Statement of the Problem
As competent reflective agents, we are aware of the many ways in which a generalised ‘climate of risk’ presses in on our daily activities; sensitive to the risks that affect our lives; and are specialists in managing risk. From health concerns to stock market gains and environmental and political issues, the contemporary risk climate is one of proliferation, multiplication, specialise, counterfactual guesswork, and anxiety (, 2002).
However, adequate consideration and calculation of risk-taking, risk-management and risk-detection can never be fully complete since there are always unforeseen and unintended aspects of risk environments. This is especially true at the level of global hazards, where the array of industrial, technological, chemical and nuclear dangers that confront us grows, and at an alarming rate. Indeed, (1996), an innovative and sociologist defines the current situation as that of world risk society. According to (1996), the rise of risk society is the result of the new global economy. He has developed powerful analyses of the ways in which the situation is transforming social reproduction, nature and ecology, intimate relationships, politics, economics and democracy.
In addressing the need to mitigate risk and to predict future losses in the economy through business organisations, requires business administrators to provide adequate risk management. Although literature shows that this law provides numerous advantages, many authors note its weaknesses. In line with this, the dissertation will attempt to answer the following question: (1) What are the differences of telecommunication industries in India, China and Philippines in terms of financial risk management aspects?
Generally, the purpose of this study is to conduct a study on the quality of service related to telecommunication industries financial strategies in dealing risks. This study tries to answer the following queries:
1. What are the variables that significantly affect the financial management in telecommunication industries?
2. Does appropriateness of risk management in finance of telecommunication industries significantly affects their progress?
3. What is the current status of overall financial performance of telecommunication industries in China, India and Philippines?
4. Is there any significant relationship between risk management and organisation’s progress of telecommunication industry?
Significance of the Study
This study will be a significant endeavour in understanding the importance of assessing risk management in an industry. This study will be helpful to business administrators and management practitioners for this will be a guide for them when they employ effective financial approach and risk management strategies to their organisation. By examining the risks and other factors involved in business strategies, business administrators and management practitioners will be able to design measures to minimise the risks. Further, through the understanding of the needs of their consumers in terms of satisfaction, this study will help different food manufacturers to satisfy their consumers. Moreover, this study will be a significant endeavour in promoting effective marketing strategies that suffice the needs of consumers.
This study is deemed useful for future researchers on business strategies and its application to different business organisations. This study could also serve as an academic tool in informing its reader about the business development and organisational change. Moreover, this research will provide recommendations on how to value business development as they are taking a large part in the organisations success. In addition, this study will provide information to business leaders regarding business progress and development. Knowing how consumers perceive development of an organisation will assist business leaders in establishing programs, policies, and staff development.
Chapter 2
Review of Related Literature
Introduction
As part of the development in the financial management, business performance management (BPM) should be considered by different organizations. Actually BPM is a set of processes that help organizations optimize business performance. According to , BPM is seen as the next generation of business intelligence since it is focused on business processes such as planning and forecasting. It helps businesses discover efficient use of their business units, financial, human, and material resources. Moreover, BPM involves consolidation of data from various sources, querying, and analysis of the data, and putting the results into practice.
In addition, BPM enhances processes by creating better feedback loops. Continuous and real-time reviews help to identify and eliminate problems before they grow. BPM’s forecasting abilities help the organisation take corrective action in time to meet earnings projections. Forecasting is characterized by a high degree of predictability which is put into good use to answer what-if scenarios. BPM is useful in risk analysis and predicting outcomes of merger and acquisition scenarios and coming up with a plan to overcome potential problems.
Basically, this part of the chapter will discuss the issues in risks financial analysis particularly performance management indicators.
Discussions
Nowadays, core values and beliefs of different sectors in the society are being challenged and questioned. Different institutions such as government, economic, philanthropic and even religious institutions are facing inconsiderate and often justified scrutiny for fraudulent and abusive behaviors resulting to tremendous losses, financially and psychologically, for many innocent people. As leaders try to chart the direction for their organizations, they can not help but face these underlying concerns about their business.
More often than not, leaders plunge into a long-term strategic planning process without first deliberating on certain fundamental questions related to beliefs and values. These questions are often about the core ideology, values, purpose, envisioned future, vision statement and vivid description of what the business would look like. Reaching a common understanding about the inherent beliefs in the organization provides a platform for further explorations on the norms of behavior that help define the organization’s culture. This exploration can also help reveal the impact that the development in the organization with the help of performance indicators.
This paper is an attempt to understand business performance management in relation with the performance of a certain business. The paper will also look approaches, motivation and dysfunctional behavior.
Apparently, BPM provides key performance indicators (KPI) that help companies monitor efficiency of projects and employees against operational targets. Most of the time, Business Industries (BI) simply means use of several financial/nonfinancial metrics/key performance indicators to assess the present state of business and to prescribe course of action. Some of the areas which top management analysis could gain knowledge from BI:
1. New customers acquired
2. Status of existing customers
3. Attrition of customers
One way of evaluating the development and progress of a business is through performance measurement. According to . (1996), performance measurement may be defined as the process measuring the competence and efficacy of purposeful action. Based from the administrative point of view, performance measurement is a subsystem that needs to be formulated, handled and assessed periodically in order to assure the attainment of the desired outcome. Several elements with functional interdependencies are involved within the system of organizational performance measurement. Typically, a system may involve elements such as a complicated set of procedures for gathering and processing data, timetables and practices for distributing data about performance to users inside and outside the corporation. The system may also include organizational learning system to facilitate the constant construction of new measures as well as updates of indicators ( and , 1996). In some ways, performance measurement is similar to that of a Rubik’s Cube wherein systems have several components with distinct shapes, which must be arranged properly to create the correct picture ( and , 1996).
