External Analysis for Many Companies,

External Analysis

For many companies, the external environment is the most important driver of the business. A variety of factors come into play -- the state of the economy, the competitive environment, and sociopolitical environment and the pace of technological change. Verizon is a clear cut case of the many ways in which the external environment impacts a business. Created by the breakup of Bell (sociopolitical), the modern incarnation of the company began in 2000 when it merged with GTE and changes its name to Verizon (competitive environment). The firm began to place increasing emphasis on wireless technology through a partnership with Vodafone in response to rapid technological and social change that was shifting the nature of the telecommunications business (Investor.Verizon.com, 2009). Today, the business has been strongly impacted by the global economic crisis, which has seen Verizon's stock price cut by a third (Appendix a) and its earnings growth brought to a halt (Appendix B).

Management's role is not to react to the changes in the external environment, but to anticipate the changes and position the company to take advantage of the changes. This paper will study the external environment that Verizon presently faces, providing insight into the types of changes that can be expected and what Verizon's management team can do to deal with these anticipated changes.

Economic Environment

Verizon faces a challenging economic environment. The company operates two main business units -- wireless and wireline. The wireline business has a national spread but is limited to 28 states. This business has a broad base of customers and is considered a mature industry. The growth prospects of wireline are heavily dependent on overall economic growth, since there is little organic growth in landline telephone service. There is room for some growth, however, in the development of new products. The success of these new products is dependent on the robustness of the technology rather than the state of the economy.

The wireless industry is less coupled with the state of the economy overall. Although growth in wireless has slowed in recent years due to saturation, the key driver of this industry is competition, rather than the economy. Even in a poor economy, there is room for growth by winning customers away from other providers.

The American economy has performed poorly in recent years. Even without the impacts of the economic downturn, the U.S. economy has been subject to slowing growth since 2004 (Appendix C). The main driving feature of the U.S. economy in the past couple of years has been the subprime crisis and the subsequent expansion of that crisis into a full-blown recession. With GDP growth stalling, firms such as Verizon must rely on other drivers of business to promote growth.

One of the impacts of the subprime crisis was an impending credit crunch. The Federal Reserve responded to this by slashing interest rates to near zero at the outset of the crisis. This has two key impacts. One is that the rates have now remained at this level for over a year. This would normally provide strong stimulus to the economy, but as of yet this effect has not been noted. The other impact is that the Fed is forced to use other policy levers to stimulate the economy -- it can lower rates no further. The current daily effective federal funds rate is 0.15% (Federal Reserve, 2009).

The U.S. dollar Index measures the value of the U.S. dollar against a basket of nine other leading currencies including the yen, the Swiss franc, the Euro, the pound and the Canadian dollar. The U.S. dollar against this basket has declined steadily over the several months, from just over 80 at the beginning of July to 75.46 today (FXStreet.com, 2009). A declining dollar is not the most important indicator for Verizon, since its sales are all domestic, but it does increase the price of inputs that are sourced overseas. Verizon must take the dollar's expected future value into account when negotiating supplier contracts overseas.

Leading economic indicators are generally positive. The stock market is one major leading indicator. As we can see in Appendix a, the S&P 500 has been slowly improving over the course of the year. This is the broadest of the three major indices, and as such is reflective of the market's view on the economy overall. It is also the most relevant of the three to Verizon because of the firm's broad customer base.

There are several other leading indicators as well. The most important ones have been aggregated into the Conference Board Leading Economic Index. This basket of leading indicators increased 1% in September, 0.4% in August and 1% in July, as well as improving the six months previous (Conference Board, 2009). This corresponds with the stock market's assessment that the economy is generally expected to improve slowly over the coming months and years.

With an economy that is expected to improve steadily, Verizon should see some organic growth in its business. It will, however, need to be wary of a couple of things. The first is that it must continue to focus on the other business drivers such as technology and marketing. These have helped it to weather the worst of the economic storm and should not be ignored simply because the economy is set to improve.

Verizon should also be aware that economic improvement will see an increase in interest rates. At present, there is little indication of future rate increases, but the rates are also at rock bottom. Verizon has the opportunity to lower its cost of capital by locking in these rates, but it will probably need to act soon in order to do so. The optimism seen in the leading indicators has yet to translate into true economic recovery, but once it does, the Fed will be compelled to raise rates to ward off inflation.

Otherwise, the Conference Board (2009) is reporting that along with the six months of increases in leading economic indicators, the economy itself has shown signs of recovery for the past couple of months. While Verizon should be wary that the recovery goes as indicated, the most reasonable response would be to prepare for a recovery scenario. If it does, demand should increase sharply over the coming months, and Verizon should be prepared to exploit that opportunity, as its competitors surely will be.

Sociopolitical environment

Verizon has in the past done a strong job of responding to shifts in demographic and sociopolitical trends. While its big move into wireless came relatively late (1999), it came at a time when product development emerged as a key driver of business rather than new customers. Verizon responded well to both challenges and has become one of the nation's largest wireless companies as a result. Recently, its wireline product introductions such as FiOS TV and Internet have contributed to revenue growth despite the slow economy. Verizon has been creative with respect to marketing products that meet its customers' telecommunications needs.

