Reference no: EM132920186

Profitel Inc. Case Study BY STEVEN L. MCSHANE, THE UNIVERSITY OF WESTERN AUSTRALIA

As a formerly government-owned telephone monopoly, Profitel enjoyed many decades of minimal competition. Even today, as a publicly traded enterprise, the company's almost exclusive control over telephone copper wiring across the country keeps its profit margins above 40%. Competitors in telephone and DSL broadband continue to rely on Profitel's wholesale business, which generates substantially more profit than similar wholesale services in many other countries. However, Profitel has stiff competition in the mobile telephone business, and other emerging technologies (e.g. voice over internet protocol, or VOIP) threaten Profitel's dominance. Because of these threats, Profitel's board of directors decided to hire an outsider as the new chief executive.

Although several qualified candidates expressed an interest in Profitel's top job, the board selected Lars Peeters, who had been the CEO of a publicly traded European telephone company for six years. This was followed by a brief stint as CEO of a mobile telephone company in the United States until it was acquired by a larger organisation. Profitel's board couldn't believe its good fortune; Peeters brought extensive industry knowledge and global experience, a high-octane energy level, self-confidence, decisiveness and a congenial yet strongly persuasive interpersonal style. He also had a unique 'presence', which caused people to pay attention and respect his leadership.

The board was also impressed with Peeters' strategy to bolster Profitel's profit margins. This included investing heavily in the latest wireless broadband technology (for both mobile telephone and computer internet services) before competitors could gain a foothold, cutting costs through lay-offs and the reduction of peripheral services, and putting pressure on the government to deregulate Profitel's traditional and emerging businesses. When Peeters described his strategy to the board, one board member commented that this was the same strategy Peeters had used in his previous two CEO postings. Peeters dismissed the comment, saying that each situation is unique.

Peeters lived up to his reputation as a decisive executive. Almost immediately after taking the CEO job at Profitel, he hired two executives from the European company at which he had previously worked. Together, over the next two years, they cut the workforce by 5% and rolled out the new wireless broadband technology for mobile phones and the internet. Costs increased somewhat due to downsizing expenses and the wireless technology rollout. Profitel's wireless broadband subscriber list grew quickly because, in spite of its very high prices, the technology faced limited competition and Profitel was pushing customers off the older technology to the new network.

In the meantime, however, Profitel's customer satisfaction ratings fell. A national consumer research group reported that Profitel's broadband offered the country's worst value. Employee morale also declined due to lay-offs and the company's public image problems. Some industry experts also noted that Profitel selected its wireless technology without evaluating the alternative emerging wireless technologies, which had been gaining ground in other countries. Peeters' aggressive campaign against government regulation also had unintended consequences. Rather than achieving less regulation, criticising the government and its telecommunications regulator made Profitel look even more arrogant in the eyes of both customers and government leaders.

Profitel's board was troubled by the company's lacklustre share price, which had declined 20% since Peeters was hired. Some board members also worried that the company had bet on the wrong wireless technology and that subscription levels would stall far below the number necessary to achieve the profits projected in Peeters' strategic plan. This concern came closer to reality when a foreign-owned competitor won a $1 billion government contract to improve broadband services in regional areas of the country. Profitel's proposal for that regional broadband upgrade had specified high prices and limited corporate investment, but Peeters had been confident that Profitel would be awarded the contract because of its market dominance and existing infrastructure with the new wireless network. When the government decided otherwise, Profitel's board fired Peeters, along with the two executives he had hired from the European company. Now, the board had to figure out what went wrong and how to avoid this problem in the future.

Questions:

• What are the 3 major OB (organizational behavior)-related issues involved in this case? Elaborate each issue.
• What process and procedures would you put into place to avoid a reoccurrence of the issues in this case (ensure that you use relevant and appropriate OB concepts and theories to support your arguments)?