Usually, performance measurement is carried out through certain performance measurement systems containing several individual measures. So as to construct these systems, several frameworks may be used. The most common examples include the Balance Scorecard, the Performance Pyramid and the Performance Prism ( and , 2000). These systems are applied to the organization depending on its vision and strategies ( and , 1996). These measures are chosen to evaluate success factors from various points of view including those of the employees, customers, financial success and business operations. View of past, present and future performances may also be measured. Thus, through performance measurement, various aspects of the organisation’s performance may be evaluated and managed.
According to (2000), the process of performance measurement undergoes four major phases. First, the organisation must choose which specific performance measure or system to apply. After which, the selected system will then be applied to the organization. Within this phase, how the system results are collected, reported and used is taken into consideration. After the design and implementation procedures, the system will now be used. Finally, the system will be redesigned in accordance to the changes of the organizations objectives. If the organisation fails to do this final step, the strategic purpose of applying performance measurement systems will not be achieved (, 1999).
The assessment or measurement of performance is significant as this may serve as a tool for implementing organizational strategies ( and , 1996). Performance measurement is being applied in several businesses as it can be used to translate the strategy of the organization into concrete objectives. Through performance measurement, these objectives van be communicated well to the employees. In turn, the knowledge of these set goals will serve as the employees’ guide towards their attainment. Performance measurement may also be used to assess whether the strategic objectives are achieved or not. This system allows the use of double-loop learning to test the strength of the strategies as well. Finally, performance measurement let the organisation visualize the overall contribution of the employees in the achievement of its objectives (, 1998; , 2000).
Another use of applying performance measurement is to establish appropriate compensation systems. The relation of performance measurement and management compensation schemes has been a common business matter. The system, more commonly known as the pay for performance system, has become widely popular in the 1960s and early 1970s. This was due to the past occurrence when rapid inflation annually demanded approximately double-digit percent increases to keep pay even with the market. The so-called pay-for-performance compensation systems begin with policies of systematic underpayment of market wage to motivate newly hired, probationary workers. The hazard of such systems is that if a worker does not get the expected pay increase at the expected time, considerable personal stress and anxiety can result, reducing performance significantly. However, there are several reasons for using performance measurement in compensation management. This system for instance enables a communicable and rational basis for explaining various wage rates. This also helps in maintaining job satisfaction among employees, while minimizing grievances. Performance measurement and compensation schemes also provides a flexible basis for modifying pay rates as well as establishing pay rates for new jobs. The system also helps in handling the employee compensation’s administrative costs ( and , 1987; , 1989).
Several topics and issues are involved in understanding performance measurement. For this discussion, focus will be given to the risks in business, financial and non-financial indicators of performance measurement. Moreover, the meaning, perspectives and advantages of Balance Scorecards will be included. In order to visualize the application and purpose of performance measurement, small case studies of some industries will be cited.
Risks
Risk is not only a source of randomness on the return of investment but also a measure of this variability because the probabilities of various outcomes are known ( & 1997 ; 2001 ). Contrary to uncertainty, risk is more predictable and measurable because outcome probabilities need not to be estimated rather given. The probability of having tail or head (i.e. 50/50) in a toss coin is an example of risk while the probability of winning or loosing in a legal trial is an example of uncertainty. In addition, there are three fallacies about risks; namely, risk is always bad, risk should be eliminated at all costs and playing it safe is the safest thing to do ( 2001 ). Risks are either threat or opportunity depending on the stance of entities involved. For example, a hurricane is a disaster for homeowners in a certain community but some people like sellers of lumber, weather radios and other emergency equipments/ tools may view the disaster as earning opportunity.
Elimination of risks to avoid untoward results should address initially two questions; namely, is it complete elimination and what is the cost of any reduction? For example, there is a chance that an asteroid could hit the earth according to some experts but would the probability of the event (i.e. 1 in 1 billion) can be substantial enough to create the need to create homes in caves and underground which have monetary and non-monetary costs ( 2001 ). Lastly, preferring zero risk is equated to a risk-averse person. For example, even though the probability of wining a ,400 raffles ticket at a cost 0 is 50%, a risk-averse person will not bet his 0 due to the adversity on having nothing. This despite the expected value of buying the raffle ticket and betting is 0 (i.e. ½ () + ½ (,400) = 0) which means there is an equal probability of doubling his money ( 2001 ).
Total Risks
Consistent with a rational market, individuals and other entities expect and are promised with higher (lower) returns if they engaged in investments with higher (lower) risks. Shareholders are concern with total risk because it is a measure of the risk of an exposure of business portfolio that is comprised by the sum of market and firm-specific risks. Due to this, investors can reduce their total risk through diversification without altering their expected return ( 1993 ). However, this incentive is less attractive to contemporary investors because firm-specific risks are automatically considered when they hold a certain number of securities. As a result, firm specific risk becomes irrelevant to investment motivation because investors do not have to bear the firm-specific risk and therefore do not have to be compensated ( 1993 ).
