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Bonar Paint is a high quality paint manufacturer company setup by two brothers, Jim and Bill Bonar. Bonar Paint is a medium sized company makes wide range of paints. Company have range of industrial customers such as car manufacturers, steel makers, oil companies, and many other smaller industrial customers.
Both Brothers realised that company's sales are not growing enough. In other words, turnover of the company has been static for some years. Jim and Bill Bonar want to retire from business. They are happy to sell their business to their three senior managers Roy Crawford - production manager, Tony Edmunds - sales and marketing manager, and Vernon Smith - chief accountant. Three managers feel that this is a major opportunity for them and they like want to avail this opportunity. In this situation senior management team wants to evaluate the current position of the company by using different strategic analysis techniques.
Strategic Analysis is required by the company to analyse the macro and micro environment. Identify the internal and external factors those could effect the business. And also evaluate the current position of the company. What is the strength of the business and what are the weaknesses or areas need improvement?
Bonar Paint is using two major tools or techniques for strategic analysis such as under:
The Macro Environment Analysis:
Traditionally, first step for strategic analysis is the analysis of macro environment. This analysis of macro environment is known as PESTEL analysis or External analysis. Analyse all possible external factors that will affect the business such as demographic change, trade barriers, or change in government policies etc...
(Haberberg and Rieple, 2008 P.105)
PESTEL, the macro environment analysis model help to categories external factors those could affect your organisation. We are able to split external factors into six categories such as Political, Economic, Social, Technological, Environmental, and Legal factors.
(Boddy, 2007 P.96)
These refer to Govt. Polices such as export polices, or the degree of interference in the economy. In the current situation of Bonar Paint, political factors are not the key concern for the senior managers. So, there is no need to evaluate political factors.
Economic factors such as change in personal income, unemployment rates, specific taxation policies & trends, and interest rates. Initially, according to the present buyout situation and B2B nature of business, company is not worry about the customer's buying trend.
Evaluation of Social factors is very important for the senior managers of Bonar Paint. These factors can affect lifestyle patterns & changes, ethnic & religious differences, willingness of individuals to work, and demand for the company's products.
Bonar Paint use to make paints infrequently and in small batches. Due to this reason, it requires huge time to produce and deliver particular paint on demand. Unfortunately, system fails to show profitability. Obviously company will lose their customers and demand of the product, if it fails to produce paints on time as per demand of customers. Team of managers really need to think about this trend.
Identify technological factors those may affect future of product. How such emergent technologies might be used to improve production process and quality of product? Technological factors such as risk of selecting the wrong technology at times of change, and changes to standards / equipment required.
There has been little recent investment in new machinery to improve quality and reduce expenses. Roy Crawford has consistently argued to reduce the range of paints and want to increase the production. He wants to invest into new production technology. To implement Roy Crawford's production strategy and use of new production technology, company need to identify all risks of selecting wrong technology.
These factors include the level of pollution created by the production, recycling considerations / waste disposal, and Attitudes to the environment from the government, media and consumers.
If Bonar Paint wants to increase their production then company must have to revise & improve waste disposal system. And in the case of new production plant / machinery, they need to analyse level of pollution.
New legislation may create risks of non-compliance with the law. Health & safety legislation, and changes to funding of charity based organisations are also included into legal factors. For the time being, senior managers show less interest to analyse legal factors in current circumstances.
The Micro Environment Analysis:
The analysis of micro environment associated with the groups of stakeholders that are directly dealing with the firm's activities. There are many factors that have a direct impact on company's strategy. Internal factors such as Customers, Employees, Suppliers, Shareholders, media, and competitors are close to company.
(Fyall and Garrod, 2005 P.62)
Porter Five Forces Analysis:
Porter's five forces is the best available framework to analyze the micro environment. Normally, this model use to re-assess the marketplace. It also determines competitive strength and overall industry profitability.
This five forces model includes two forces from Horizontal Competition and the rest three forces from Vertical Competition.
Horizontal Competition Forces:
Threats from substitutes
Threats of new entrants
The threat of established rivals
Vertical Competition Forces:
The bargaining power of customers
The bargaining power of suppliers
(Grant, 2002 P.72)
Threats from Substitutes:
Company needs to analyse that what are the substitute products are available in existing market. What are the prices, quality, and the performance of that substitute products. And also needs to analyse, how easily your customers can switch to that substitute product.
