Opportunities
- Trend toward outsourcing: PFS
As investment- related fixed and overhead costs of establishing distribution systems was very high, firms might opt to companies like PFS for outsourcing services that can provide a total distribution management with expertise and experience at a lower cost. Outsourcing allows manufacturing firms to focus on operational side while benefit from professional, value-added services of outsourcing service providers. The outsourcing trend provides huge growth opportunity for PFS as profit margin is higher and the markets are not restricted to only office consumables industry.
As more and more companies are conducting business as an E-Commerce, PFS can step between those firms and their customers offering logistic services. Through the growth of E-commerce and internet, PFS can approach clients who seek to do B2B E-commerce or B2C E-commerce but do not want the burden of distribution system.
Advancement in technology aids the company to provide better, faster and more accurate service, maintain profitability, lower the cost and survive the environment of decreasing margins. The use of software like ERP (Enterprise Resource Planning) and CRM (Customer Resource Management) software and database techniques enhance company to improve efficiency, accuracy and quality of service. The invention of new technology is never-ending. Daisytek must continuously search for the latest technology that maximizes the firm’s value.
The use of technology in operational processes increases significantly over a decade. Enterprises had added automation in the workplace to enhance efficiency and effectiveness of the works. This trend is not restricted to developed countries but also extended to emerging markets like Asia and South America. The increasing demand in those of office automated machines give rise to demand of office consumables as well, thus, it is an opportunity for the firm to expand internationally.
Daisytek can expand to serve customer in Europe and Asia where demand already exists.
Threats
Daisytek:
The competition in office consumables segment was fierce. There are about 250 players competed with Daisytek in the domestic market. Large companies that compete directly with Daisytek are Micro United (United Stationers), Ingram Micro and Azerty (Abitibi-Price). All of them are more than five times bigger than Daisytek and offer broader range of product lines. Even though major lines of business of these enterprises are different, there are possibilities that they will expand product lines to increase profit margin and to cover all office needs increasing competitive battle for market share in the office consumables industry. Due to their size advantage, extensive distribution channels and relationship with the producers, Daisytek could lose the leading market position in nonpaper consumables and imaging supplies to those large three firms.
PFS:
Currently, there were little direct competitors that offer the same value-added service like PFS does. However, if PFS’s profitability is realized, new firms might enter the market to compete with PFS. Possible competitors are Daisytek’s primary competitors mentioned above whose size advantages are significant, other traditional wholesalers in any industries and other direct marketers like Fingerhut. Those firms possess the expertise and experience in providing services for their own businesses. They have a capability like Daisytek to offer outsourcing services.
- Consolidation in customer bases
Initially, customer bases for Daisytek are independent product dealers which market shares are reduced drastically to the chain stores like Office Depot and Staples. Also, another major customer, contract stationers, have been bought by big companies reducing the number of tier-three firms that delivered office product to small-sized, local customers. Chain stores and large contract stationers was able to by-pass distributors and wholesalers and deal directly with manufacturers reducing the role of companies like Daisytek.
- Substantial margin pressure
The average profit margin in the office consumables industry is about 2.5-3% which is considered to be quite low. Competition is getting fiercer, thus, margin will continuously experience huge pressure. As products are commodity-liked, it is difficult for the firm to increase price for higher margin. Daisytek’s strategy was effective use of technology to be cost efficient and a focus on high-margin products. However, they have reached the point where marginal returns from operational improvements based on technology are reducing.
Demands for the Daisytek’s products are derived from office automation machines such as printer, copy machine and computer. If there is an introduction of new technology, those machines could become obsolete, thus, reducing sales of Daisytek.
Financial Analysis
Liquidity
- Current ratio: Current Asset/Current Liability
= 117,184/60,521 = 1.94
- Quick ratio: Current Asset – Inventory/Current Liability
= 72,826/60,520 = 1.2
An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. The company would be in relatively good short-term financing. However, for big company, like Daisytek, there is no need to maintain high liquidity ratio because we can seek money more easily and more ability to borrow due to its size and well-known name.
Leverage
- Debt ratio: Total Debt/Total Asset
= 76,940/128,601 = 0.5983
Debt ratio tells us how much the company relies on debt to finance assets. Daisytek is moderately leveraged.
