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Verizon Communications - 2004

Melissa Birch: Francis Marion University Forest David: Francis Marion University

A.

Case Abstract
The Verizon case is designed for use in business policy or strategic management courses at both the graduate and undergraduate levels. The case provides vision/mission data, competitive information, and focuses on Verizons battle with Nextel for market share. The case time setting is 2003/2004. Verizon Communications Inc. is a provider of communications services with four operating segments: Domestic Telecom, Domestic Wireless, Information Services and International. Domestic Telecom services principally represent Verizon's telephone operations that provide local telephone services in 29 states and the District of Columbia. Domestic Wireless products and services include wireless voice and data services and equipment sales across the United States. The Information Services segment encompasses Verizons domestic and international publishing businesses, including print SuperPages and electronic SuperPages.com directories, as well as Website creation and other electronic commerce services. This segment has operations principally in North America and Latin America. The International segment has wireline and wireless communications operations and investments primarily in the Americas, as well as investments in Europe.

B.

Vision Statement (proposed)


At Verizon, our vision is to be the market leader in delivering innovative, integrated communications solutions to customers at home, at work and on the go.

C.

Mission Statement (proposed)


At Verizon, our mission is to be the market leader in delivering innovative, integrated communications solutions (2) to customers at home, at work and on the go. The more people connected to a network, the more valuable it is to users. Thats the idea that underlies our business. Its also the philosophy behind our commitment to our communities (8). Our aim is to mobilize and empower the millions of individuals and organizations (1)employees, retirees, customers and nonprofits that comprise the Verizon community, putting the tools for progress into the hands of people who can make a difference on the local level. We

promote employee volunteerism (9) through matching gift programs that recognize contributions of money and time. And we are helping build a strong and lasting infrastructure for progress by making sure people have the fundamental skills (5)like literacy and access to technology (4)to succeed in the digital era. 1. 2. 3. 4. 5. 6. 7. 8. 9. Customers Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees

D.

External Audit

Opportunities 1. 2. 3. 4. 5. 141 million possible customers in Europe, UK, and Germany Strengthening foreign currencies vs. dollar- Euro advantages Increased usage of wireless services Small wireless providers are consolidating with larger providers due to increased competition Increased desire for high-speed internet service

Threats 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. New regulatory complaints (new phone # portability) Rising costs of healthcare Global unrest- economic monetary and financial Consumer privacy rights under attack Weak consumer spending Decreasing demand for traditional voice lines and fixed lines Increasing overlap of telecommunication territories Increasing competition for providers of web search directories Increasing providers of wireless services Brand recognition

Competitive Profile Matrix


Critical Success Factors Market Share Price Financial Position Consumer Loyalty Brand Awareness Total Weight 0.10 0.25 0.20 0.30 0.15 1.00 Verizon Rating Weighted Score 4 0.40 3 0.75 2 0.40 2 0.40 4 0.60 2.55 Alltel Rating Weighted Score 2 0.20 4 1.00 3 0.60 3 0.90 3 0.45 3.15 SBC Rating Weighted Score 3 0.30 2 0.50 4 0.80 3 0.90 3 0.45 2.95

EFE Matrix
Opportunities 141 million possible customers in Europe, UK, and Germany Strengthening foreign currencies vs. dollar- Euro advantages Increased usage of wireless services Small wireless providers are consolidating with larger providers due to increased competition 5. Increased desire for high-speed internet service 1. 2. 3. 4. Weight Rating Weighted Score 0.06 1 0.06 0.06 1 0.06 0.02 4 0.08 0.06 0.10 2 4 0.12 0.40

Threats 1. New regulatory complaints (new phone # portability) 2. Rising costs of healthcare 3. Global unrest- economic monetary and financial 4. Consumer privacy rights under attack 5. Weak consumer spending 6. Decreasing demand for traditional voice lines and fixed lines 7. Increasing overlap of telecommunication territories 8. Increasing competition for providers of web search directories 9. Increasing providers of wireless services 10. Brand recognition TOTALS

Weight Rating Weighted Score 0.10 2 0.20 0.07 2 0.14 0.12 2 0.24 0.02 4 0.08 0.10 2 0.20 0.05 4 0.20 0.06 3 0.18 0.02 2 0.04 0.06 4 0.24 0.10 4 0.40 1.00 2.64

E.

