CASE STUDY: GRACE TELECOM LIMITED
Introduction: Grace Telecom Ltd. is a well-established company providing telecommunications services both nationally and internationally. It offers telephone services, telephone lines and equipment, and private telecommunication networks. Recently, it has expanded into mobile phone services, an expanding global market.
The company has a diverse customer base, including residential users, multinational companies, government agencies, and public sector organizations. Grace Telecom Ltd. handles approximately 100,000 million calls each working day and employs nearly 140 personnel.
Strategic Development: The Chairman of Grace Telecom Ltd., in the latest Annual Report, identified three main growth areas reflecting the evolving telecommunications market. The company aims to:
- Expand its telecommunications business nationally and overseas, acting independently or through partnerships.
- Diversify into television and multi-media services, including telephone shopping and broadcasting.
- Extend joint ventures and strategic alliances already established in West Africa.
The Chairman emphasized the company’s intent to become a world leader in communications by focusing on long-term development, improving customer services, developing high-quality products, and maintaining innovation, flexibility, and market-driven approaches to deliver world-class services at competitive costs.
Financial Information: The following comparative statistics show extracts from the company’s financial performance in the national telecommunications market over the last two years:
| Last year |
Previous year |
| Revenue/Turnover (GHS’000) |
16,613 |
| Profit before interest and tax (GHS’000) |
3,323 |
| Capital employed (GHS’000) |
22,150 |
The company estimates its cost of capital to be approximately 18%.
Business Opportunities: The Chief Executive of Grace Telecom Ltd. identified major opportunities in:
- Encouraging greater telephone usage.
- Providing advanced services, including research and development into new technologies.
- Benefiting from the increasing deregulation of global telecommunication services.
An extensive advertising campaign was used to penetrate the residential market further, offering various charging incentives to residential customers.
To increase long-term shareholder value, the company is considering investing GHS200 million annually for three years in new technology and quality improvements in its national market. This investment, due to its specialized technical nature, is not expected to have residual value at the end of the three-year period.
Following the investment, the directors believe the company’s rate of profit before interest and tax to turnover in the national telecommunications market will remain constant, at the same level as last year, for the three years of the investment.
Markets and Competition: Grace Telecom Ltd. is experiencing market share erosion and faces strong competition in the mobile phone market. Despite leading its national market with an 85% share, the company has seen reduced demand for residential lines over the past five years due to increased competition.
The market for telecommunications equipment is perceived as static. The planned investment of GHS200 million annually is estimated to increase Grace Telecom Ltd.’s market share to 95%. This improvement is expected to be fully realized in the first year and maintained for the full three-year period. Without further investment, the market share is expected to revert to current levels due to competitive pressures.
Industry Regulation: A government regulatory organization has been established to promote competition and deter anti-competitive behavior. Due to regulatory activities and aggressive pricing strategies, charges to customers are anticipated to remain constant for the full three-year period of new investment.
All cash flows are 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 remains under family control, but the board is considering an expansion program, which would require raising GH¢200 million in equity or debt finance. However, there are risks associated with the expansion, such as the declining market for fixed telephone lines. New income is expected from expanding into mobile money transfer services. The company’s key to profit growth lies in generating sales growth, though it faces stiff competition from larger telecom companies.
Grace Telecom Ltd. must carefully consider external factors, including government economic policy. Recent key economic data include:
- Bank base rate reduced from 22% to 20%, with a forecast of a further 0.5% reduction within six months.
- Annual inflation rate reduced to 12% from 14% in the previous quarter and 16% twelve months ago, with no further declines expected in the medium term.
- Personal and corporate tax rates 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 Grace Telecom Ltd. in developing its business and increasing its market share. (8 marks)
b) Apply Ansoff’s Product/Market Growth matrix to assess the extent of the potential market development opportunities available to Grace Telecom Ltd. (12 marks)
c) Explain the relevance of each of the items of economic data listed in the case to Grace Telecom Ltd. (6 marks)
d) Explain whether Grace Telecom Ltd. should continue with its expansion plans. Clearly justify your argument for or against the expansion. (10 marks)
e) Outline FOUR (4) methods whereby Grace Telecom Ltd. can obtain a quotation for its shares on the Ghana Stock Exchange. (4 marks)