- Time interest earn (TIE): EBIT/Interest payment
= 18,946/1,482 = 12.78
Our earning before interest and tax allow us to pay the interest payment for 12.78 years. High ability to pay interest expense allows company to issue more debt and borrow more from the bank.
Profitability (ability of a company to make profit)
- Compounded growth rate (past 15 years) = 36.62%
- Net profit margin (NPM): Net profit/Revenue
= 10,767/464,169 = 2.32%
Indicate how much company can retain from revenue but given the low profit margin nature of the industry, it might be more accurate to compare with other players in the industry. For the net profit margin, comparing to the industry average, Daisytek is doing moderately well. Daisytek’s NPM is higher NPM than United Stationers and Ingram Micro which are big players in the market.
- Return on asset (ROA): Net profit/Total asset
= 10,767/128,601 = 8.37%
Indicate how much net profit company can generate from its asset
- Return on equity (ROE): Net profit/Total equity
= 10,767/51,661 = 20.84%
Indicate how much company can generate from the investor’s money
From Dupont analysis of Daisytek and its three main competitors, Daisytek’s ROA is the highest among four companies indicating that the company has generated the highest profit per one dollar of assets. Its ROE ranks the second after United Stationers, thus, considered above average.
Asset utilization
- Total asset turnover: Total revenue/Total asset
= 464,169/128,601 = 3.61
Indicate how much your asset can generate sales for the company. It measures the firm’s efficiency at using its asset in generating sales. Comparing with the three big players in the industry, Daisytek has the highest asset turnover indicating that the management can efficiently utilize the asset to generate sales.
- Days sale outstanding (DSO): (365*A/R)/Sales
= (365*69,169)/464,169 = 54.39
Indicate how many days does it take to collect A/R. Daisytek’s DSO is moderate implying that credit and collection department can utilize their resources and manage to collect receivable quite well but it can be further improved. For PFS to provide better service, the company should be able to manage credit well enough to meet requirement of customers.
- Inventory turnover: COGS/Inventory
= 416,199/44,358 = 9.38
Indicate how many times in a year the company can sell off the inventory.
Marketing Position
Product
1. Daisytek original product offering; consumable and imaging supplies, computer and office supplies and accessories
As both B2B and B2C-focused Company, Daisytek offers number of product in the category of non-paper consumable and imaging supplies. In addition, its product line also includes computer and office supplies, which comprise of ink jet, toner cartridges, data storage media, copier suppliers and printer ribbon. These products are usually offered to independent contract stationers. Although Daisytek’s majority revenue comes from small to medium-sized business customers, it is still considered as an international company due to the fact that it is currently serving more than 24,000 customer locations in more than 50 countries.
2. Priority Fulfillment service (PFS):
In addition to Daisytek’s existing product lines, the company has expanded its lines of business, which is PFS or Priority Fulfillment service, to provide service to other companies who wish to outsource part or all of their sales and distribution function. The firm will basically take the calls, interface with the customers, perform selling both on an inbound basis, administer the product, provide the warehouse and distribute the products in the customer’s name.
Price
Concerning the pricing strategy of Daisytek, due to the low margin in the industry, it is possible that most players are not willing to reduce the price of the products. On the other hand, because of the fierce competitions within this market, those players are not capable of raising their price as well. As for Daisytek, it is regarded as low price in relation to the level of service providing. Thus, Daisytek often emphasizes on the service quality and technology of the company as a competitive advantage. Therefore, in order to increase their profit margin, the company would derive its energy towards effective use of technology to drive down the cost rather than increasing the price.
For PFS, the pricing strategy is relying heavily on the appropriate bidding proposal because it is one of the factors that the customer needs in making the decision whether to use PFS or not. Therefore, it is important that PFS comes up with the reasonable and attractive bidding proposal to gain more customers.
Place
With the state of being the world’s leading distributor of computer and office automation supplies and accessories, the distribution of Daisytek is considered to be one of it strongest edge in its business, where the company maintains effective globally networked system. This system allows Daisytek to distribute its products to countless countries around the world.
Promotion
Due to the characteristics of being a distributor for office supplies and computer consumables, Daisytek does not emphasize on advertising or marketing campaign, partially because the majority of its customers are independent business resellers. Therefore, the company does not invest a lot of effort and time in marketing its products and services but rather on mutual benefit relationship marketing, which emphasizes on building the relationship with the customers to gain customer loyalty in a long run.
