Paragon Information Systems

Individual Case Analysis Memorandum Paragon Information Systems BU481 – E Tabatha Dominguez Tuesday, November 29, 2011 PROBLEM AND RECOMMENDATION Paragon Information Systems is a wholly-owned subsidiary of Newtel Enterprises Limited, that operates in Atlantic Canada’s information systems industry. They meet their customers’ needs for information systems hardware and provide them with excellent customer service as well. There was recently a crisis as the founders of Paragon left the company, with the entire sales force, to start a new company in direct competition. Paragon was rebuilt and has become a stronger company since the founders left (EX1). Information systems hardware is a largely undifferentiated product so Paragon needs to deliver something unique and of value to customers. This can be done by adopting a focus differentiation strategy based on offering superior customer service (EX 8-9). Also, they will provide services that complement their hardware. This will allow Paragon to capitalize on their relationship with NewTel Information Systems (NIS) and become more profitable. ANALYSIS Focusing on the customer will create switching costs that will help to better protect Paragon’s position in the market (EX3,5). This will enable them to differentiate their company from competitors with a more sustainable method than simply competing on price. The new strategy will allow Paragon to fully realize the potential of their relationship with NIS (EX6-7). NIS has experience with selling services for information systems that Paragon can use to help their focus on services succeed. Working with an established organization like NIS will give them an opportunity to identify where there are gaps in their strategy and how they can best deal with those deficiencies. The services that accompany the hardware have much better margins than the hardware itself. Including services in the product market focus of Paragon will increase the profitability of the company and increase switching costs for clients (EX10). This change in focus will provide the management with the sustainable growth they wanted (EX2). Finally this alternative will properly align Paragon’s goals, product market focus and core activities with their now formalized value proposition (EX4). This will guide the actions of employees as it gives them direction for how they can provide value to the organization. IMPLEMENTATION The First thing Paragon needs to do is to meet with their employees and inform them that excellent customer service is how the company plans to differentiate themselves. Employees that will be trained to become capable of providing the services Paragon will now offer. The sales department will need to learn the specifics of the new services and will also receive customer service training. As the employees are being trained Collins will meet with NIS management and establish a formal relationship between the two subsidiaries. Paragon has moved from the crisis/reactive stage of the crisis curve to the anticipatory stage. With this in mind they should continue to use the participative leadership style they have been using so that they can gain acceptance for the changes that are planned more quickly. A more detailed outline of actions can be found in Exhibit 11. Exhibit 1 – Assessing Performance Customer Financial Innovation and Learning Internal Business processes Balanced Scorecard -Market share is increasing -Revenue has increased since the crisis -Investment in training tripled -Improved productivity -Had highest net income in company’s history Implications: Currently Paragon Information Systems is performing quite well. The changes they made have enabled them to change their position on the crisis curve from the reactive/crisis stage to the anticipatory stage. Exhibit 2 – Direction NEL Mission Statement – To provide sustained and consistent growth in shareholder value, through primary focus on telecommunications and related businesses in Atlantic Canada. Essential to our success will be exploitation of emerging competitive opportunities, responsive customer service and an effective, action-oriented management team. Implications: NewTel Enterprises Limited, which wholly owns Paragon, is committed to growing shareholder value and they believe providing excellent customer service is crucial to their success. Exhibit 3 – Atlantic Canada Information Technology Industry Analysis Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Intensity of Competitive Rivalry Porter’s Five Forces -Relatively low threat of substitute products -Computer hardware is necessary for an information system. -Barriers to entry are low, because of little government regulation and the lack of high upfront or fixed costs. Bargaining power of buyers is increasing -There are few competitors in the market place but more are entering -Buyers are happy to see more competition -Bargaining power of suppliers is unknown -level of intensity is unknown -Hardware is largely undifferentiated Implications: The information technology industry in Atlantic Canada is somewhat attractive. Hardware products are largely undifferentiated but excellent customer service can serve to establish switching costs. With the threat of new entrants and increasing bargaining p ower of buyers firms needs to offer more value than their competitors. Exhibit 4 – Business Strategy Business Strategy Triangle -The underlying strategy is to become more client-focused, and provide responsive customer service -They do not have a formal strategy in place Goals -Provide sustained and consistent growth in shareholder value -Create a more participative culture -Develop capabilities of employees Product Market -Systems integration, application development and computer networking Focus products and services in Atlantic Canada Core Activities -Selling hardware -Providing after sales support Implications: The goals, product market focus, and core activities are all aligned with providing the customer with quality service. However, Paragon has made no attempt to develop a formal strategy built around customer service. Value Proposition Exhibit 5 – Environment Analysis PEST Political Economics Unable to be determined. The strength of the economy can have a significant impact on the demand for computer hardware. Information systems do not directly generate revenue so if the economy is hurting a company’s ability to generate profits they may be hesitant to purchase an information system. If economic conditions are good then a company may be more likely to take this opportunity to develop an information system that can further improve their efficiency. Unable to be determined. Use of the internet is gaining momentum and will change the way that businesses operate. The way that customers communicate with businesses is moving from over the telephone to email. Companies need to be prepared for this change and be able to interact with customers through the medium they desire. Also, the technology that is sold in the industry is changing. The hardware is constantly improving, removing any advantage gained from superior technology quite rapidly. Social