Internal Audit
Financial Ratio Analysis (March, 2004)
Verizon Industry 27.90 36.84 10.16 1.28 1.93 2.59 4.36 6.92 16.18 38.23 4.20 2.34 -0.87 33.73 2.36 3.55 12.49 -17.21 -4.84 -1.81 -2.37 Sector 28.90 48.47 16.09 0.96 2.80 3.89 6.60 17.03 33.11 50.48 2.14 1.43 -0.89 15.54 14.39 15.92 17.25 15.43 16.37 15.23 2.61 S&P 500 24.01 45.41 16.26 1.00 3.33 4.29 7.56 17.32 28.97 64.19 2.04 1.48 6.48 26.78 13.40 11.90 9.30 28.69 21.92 12.15 4.06

Valuation Ratios P/E Ratio (TTM) P/E High - Last 5 Yrs P/E Low - Last 5 Yrs Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions Dividends Dividend Yield Dividend Yield - 5 Yr Avg Dividend 5 Yr Growth Rate Payout Ratio (TTM) Growth Rates % Sales (MRQ) vs Qtr 1 Yr Ago Sales (TTM) vs TTM 1 Yr Ago Sales - 5 Yr Growth Rate EPS (MRQ) vs Qtr 1 Yr Ago EPS (TTM) vs TTM 1 Yr Ago EPS - 5 Yr Growth Rate Capital Spending - 5 Yr Growth Rate Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM)

28.99 NA 9.04 0.97 1.50 3.03 N/A 5.94 16.00 54.54 4.21 3.40 0.00 120.60 0.72 0.67 3.49 N/A -25.06 -7.98 -1.50

0.48 0.69 1.18 1.36 2.68

1.01 1.22 0.84 0.95 3.18

0.93 1.47 0.74 0.82 7.84

1.26 1.76 0.68 0.85 11.86

Profitability Ratios % Gross Margin (TTM) Gross Margin - 5 Yr Avg EBITD Margin (TTM) EBITD - 5 Yr Avg Operating Margin (TTM) Operating Margin - 5 Yr Avg Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr Avg Net Profit Margin (TTM) Net Profit Margin - 5 Yr Avg Effective Tax Rate (TTM) Effective Tax Rate - 5 Yr Avg Management Effectiveness % Return on Assets (TTM) Return on Assets - 5 Yr Avg Return on Investment (TTM) Return on Investment - 5 Yr Avg Return on Equity (TTM) Return on Equity - 5 Yr Avg Efficiency Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM www.investor.stockpoint.com

67.85 57.39 31.16 39.98 11.06 20.77 7.03 14.12 5.18 8.79 26.30 41.35 2.09 4.17 2.51 5.37 10.25 19.36 333,589 17,277 6.28 15.92 0.40

60.97 54.17 31.75 30.70 12.99 13.72 10.68 10.56 7.03 5.18 29.08 35.99 3.21 2.87 3.84 3.70 13.28 9.79 405,314 102,467 7.39 21.63 0.47

42.84 42.06 22.32 21.97 12.90 11.21 10.37 11.77 7.54 7.62 32.18 36.04 5.91 5.49 7.98 7.59 13.51 13.18 479,338 90,606 17.23 17.53 1.17

47.32 47.01 20.79 20.82 20.33 18.35 17.27 17.54 13.12 11.59 31.31 34.20 6.40 6.79 9.97 10.93 18.71 19.22 622,866 81,707 9.76 10.46 0.92

Company Worth Analysis (year-end 2001/2002/2003 average) Stockholders Equity Net Income x 5 (Share Price/EPS (4/1/04)) x Net Income Number of Shares Outstanding (4/1/04) x Share Price Method Average $33,000,000,000 $26,815,000,000 $247,966,666,667 $119,084,716,000 $106,716,595,667

Strengths 1. 2. 3. 4. 5. 6. Top wireless provider in the U.S. serving 49 of the top 50 markets High-speed data network in all major markets Largest provider of local, long distance, data, and broadband services in 2/3 of the top 100 markets in the U.S. Leading print and on-line directory publisher with 2100 in U.S. and 13 other countries Verizon invested $12 billion in 2002 in 400,000 miles of fiber-optic cable. Marketing campaign brand awareness

Weaknesses 1. 2. 3. $49 billion in long term debt Lack of international presence Revenue only increased 4 percent since year end 2000.