Management Critique
- CEO has a respectable business mind
Concerning the management aspect of Daisytek, Mark Layton, the president and CEO of the company, portraits an impressive business mind, where he is capable of developing as well as organizing his business in an effective manner, which contributes to the rapid growth of Daisytek.
- Understand the nature of business
In addition, he also has a comprehensive understanding of the office supply and computer consumable industry. This assists the company in a way that technology is a significant factor in improving efficiency in the firm.
- Seek for possible opportunity
On the other hand, he seems to always seek for possible alternatives in the response to the threat the company, such as fierce competition and low profit margin. For example, he foresees the growth opportunity in PFS, where there is a higher profit margin as well as an acceptable customer based. However, management has to prepare to face the risk of going into the new field, in which they lack the experience in outsourcing service industry.
For the working environment, as a leader of the company, Mark Layton strives for work place that encourages strategic and creative thinking, risk-taking, teamwork, and a commitment to quality.
- Professionally organized departments
Besides the motivated atmosphere, the department in the company is professionally organized, according to their responsibility, such as call center operations, credit and collection, distribution center and information technology.
These departments are managed by executives who strive for similar objective; high service quality, innovative technology and low cost, which is consistent with the company’s mission. For instance, Scott Talley and Dave Reese, the director of distribution and PFS director of distribution, emphasize on the concept of service commitment in the department by aiming at 100 percent of all orders to be ship before the day’s evening cutoff. This results in Daisytek’s ability to deliver their products much faster than many other distributors in the industry. In conclusion, the management for Daisytek is considered to be professional with an expertise in the area they are responsible for.
Distinctive competencies
Daisytek has cutting edge technology that improves operational management to lower cost and improve service quality. Daisytek had established a technological platform in all three main operations to effectively serve customers and efficiently manage processes. Time and accuracy are the key success factors in distribution services which can be extremely improved by the use of technology and information system.
Daisytek believes that they have a delivery that is faster and more accurate than any other distributors. Complex infrastructure of distribution network in superhub center in Memphis and a strategic alliance with FedEx allow Daisytek to ship almost 100% of products the same day that orders were received.
Daisytek divided operational management into three essential parts which allow the management to establish tightly control within each department. This allows Daisytek to tailor service to match with customer preference and increase customer satisfaction.
Problem
- How can Daisytek survive the fierce competition in the office supplies and computer consumables industry?
Regardless of Daisytek’s self-perception of being the world’s leading distributor of computer and office automation supplies and accessories, there are number of noteworthy players in the industry. Those competitors are considered to possess several advantages over Daisytek, including the larger company’s size and broader product lines offering. These factors have a tremendous effect on the sales and profitability of the firm, where it is already struggling with low profit margin of 2.32 percents. Eventually, Daisytek might be aggressively challenged by these competitors.
- How can Daisytek integrate PFS to current operation and utilize PFS service to provide maximum benefit to the company?
Due to the opportunity and higher profit margin PFS can bring to the company in the future and the present secured income Daisytek product lines are generating, it would be more beneficial for both products and services to continue their existence in the company. However, with PFS being a new practice for Daisytek, it is difficult for the management to effectively incorporate the new outsourcing service into the current distribution business. Thus, management must figure out the appropriate approach to make the two operations applicable that is consistent with the goal of low cost and service quality.
- How can PFS offer effective bids when there is inadequate information from the customer; BASF?
One of the main problems with PFS is the bidding proposal and the cause of this is lack of information from the customers. With the exception of distribution center, all of the departments that are involved with PFS bidding are facing difficulties in coming up with appropriate cost of the operation, since the customers are not willing to inform the real cost of the business they wish to outsource.
- What strategy should the company implement to increase the visibility of PFS to its potential customers?
Since Daisytek is only known for being one of the major distributors in the office supplies and computer consumables industry, PFS is basically not present in the mind of its potential customers. In addition, the company is considered inexperienced and lack of expertise in this outsourcing business. Therefore, the problem of PFS revolves around finding the effective way to communicate as well as promote their service to its target customers.
5. What strategies should Daisytek implement to diverge from its resale business and pursue the potential customers of PFS?
Problem Statement
What strategies should Daisytek implement to diverge from its resale business and pursue the potential customers of PFS?