Going forward, two major, long-term demographic trends emerge. America has an aging population. The difference between the country's current elder generations and the baby boom generation now entering its senior years is that the latter has adopted modern telecommunications. With demographic shifts come shifts in consumer tastes. Retirees travel more, which places additional emphasis on telecommunications providers to expand coverage. They also prefer to be in communication with their friends and families more, which can be a strong driver of the telecommunications business in general. This opens up a large opportunity for Verizon to satisfy the unique needs of this generation.

Another major demographic trend is the increasing diversity of America. This long-term trend can have specific implications for marketing, in particular with respect to the way that different communities utilize telecommunications. Verizon will utilize its extensive marketing muscle to build and maintain a strong market share in each community.

The way that society in general views telecommunications is also changing, rapidly. This shift has become evident only in recent years, evidence by the popularity of devices such as the Blackberry and the iPhone. Many consumers now view their telecommunications devices are more than simply telecommunications devices. These devices have become tools to meet several broader market needs including the provision of entertainment and information. Verizon has been slow to respond to this shift. It has been unable to sign a deal with Apple for iPhone service and is currently placing emphasis on a fledgling Google product called the Android (Chen, 2009). Verizon does service the Blackberry, however.

Consumers have become very demanding with respect to the telecommunications providers. This has driven competition to intense levels, but also provides opportunity for large firms such as Verizon that have the financial capability to stay on top of the emerging technologies in the industry. Verizon must continue to evolve its product/service offerings to meet the needs of modern consumers, as rapidly as those needs shift.

The most significant legal threat is that the FCC may open up new wavelengths and channels to allow greater competition in the wireless industry. This could bring a flood of new competitors to the market. Verizon is working with other wireless providers to gain preferential access to new wavelengths. Previous auctions, including the 2007 auction of the 700 MHz spectrum that Verizon won, came with open-access rules. Verizon is battling the FCC with regards to the regulator's desire for openness rules on all bandwidth, something Verizon considers a threat to be actively combated (Singel, 2009). As a whole, the regulatory environment has become less favorable to the wireless industry of late, with the FCC taking a more active role in micromanaging the industry (Corbin, 2009).

Competitive Environment

An analysis of the competitive environment using Porter's Five Forces model reveals that the competitive environment for Verizon is moderately challenging. There is strong buyer power. The main driver of buyer power in wireless is the low switching cost between providers. Buyers are also savvy and have ample information with which to make their decisions. Buyers are sensitive to both price and service offerings.

Supplier power is moderate. As with most technology industries, the power of suppliers is low for commodity inputs but high for specialized ones. Verizon is a volume buyer, which gives it bargaining power. However, for the most cutting edge of technologies, it is conceivable that the major wireless firms could even compete with each other for contracts, shifting power to the supplier.

There are high barriers to entry. While the legal barriers to entry have largely been removed, there are cost advantages associated with economies of scale that have limited to number of major players in both landline and wireless. The size of the wireless network is an important point of competition, and capital requirements to build a competitive network can be very high. There is a high proprietary learning curve, in particular with respect to the demands of customers. Overall, the barriers to entry are high, which is favorable to Verizon.

Although there are only a handful of reasonable substitutes, and Verizon is involved in each of these in some way, there is a high threat of emerging substitutes. The bulk of the threat comes not from existing technologies but from new ones. The pace of technological change in the telecommunications industry is rapid at present. Not only does thing bring a steady stream of improvements and additions to existing technologies but it also brings with it the threat of new technologies. While it is difficult to determine where the next threat may come from, Verizon needs to view emerging technologies as a serious potential threat and must always be attuned to the cutting edge of telecommunications.

The degree of rivalry in the industry is high. Verizon is engaged in competition in its wireline business, although this is less intense than in the wireless business. There are four national carriers as well as 173 regional and specialty carriers (Megna, 2009). The national carriers all have high exit barriers. There are high corporate stakes in the telecommunications business as well, given the industry concentration at the national level. Moreover, growth in wireless is fast, but is expected to be capped by physical bandwidth requirements unless the FCC frees up more bandwidth. This means that carving out market share now will enable the largest firms to survive, generating intense market share rivalries today.

These five factors make the telecommunications business moderately attractive for Verizon. The business is profitable and is expected to grow for several more years. The competition, however, is intense although there are high barriers to entry at least on the national level. Overall, Verizon's strategy should remain tied to building strength in its competitive environment and finding means of attaining sustainable competitive advantage, which in the telecommunications industry comes from economies of scale and technological proficiency.

Technological Environment

The pace of technological change is rapid. In the next year or two, most major wireless companies in the United States will be migrating to the fourth-generation Long-Term Evolution (LTE) network (Chen, 2009). This is indicative of the industry -- each competitor must keep pace with the technological developments of the industry as a whole, or be left at a competitive disadvantage. There are myriad threats and opportunities inherent in both landline and wireless technological change.

The new cellular network, LTE, is the next step in technological shift and has been developed in response to consumer demand for greater wireless bandwidth. The infrastructure in this case has followed the application, which is found in the sophisticated wireless devices like the Blackberry and iPhone. Developments at the device level therefore spur technological change at the telecommunications level. The device-level developments are in turn spurred by interpretation of consumer demand -- products are created to satisfy needs that, in the case of the wireless industry, may not yet have been articulated by consumers but have been identified by device-makers. Verizon must work with device-makers to understand the needs of devices and of consumers for the coming years, so that Verizon can make the necessary infrastructure investments to meet this demand.