IFE Matrix
Strengths Weight Rating Weighted Score 1. Top wireless provider in the U.S. serving 49 of the top 50 0.17 4 0.68 markets 2. High-speed data network in all major markets 0.13 3 0.39 3. Largest provider of local, long distance, data, and broadband 0.10 4 0.40 services in 2/3 of the top 100 markets in the U.S. 4. Leading print and on-line directory publisher with 2100 in U.S. 0.10 3 0.30 and 13 other countries 5. Verizon invested $12 billion in 2002 in 400,000 miles of fiber-optic 0.15 4 0.60 cable. 6. Marketing campaign brand awareness 0.10 4 0.40 Weaknesses 1. $49 billion in long term debt 2. Lack of international presence 3. Revenue only increased 4 percent since year end 2000. Weight Rating Weighted Score 0.10 1 0.10 0.05 2 0.10 0.10 1 0.10

TOTALS

1.00

3.07

E.

SWOT Matrix
Strengths Weaknesses

1. Top wireless provider in the U.S. serving 49 of the top 50 markets 2. High-speed data network in all major markets

1. 49 billion dollars in long term debt 2. Lack of international presence


3. Revenue only increased 4

3. Largest provider of local, long distance, data, and broadband services in 2/3 of the top 100 markets in the U.S. 4. Leading print and on-line directory publisher with 2100 in U.S. and 13 other countries 5. Verizon invested 12 billion in 2002 in 400,000 miles of fiber-optic cable. 6. Marketing campaign brand awareness
Opportunities

percent since year end 2000.

1. 141 million possible investors in Europe, UK, and Germany 2. Strengthening foreign currencies vs dollar- Euro advantages 3. Increased usage in wireless services 4. Small wireless providers are consolidating with larger providers due to increased competition
5. Increased desire for high-speed internet service Threats

S-O Strategies 1. Expand wireless services into Europe, UK and/or Germany (S1, O1, O3) 2. Expand high speed internet service in Europe, UK and/or Germany (S2,O5) 3. Acquire small domestic wireless providers such as Powertel or Aerial (S1, O4) 4. Invest capital into fiber optic cable to compete with cable companies. (S5, O5)

W-O Strategies 1. Purchase international wireless providers such as MMO2 (W2, O4) 2. Offer services to people in Europe to increase revenue due to the difference in foreign currency (W1, O2)

1. New regulatory complaints (new phone # portability) 2. Rising costs of healthcare 3. Global unrest- economic monetary and financial 4. Consumer privacy rights being attacked 5. Weak Consumer spending 6. Decreasing demand for traditional voice lines and fixed lines 7. Increasing overlap of telecommunication territories 8. Increasing competition for providers of web search directories 9. Increasing providers of wireless services 10. Brand recognition 11. Customer Loyalty 12. Wireless carriers moving

S-T Strategies W-T Strategies 1. Enter into a joint venture with 1. Expand globally in Europe (W2, MCI to offer a package deal T7) (S1, T12) 2. Liquidate the 2. Proceed with legal battles to Telecommunications Services serve local markets to increase such as fixed lines and traditional traditional voice and fixed lines. lines business to reduce long(S3, T7) term debt. (W1, T6)

toward packages

F.

SPACE Matrix
+4 -2 5 -1 +1 worst to + 6 best +1 worst to +6 best 6 best to 1 worst -6 worst to 1 best Y axis: 4 + (-2) = 2

Y axis Financial strength Environmental stability External strategic position Industry strength Competitive advantage

X axis: 5 + (-1) = 4

Conservative

FS

Aggressive

CA

IS

Defensive

ES

Competitive

G.

