Deltacom's competitive threats and strengths in telecommunications

Deltacom

Environmental Scan

The environmental scan is focused on identifying and analyzing the threats in the external environment. There are factors outside of the company that can reduce revenue or profits for the future. These can be obstacles, externally-driven changes or just competition (MindTools, 2013). Deltacom faces a number of such threats. The main threats in the external environment are competitors, regulators, and economic threats. Competitors are a significant threat. Deltacom operates in eight southern states, and it competes against other national and regional players. Deltacom has been purchased by Earthlink and renamed Earthlink Business, indicating that it competes for business with corporate customers (Deltacom.com, 2013). The competition includes some major companies, like AT&T, Verizon and more, in addition to smaller, more regional players. Competitors will use all manner of enticements to attract competitors, and this can affect the prices or the margins that Deltacom earns. Clearly, Deltacom faced substantial competition in its market, as it was forced to sell out to Earthlink, a tactic normally associated with a struggling company.

The second major environmental threat is regulatory. While all businesses face basic regulatory burden in the form of human resources and environmental laws, the telecommunications industry is one of the more heavily-regulated industries. The industry is governed by the Federal Communications Commission (FCC), a body that among other things investigates the conduct of telecommunications firms and auctions off wireless bandwidth. Because most of Deltacom's business is landline-based, the company is not as heavily-impacted by regulatory burden as many other firms in the industry.

The third major environmental threat is economic. When the economy is struggling, firms will often reduce their expenditure on all items, including telecommunications. It could be argued that a sluggish economy represents an opportunity to grow telecommunications businesses as a substitute for travel, but when businesses are closing and contracting, the net effect is at best a wash, and more likely a revenue downturn for firms that service other businesses.

Strengths

Deltacom does not have too many strengths. The company was bought out by Earthlink, and this gives it two main sources of strength. First, the Earthlink brand is more widely-known as this was one of the tech companies that rose to prominence in the late 1990s. Deltacom has a presence in eight states, and has built up a network of customers in that region -- this geographic base is a source of strength should the company seek to improve its share, building on the reputation that it already has. The company has a group of talented, dedicated employees who can help it to recover after a difficult period surrounding the Earthlink acquisition.

However, the challenge for Deltacom is that many of its competitors possess the same strengths, and in some cases more strengths. Larger firms have greater capacity to invest in technology upgrades, for example. Earthlink itself is struggling after the purchase. It lost money in the last fiscal year, and with the debt it assumed from Deltacom, Earthlink has seen the book value of its equity decline in the past couple of years. It does not look like there is much financial strength at present for the company, but compared with prior to the acquisition, Deltacom is in a much better place financially, so that is something.

It will be difficult for Deltacom/Earthlink Business to leverage these strengths in the marketplace. Their competitive position as a smaller, regional firm is such that they need to leverage the familiarity of the Earthlink name in one of two ways. They need to either be a low cost provider or a high-end provider. They should not seek the middle ground, taking on the major competitors head-to-head (QuickMBA, 2010). Earthlink does not really have the money to invest in technology to be a high end player, so should probably focus on developing a low cost strategy that sees them undercut the major players in order to build the business. They should still provide strong service, but must keep costs a little bit lower than the national competitors.

Recession Strategy

The last recession nearly wiped Deltacom out, leaving it vulnerable to takeover, one that perhaps was so bad for shareholders that legal action is being investigated (Korsinky LLP, 2010). A recession will have the following consequences for Deltacom -- reduced revenues, tighter margins and an increasingly hostile competitive environment. Deltacom will need to take dramatic measures to prevent a repeat of the last recession's devastation.

The first step will be to cut some staff. This is necessary because costs will need to be reduced in line with revenue. The company's margins are too tight to absorb any sharp revenue declines. Further, Earthlink is already losing money so the cuts might have to be fairly sharp. The next step is going to be to reach out to customers. It is important that customers understand how much their business is valued, and Deltacom should communicate a desire to work with customers who are also struggling. This is necessary because the major companies are going to be looking for new customers, but they have the cash reserves to undercut Deltacom. Thus, Deltacom needs to remind customers of the high quality of its service. Further, Deltacom needs to prepare for a recession by paying down as much of its debt as possible. It needs to do this because firms that have a high degree of leverage are most vulnerable in an economic downturn because of the need to divert cash flows to interest payments. Deltacom needs to pay down the debt during the good times so that it is not at risk during the bad times.

Global Competition

Global competition is an interesting issue in the telecommunications business. Usually for national security reasons, most governments have strict regulations about telecom companies. However, there is a move to open up telecom and foreign players are interested in the U.S. market. Likely, as the U.S. pushes for access to foreign markets, it will have to reciprocate. That will only serve to bring more competition to the doorstep of Deltacom. This competition is likely to be just as strong as the domestic competition, but just as mainstream it its approach. This is the strategic key for Deltacom/Earthlink Business. The Southern company needs to adopt its service-first Southern strategy and leverage that. Global competitors will try to pry away customers with price and services offerings, but it is customer service where they will have the most trouble. There is little doubt that if the Deltacom strategy works against the likes of AT&T, it will work against British, German or Canadian companies as well.