Business Deconstructed BT

Table of Contents

1. Introduction
1.1. Company profile
1.2. BT’s vision and mission

2. Stakeholder Theory
2.1. BT’s stakeholder definition
2.2. Addressee of this report
2.3. Stakeholder mapping – the needs of shareholders

3. BT’s legal form and its implication on shareholders
3.1. Memorandum of Association
3.2. BT Group plc
3.3. Shares
3.4. Dividends
3.5. AGM
3.6. Accounting records

4. Analysis of the financial strengths and weaknesses
4.1. Horizontal Analysis
4.2. Profit margin
4.3. Profitability – roce
4.4. Efficiency – asset turnover
4.5. Liquidity – current ratio & quick ratio test
4.6. Structure – leverage ratio & debt to shareholders’ equity
4.7. Cash Flow
4.8. Comparison of BT to the Deutsche Telekom

5. BT’s financial strengths and weaknesses

6. New financial strategy
6.1. BT’s overall strategy
6.2. BT’s new financial strategy

7. Implementation of the new financial strategy
7.1. Inform shareholders
7.2. Build a team
7.3. Introduce Balanced Scorecard
7.3.1. Proposed Balanced Scorecard Approach
7.4. Budgeting
7.4.1. Proposed Budgeting Process

8. Appendix
8.1. Bibliography
8.2. Calculation – financial analysis of BT Group plc
8.3. BT Group plc Balance Sheet
8.4. BT Group plc Profit and Loss Account
8.5. BT Group plc Cash Flow Statement
8.6. BT’s Key performance indicators and targets
8.7. Deutsche Telekom – Consolidated Balance Sheet 3235 words (excluding tables)

1. Introduction

1.1 Company profile

BT Group plc is a provider of telecommunications employing a total of 100,000 people worldwide and operating in 170 countries. In the UK, BT serves more than 20 million business and residential customers. The group consists of the following 5 sectors: (Company Profile, 2006)

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1.2 BT’s vision and mission

BT’s vision is to be dedicated to helping customers thrive in a changing world (Vision, 2006). A vision in general is the “desired future state: the aspiration of the organisation”, whereas a mission is the “overriding purpose in line with the values or expectations of stakeholders” (Johnson & Scholes, 2005, p. 13). BT’s mission is “to be the leader in delivering converged networked services”. (Annual Report, 2006, p.7)

2. Stakeholder theory

A stakeholder in general is “any group or individual who can affect or is affected by the achievement of the organisation’s objectives…” (Freeman, 1984). Eden and Ackermann (1998) define stakeholders as “People or small groups with the power to respond to, negotiate with, and change the strategic future of the organization…”. Ward (1992) specifies the term stakeholder and divides it into different groups with the power to influence the overall business strategy.

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2.1. BT’s stakeholder definition

BT defines its stakeholders in a slightly different way. Its stakeholders are: customers, employees, suppliers, shareholders, partners and the community (Stakeholder Dialogue, 2006). Different to Ward (1992), BT does not take into consideration its managers, the government and debt holders. However, managers can be considered as part of the staff and the government could be part of the community.

BT engages with its stakeholders by different means in order to satisfy its stakeholders. Examples are Consumer Liaison Panels or the Supplier Satisfaction Survey.

2.2. Addressee of this report

This report provides information about BT’s financial performance and position and proposes a future financial strategy. Hence, it is directed at investors and shareholders. Shareholders are owners of the company through the ownership of their shares (Emerson, 1997). Investors need financial information to evaluate BT’s ability to generate cash. The author focuses on the “information needs of present and potential investors” (ICAEW, 2002/2003). Emerson (1997) recognised that the company exists for the shareholders’ profit and benefit. Profit and benefit derive from good performance. Hence, it is justified to address the report solely to shareholders.

2.3. Stakeholder mapping – the needs of shareholders

To classify BT’s stakeholders and to justify why the author chose to address the report to shareholders, the Mendelow Framework was applied. This model classifies stakeholders into the following categories: minimal effort, keep informed, keep satisfied and key players, as shown in the following diagram: (Johnson & Scholes, 2005)

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Power means the ability of people to change or to interact actions. The level of interest describes the interest that individuals have in supporting or offending the strategy. (Johnson & Scholes, 2005, p.185). In BT’s case, investors are to be kept informed and kept satisfied, representing category B and C. However, if they are not satisfied or informed or if they do not accept the strategy of the company, they may develop to be key players with high power and a high level of interest. The author proposes a financial strategy which is in the interest of BT’s shareholders.

3. BT’s legal form and its implication on shareholders

3.1. Memorandum of Association

The Companies Act of 1985 lists the following issues that have to be handed in to incorporate a company – which is in BT’s case to form a plc. It is called the Memorandum of Association (Cavendish, 2006).

- Name
- Domicile of the company’s registered office
- Objects of the company
- Limitation of liability clause – liability of members
- Share capital clause – amount of share capital

3.2. BT Group plc

BT Group plc is a public limited company. A plc is according to Handley et al (1996, p.131) a body recognised by law as having an existence separate from its members. This separation results in limited liability of its members and unlimited liability of the company. This is also called the Veil of Incorporation which hides shareholders from creditors. According to Handley et al (1996) limited liability means that individual shareholders are not liable. Investors are not personally responsible for company’s debts and cannot loose more money than invested (Investorwords, 2006). The company is fully liable (Oliver & Marshall, 1994). A line between the company and its shareholders is drawn. The Veil of Incorporation separates the company and the people into 2 legal persons. “A legal person can be described as any person, human or otherwise who has rights and duties at law”. (Oliver & Marshall, 1994) BT itself is a proper legal person – a corporate personality. This implies that it can sue and be sued in its own name.

3.3. Shares

A further characteristic of a plc is that shares are offered for sale to the public by share certificates. Capital is divided into shares and sold to shareholders. (Oliver & Marshall, 1994). Everybody is able to acquire shares and to become a shareholder of the company. Charkham (1999) explained that the main motivation for shareholders is to share prosperity of the company. Whenever the share price rises, the shareholder makes profit. Acquiring shares implies the following rights :

3.4. Dividends

Dividends are payments to shareholders in form of cash or new shares. This ensures that shareholders receive a part of the company’s profits. (Accounts payable, 2006)

3.5. AGM

Section 366 of the Companies Act of 1985 imposes an Annual General Meeting to be held in every calendar year (Cavendish, 2006). Shareholders have the right to take part at AGM. They are allowed to vote resolutions and have the possibility to ask questions (Matalan, 2006). Hence, they take actively part in the company.

3.6. Accounting records

A public limited company has the duty to publish their financial books and to present results to their shareholders. The shareholder, on the other hand, has the right to inspect the corporate books and to ask questions (Shareholder’s Rights, 2006). The accounts consists of the balance sheet, the profit and loss account, the auditors report and the notes to the accounts (Mc Gregor, 2006).

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