Grand Strategy Matrix


RAPID MARKET GROWTH Quadrant II Quadrant I

Verizon

WEAK COMPETITIVE POSITION

STRONG COMPETITIVE POSITION

Quadrant III SLOW MARKET GROWTH 1. Market Development 2. Market Penetration 3. Product development 4. Forward Integration 5. Backward Integration 6. Horizontal Integration 7. Concentric diversification

Quadrant IV

H.

The Internal-External (IE) Matrix

The Total IFE Weighted Scores


Strong 4.0 to 3.0 4.0 High I Average 2.99 to 2.0 II Weak 1.99 to 1.0 III

3.0

IV

VI

The EFE Total Medium Weighted Scores

30 %

30 % 70 %

Wireless

Verizon
Telecom 2.0 VII

70 %

VIII

IX

Low 1.0

I.

BCG Matrix

10

High 1.0 High +20 Star

Relative Market Share Position Medium .50 Question Mark Wireless

Low 0.0

30 %

70 %

Industry Sales Growth Medium 0 Rate (Percentage)

Cash Cow

Dog

Telecom

30%

70%

Low

-20

J.

Matrix Analysis and SWOT Summary


IE X X X X X X SPACE X X X X X X X X X GRAND X X X X X X X COUNT 3 3 3 3 3 3 1 2 1 0 0 0 0

Alternative Strategies Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation

K.

QSPM

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Enter into a joint venture Invest capital with MCI to in fiber optic offer a cable bundled wireless
1. 2. 3. 4. 5. Opportunities 141 million possible customers in Europe, UK, and Germany Strengthening foreign currencies vs. dollar- Euro advantages Increased usage of wireless services Small wireless providers are consolidating with larger providers due to increased competition Increased desire for high-speed internet service Threats New regulatory complaints (new phone # portability) Rising costs of healthcare Global unrest- economic monetary and financial Consumer privacy rights under attack Weak consumer spending Decreasing demand for traditional voice lines and fixed lines Increasing overlap of telecommunication territories Increasing competition for providers of web search directories Increasing providers of wireless services Brand recognition Weight 0.06 0.06 0.02 0.06 0.10 Weight 0.10 0.07 0.12 0.02 0.10 0.05 0.06 0.02 0.06 0.10 AS 2 0 4 0 0 AS 0 0 0 3 0 0 0 2 0 0 TAS 0.12 0.00 0.08 0.00 0.00 TAS 0.00 0.00 0.00 0.06 0.00 0.00 0.00 0.04 0.00 0.00 AS 4 0 2 0 0 AS 0 0 0 2 0 0 0 3 0 0 TAS 0.24 0.00 0.04 0.00 0.00 TAS 0.00 0.00 0.00 0.04 0.00 0.00 0.00 0.06 0.00 0.00

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Enter into a joint Invest capital in venture with MCI fiber optic cable to offer a bundled wireless pack age Strengths Weight Top wireless provider in the U.S. serving 49 of the top 50 0.17 markets High-speed data network in all major markets 0.13 Largest provider of local, long distance, data, and broadband 0.10 services in 2/3 of the top 100 markets in the U.S. Leading print and on-line directory publisher with 2100 in U.S. 0.10 and 13 other countries Verizon invested $12 billion in 2002 in 400,000 miles of fiber-optic 0.15 cable. Marketing campaign brand awarenes s 0.10 AS 2 2 2 4 4 2 TAS 0.34 0.26 0.20 0.40 0.60 0.20 AS 3 4 3 2 2 3 TAS 0.51 0.52 0.30 0.20 0.30 0.30

1. 2. 3. 4. 5. 6.

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1. 2. 3.

Weaknesses $49 billion in long term debt Lack of international presence Revenue only increased 4 percent since year end 2000.

Weight 0.10 0.05 0.10

AS 4 3 1

TAS 0.40 0.15 0.10 2.95

AS 3 4 2

TAS 0.30 0.20 0.20 3.21

TOTALS

M.

