Strategic management: Competitiveness & globalization

Strategic management: Competitiveness & globalization

College of Doctoral Studies

DBA-835 Integrated Case Study

In this course, you will interact with Part III of a multi-year, integrated case study experience. This part of the case study focuses on economic issues and related ethical decisions.

The Case

Purple Cloud was founded 15 years ago and has grown from a start-up security company to a small, but well-respected competitor in the rapidly growing security sector. The founder, A. Nathan Tecnoti, is a visionary leader who forecasted the need to develop robust software products that protected both individuals and companies. As the Internet grew, so did Tecnoti’s business. He innovated rapidly, but Tecnoti could not keep up with the ever-changing technologies and was often outmaneuvered by larger companies who had larger and more proficient technical staffs and marketing budgets. Tecnoti began seeking a way to accelerate product development so he could increase market share and take advantage of new market opportunities. It is for this reason that Tecnoti developed an acquisition strategy to rapidly acquire companies that offered promising security technologies.

Invoking that strategy, Purple Cloud acquired ABCTech during a positive economic outlook. Video press coverage of this event can be viewed at https://lc.gcumedia.com/mgt805/business-acquisition-press-release-video/v1.1/. The ABCTech product acquired by Purple Cloud was completely different than any other software security application offered in the market. The product offered an elegant solution implemented with a single update to the user’s computer operating system thereby bypassing the need to distribute daily updates to address new security threats. The simplicity of the solution circumvented both the necessity to acquire capital to build or acquire extensive infrastructure and the requisite addition of high-priced support staff. Nonetheless, the company now has approximately 200 employees, about 40% of which are full-time.

Purple Cloud has survived the economic downturn of a few years ago and, in fact, experienced a resurgence on the cybersecurity front since many people feared the vulnerability of personal information located online. Despite transforming this $40 million company into a $100 million organization with a current stock price of 71, the executives still feel it is necessary to safeguard their long-term investment as they look toward a more sustainable future. The uncertainty surrounding how Purple Cloud will approach sustainability has led Chris Christianson, one of the co-founders of ABCTech, to have his company shares bought out stating that he is uncomfortable with the current forecasting. When asked about his departure, Christianson said,

It has been a long time coming. I was new to running a business, and as long as I was able to see where the company was going and growing, I was willing to stay. Recently, it just was not fun for me anymore. So, I am stepping down to allow the Purple Cloud leadership to replace me with someone who can help take them to the next level.

Tecnoti, the CEO of Purple Cloud, and Thunder Thompson, co-founder of ABCTech and newly appointed chief information officer (CIO), released this joint statement:

We are saddened by the loss of our colleague, though we know he is going to move on and do what he loves to do. We know he will still be watching as we work on a more sustainable future.

In its quest for sustainability, Purple Cloud is interested in expanding its operations. It currently is doing well in both domestic and international sales. In essence, it is acting like an international organization, exporting its product solely via computer downloads. However, customer service costs are rising in the United States as the increased need for 24/7/365 support is needed to serve its global clientele. The addition of the second and third shifts is impacting profits.

Concerns exist in the cybersecurity market as well. First, there is increased speculation that a company has developed toys with embedded learning software that can be used as spying devices for companies to gain a competitive advantage. However, given Purple Cloud’s acquisition strategy, this may provide an opportunity for Purple Cloud to acquire a cyber security software and then use its existing technologies necessary to implant the software. This would allow them to become the leader of cyber security products that detect this type of spying and ultimately put the world at ease from cyber spying while remaining true to its strategy and using its existing technology.

The second concern is the current flux of United States international policies. For decades, the United States has played the role of world police force, but there is a current trend to focus more on national versus international concerns. Trade agreements such as NAFTA which have been in place for decades are being questioned, and higher tariffs may be on the horizon in order to bring manufacturing jobs back to the United States from countries such as China and India.

However, corporate tax rates in the United States are currently in flux and could turn favorably for Purple Cloud. Thus, Purple Cloud’s leaders are considering whether this is enough to support the desired growth rate or whether going international is the right option.

With the desire for continued growth, Purple Cloud needs to review its options, and the executives have hired a global consultant to provide them with potential global growth scenarios. Purple Cloud is advised it first needs to determine whether to remain just an exporter or to explore other international modes. The consultant, utilizing the work of Hitt, Ireland, & Hoskisson (2013), is providing the following modes of entry as a reference:

· Licensing – An agreement is formed that allows a foreign company to purchase the right to manufacture and sell a firm’s products within a host country’s market or a set of host countries’ markets.