The UK Paint Industry is very uneven. Top end of market is occupied by large international paint manufactures with significant brands and the bottom end is occupied by many small and medium sized paint makers.
Currently, Bonar Paint is producing wide range of paint and supplying to industrial customers. The problem is many substitute products are available in the market. And Bonar Paint is unable to produce high volume to meet the need of industrial demand.
Company must have scanning system in place to warn of such substitute product threats. Production of unique quality product is the key to success.
Threats of New Entrants:
New entrants will effectively decrease the profitability. There is always threat of new entry if industry is highly profitable, require a low investment to jump in, friendly government polices, ease of access to distribution channels, and product can be copied.
The trend of UK Paint industry shows that it not really hard to jump into paint industry. Verities of distributions channels are available and product can be copied easily.
The Threat of Established Rivals:
The threat of traditional competitors is always there unless your product is unique or really tough circumstances for new entrants.
Bonar Paint must have a system or strategy to analyse the competitors included their product quality, prices, volume of production, and other technologies in use.
The Bargaining Power of Customers:
The bargaining of customers will be high when large players in the market. If too many manufactures of the same or similar products are available in the market then customers have more choices. High bargaining power of customers will effectively decrease the profitability.
Turnover of Bonar Paint has been static for some years because top end of market is covered by international paint manufactures and large number of small and medium sized paint manufactures is present to cover rest of the market.
The Bargaining Power of Suppliers:
Bargaining power of suppliers is a key factor that could directly affect profitability of the company. The Bargaining power of suppliers will be low when lot of suppliers are available in market to deliver particular material to the industry. And obviously prices will be low when high competition in between suppliers.
I will suggest to Bonar Paint to produce raw material by itself as much as possible. New machineries will be required to produce raw material. Company needs to identify all risks of selecting wrong machinery before any investment.
Operation of Bonar Paints: (Advantages & Disadvantages)
Roy Crawford is the production manager and the Tony Edmunds is the sales manager of the company and they both have different strategies. Here we discuss the advantages and disadvantages of the strategy of the operational manager Roy Crawford. He wants to reduce the ranges of paints on the limited numbers and increase the productions of some particular verities so that they can get advantages and perfection of same verities. While the Tony Edmunds says that if they reduces the number of verities they can lose the customer and good will also. They should not have to reduce the verities but they have to reduce the productions of the products.
Reduce the range of paints in order increase the production of specific ranges will result in increase in sales and profit.
Getting perfection on the limited product range will improve production quality and quantity.
Adopting this strategy will reduce the cost of production and increase the volume of production.
This strategy will improve the quality of production that will result in increase in sale volume and customer satisfaction.
Producing specific range of paints will decrease the cost of production and will give the company enough resources to improve research and development of the company
Improving quality of production will increase repetitive customers. By applying this strategy Bonar paint can get repetitive customer which is the key success of the business and company can get more business from one customer.
Extra innovation cost will be reduced by the production of specific range of paints. That means company do not have to bear any extra cost for the innovations which takes highly extra cost.
Producing specific range of quality paints will increase the volume of sales. Now Bonar paints can sell increase the volume of specific products and can increase its sales which means company can earn healthy profit.
Increase in production of the limited number of verities will increase perfection. By adopting this strategy company can get perfection in specific range of paints which may cause to increase the good will of the company.
Increase in good will of the company.
Strategy of Roy Crawford has also some disadvantages should be kept in mind; following are some drawback of his strategy.
Reduction in variety may result in loss of potential customers. Company can loss its potential customers which were doing big business with the company.
By reducing the range of the paints company may lose its potential customer which means revenue of the company will decrease and company's business may affect.
The most important drawback of this strategy that the growth of the company may stop due to no innovations. Company may not compete and survive in the market due to no innovations.
Company has to stop the production of number of products to achieve desired results. By doing this company can stop the production of such variety which gives the competitive advantage to the company.
There are many advantages and disadvantages of this strategy which are not ignorable but according to me Bonar paints has to analyse that what are the specific range of paints are enhancing and doing good business and are giving more profit to the company. Company should not stop the production of these varieties and should stop the production of those verities which are casing loose for the business or earning very low profit. Company should not stop its innovations and must allocate some portion of its profits in research and innovations for the growth and batter future of the company. For the industrial paints company produce paint on order basis. Company should not loose these industrial customers and should try to get more orders and should take some steps to complete the orders on time. Company should also have to introduce some general paints which are mostly used in the markets and should improve the quality and can increase productions of such varieties, for this purpose company have to make some research. Bonar paint should have to explore some new markets to increase the sale.
