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Case Study

A small IT company faces big competition: Zsolt was 18 years old and a very energetic person. In 2000, after graduating from a secondary school in Budapest, he decided to apply for a customs administration program in his school that lasted for an additional year. Fortunately, he was accepted on the course and he was eager to learn more about this area. However, after the extra year, he was not motivated enough to work in this field. He had had two semesters of management courses during his vocational training and had turned out to be very good in this subject. As he was motivated, he read many books about how to be a good manager and became excited by the idea of having his own company. The only problem was that he had no real idea in which field he should be involved. Also, he was looking for a business partner who was skilled in a specific field which could be profitable. In 2001, a friend of Zsolt introduced him to Peter, who was just finishing his IT studies at the University of Pcs. Peter had excellent skills and knowledge of programming, developing, designing and managing websites. He was also very young at only 21 years of age. After graduating from University, Peter decided to join Zsolt and set up their own IT company. Zsolt had a large social network of web- and graphic-designers, journalists and students from different art schools. He knew that it was not easy for them to start careers as freelancers or to be self-employed. They were very skilled and some of them had good jobs but most wanted flexible working hours and to have their own business. Zsolt studied the market for IT services and he found out that there are not many companies specializing in website development. It was a niche market at that time and consequently there was a great opportunity to enter and make a profit before competitors arrived. The two of them had only a small amount of money to invest but they had the tools they needed; basically two computers, a room to work in and a fixed phone. After they learned about how to register the company they asked a friend to be the companys accountant. Finally, in December 2001, they founded their own business. Its first base was in Kaposvr, a small city in South-West Hungary. Peter lived there and had a small flat that they could use as an office. They decided to name the company PageForU which referred to the main activity of the company. In order to get into the business, the first step was to come up with a marketing plan. Neither of them had previously studied how to create a proper marketing plan. They read about it in several books and articles and finally the two young entrepreneurs managed to prepare a one-year marketing plan which included a definition of the target audience, detailed action plans, different scenarios and a maximum and average budget plan for all the activities. The plan involved mostly offline marketing tools such as leaflets, small posters and spreading business cards. The company mainly targeted freelancers and self-employed people who might be interested in promoting their portfolios online. The price was fixed. Since they did not face stiff competition at that time, they could ask for a high price for their services. We went to universities and left our leaflets there as well as in art studios. In a short period, many people contacted us. Also word-of-mouth advertising was helpful. Peter was extremely busy with the technical part and me with the financial and customer side, explains Zsolt. Our business became very popular. It was an easy way to earn money. And most of the new customers came because we were recommended by a previous client. However, more and more companies showed up on the market. The competition was increasing every day. They were not as popular as us but still it was time to think about some additional services that we could include in our portfolio, adds Peter. In 2004, the two young entrepreneurs came up with new services to offer. One of them was to provide assistance to people who had accidentally erased hard drives and needed to retrieve all or some of the lost information. Another new service was website hosting and maintenance. The focus changed from providing a one-off service to a continued involvement with the customers. The company grew bigger and bigger. Zsolt and Peter decided to move the business to a better office where they could welcome the customers. Zsolt found a very comfortable office in the heart of Kaposvr. It was in a modern building, furnished for two people and with a meeting room shared with five other small enterprises. The price was reasonable and it included the basic furniture. We managed to create a small business on our own and this was a great feeling. We were very young and already had our own company which was profitable. A good idea, a bit of luck and big motivation were the key factors that helped us to create all this, says Zsolt. However, the competition was growing. Plenty of small companies were set up in 2003-2004 and offered their services for similar or cheaper prices. For Zsolt and Pter it was clear that in the long- term they had to lower their prices in order to survive in the market. However, Zsolt knew that PageForU already had a good reputation and even with the same prices the regular customers would not chose another service provider. Online advertising had become more and more popular since the company was established. There were customers from all over Hungary and both of the founders were extremely busy running the business. It gave us a lot of experience. We had to be aware of the legal, financial and market-related issues, like the new upcoming trends. We had plenty of different tasks and it gave us confidence that we could handle them, says Zsolt. However, competition grew rapidly and we had to charge less and less for our services. We were really concerned that eventually we might have to close the business because it could be unprofitable, adds Peter. We had the competitive advantage of having been established well before the others and our circle of customers was loyal. Designing websites added up to almost 60% of the turnover, the rest was mostly website maintenance. After 5-6 years of running the business we had very good references and all was going well. But after so many years of operation we did not have the same spirit as before. It was more like a fight to stay in the market. And the competition was extremely intense. Maybe with an aggressive marketing strategy we could have planned for a longer time period. But we wanted to try something new and the future did not look as bright as in the beginning, comments Zsolt. The problem was mostly with the marketing of the company. In the beginning the target groups were freelancers and other artists who wanted to sell their products or services. But with time the marketing plan relied more and more on word-of-mouth advertising and with the competition they faced, this was not enough. Also other companies offered the same services for much lower prices. We were making less and less profit compared to when we started. Of course we could have continued to operate the business this way as we had many customers, but from 2006 so many small IT companies emerged that we lost control. We had to lower prices. Pter was often stressed and he wanted to hire a full-time employee to help him with the technical part of the work. Finally, we hired a girl, Szonja, who had excellent skills in programming and was about to finish her studies at the University of Budapest, explains Zsolt. She joined the team in 2007 and turned out to be an excellent colleague. While Pter and Szonja were fully busy with the websites, Zsolt hired an external consultant to research the market. The results of this showed that they were still in the high price range in the market. But as taxes, such as flat-rate healthcare contribution, self employment tax, as well as the overhead costs was very high, they did not want to lower their prices. In addition, more and more do it yourself software emerged with which users could create and manage their own websites. We had a real management crisis when we were discussing the options. Zsolt wanted to expand our operation abroad. My idea was to have a more aggressive marketing strategy. Teamwork is very important especially if you are the only two managing the company. For us the main problem was that we could not agree on what to do. Our business was still profitable and we had many clients but we both knew we couldnt continue like this, says Pter. After some months of looking for solutions and researching the market, Zsolt decided to quit the business and look for a change. He was not motivated enough to control this business with its income fluctuating from month to month. There were too many competitors in the market and it was hard to make the same profit as back in 2002-2004. Zsolt left the company in early 2009 and decided to study again. He applied to medical school as he wanted to be a dentist. He does not regret his decision. As he says: For the profit we were making at the end or which we could have made in the future, it was too much stress for me. I dont regret starting the business as I now have a lot of experience behind me. I would even consider starting another business in the future. But the market was full of competitors and we could not really find the right position for ourselves. It was the best decision to leave. Pter continued running the business on his own with the help of Szonja - and later a bigger business in the market offered a very high price to take over the company. Pter hesitated for a while but at the end he decided to sell his business and work for the new company as it had many highly skilled IT-technicians and the management was reliable. He has a good salary and he works only part-time, with flexible working hours and in a less stressful environment. In conclusion, Pter comments: All in all it was worth having our own business. We were lucky and we tried to gain as much as we could out of it. It is important to know when to finish and we did it well.

a) Do you think that Zsolt & Peter introduced Corporate Entrepreneurship for their firm? Justify your opinion with reference to case below.

b) While entering into the market, Page For U was valuable, rare and inimitable for Zsolt & Peter. Which strategy do you think both partners must have adopted to enter the market and why? Justify your opinion with reference to case below. c) What you had done if you were Zsolt? Had you left the business or not. Give valid reasons and explanations other than those in the case also.