Derivation of Total Risk
To measure the total risk of a portfolio, correlation and covariance will be used ( 1999). The first step to do is to get the return of the portfolio. This is merely the sum of expected returns of single-asset multiplied with their proportional share in the investment amount. Say I have 00 and opted it to invest in stocks and bonds in two different companies. If I will invest 50:50 on each financial instrument, their earlier computed single-asset expected values should be reduced to 50% and be totaled. In the same manner, their earlier computed standard deviation should be reduced to 50% or their share of the 00 investment. However, the problem of the preceding statement is that the standard deviation or the risk could lead to inaccurate decision information. Due to complexity of two-factor and much of the multi-factor portfolio than single-asset, the procedure requires further information about stocks and securities. Are they positively, negatively or no relation at all? Due to this, the correlation (the underlined one) in the formula Varp =(w1 )2(σ1 )2+(w2 )2(σ2 )2+2(w1 w2 ρ12 σ1 σ2 ) should be determined if will be indicated by +, – or zero values ( 1999).
Distinction between Systematic and Unsystematic Risks
It is important for an investor or a firm to assess associated risks for every business engagement. There are risks attached to inability to repay short-loan liabilities due to abrupt demand payment. On the other hand, a more long-term security can extend the debtor days of the investor but still risks on paying large interest and principal can lead to default. Therefore, assessment is required to know the level of risks associated to a given level of return on certain assets ( & 1997). In this regard, unsystematic risks are those risks associated with price changes due to unique characteristics of certain securities that can be eliminated or minimized through diversification ( 2006). On the other hand, systematic risks are risks found in the entire class of assets which implies that they are sensitive to economic changes and market shocks. In effect, the latter kind of risk is less diversifiable and assets in a portfolio are more prone to inherent risks. Perhaps, when assets outperform the market, systematic risks can show its superiority in terms of higher returns with the security.
It is suggested that when an investor participates in the marketplace, he is compensated by systematic risks and not unsystematic risks ( 2006). This is consistent to the dogma that returns and risks have positive relationship, that is, when returns increase or decrease the same thing happens to risks. The adverse effects of unsystematic risks is ultimately dissolve in the marketplace as the investor net exposure is hedged through diversification by merely holding a number or combination of assets. Therefore, the only risks that should be in question is the systematic risks in which the investor cannot fully depict. In effect, the investor’s returns only confront systematic risks in the marketplace.
efficiency frontier can clarify this statement ( 1952). This frontier not only shows the optimal portfolio but also indicates how a risk-taking investor can maximize returns. The frontier assumes that there is no effect from trading costs like commissions rather the factors that can affect decision is on return and risk factors. All points in the efficiency frontier are diversifiable because it is a combination of risk-return trade-offs. All the points that lie in the efficiency frontier and therefore its constituent assets diminished specific risks associated with individual assets. This is because of diversification. However, it is to be noted that systematic risk or the risk in the market or external factors are not stabilized and always moving.
Derivation of Unsystematic Risk
Business risk is related to operating features of a firm while financial risk is related to the strategies behind the capital structure of a firm (1999). The former is a type of risk that is outside the control of firms and hardly affected by certain tactics and strategies because business risk is very dynamic and uncertain. On the other hand, the latter involves factors within the scope of managerial control because it arises from borrowed funds the company is bound to pay unlike equity funds. However, they are both under the definition of systematic risk or inherent risks of companies that cannot be reduced by diversification strategies. Business risks includes example such as the sensitivity of competitive structure of an industry to changes in macroeconomic variables such as inflation and interest rates. On the other hand, the more debt a firm has a greater level of financial risk or inability to meet such obligation.
Valuation can come directly to the firm. This is referred to as business risk ( 2000). For example, its integration effort has indicators of failing (partly indicated in high employee turn-over from a proposed merger), thus, requires greater returns for the heightened risks of integration failure. On the other hand, electric utilities initially have relatively lower business risk compared to aggressive and expanding firms. This is so the expected earnings will not largely depart from the original due to business risks.
Lastly, financial risk basically provides valuation of investors that the firm can control ( 2000). By merely looking in its financial statements, an investor can decipher financial risk involve in his stock investment. In the similar manner, he can assume his position of its value. For example, in capital structuring, common stock price will be undervalued when the firm is over- or under-leveraged. Although leveraging is good for the health of the firm, this suggest relatively complex forecast of future earnings of investors. This may also mean that debt servicing requirements might not be met, and as a result, it can affect the dividend pay-out or long-term goals of investors in their stakes on the firm. In additional, the level and duration of loan repayments is taken into consideration to calculate financial risk. Another, leverage buy-outs can dramatically pull the price of common stock.
Derivation of Systematic Risk
For example, every stock in London Stock Exchange is uncorrelated with every stock; the beta coefficient is zero ( 2006). In this case, it will be possible to hold a portfolio in LSE that has risk-free. Investors would be acting like a casino owner having to only wait at the end of the day to receive fees from the players. The owner will accumulate earnings without any risks in playing rather only responsible for maintaining the venue. With zero betas, game theory will not hold and stock markets will never exist as correlated risk is the source of all risk in the diversified portfolio. On individual assets, beta represents volatility and liquidity of the market place while on portfolio perspective it refers to investor’s level of risk adversity. Beta is estimated through times series analysis and linear regression models ( 2006) like estimating ninety trading days of simple returns used as estimators for covariance and variance. Negative betas can be derived by holding securities that move against the market, shorting stocks and putting on options.
However, betas are limited because they are only based on historical market data ( 2006). As such, future implications to investments cannot be inserted in the decision-making criteria. Variables are identified based on their past performance and any future or expected changes are not taken into consideration. In effect, investors that accept and address this limitation often lead to speculation for a possible war, major earthquake, political scandal and other stock market related events due to the inability of the beta to represent the overall perception of the market about the future trends. In effect, it can be said that the limitation of the beta caused the stock market bubbles and other economic crisis that adversely affected the lives of the people; both rich and poor as over-speculation in the market lead to distorting the real performance of the market rather mere expectations of market participants without any proven level of superior output.
