Entrepreneurial Small Business 4th Edition by Jerome Katz ,Richard Green

Exercise 24

BUSINESS DEMISE
When you look at a page of a textbook chapter, you see a carefully organized grouping of body matter text lines, text boxes, photos with captions, and figures. For more than 200 years, the process of arranging material to be printed (called typesetting) was the same, with hundreds of small mom-and-pop businesses doing this type of work under contract for major publishers. Often, the shops were near the publisher's major installations, and the business relationships were based on personal contacts between publishers and typesetters. By the 1980s, Asian companies (primarily in India and China) came into the business, seeking work from the large American and British publishers.
Donald Sontag was a 32-year-old New Yorker who had been in the business and had the idea to buy a large number of the small mom-and-pop typesetting shops (called a rollup ). He started by buying the 100-employee Carter Typesetting Company, an Iowa typesetter and one of the larger such companies, as a basis for the rollup. He had roughly 70 people employed in small shops in the Northeast. He also bought a 30-person Manila, Philippines typesetter to take advantage of the lower costs of Asian typesetting shops. His vision was on target. Carter soared to $10,000,000 in annual sales and profits of $1,000,000. His own bank account grew to over $2,000,000.
In the world economy of the 1990s, outsourcing from the United States to Asia was a growing phenomenon, and one from which Donald thought he was positioned to benefit. But even as he was taking the lead in this, and promoting this approach to his customers as a competitive advantage, his customers were themselves looking for Asian typesetters to forge direct business relations.
Ironically, the growth of the Internet made outsourcing easier for the large publishers. Originally, the graphic transfer machine needed for remote typesetting cost $45,000 and the slow data line cost $10,000 a year at least. Since typesetting was an industry composed of many small shops, it was uneconomical to try and equip all of them with the equipment. However, with the advent of digital typesetting programs and the growth of personal computers and the Internet, the graphic equipment dropped to a cost of $200, while a fast data line cost $1800 a year. Suddenly it was cost-effective for the major publishers and all typesetters to have the equipment and fast Internet hookups that made worldwide outsourcing feasible.
While the American typesetters like Carter originally had an edge on quality, the Asian shops were faster at adopting the new lower-cost technologies, which decreased their costs. As the Asian typesetters got more opportunities for business from the major publishers, they quickly improved their quality to keep these lucrative customers. Soon the American typesetting industry was losing market share to their Asian competitors.
At Carter, the employees were resisting the new technologies and were very protective of their good pay and perks. The workers (mostly women who were second breadwinners in their families) were more interested in protecting a lifestyle they valued than in meeting the economic and technological challenges of a newly competitive industry. In addition, they had trouble letting work go overseas, keeping it in Carter even when it made financial sense to send it overseas. The company's profitability was dropping quickly. Donald's partner Dan believed in "benevolent capitalism" (an idea about treating employees in as fair and considerate a way possible pioneered at IBM in the 1950s and 1960s) and was reluctant to press the employees for faster changes or cost-cutting activities.
Donald could see business moving overseas at an even faster rate. He could see the quality of the Asian typesetting improving dramatically and quickly. He saw the costs of the technology for outsourcing (and managing outsourced projects) improve in completeness and drop in cost at the same time. The all important question was, what should he do about this and what could he get the Carter Company to do
How would you describe the problem the Carter Company is facing What is causing it