However, Roy Crawford's strategy has few drawbacks but in current circumstances, company's aim is to increase the turnover and secure more customers. I think, Roy Crawford's strategy is useful to achieve company's objectives.
Identify and explain the key areas of change likely to be needed in Bonar Paint in order to implement a successful buyout
When company's existing managers takeover a large part or the entire firm is called MBO (Management Buyout).
Each manager has a different view to make Bonar Paint successful after the buyout take place. Roy Crawford's idea is to reduce the product range and increase investment in new production technology. He focusing on getting a big share of industrial customers' needs only as smaller customers are unprofitable. However, Tony Edmunds as sales and marketing manager wants to increase the product range and focusing on getting both domestic and industrial paint customers including professional painters and decorators.
Steps to a successful MBO (management buyout)
Management Buyout should be undertaken not only to cut costs but to improve the business.
Understanding of business goals:
Buyout managers need to understand their business model. How an organisation uses its assets to deal with customers and make high profit for its stakeholders and owners.
They need to analyse the real values of the business. What is the purpose of existence? What are the company's goals & objectives? What is the business strategy to achieve company's goal? And also need to identify the element those creating problems to achieve that goals.
Once buyout managers have this knowledge, they are in position to help their company to get goals and objectives they already have. It is not possible for anybody to run or improve an existing business with out having knowledge about its actual goals.
Think like a owner:
Now, buyout managers have to stop thinking like a manager. They have to think and make decisions like an owner. Close down areas, if you think those are not performing. Review the performance of each employee and let people go if they are not performing well. Buyout managers need nerves of steel. They must have patience of saint to handle huge pressure and ability to live with risk. MBO is a great opportunity for the managers but really hard to perform.
Make changes at the top
Sometimes new people, new talent can help business to achieve the objectives of buyout. Try to build a quality team that has all essential skills, shared vision, fully understanding your customer base, target market and can demonstrate a successful track record.
Business strategy is a long term plan: which achieves company's objectives or goals through utilizing available resources with in a challenging environment, to fulfil the stakeholder expectations and to meet the need of the markets.
Bill and Jim have taken all important strategic decisions to date with the little advice of senior management team. All prospective buyout managers never involved in business strategic decisions.
Buyout managers need training, how to develop a business strategy? What are the tools, techniques, or methods using by Bill and JIM to develop business strategy?
Management Buyout may be the best available exit strategy. There are four most important factors to make buyout successful such as under;
Strong management team
Adequately funded buyout
Understanding of company's goal & objectives
Understanding of working nature of the paint industry.
Formal Mission: (Statement)
Mission statement is a foundation of any organisation. Formal mission statement is a short written statement to describe the goals and objectives of an organisation. In other words we can say that it defines the purpose of existence. It provides a direction to achieve company goals and help to develop a business strategy.
(Lewis, 2000, P.63)
Business direction - It helps to define the purpose of an organisation. What are the goals and objectives in written format?
Business strategy - Useful to develop a business strategy to achieve the company's goal. It is impossible to develop a good business plan without having any knowledge of organisational goals.
Understanding for people - People can easily understand what we are doing?
Customers Satisfaction - it help customers to understand how our company want to satisfy our customers
Marketing Plan - plays important role to develop a marketing plan and identification of target audience
More expectations - customers are coming to except more. If you creating high expectations than it mean you need to meet them or over deliver.
Business Growth - It can be an anchor when company need change and looking at the potential to the boost profitability.
Conclusion & Suggestions:
In conclusion, formal mission statement can be hurdle in business growth. However, the sense of direction & purpose of the business is the major step. Mission statement has its own importance for every organisation. We can't ignore this. In order to develop an effective mission statement, I would like to suggest few things to buyout managers of Bonar Paint.
Need to understand and clearly state goals & objectives of Bonar Paint
Decide what make you different. How to get competitive edge because you are targeting same customers as your competitors.
Be honest and make sure that it reflects what you really believe.
Keep mission statement short and simple.