Director’s Comments
In the above discussions, the first comment that portfolio of stocks need to only consider systematic risk is valid. This is because the total risk of their holdings is already diversified by investing in different firms; therefore, unsystematic risk becomes irrelevant. The second statement only becomes crucial if the company is holding only minimal number of portfolio. However, total risk becomes important when the company decided to hedge their risks by holding government bonds which is said to be risk-free asset. In this regard, focusing only on systematic risk is limited in gaining the minimum level of risk. The third statement is true because when the expected return is smaller than the whole market the security in question is underperforming while when it is smaller than the risk-free asset the trade-off between risk and return is not optimized.
Financial Reporting Process
Financial reporting is a continuous process that provides management information and financial statements. To effectively review interim and annual financial statements, the committee must understand the organisation’s business and industry, and the attendant risks. The committee should be satisfied that the key financial systems and the procedures and controls that support them will generate information necessary to manage and properly report on the operations of the organisation.
On the other hand, information technology has a significant influence on financial reporting at most companies. The committee should be briefed on the extent to which the financial reporting system is automated and the controls are in place to ensure the generation of reliable information and to provide computer security. Internal auditors and independent auditors should describe the results of their testing of computerized systems and their assessment of controls over them.
Financial Report
Financial report is very vital for a certain business since it depicts the future of a certain organization. In addition, financial statements (or financial reports) are a record of a business’ financial flows and levels ().
Typically they will include:
· a balance sheet setting out the net asset position of a business
· an income statement, income and expenditure statement or profit and loss account
· a cash flow statement
· a statement of other recognised gains and losses or other comprehensive income statement setting out movements in equity that do not go through the income statement or profit and loss account (eg a revaluation of the value of head office of an organisaiton)
· statement of retained earnings
· supplementary notes and management discussion
Today most governments require publicly-traded companies to issue, and issue in a certain way, annual financial statements. Some governments, such as the United Kingdom government, require all companies to publish annual financial statements, although smaller companies only need publish them in abbreviated form.
Basically, financial statements and records have been produced for as far back as there has been human writing. The people in the old Mesopotamian societies operated both insurance and credit corporations, and had the obvious need of record keeping.
The Non-financial Indicator
In assessing the financial risks in an Industry, there are several factors to consider and one of these is based on their non-financial indicators. Due to the evolving trends and practices in business, various organizations have recognized the possibility of measuring performance that not solely based on traditional measures. Although, price and financial indicators are still significant factors for performance measurement, particularly in the intense competitive environment, these indicators are no longer the main determinant of profitability. Product quality, customer and employee satisfaction, business operations as well as shareholder satisfaction, collectively known as non-financial indicators, have become important measures in performance as well. Due to this transition, flexible manufacturing has been converted to process-oriented operations to product-oriented manufacturing operations. By means of non-financial indicators, maximization of profit has been achieved through the identification and elimination of waste in the operations rather than in mere controlling of the input costs ( and , 2002).
Non-financial indicators like innovation, business environment, product quality and participant satisfaction are now considered as major contributors to the market value of the organisation. As non-financial indicators are more forward-looking, less aggregate and closely related to the business operations, they are able to modify the focus of the manager as well as aid directors in making better job evaluations of the management’s outputs. Further, in some business contexts such as limited product life cycles and competitive product markets, non-financial information is very essential. In a way, these external forces lower the accuracy of more complex financial measures as a performance indicator ( and , 2003).
Within the new environment, the role of the system has become more pronounced as it increased the participation of the worker. According to and (1995), non-financial indicators of performance measurement is heavily based on common sense, intelligence, creativity as well as the participants’ personal values. Due to the decentralized nature of these factors, internal controls are required for the new system, which in turn increases the integrity of the organization. Moreover, this system promotes consistent, meaningful, reliable and relevant measuring mechanism that is vital to an operation’s success.
The Balance Scorecard (BSC)
As businesses placed significant recognition and interest in performance indicators, several performance frameworks have risen. One of which is the Balance Scorecard (BSC). The balanced scorecard is an innovative performance measurement process that builds on the notion that reliance on traditional (particularly short-term) financial measures is no longer adequate for firms competing under knowledge-based strategies that derive value from the management of intangible assets ( and 2001, 2001). Financial measures are outcome measures based on historical results. As such, these lag indicators generally focus management’s attention on past actions and short-term performance related to the management of tangible assets. In contrast, non-financial measures, categorized as lead indicators, tend to focus attention on actions that drive future results, creating value for the long-term from such intangible assets as human capital, customer relations, innovation in products, and highly efficient operating systems ( and 1996, 2001). A balanced scorecard combines measures in such a way that management has access to key financial and non-financial information that they need, while not being inundated with abundance of information.
and of Harvard University are widely credited for creating the distinct characteristics of the balance scorecard approach. They have demonstrated that using a scorecard helps companies translate vision and strategy into action and high performance. The scorecard model they most frequently describe contains four perspectives. Within each of these perspectives companies develop objectives, measures, targets, and finally initiatives. and make a critical distinction between strategic and diagnostic measures, and as a consequence suggest that a scorecard should contain a limited number of objectives and measures, typically 15 to 25 (, 2000).