· Strategic Alliance – A firm collaborating with another company in a different setting in order to enter one or more international markets.

· Cross-Border Acquisition – A firm from one country acquires a stake in or purchases all of a firm located in another country. A related strategy, domestic acquisition, was used earlier in Purple Cloud’s development.

· Greenfield Venture – A firm invests directly in another country or market by establishing a new wholly owned subsidiary, which is 100% owned by the parent company.

Second, the consultant worked drew on the work of Iwan (2007) and advised Purple Cloud executives of three possible types of global organizations Purple Cloud could become including the following:

· Multinational companies have investments in other countries but do not have coordinated product offerings in each country. These companies tend to be focused on adapting their products and service to each individual local market.

· Global companies have invested in and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. Generally, one corporate office is responsible for designing and implementing a global strategy that tends to emphasize volume, cost management, and efficiency.

· Transnational companies are much more complex organizations. They have invested in foreign operations and have a central corporate facility, but they delegate decision-making, research and development, and marketing powers to each individual foreign market.

Given the goals of Purple Cloud, the consultant has presented the following three expansion countries for the executives to review further:

· China – China is an autocratic regime following export oriented growth strategy. China has the biggest military budget in the world. Together with India, China did $73 billion in trade last year. China has become known as a leader in manufacturing, and pride itself on quality at a good price.

· India – India is a democracy following inclusive growth strategy. India is nonaligned and is a self-reliant nation. No third country, directions, or orders influence India’s behavior. They have been known previously for customer service contracts and software development.

· Mexico – Mexico is up-and-coming. They have signed 44 free trade agreements, more than any other country in the world. This is more than twice as many free trade agreements as China and 4 times more than Brazil. Mexico has increased the number of engineers and skilled laborers graduating from its schools. Today, Mexico is exporting more manufactured products then the rest of Latin America combined. For example, Mexico is a base to supply some Fiat 500s to the Chinese market. There are also several technology start-ups emerging up in Mexico. As the population continues to shift, language needs are also shifting.

As a tool for researching, the consultant has recommended that Purple Cloud executives access globalEdge at https://globaledge.msu.edu/. This is a free database of international business information, and the consultant has indicated that this is an excellent resource for executives considering the types of decisions currently faced by Purple Cloud.

The consultant has also mentioned the need for Purple Cloud to explore its current corporate social responsibility policy and consider a change of philosophy to more closely align with the notion of conscious capitalism.

References

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2013). Strategic management: Competitiveness & globalization (10th edition). Mason, OH: South-Western.

Iwan, L. (2007, June 18). Differences between a global, transnational, international, and multinational company [Web log comment]. Retrieved from https://leeiwan.wordpress.com/2007/06/18/difference-between-a-global-transnational-international-and-multinational-company/

Questions to Consider

What mode of entry and organizational type should Purple Cloud adopt to assure its future sustainability if it decides to move to become a global corporation? Why?

Into which country or countries should Purple Cloud pursue expanding its operations? Why?

What ethical considerations arise from the response options described? How should Purple Cloud leaders manage those considerations?

Background Information

Mission, Vision, Core Values

Mission

Purple Cloud exists to provide quality protection products to ensure client online security.

Vision

Safe movement in the cloud for all applications.

Core Values

Security

Honesty

Reliability

Teamwork

Efficiency

Member Biographies

Purple Cloud

A. Nathan Tecnoti, Founder and CEO

Tecnoti is a visionary. He started his company to help protect the privacy of individuals and small companies. With this focus, he has built a successful small business. However, with just $50M in revenue, he is often out-maneuvered by larger companies who have the marketing resources and technology to block his expansion into this market. Tecnoti’s experience with previous organizations allowed him to establish quick responses to market situations, improve customer relevance, and create better partnerships in the digital industry, especially in cloud-based models.

With a B.S. in business and an M.S in information technology, Tecnoti brings to the company significant experience working globally as well as a strong IT background. In addition, Tecnoti has extensive experience in the industry prior to Purple Cloud where he worked in the roles of senior vice president of technology for two other large corporations. He was responsible for growth, marketing, and the companies’ office operations. Tecnoti also has experience in licensing of software and managing sales in the United States and Europe for previous corporations.

