OnLine Case Study resource. Suggested solution Task 2

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1 OnLine Case Study resource Suggested solution Task 2 The following is a suggested solution to the task and should not be regarded as comprehensive or correct in all aspects. It is intended to indicate the type of approach, style and content expected at the Final level. Your answer may differ in both presentation and content but still achieve a pass standard. In particular, you may have included other (quite valid) points based on your own research. To: Partners From: Financial Controller Date: Today Divine competitive position Contents Terms of reference Rivalry Threat of new entrants Threat of substitutes Bargaining power of customers Bargaining power of suppliers Key issues Conclusions and recommendations Terms of reference This report evaluates the competitive position of Divine using the competitive forces model developed by Professor Michael Porter of the Harvard Business School. This model is commonly used in strategy formulation, so it is not described here. If readers are unfamiliar with the model, details can be found in most good strategy textbooks. Rivalry While there is little evidence of aggressive price competition or stealing of clients, the Bandaran recruitment industry is changing rapidly and there are several rival firms operating in the industry. The following summary identifies the key features of each firm, as far as they are known: Name Size Key features 4staff L (120) Temporary to permanent business, strong in media. Divine M (60) Junior/middle management appointments Hot Staff S (2+) Media specialists, unconventional jjb S/M (?) Regional offices Talisman Little known tsc L (250) General consultancy, highly-developed online (Web) systems Walker-Wilks S (23) Search consultants, very up-market

2 One of the most significant issues within the industry is the extent to which clients avoid exclusive supplier agreements. This is discussed under key issues later. Threat of new entrants Many of the existing rival firms seem to have been established by staff from another consultancy breaking away. There are few barriers to entry in this industry capital investment requirements are relatively low, clients and candidates are probably loyal to individual customers as much as to firms, and there are few economies of scale. In the absence of any obvious legal controls, other than those over general company formation and operation, this industry seems likely to fragment further. It is also susceptible to foreign entrants. Threat of substitutes There are a number of substitutes to traditional recruitment services: Candidates can find jobs by means of personal contacts or word-of-mouth. Candidates can also mailshot prospective employers on a speculative basis. This eliminates most of the cost and avoids the recruitment fee entirely. Clients can, if they wish, use press advertising and handle their own (sometimessubstantial) responses. This is expensive and time consuming, and most of this cost can be avoided by the use of a consultant in return for a fee. Staff loyalty and internal promotion is a substitute for recruitment. The use of new technologies such as e-commerce can be seen as a substitute to conventional recruitment consultancy. It has a number of advantages to both the client and candidate in terms of differentiated service and cost savings. Bargaining power of customers While there are large differences between the cost and service level profiles of conventional recruitment (using press advertising) and the use of recruitment consultants, there are few switching costs involved in changing consultant. While the relationship between client and consultant is important, the service provided is to a great extent undifferentiated. Candidates are free to place their details with a number of consultants, and clients may find themselves being offered the same candidate by two or more firms. The client organisations are also much larger than their recruitment consultants, and are buying a relatively unimportant component of their product or service. Although staff are an important input, recruitment services are not. This leads to an inherent disloyalty, with many of the large Bandaran organisations multisourcing their recruitment consultancy. This issue is discussed further under key issues.

3 Bargaining power of suppliers The major inputs to a recruitment business are staff and candidates. Staff cannot, in most countries, be tied to their employer for a long period by restraint of trade clauses, so they are free to move to a rival, to a client, or to set up their own consultancy firm. Candidates cannot be prevented from registering their details with other consultants. Key issues 1. Fragmentation and differentiation The current trend within the industry seems to be towards firms finding themselves a niche, either in terms of client, market or service level. The firms currently appear to be adopting the following competitive strategies: jjb Walker-Wilks Hot Staff Temporary staff, close to the customer E-commerce Upmarket search Industry-specific (media) high service content 4staff, Divine and Talisman do not appear to have clear strategic direction, though little is known about Talisman. Divine appears to have grown away from its historic junior staff niche, and now provides a more general service. Both 4staff and have considerably higher staff numbers than Divine, and are therefore more likely to be able to exploit what few economies of scale exist (for example in the management of systems and the provision of specialist functions such as IT, HRM and marketing). may also have cost advantages due to their use of internetbased IT systems and e-commerce. 2. Multi-sourcing The recruitment industry clients appear to be inherently disloyal. A summary of client distribution illustrates this trend: Client Duller Metals plc BTV Television Bandara Power plc Life Associates Government of Bandara GHN Manufacturing Jilles Holdings plc Park Royal Ltd Noble Entertainment McBaird and Phoenix Group Use Divine and 4staff This is a major threat to Divine, as all our major clients except Jilles Holdings and Noble Entertainment are certainly shared with at least one rival (if the firms claims are true). Information is not available about the client portfolios of Hot Staff, Talisman, jjb or Walker- Wilks, but it is likely that clients are also shared with those firms.

4 3. Customer account portfolio Analysis of client responses to the customer satisfaction survey shows a mixed message. A quick statistical analysis (see appendix) using mean and standard deviation shows weaknesses in almost every one of our client relationships. It is essential, for future loyalty and profitability, that clients rate us at least satisfied and preferably completely satisfied. Although this is the feedback received from the majority of client responses, there are worrying patterns in both the level and consistency of client service. Four of our top ten current clients give us an average rating of below 4 (satisfied). This suggests that service levels must be improved, as these four clients represent 33% of our projected year 2000 fee income. Three of these clients (apparently) also place significant business with at least one of our rivals, so there is a serious risk that our share of their business may fall or we might lose them completely. Our reputation is built by word of mouth, and staff within our clients do discuss our services. It is very difficult to build a client relationship, but very easy to destroy it. More worrying still is the apparent inconsistency of our service levels. Applying standard deviation to the survey results shows that almost all clients exhibit an unsatisfactory distribution. While the absolute acceptable level of deviation can be discussed, a look down the 3 column shows the scale of the problem. We have no idea of the level of seniority of these indifferent clients, and they may be able to influence the purchasing behaviour of their colleagues. Interestingly, while our service levels are similarly inconsistent, the smaller clients rate us, on average, more highly than our major clients. Small firm business seems to be very low priority, so this area should be explored during the formulation of future strategy. The last, and possibly most serious, point is that Jilles Holdings gives us the worst overall assessment of all our clients. Jilles is the only one of our top ten clients who we are not aware of using one of our major rivals. This suggests that the risk of losing some or all of this business is very high. It is important to remember that we can only get feedback from our clients. We do not know what non-clients think of us. Conclusions and recommendations The industry is becoming more competitive, and lacks efficient barriers to entry and control over client switching. Divine is also losing its historic differentiators technology leadership and a focus on junior positions. This suggests the need for an urgent strategic review. The market is fragmenting, and rivals are differentiating in terms of industry, service level and delivery. Divine must therefore identify its own niche and decide how to differentiate the service. Service levels are poor and inconsistent, with particular risk attached to Jilles Holdings. This requires urgent attention, and a Total Quality (TQ) programme should be considered. Small clients show better satisfaction levels. This market should be considered a priority in the forthcoming review.

5 Appendix statistical analysis of customer satisfaction survey Client Mean SD Duller Metals plc BTV Television Bandara Power plc Life Associates Government of Bandara GHN Manufacturing Jilles Holdings plc Park Royal Ltd Noble Entertainment McBaird and Phoenix Small clients (North) Small clients (South) Client service is considered unsatisfactory if the mean score is less than 4 Client service is considered inconsistent if the standard deviation is greater than 0.5