Justifications
- Potential high growth opportunity of PFS
Daisytek should make use of PFS to capitalize demand from increasing in outsourcing trend. Comparing the opportunity for PFS and Daisytek, PFS expansion is not limited to only one segment and also provides much more margin than Daisytek. It can use PFS to leverage Daisytek. In a long run, management should alter the business model of company to outsourcing service to leverage infrastructure present in Daisytek and branch out of the office consumables industries by providing outsourcing services to firms in a variety of industries.
- Mature office consumables market
Traditional distribution business faces a fierce competition and a substantial margin pressure. Daisytek had to fight with other distributors for market share to increase sales. It is very difficult for Daisytek to expand in office consumables segment because there are many players in the market where big players capture most of the market and possess stronger brand equity and larger distribution system.
-
Business models are different
Even though management is capable of managing the growth of Daisytek in the past, there is no guarantee that they can manage two different operations effectively. At this stage, PFS is still very small, thus, managements could possibly manage both PFS and Daisytek without losing focus because they share three main operations. It can use PFS to utilize resources Daisytek has to the maximum and allow the company to be as efficient as possible. In a long term; however, the shared environment can potentially reduce the effectiveness of PFS operations and reduce quality of service provided to clients. The management must come up with the right strategic direction of where Daisytek and PFS should go to maximize the value of both firms.
Alternatives
PFS started as a very small firm and serve clients that have low potential. However, there are huge growth potentials in value-added outsourcing service segment. At this stage, PFS should focus on expanding its customer bases and increasing visibility in the market. The growing E-commerce is the one of the main segments that PFS should capture demand. It can offer distribution service for manufacturers who do not own one or who do not bear the burden of high cost of managing their own.
- Cut unprofitable product lines
These will allow firm to focus more on core products and services. Freed up resources and time of Daisytek’s personnel and allow them to focus on PFS’ s customers who have specific needs.
- Complex but user-friendly computer system
Core operations of Daisytek rely on technological platform. The software and interface must be simple but effective. Especially in the call center, the system should aid employees in providing faster service and response. The computer and information system of Daisytek and PFS must be complex and detailed enough for employees to enter and retrieve orders from the system, look at historical transactions of customers, answer questions effectively and tailor high quality services to clients. However, it should also be easy to use and understand to increase overall productivity and reduce rate of error.
- Set up Human Resources Department
The responsibility of the Human Resources Department is to create motivation and incentive for employees, set up the appropriate evaluation program for each department, set up a reward system to encourage employees and establish a strong corporate culture that enhances morale, initiative and teamwork. The goal of the HR department is to set high standards for professionalism, ethics, and positive attitude among employees, create an effective workforce and minimize human error in operations.
Daisytek and PFS can add value to the firm by offering web-based services such as online ordering, e-catalogue, order status checking and e-blast to keep customers update about product offering and discounts. Web-based services offer convenience, real-time information to the customers and increase professional management perception in customer’s mind.
- Emphasis on information-gathering system
The management can use their own personnel or third party to conduct research about potential customers. Begin research process inside Daisytek by asking division managers to come up with the key information regarding each bid. They can use past experiences and database to estimate the figure. PFS could also utilize the internet to collect data about prospective clients and their industry nature. However, if it is a very important bid such as BASF and PFS cannot afford to lose this client, they may hire outside parties to do research on customers because benefit from winning the bid is higher than cost of hiring research team
Employees are the key success factor of the company. Currently, employees are familiar with resale business and trained to handle only Daisytek’s clients. As mentioned in the case, call center operators have to answer the telephone as Daisytek one time and as PFS’s clients the next. Shared environment might bring about confusion and reduce quality of work done. Therefore, Daisytek should increase training and workshop to form taskforce that effectively handle multitask services and be able to convey correct messages that each client has preferred and specified.
- Increase advertising and promotional effort to promote PFS
Spend more budgets on advertising that can reach its target markets. Advertising can be brochures, e-mail to existing suppliers Daisytek has or any potential customers, or promote via Daisytek’s website.
One of Daisytek weaknesses is size disadvantage which prohibit Daisytek become a true leader in computer and office consumables distributors. It will need tremendous effort in order to expand Daisytek to be as large as the ‘Big Three’ in the market. Furthermore, the growth opportunity of Daisytek is uncertain because of fierce competition and margin pressure. Daisytek should merge with other companies in the industry who offer different product lines and possess a good distribution network. Both companies will benefit from size advantage, economy of scales, broader product lines and more extensive distribution system. PFS also benefits from merger agreement because it can utilize expertise and experience from merging partner.