The balance scorecard approach is founded by four main perspectives: customer, internal business processes, learning and growth and financial. The focus of the customer perspective is on the external environment, which aims to discover, understand and stress on customer needs. Common measure used in this perspective includes customer loyalty, customer satisfaction and customer retention (, and , 2002). The internal business processes perspective concentrates on the internal environment along a value chain encompassing operations, post-sale service and innovation processes. Common measures used for this perspective are expenditures on research and development, new product sales, cycle time, throughput efficiency and productivity. Alternatively, the learning and growth perspective provides the infrastructure or foundation required to meet the goals of the other two operational perspectives. The common indicators are employee satisfaction, voluntary turnover and dollars spent on training. Lastly, the financial perspective is focused on shareholders. According to and (1996), every measure within the balance scorecard should be casually linked that leads to financial measures. In this indicator, common measures include return on investment, economic value added and net income.
In general, balance score cards are advantageous as it help create management mechanism, which enhances the success of the organization. Specifically, balance scorecards help in the creation of a commonly understood and precisely identified strategy within the management team. It also provides an incorporated view of the strategy within all sectors of the organizations. Balance scorecards also encourage the participation and contribution of the employees as well as present a balanced combination of measurement, which enable easier management towards success.
Like other systems of performance measurement, many companies have applied BSC into their operations. One good example is Subaru-Isuzu, a joint Japanese automotive manufacturing venture between Fuji Heavy Industries and Isuzu Motors Limited (, 2003). In 1996, the organisation had recognized that their performance measurement system based on historical data is not sufficient enough. Due to this system, the organisation was not able to forecast targets and establish objectives. Hence, in 1998, the organisation decided to adapt the balance scorecard approach to measure its performance. After much brainstorming, the organisation decided to adapt the National Quality Award criteria. In this way, the selected performance measures can be classified under one of seven business performance objectives. These objectives include strategic planning, leadership, customer and market focus, human resource focus, information and analysis project management and results. Through BSC, Subaru/Isuzu ultimately reduced the seven down to five major categories that best represented the venture’s key business performance goals.
Synthesis
In financial risks assessment of telecommunication industry, performance measurement has long been used by the various firms to assess different business factors. In general, three methods are being used to measure performance: financial, non-financial and integrated approaches. While these approaches have their own advantages and drawbacks, the goal of their application remains one and the same. Through the beneficial effects of performance measurement, businesses are able to create successful strategies towards success.
Chapter 3
Methodology
The Method to Use
For this study, the descriptive research method was utilized. In this method, it is possible that the study would be cheap and quick. It could also suggest unanticipated hypotheses. Nonetheless, it would be very hard to rule out alternative explanations and especially infer causations. Thus, this study used use the descriptive approach. This descriptive type of research utilises observations in the study. To illustrate the descriptive type of research, (1994) guided the researcher when he stated: Descriptive method of research is to gather information about the present existing condition.
The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena. The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study.
To come up with pertinent findings and to provide credible recommendations, this study utilised two sources of research: primary and secondary. Primary research data were obtained through this new research study. Questionnaire survey was conducted (see Appendix). On the other hand, the secondary research data were obtained from previous studies and telecommunication industry details on the same topic.
The primary sources of data came from the survey-questionnaire conducted by the researcher. The secondary sources of data were based on published articles from telecommunication industries information, business strategy, business and innovation journals, books and related studies on strategic management.
Since there have been several methods to measure performance, several companies question which method is the most effective to use. Considering that financial and non-financial approaches are two very different systems, applying one mechanism in place of the organisation’s existing performance and evaluation means will entail greater changes and adjustments. Moreover, some aspects in traditional systems are lacking in the non-financial systems and vice versa. Hence, the application of only one system will not result to the maximisation of the advantages of both systems. Thus, out of this analysis, this paper considers to use the financial ratios based on the gathered information from the telecommunication industries in three countries (i.e. China, India and Philippines). Actually, the individual financial details of the telecommunication industries in these three countries is very discreet, thus the researcher only use the overall details of information of the telecommunication industries in three countries. Aside from financial ratios evaluation, the researcher also considers the perception of the personnel in a telecommunication business. In this regard, the researcher conducted a survey in a certain telecommunication organisation who operates internationally. Through the use of financial ratios and perception of the respondents, this paper is now using the integrated approach of performance measurement.
Respondents of the Study
Basically, the results of this study is not only based from the information gathered from the overall telecommunication industry information, business strategy, business and innovation journals, books and related studies on strategic management but also to several employees and managers a certain telecommunication industry in which their names are not divulge to ensure the secrecy of their identity as they requested. The general population for this study will be composed of selected personnel related to telecommunication industry, numbering to 30 respondents with different nationalities i.e. 10 form India, 10 from Philippines and 10 from China.
Instruments to be Used
To determine the effects of telecommunication industry’s internal and external environment management, the researcher will prepare a questionnaire. The respondents will grade each statement in the survey-questionnaire using a Likert scale with a five-response scale wherein respondents will be given five response choices. The equivalent weights for the answers will be:
Range Interpretation
4.50 – 5.00 Strongly Agree
3.50 – 4.49 Agree
2.50 – 3.49 Uncertain
1.50 – 2.49 Disagree
0.00 – 1.49 Strongly Disagree
The decision was made to use a questionnaire for the data collection for this project due to the sensitivity of the information being obtained. It is important for the respondents to be open and honest in their responses. The use of the questionnaire provides the project owner with the ability to test the views and attitudes of the managers. The questionnaire was designed to allow the collection of specific information about the participants to conduct statistical analysis, e.g. age, sex, length of time with the organisation and position in the organisation.
