Telstra. Telstra has made a large investment for the transformation of next generation telecommunication services. · In the recent years, Telstra has made investments in latest technologies like 4G services, high quality of video media and others. · Telstra has been able to expand their business in the major markets like Telstra Healthcare, Telstra Software and Telstra Ventures.

Weaknesses

· Major weaknesses of Telstra are operational inefficiency and unsatisfactory customer service. Occasional glitches regarding service quality and customer services can be seen in Telstra. · It can be seen that sometimes, Telstra suffers from latency issues compared to its competitors like Optus and Vodafone. Sometimes, Telstra takes large time in data traveling that affects customer services. · It can be seen that the products and service prices of Telstra is higher than its competitors. This is a major weakness for Telstra.

Opportunities

· Telstra has been entering into ventures into international markets like Asia-Pacific, China and others. This aspect is creating massive business opportunities for Telstra. · Telstra can expand its business operations by entering in different industries with the help of leveraging their core competencies. This will create business opportunities for Telstra. · Telstra can avail the opportunity of expanding their businesses by improving their cloud services in both public and private.

Threats

· Saturated telecommunication market of Australia is limiting the business opportunities of Telstra. This is a major threat for Telstra. · The strict regulation of the telecommunication market of Australia is creating threat for Telstra as the company has to comply with different regulations. · The adoption of rapidly changing technology is creating threat for the business of Telstra.

Apart from these above discussed factors, some other external factors affect the business operations of Telstra. The global monetary policy along with the bond yield is affecting the share prices of Telstra (afr.com 2017). The monetary operation of the Australia banks have been hurt by complying with the principles and regulations of BASEL III and the banks now have to maintain bug cash reserves. This affects the financing activities of Telstra as now; the company has not been able to get enough term loans from the banks (smh.com.au 2017). These are other external factors.  

For measuring the financial performance of Telstra, some of the major financial ratios have considered. It needs to be mentioned that Spark New Zealand Limited is considered as the major competitor of Telstra. The ratio analysis is shown below:

From the above table and graphs, it can be seen that the profitability position of Telstra is better than the position of Spark New Zealand Limited. In case of the gross profit margin of Telstra, it can be seen that the margin is almost same throughout three years. In case of net profit margin, increase can be seen in 2016 compared to 2015 that is from 16% to 22%. The same trend can be seen in case of return on equity, as there is a significant rise in it from 2015 to 2016 that is from 30% to 36% (telstra.com.au 2017).

As per the above table and graphs, it can be seen that the liquidity position of both Telstra and Spark is almost similar. In case of current ration for Telstra slight increase can be seen in 2016 from 2015 that is from 0.86 to 1.02 (telstra.com.au 2017). The same tread can be seen in quick ratio as increase can be seen in 2016 from 2015 that is from 0.80 to 0.96. However, in case of time interest  earned ration, it can be seen that Spark have stronger position than Telstra as massive difference can be seen between this ratio of Telstra and Spark (telstra.com.au 2017).

The above table and graphs show the fact that the stability position of Telstra is inferior to that of the liquidity position of Spark. From the debt ratio, it can be seen that Telstra is more dependent on the outside debts for capital as the debts ration for three years are higher than 0.5. This fact can also been seen in debt to equity ratio more capital is raised through term loans than equity shares. The same fact can also been seen in case of the equity ratio. Thus, it can be seen that more dependency of debt capital raises the interest expenses along with financial risks of Telstra (telstra.com.au 2017).

Part 5: Business Objectives, Strategies, and Risks

In Telstra, the external auditors of the companies are responsible for internal control that includes auditing activities and financial reporting system. The internal auditors of Telstra are responsible for risk management, assurance and governance (telstra.com.au 2017). There is a relation between the organizational valued of Telstra with its code of conducts. Some of the major ethical standards of Telstra are to show care, better together, to trust each other to deliver, to make the complex situation simple and to find the courage. Every organizational members of Telstra are required to comply with all these ethical standards. The ethical standards of Telstra come from the combination of the company’s Ethical Behavior Framework with the organizational values (telstra.com.au). Telstra has undertaken certain processes for the communication among all the organizational members. First, face-to-face communication is the most common communication channel in Telstra. Many meetings and conferences take place in Telstra for a daily basis. Second, written communication is another channel for communication Telstra. Apart from this, other communication channel in Telstra are mobile communication, media communication, electronic communication and others.

Conclusion

The main objective of this report is to analyze the various aspects of the business operations of Telstra. From the analysis, it can be seen that Telstra has acquired almost 50% market share of Australian telecommunication industry. The analysis shows that Telstra follows the principles and standards of IASB, AASB, IFRA and Australian Corporation Act 2001 for the preparation of the financial statements of their company. As per the PEST analysis, it can be observed that Telstra has to comply with different governmental regulations and legislatives at the time of their business operations. In addition, the world economic downturn has been affective the operations of Telstra. From the analysis of Porter’s Five Forces, it can be seen that due to be the market leader in the communication industry, Telstra do not have to face the risk of new entrants and bargaining power of suppliers. However, the bargaining power of customers remains high. The SWOT analysis states the fact that due to the increase in governmental regulations, Telstra may have to face threats. However, the large markets share is the major strength of the company. Based on the above discussion, some recommendations are provided below:

• The earlier discussion states the fact that the Australian telecommunication industry is full competition. Thus, in order to get the required competitive edge, it is recommended that Telstra should introduce more unique plans and services so that they can attract the attention of more customers.
• The above discussion also shoes the fact that Telstra has higher price structure when compared to its competitors. Thus, it is recommended to Telstra that Telstra needs to reconsider their price strategy so that they can lower the price of their products.
• It is recommended to Telstra that the company needs to make expansion strategy so that they can make their presence more stronger all over the world.

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