- Separate sales and marketing department of Daisytek and PFS
Because the business models of those entities are different, sales and marketing effort toward their end-customers are also different. Daisytek is the intermediary between manufacturers and dealers/customers. Their main customers are small to medium independent local dealers who are not big enough to negotiate directly with manufacturers. On the other hands, PFS’s clients are manufacturers and producers who produce and possess products but do not have logistic capability to effectively distribute and market products. The management should separate sales and marketing department of Daisytek and PFS and allow each entity to focus on their target markets.
- Maximize the value of Daisytek for potential sell-off
In a long run, PFS will expand large enough to separate itself from Daisytek. It will become the main revenue of the company. Thus, the management should maximize the value of Daisytek by focusing more on CRM to build brand recognition, loyalty and relationship with customers and suppliers.
Recommendation
1).
At the moment, Daisytek is challenged with fierce competition and low profit margin in the office supplies and computer consumable industry. In addition, in the future, this industry would still continue to experience significant margin pressures. Although Daisytek was always able to maintain their profit margins by effective use of technology and emphasis on high-margin product lines, the company is still coming to the end of what they could gain from the operational improvement based on technology. Hence, pursuing PFS is the ultimate solution for higher profitability at minimum level of capital investment. In addition, PSF has a greater potential to grow in the outsourcing industry, since there was only a little direct competition for the full range of services that PFS offered. PFS is estimated to bring in the profit margin of 6 percent, compared to Daisytek’s current profit margin of 2.3 percent.
- Emphasis on Information gathering system
With this margin opportunity, PFS is a promising candidate in a way that it could bring in the company’s main revenue in the near future. Therefore, it is vital that there is an effective growth strategy for the future of PFS, which mainly concentrate on the mean to reach the potential customers. Unfortunately, given the current circumstance that company is still inexperienced in this new business as well as is lack of accurate information required in the business process. There should be a greater emphasis on information gathering system.
This could assist in getting information needed for writing more accurate bidding proposal, since currently the company is possessing most of the cost drivers. What it lacks relies heavily on the customer’s side, such as the number of orders or delivery. Therefore, with effective information gathering system, PFS is then capable to develop the bidding proposal that will generate the acceptable level of profit as well as is most attractive to the potential customers.
- Customer information on target customers
With the effective information system, the company would be able to gain more understanding about their target customers; what kind of distribution service would be most appeal to the potential customers or what kind of distributing function they lack. This would enable the company to approach them with a more meaningful business proposal.
- Focus on technology-based customers
However, PFS is still considered unknown to the outsourcing industry, it is more effective to focus on the deal with Daisytek’s current suppliers; because these manufacturers are familiar with the way the company run the business. In addition, these manufacturers are mostly technology-based, in which the company’s expertise lies. Thus, in reaching these customers, it is much easier and appropriate for the line of business the company is presently operating. Once the company gains more experience, credibility and visibility in the market, it can expand the customer base to other segment, such as e-commerce, which has no expertise in the area of distribution network.
2).
- Maximize value of Daisytek for future sell-off
Although PFS is estimated to bring in much higher profit margin compared to existing Daisytek products, currently the company is heavily relied on the revenue of those product lines. Therefore, it is impossible to solely and immediately pursue the new outsourcing business. The potential solution is to maximize the value of Daisytek by maintaining and if possible, expanding its customer based. Eventually, when there is a well-presented opportunity, Daisytek could sell off the traditional distribution business to a potential buyer.
- Customer relationship management
Daisytek could expand their customer based by focusing on customer relationship management, where the company will focus on creating and maintaining relationship with the customers. This means that the activities in the organization at would be emphasized primarily on satisfying customer’s needs, leading to customer loyalty. CRM is important in maximizing the value of Daisytek because since the main operation of PFS would require the existing facility, those assets obviously could not be sold to the buyer. Therefore, it is vital for Daisytek to maintain good relationship with the current customers as well as continually expanding its customer-based. In conclusion, by putting its energy towards CRM, Daisytek would definitely establish customer loyalty and brand equity, which in turn could be attractive offering for the potential buyers of Daisytek.
There are other significant assets that could be worthy in the eyes of the prospect buyer, such as customer list, strong relationship with suppliers, brand equity, agreements Daisytek possesses in the benefit of the company and leading-edge technology.