In the Likert technique, a set of attitude statements are presented, where subjects of a study are asked to express agreement or disagreement using a five-point scale. The degree of agreement is given a numerical value ranging from one to five, thus a total numerical value can be calculated from all the responses.
Validation and Administration of the Instrument
For validation purposes, the researcher initially submitted a sample of the set of survey questionnaires and after approval; the initial survey were conducted to five respondents. After the questions were answered, the researcher asked the respondents for any suggestions or any necessary corrections to ensure further improvement and validity of the instrument. Afterwards, the researcher again examined the content of the questions to find out the reliability of the instrument. The researchers then excluded irrelevant questions and changed words that would be deemed difficult by the respondents, to much simpler terms. The researcher excluded the five respondents who were initially used for the validation of the instrument. The researcher also tallied, scored and tabulated all the responses in the provided questions.
Statistical Treatment of the Data
After all the survey questionnaire will have been collected, the researcher will use statistics to analyse all the data. The statistical formulae to be used in the survey questionnaire will be the frequency, percentage, and weighted mean. The researcher will be assisted by the SPSS in coming up with the statistical analysis for this study.
1. Percentage – to determine the magnitude of the responses to the questionnaire.
n
% = ——– x 100 ; n – number of responses
N N – total number of respondents
2. Weighted Mean
f1x1 + f2x2 + f3x3 + f4x4 + f5x5
x = ——————————————————;
xt
where: f – weight given to each response
x – number of responses
xt – total number of responses
Synthesis
Performance measurement has long been used by the various firms to assess different business factors. In general, two methods are being used to measure performance: financial and non-financial. While these approaches have their own advantages and drawbacks, the goal of their application remains one and the same. Through the beneficial effects of performance measurement, businesses are able to create successful strategies towards success.
Telecommunication industries competencies are immutable, since the firm has irrevocably sunk resources into developing these capabilities. Moreover, for a organisation to be successful, business strategy must be based on these capabilities. In the external environment, the intensity of competition is not completely under the firm’s control. Since competitive advantages for the firm will depend on the match between its strategy (i.e., mode of competing based on its internal resources and capabilities) firms must endeavor to achieve the best fit between their preferred business strategies and these exogenous mandates from the market.
As stated in this methodology part, the research underwent stages. In the research design, the researcher collected both primary and secondary data and formulated and developed the questionnaire. In this stage, these instruments were subjected to approval and validation. During the data collection, the researcher collated and summarised the data obtained from the questionnaire and survey. The researcher then analysed these data and from these, the researcher came up with findings and recommendations that shall be presented in the next chapters.
Chapter 4
Analysis, Presentation and Interpretation of Data
Overview
In any contemporary operating organisation, progress that the organisation is making is recorded as basis for, among a host of other essential things, decision-making and as a benchmark for measuring the firm’s performance for the period under scrutiny. A financial situation analysis is one such yardstick that documents current and future financial situation in an attempt to determine a financial strategy to help achieve organisational goals. As formally defined by in 1998, financial analysis ‘is an information processing system used to provide relevant information for decision making’ (). The main sources of information for such analyses are published financial statements of the concerned organisation. Various accounts from published financial statements are evaluated in relation to each other to form performance indicators, which are then compared to ‘established’ standards. These performance indicators are better known as ratios, and constitute the main tools of conventional financial analysis. For the last several years, businesses have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organisations are realising the importance of the analysis of their financial situations in order to keep up with the demands of the business world nowadays.
This paper is an analysis of financial situation of telecommunication industries in India, China and Philippines. The main purpose of this paper is to examine the financial statements of the telecommunication industry for the last twelve months by using tools such as Ratio Analysis to see how much growth that these telecommunication industries has been able to achieve and also to see what might be the other factors that can influence the organisation’s growth and its decision making and than to see the limitations of the financial analysis.
These performance indicators are better known as ratios and constitute the main tools of conventional financial analysis. For the last several years, businesses have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organisations are realising the importance the analysis of their financial situation in order to keep up with the demands of the business world. Aside from the evaluation of financial ratios, the perception of individuals related to telecommunication industry with respect to financial risks was also considered and discussed in second section.
Section 1: Financial Ratios
& (2004) mentioned that by calculating a relatively small number of ratios, it is often possible to build up a reasonably good picture of the position and performance of a business. Ratios help to highlight the financial strengths and weaknesses of a business, but they can not, by themselves, explain why certain strengths or weaknesses exist, or why certain changes occurred. Just by details investigation will find the reasons. Ratios can be grouped into certain categories; each of them identifies a particular aspect of financial performance or, position. There are five broad categories which define as follows: (1) Profitability; (2) Liquidity; (3) Financial Leverage; and (4) Asset Management ( & 1999).
Profitability Ratios
The following ratios may be used to evaluate the profitability of the organisation:
Ø Return on ordinary shareholder funds;
Ø Return on capital employed;
Ø Return on assets;
Ø Net profit margin; and
Ø Gross profit margin
Each of them are calculated for the Telecommunication Industry as follows:
TURNOVER
YEAR
TURNOVER (in $)
CHANGE
2006
16,197,000
21
2005
13,414,000
46
2004
10,910,000
29
2003
9,318,440
68
2002
5,518,440
-
From the said figures, the Telecommunication Industry has achieved remarkable consistent growth in its overall sales turnover, with more than double in terms of percentage of change.