EPS/EBIT Analysis
1,000M 5% 35% $25 2,765M
Recession 5,000,000,000 50,000,000 4,950,000,000 1,732,500,000 3,217,500,000 2,765,000,000 1.16 Debt Financing Normal 10,000,000,000 50,000,000 9,950,000,000 3,482,500,000 6,467,500,000 2,765,000,000 2.34 Boom 15,000,000,000 50,000,000 14,950,000,000 5,232,500,000 9,717,500,000 2,765,000,000 3.51

Amount Needed Interest Tax Rate Share Price Shares Outstanding

Common Stock Financing Recession Normal Boom EBIT 5,000,000,000 10,000,000,000 15,000,000,000 Interest 0 0 0 EBT 5,000,000,000 10,000,000,000 15,000,000,000 Taxes 1,750,000,000 3,500,000,000 5,250,000,000 EAT 3,250,000,000 6,500,000,000 9,750,000,000 # Shares 2,805,000,000 2,805,000,000 2,805,000,000 EPS 1.16 2.32 3.48

70 Percent Stock - 30 Percent Debt Recession Normal Boom EBIT 5,000,000,000 10,000,000,000 15,000,000,000 Interest 15,000,000 15,000,000 15,000,000 EBT 4,985,000,000 9,985,000,000 14,985,000,000 Taxes 1,744,750,000 3,494,750,000 5,244,750,000 EAT 3,240,250,000 6,490,250,000 9,740,250,000 # Shares 2,793,000,000 2,793,000,000 2,793,000,000 EPS 1.16 2.32 3.49

70 Percent Debt - 30 Percent Stock Recession Normal Boom 5,000,000,000 10,000,000,000 15,000,000,000 35,000,000 35,000,000 35,000,000 4,965,000,000 9,965,000,000 14,965,000,000 1,737,750,000 3,487,750,000 5,237,750,000 3,227,250,000 6,477,250,000 9,727,250,000 2,777,000,000 2,777,000,000 2,777,000,000 1.16 2.33 3.50

N.

Epilogue
On April 24, 2004, the National Latino, Lesbian, Gay, Bisexual, and Transgender Organization (LLEGO) presented Verizon with its highest honor, the Plumed

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Warrior Premio Visionario, or Visionary, Award. Verizon was honored for its corporate commitment to diversity and workplace equality. Following the lead of Verizon CEO Ivan Seidenberg, the companys employees feel valued and respected for their differences. Verizon provides compensation and benefits, including same-sex domestic partner benefits, to attract and retain the best and brightest work force. For example, same-sex domestic partners and their eligible dependents receive medical, dental and vision coverage and dependent life insurance. There are ten employee resource groups within Verizon, including the Gay, Lesbian, Bisexual & Transgender Employees of Verizon and Their Allies (GLOBE) and the Hispanic Support Organization. These groups promote personal and professional growth for employees with common interests, assist with strategic business goals such as employee development, diversity awareness and recruitment, and volunteer in the community. There are more than 12,000 employee resource group members at Verizon facilities around the country. Also in April 2004, Verizon announced that the company's consolidated and online billing options will reduce the amount of paper used for customer bills by more than 550 million sheets per year, preserving more than 7,500 trees annually. In addition, Verizons consolidated and online billing saves more than 3.6 million kilowatt hours of electricity and more than 165,000 pounds of ink each year. Verizon Wireless has rolled out consolidated billing across the country, using about 40 percent less paper to produce customers' monthly billing statements. Customers are still able to view itemized charges to their bills by logging onto My Account on the Verizon Wireless Web site, www.verizonwireless.com. Verizon also has a successful HopeLine (SM) phone recycling program. Verizon Wireless' HopeLine program is one of the industry's longest recycling efforts and has collected more than 2 million phones to date -- diverting approximately 400 tons of material from landfills. The national HopeLine program distributes previously owned wireless phones to victims of domestic violence, supports nonprofit domestic violence advocacy groups and provides an environmentally safe method of recycling phones. Donations are accepted at all 1,200-plus Verizon Wireless Communications Stores across the country.

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