Technological Implications: With the threat of new competitors and lack of differentiation between products firms need to find another way to set themselves apart. They need to create value for their customers through means other than the technology they are selling. Exhibit 6 – Resource Analysis VRIO analysis – Relationship with NewTel Information Solutions (NIS) Value This relationship will allow Paragon knowledge on they can grow their service offering. NIS has experience providing services in the IS industry and can give advice to Paragon. Rarity No one else in the industry has a relationship with an established service provider like NIS. Inimitability Very difficult to establish a relationship with a company that may ultimately be a competitor. Organization There is no formal relationship between NIS and paragon. Implications: Paragon’s relationship with NIS can provide them with a competitive advantage. They just need to address the fact that there is no organization to capitalize on this resource. They need to have meetings with NIS or an intermediary that will allow them to communicate formally so they can share information and make sure they do not interfere with each other’s interests . Exhibit 7 – Strategy Analysis Strategy – Environment Linkage Strategy – Resources Linkage Strategy – Management Preferences Linkage Strategy – Organization Linkage Diamond-E Due to increased competition and a lack of differentiation in the hardware the industry sells Paragon needs to find a sustainable way to differentiate themselves. Paragon is not set up to capitalize on the possible benefits of sharing skills with another NEL subsidiary, NIS. NIS already has experience offering services for information systems in the Atlantic Canada market. Management at NEL is committed to revitalizing paragon. They are willing to give Collins whatever he determines is necessary to sustain growth of the company. They believe that excellent customer service is valuable enough to their customers, to provide a basis for which to set themselves apart from their competition. Paragon has identified training as a priority. They increased spending allocated to training to a level three times larger than before. Paragon needs their employees to have the technical knowledge and the proper communication skills to provide customer service that will differentiate the company. Implications: Paragon’s strategy, to differentiate themselves in Atlantic Canada with excellent customer service, is aligned with the needs of their environment and what management wants to do. However, there is a gap in the strategy-resources linkage as Paragon is not properly organized to exploit their relationship with NIS. They need a linkage or liaison with NIS so that they can fully utilize their knowledge of the service aspect of the information systems industry Exhibit 8 – Strategic Alternatives Alternative 1: Paragon will expand so as to offer services around their applications, differentiate themselves with superior customer service, capitalize on their relationship with NewTel Information Systems. Alternative 2: Paragon will expand its offering to include services with their applications, enter the New Brunswick and Quebec markets, differentiate themselves with superior customer service and restructure to a geographic organization. Exhibit 9 – Strategic Alternative Selection Alternative 1 -The market is large enough to sustain Paragon and is growing -Demand is steady -Low barriers to entry which can lead to more competitors -Low cost to serve customers -Low fixed costs Sustainability of -Utilizes customer service to create Competitive value for the customer Advantage? -Uses distinctive capabilities and processes to build strong customer and channel relationships Prospects for successful -Training has been increased to give implementation employees the customer service and technical skills required for this alternative -Consistent with managements goal of sustainable growth and responsive customer service (EX2) Are risks acceptable -A robust alternative -Assumes that Paragon is capable of providing services around their information systems hardware. Tests How attractive is the market? Alternative 2 -Larger market than alt 1 -Demand is steady -Low barriers to entry which can lead to more competitors -Low cost to serve customers -Low fixed costs -Utilizes customer service to create value for the customer -Uses distinctive capabilities and processes to build strong customer and channel relationships -Employees are capable of providing the customer service required -Organization has no experience in the Quebec and New Brunswick markets Will the forecast financial results be achieved and increase shareholder value? -Profitability of Paragon is expected to increase so even if revenues don’t meet expectations alternative will remain profitable. -A fragile alternative -assumes that Paragon can differentiate themselves in new markets -Assumes Paragon can withstand retaliation from competitors in new markets. Alternative is more dependent on reaching expected revenues -If targets are not met alternative will be less profitable Implications: Alternative 1 is a superio r alternative. They both have attractive markets and perceived sustainable competitive advantages. Alternative 2 offers a larger payoff but is much riskier. It assumes that paragon will be able to enter a new market and compete without any experience in those markets. Alternative one is more conservative but still offers growth and profitable returns with minimal risk. Exhibit 10 – Financial Projections Paragon Information Systems Projected Income Statement Years ended 1998, 1999, 2000 (in thousands) 1998 1999 $16,299 $17,927 15,729 17,255 $570 $672 Revenue Total Expenses Net Income 2000 $19,720 18,931 $789 Implications: This projection is based on revenues increasing 10% annually and net income as a percentage of revenue increasing from 3. 5% in 1998, to 3. 75% in 1999, and 4% in 2000. The increase in profitability occurs because the services that Paragon offers have a much higher margin. As services become a larger part of Paragons revenues, they will become more profitable. The increase in profitability from 1997 to 1998 is less than other periods to account for the loss of productivity when employees are being trained. Exhibit 11 – Strategy Implementation Immediate 3 Months 6 Months Long Term Hold a meeting with employees to inform them of the changes to the strategy and product offering -establish a formal relationship with NIS -train employees to properly provide services that will be offered. -Sales Department: learn about the services so they can -Sales Department: start pushing the service offerings -Meet with cl ients to discuss how Paragon can provide better service and offer more value -Meet with employees to discuss the progress of the new strategy and determine if any changes need to be made -Develop new customer service objectives with the information that was obtained from clients -Meet with employees to discuss the progress of the new strategy and determine if any changes need to be made -Evaluate the success of the strategy and make changes as necessary