Executone Information Systems, based in Milord, Connecticut, which designed and marketed telecommunications products for small-and medium-sized businesses, has become a major telecommunication company competing with AT&T and Northern Telecom since 1988. Because of economic recession in 1993, many companies had to change their product strategy to overcome this unbreakable situation. Not only the largest company in this business area such as AT&T decided to lower price and revenues, but also Executone reduced its profit margin since it had recently overhauled healthcare communication system that was malfunctioning after installation. With this current situation, even though Executone showed slightly incremental Return On Sale from 0.4% in 1991 to 1.2% in 1992 in its Annual Report, this was not yet its great appreciation. After facing this crisis, Alan Kessman, the president of Executone Information Systems, questions its future business that it would be able to conquer with its rivals in the market. To achieve the highest degree of success in this industry, Kessman wonders whether any mid-course adjustment should be implemented.
uAlternatives
1. Continuing every product with more advertisement and introducing promotion campaigns
2.Dropping non-system telephone hardware
3.Dropping healthcare system and making some changes in its organization
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uAnalysis of each option
Continuing every product line on the market by putting more advertisement and introducing promotion campaigns is not the best solution in helping Executone to become successful in this situation since there were some flaws from this approach. With adopting its strategy, the company could gain more sales, resulting in increase in return on investors. However, this approach would definitely not only cost the company a huge amount of expense but also impact on its overall profit. Furthermore, by implementing all of current company products, the total expense was about 98.5% of total sales. Then, income before taxes for shareholders was only 1.5%. This number was fairly low (See Appendix A).
Therefore, the critical issue at this time was operating decision that could control cost of good sold, sales, general, and administrative expenses (SG&A), as well as other expenses, not promotion strategy. To complicate the matter, the company might not have enough money to invest in any sales or marketing strategies because its income before taxes was practically small. Therefore, in this situation, managing cost would be considered as one of the most important factors that could increase bottom line profit and equity investorsf capital. These points support that continuing every product line on the market by putting more advertisement and introducing promotion campaigns is not the best solution in helping Executone to become successful in this situation.
Reducing product line by dropping non-system telephone products looks like another good alternative for Executone since these items had a positively high cost of good sold and did not generate a large amount of return for investors. However, according to Harvard Business School (1994), even though the company did not generate a large amount of return in 1992, its sales, 12.7%, was the second highest revenue as percent of total sales (p15).
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Therefore, with dropping these products, the company could lose much money, which potentially impact to return on sales, -0.6% compare to 1.2% (See Appendix B).
Therefore, the company did not have any cost in producing and carrying these items (See Appendix B: SG&A very slightly decreases when drop these products).
These points support that reducing product line by dropping non-system telephone products is also not the best solution for Executone at this time.
uRecommendation
With this current situation, the most effective approach for Executone is dropping its healthcare system and making some changes inside its organization. In order to gain competitive advantages and stand out of the group as the successful company in this business arena, Executone should create competitive advantage with providing differentiate products and services for its customers. First, the company should concern about its reputation inside the telephone market. Even though the healthcare system was far superior to other options, it had serious malfunctions problems. In another words, the company should consider whether it was worthwhile to trade-off some revenue from healthcare system with its creditability and reputation in this industry. Second, Porter declares, gA company can outperform rivals only if it can establish a different that it can preserveh (qtd. in Porter, 1996, p.62).
Therefore, the company should create competitive advantage over its competitors using by differentiate strategies. With dropping its healthcare system, the company could define the telephone system as its core product because it would gain competitive advantage in this productfs category in spite of not the first mover in this market. Moreover, because the company spent a half of the total R&D expenses on healthcare system at that time, this process could significantly reduce R&D, SG&A expenses, resulting in higher return on sales from 1.2% to 2.3% in 1992 (See Appendix C).
Furthermore, the company could use a part of R&D expenses that used in its healthcare system before in order to differentiate other products and services. With dropping its healthcare system, the company also could have an extra resource that used to be responsible for those tasks that could use in other portions. Capitalizing on competitorsf weaknesses is another essential approach. For example, AT&T weakness was clearly not only its average 8% higher price of all products but also its requirement to change long-distance rate rather than other competitors. Therefore, Executone should choose a price strategy using by decreasing its long distance rate to attract AT&T clients. Finally, as the result of its money saving from R&D expenses, the company could invest the money in educating its customer using by having higher performance of sale representatives. In another words, the company should hire technician sale people who could provide product information instead of typical sales representatives in order to increase customer satisfaction. To change its organization structure, it should adjust some approaches that increase sales volume by enhancing customerfs perception. These strategies enable Executone to strengthen not only its financial position, but also it competitive advantage in Telecommunication industry. Therefore, we must conclude that the best option for Executone is dropping its healthcare system and making some changes in its organization.
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