Thunder Thompson, Chief Information Officer (CIO)

Thompson is co-founder of ABCTech. As the CEO of ABCTech, Thompson focuses on the company’s growth and technology strategy. Thompson has a B.S. degree in computer programming and a passion for creating safe data products and applications. He brings more than 10 years of experience in enterprise IT software, data analytics, security, and knowledge of cybercrime. Thompson also has experience in technical operations and cloud and data platforms. He is new to being an entrepreneur, but is excited at the prospects of making a difference in the technology world with his company’s safe data products. Thompson believes in ABCTech’s vision: A world protected from cybercrime and personal security breaches.

Maria Preston, Chief Operational Officer (COO)

Preston is responsible for driving profitable growth and creating operational excellence. She has an excellent track record of innovation and creating excellence in the operational division. Preston oversees the national and global supply chain of the company. Her innovative approach to problem solving has put her at the top of her industry in her previous organizations and now with Purple Cloud where she is charge with innovating operational processes for maximum efficiency.

Preston’s previous experience shows she has held leadership roles in IT and manufacturing. She has worked with a variety of companies in Silicon Valley and is known for creating partnerships that reshape and create cross-functionality for the organization. Preston holds a B.A. in economics and an M.B.A. in business administration.

Will Taylor, Chief Financial Officer (CFO)

Taylor comes to Purple Cloud with an abundance of experience in the financial strategy and operations of IT companies. He is tasked with creating value for shareholders, upholding a balanced portfolio, and leading the growth initiatives of the company. He believes integrity is critical in creating a successful financial strategy.

Taylor’s previous experience comes from working in business, technology, operations, and finance for companies in Silicon Valley. He has had experience partnering with organizations to focus on long-range strategic planning, forecasting, and working with budgets as high as $50M. Taylor has a B.S. in finance and an M.S. in business with a specialization in finance. He also has extensive experience in mergers and acquisitions, financial planning, and profit and loss.

Herbert VanderLugt, Marketing Director

VanderLugt has extensive experience in marketing. Before joining ABCTech, he worked in Silicon Valley as head of marketing operations for a large tech firm. VanderLugt has a B.A. in business as well as an M.B.A from a prestigious business school. He is also fluent both in writing code and in website design. These skills complement his understanding of ABCTech and its marketing needs within the tech industry.

Tom Englewood, Director of Customer and Techical Support

Englewood provides oversite of all the customer support and technology issues for ABCTech. He has both a B.S. and an M.S. in computer science. Englewood brings 30 years of experience in the field of technology and customer service both at the university level and in the corporate setting. He has experience in enterprise applications, teaching, research and learning, user support information security, infrastructure, and communications.

Organizational Charts

Purple Cloud Structure

Financial Statements

Purple Cloud Projected Income Statement*

• Notes:

The decrease in revenue from subscription software and the increase in the revenue from the ABC product line reflects the company’s strategy to shift resources to ABC. The ABC product line provides a better solution for the customer and a greater return to the company.

Implementation of the company’s strategy to shift resources to the ABC product line also resulted in a decrease in the cost of customer support and allowed hosting expenses to remain flat.

While product development remains important, the company’s acquisition strategy will be the primary avenue through which new products will be integrated into the company’s offerings.

The tax rate is subject to change. Current projections are that the rate may drop to approximately 20%.

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Purple Cloud

Income Statement

For Year Ending December 31, 20XX

Previous PeriodCurrent Period

Revenue

Subscription Software Revenue35,000,000$ 30,000,000$

ABC Product Line24,000,000 48,000,000$

Professional Services11,000,000 22,000,000$

Total Revenue$70,000,000$100,000,000

Cost of Goods

Customer Support$7,000,000$6,000,000

Hosting Expense$800,000$800,000

Professional Services$8,800,000$17,600,000

Total Cost of Goods Sold$16,600,000$24,400,000

Gross Profit$53,400,000$75,600,000

Gross Margin76%76%

Operating Expenses

Sales$18,000,000$25,000,000

Marketing$14,000,000$18,000,000

Product Development$1,200,000$2,000,000

General Administrative$3,000,000$3,862,000

Total Operating Expenses$36,200,000$48,862,000

Net Income$17,200,000$26,738,000

Tax @ 30%$5,160,000$8,021,400

Profit$12,040,000$18,716,600

Profit % / sales17.2%18.7%

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