Return on Ordinary Shareholder funds (ROSF)
The ROSF compares the amount of profit for the period available to the owners with the owner’s stake in the business. For a limited industry the ratio is as follows:
Net profit after taxation and preference dividend
ROSF= x 100
Ordinary share capital plus reserves
RETURN ON SHAREHOLDER FUNDS (ROSF) RATIO
YEAR
%
2006
10.1
2005
7.1
2004
5.3
2003
4.4
2002
9.4
From the above computation, it shows that the longer the organisation operates, the amount of profit percentage available to the shareholders increases as well in parallel. This is mainly due to the increase in the realisation of profits of the organisation, as it exercises a profit-sharing system.
Return on Capital Employed (ROCE)
The ROCE is a fundamental measure of business performance. This ratio expresses the relationship between the net profit generated by business and long-term capital investment in the business. The ratio is expressed as follows.
Net profit before interest and taxation
ROCE = x 100
Share capital +Reserves +Long-term loans
RETURN ON CAPITAL EMPLOYED (ROCE) RATIO
YEARS
%
2006
7.30
2005
5.60
2004
6.16
2003
5.94
2002
8.89
It is evident that as time passes, the return on capital employed by the business fluctuates and cannot be pinpointed to one pattern. This is largely due to the differences in the focus on capital investment as business activities progresses. At one point in time, the firm may be very active in business investment and other periods, it may be not very keen on investing.
Return on Assets (ROA)
The ROA ratio measures the efficiency of the organisation to use its assets to generate profit. The figure shows what the organisation is earning against every pound invested in assets. Telecommunication Industry’s performance is steady as compared to industry standards. The formula for computing the ROA is as follows:
Net income
ROA = x 100
Total Assets
RETURN ON ASSETS (ROA)
YEAR
%
2006
4.43
2005
4.22
2004
4.69
2003
4.57
2002
6.72
From the previous results, it shows that Telecommunication Industry in China, India and Philippines has managed to use their assets effectively to generate profits. It has been markedly decreasing in the last few years though, but so are the rest of the companies in the telecommunication industry in America, mainly due to the reverberations of the September 11 attacks in 2001.
Net Profit Margin (NPM)
The net profit margin ratio relates the net profit for the period to the sales during that period. The ratio is expressed as follows:
Net profit before interest and taxation
NPM =
Sales
PROFIT MARGIN/NET PROFIT MARGIN RATIO
YEARS
%
2006
12.63
2005
5.06
2004
5.70
2003
5.53
2002
12.97
The ratio of the net profit to the amount of sales is witnessed to decrease over time, as larger costs are experienced by the organisation, especially for Telecommunication Industries, where overhead costs are said to go skyrocket high, mainly resulted from increase in oil prices worldwide, oil that is used in the flying of an aircraft but has witnessed improvement during 2006.
Gross Profit Margin (GPM)
The gross profit margin ratio relates the gross profit of business to the sales generated for the same period. This represents the difference between sales and the cost of sales. Therefore it is the measure of profitability in buying (or producing) and selling goods or services before any other expense are taking into account. The gross profit margin is calculated as a follows:
Gross profit
GPM =
Sales
GROSS PROFIT MARGIN RATIO
YEARS
%
2006
13.75
2005
13.05
2004
14.82
2003
16.83
2002
25.12
The gross profit margin ratio of the Telecommunication Industry shows that the price of purchasing aircraft and other direct machines and equipment used to deliver service to passengers increase their purchase value as time progresses.
Liquidity Ratios
Liquidity ratios show how quickly the organisation can meet its short-term obligations using its current assets. The following ratios are needed to determine the status of liquidity of the firm under analysis:
Ø Current Ratio; and
Ø Quick Ratio
Each of them are calculated for Telecommunication Industry as follows:
Current Ratio (CR %)
The current ratio shows the ability of the organisation to pay its liabilities, i.e. debts and payables during the period. It is expressed as:
Current Assets
CURRENT RATIO =
Current Liabilities
CURRENT RATIO
Years
%
2006
4.17
2005
2.25
2004
2.18
2003
1.83
2002
2.01
It is evident in the computations that the Telecommunication Industry was always in better position to meet its short-term debt as compared to those of rivals in a peruse of the rivals’ current ratios. This means that Telecommunication Industry is always bale to meet their current liabilities using their current assets (cash, inventory, receivables). The figures are not high so as to make the shareholders fear that the assets of the organisation are not working to grow the business, and not low so as to drive creditors away with respect to the level of risk present.
Quick Ratio
As an alternative to the use of the current ratio, which may include financial statement items that are not easily liquidated and have uncertain liquidation values, the quick ratio does not include inventory in the computation of liquidity. In formula:
Current Assets – Inventory
QUICK RATIO = x 100
Current Liabilities
QUICK RATIO
Years
%
2006
2.43
2005
2.25
2004
2.18
2003
1.83
2002
2.01
Since quick ratios are perceived as a sign of the organisation’s financial strength or weakness, the figures in the previous table shows the relative stability of the financial strength of the Telecommunication Industry. A higher number would indicate stronger financial performance, and a lower one means weaker performance. Although there was a decrease in the 2003 ratio, the following year already showed signs of recovery and has continued up to last year.
Financial Leverage Ratios
The high financial leverage ratios of a organisation provide an implication that the organisation is solvent in the long-term. The following ratios are used to determine the financial leverage of Telecommunication Industry:
Ø Debt Ratio; and
Ø Interest Coverage
Each of them are calculated for Telecommunication Industry as follows:
Debt Ratio
The debt ratio shows the organisation’s position to meet it long-term obligation or liabilities. Debt ratios are dependent of the industry’s classification of long-term leases and other items as long-term debt. This is the gauge with which the financial strength of an organization is a sign of the ratio of capital that has been funded by liability, counting preference shares.
DEBT RATIO
Years
%
2006
53.72
2005
52.13
2004
59.58
2003
67.26
2002
68.31
The formula for the debt ratio is:
Total Debt
DEBT RATIO = x 100
Total Assets
A higher debt ratio (which means the organisation has low equity ratio) does not give the firm’s creditors the security they require from an organisation. The firm would, as a result, find difficulty in raising supplementary financial support coming from outside sources if the firm wishes to take such action. Therefore it reveals that the higher the debt ratio, the harder it is for the organisation to raise funds from the outside. The table previous table shows that the Telecommunication Industry is decreasing their debt ratio as time passes, and that in itself is a positive indication for the credit standing of the organization.
Interest Coverage
Interest coverage shows the organisation’s ability to pay the interest on its outstanding debts using the firm’s earnings. This is the number of times over that the organisation is able to meet its payments to their creditors. The figures to this ratio would imply the ability of the industries to pay its obligations to external sources. The formula for its computation is shown below:
EBIT
INTEREST COVERAGE =
Interest Charges
INTEREST COVERAGE
Years
%
2006
4.89
2005
9.28
2004
24.04
2003
35.33
2002
14.69
Asset Management Ratios
A high turnover of assets means that the firm is able to use its assets efficiently to benefit the business. This has grave implications for stakeholders, as they would want the organisation’s assets to work for the business. The ratio used to determine the state of the asset management of Telecommunication Industry is:
Ø Fixed assets turnover
It is calculated for the Telecommunication Industry as follows:
Fixed Asset Turnover (FAT)
The ratio for fixed assets determines the Telecommunication Industry’s ability to use its fixed assets in the generation of profits on a certain period of time. The formula for FAT is:
Sales
FAT = x 100
Net Fixed Assets
FIXED ASSETS TURNOVER (FAT)
YEAR
%
2006
1.56
2005
1.87
2004
1.70
2003
1.43
2002
1.02
The higher the turnover ratio for fixed assets, the more attractive the organisation is to investors, because it shows that the organisation is able to effectively use its fixed assets to generate profits for the shareholders. A too-low fixed asset turnover indicates that there may be assets owned by the organisation which could to be sold due to their apparent uselessness. The table shows that as years progresses, Telecommunication Industry is able to continuously use its assets to the best interest of those involved.
Section 2: Survey Analysis
This part of the study discussed the findings based on the collated information on the survey conducted by the researcher. The general population for this study will be composed of randomly selected staff and managers of a certain Telecommunication business whose function is directly related to the organisation and implementation of the financial risks management strategy. The study intends to understand the current financial risks management approach of the said organisation.
A. Profile of the Respondents
This part of the chapter discussed the general profile of the respondents. The first to be taken into consideration is the age of the respondents. Followed by gender, marital status, and educational attainment. The responses are summarised in the next figures.
Exhibit 1. Age of the Respondents
Exhibit 1 shows the age range of the respondents. Sixty two percent (62%) of the respondents were 26-30 years old, showing that most of them were already considered as young adult. Eighteen percent (18%) of the respondents were between 31-35 years old. Six percent (6%) of the respondents were between 36-40 years old. Respondents’ aged 21-25 is 8% of the total respondents. On the other hand, 6% of the respondents are in the 40 and above status. Lastly, there is zero percent of respondents who are in the ages between 15-20 years old. The apparent diversity of the maturity of the respondents reflects several implications in the study’s findings. To illustrate, sixty two percent of the respondents stated that they are currently occupying a managerial position in the organisation. In relation of the age bracket of the respondents, the researcher could presume that in the said percentage, a considerable number could be among the young adult members of the population.
Exhibit 2. Gender of the Respondents
Exhibit 2 shows the respondents gender, the number of male respondents is about 62% while the female respondents is just 38%. It only shows that most of the respondents are male. Based on the collated questionnaires, 62% of the employees or respondents in the companies are male and the remaining 38% are composed of females. It doesn’t show an equal footing in terms of representation of gender regarding the perception of the respondents to the strategic management approach of their companies. The male respondents outnumber the female respondents by 24%.
Exhibit 3. Marital Status
Exhibit 3 shows the marital status of the respondents. 49 % of the total respondents were dominated by single and 45% of the respondents are married. As the figure was interpreted, there is a little percentage of respondents who are separated and widow. The figure shows that most of the respondents are both married and single. Likewise, the respondents were asked for their marital status and the report shows 49% of the respondents are single while the 45% are married. This is due to the large number of young adult in the sample as compared to those who are adult.
Exhibit 4. Educational Attainment of Respondents
Exhibit 4. Likewise, the respondents were asked for their educational attainment and the report shows 52 % of them are college graduate. The survey indicates that most of the respondents are college graduate that is engage to the study. The diversity of the population is further asserted when the respondents were asked regarding their professional history. This data illustrate the maturity of the respondents particularly in terms of experience. On the other hand, the apparent youthfulness of the respondents, provided by their age and their lack of professional experience could not be considered as deterrence to their responses considering that the researcher has made sure that the respondents have been connected with the organisation for at least twelve months. Moreover, there is a noticeable distinction of the respective positions of the younger generations in their respective perceptions towards the financial risks management in the said organisation.
B. Perception of the Respondents- Financial Risks Management Approach of Telecommunication Industry.
Credit:ivythesis.typepad.com
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