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Bonar Paint(a) Senior management are considering buying Bonar Paint and they have to evaluate carefully the company’s

current and likely future strategic position and performance as these will have a direct bearing the company’s attractiveness, and therefore on the purchase price and other conditions of sale.

Financial performance

Recent financial performance shows a decline with respect to almost all financial measures. Then consistent improvements are forecast for the next two years. In addition to the figures provided in Table 1, the following are worth noting:

2004 2005 2006 2007(forecast)

2008(forecast)

Gross profit % 50% 47% 45% 48% 50%Net profit % 13% 8% 4% 7% 13%Days of inventory 101 118 133 110 80Sales/employee (£000) 42 39 38 38 39Admin as a % of sales 20% 21% 22% 21% 20%Warranty costs as a % of sales 1% 1.5% 1.5% 1% 1%

Sales have been static, gross margins have been declining and net profits declining. In terms of future results it looks as if Bill may have been anticipating his and Jimís exit from the business by providing an optimistic picture of things to come. Some justification for this optimism has to be made. There is no strategic reason why all the measures listed above should improve in 2007 and 2008 and these estimates should be carefully examined by the buyout team.

Strategic position

The product range has continued to increase but there is no indication that this is resulting in improved profitability and the days of inventory being held have markedly increased. Certainly, the buyout team will have to determine the level of current customer satisfaction and the likelihood of those customers remaining loyal when the founding owners retire. Some fears have been expressed about customers switching to other suppliers if Bonar Paint’s product range is reduced.

Using Porter’s five forces analysis suggests that there are no particular pressures from raw material suppliers and that there Is a good range of customers. However, the company does face strong competition from larger manufacturers, although the company gets some protection from competitive rivalry by its focus on low volume specialist paints ñ a market unlikely to attract the attention of its larger rivals. There is a very real threat from new entrants to the market and the use of modern material means that substitutes to paint appear to be more acceptable (for example as a finish on window frames). Despite that, the specialist nature of many of Bonar’s products will probably substantially protect the company from high volume substitute products.

Bonar is said to be a medium-sized manufacturer and so will probably not enjoy the economies of scale seen in larger manufacturers. Bonar has therefore concentrated on more specialist paints, historically making a success off a differentiation and focus strategy to create acceptable margins. Generally such a strategy requires continual innovation and this will become harder to achieve when Bill Bonar retires. Research and development expenditure looks low compared to sales.

Some concern has been expressed at the growing environmental or ecological concerns about paint, its use and manufacture. These concerns are likely to Increase and encourage the adoption of substitute technologies. It is also likely that paint sales are very dependent on the economy as much paint use is associated with capital-intensive industries such as steel manufacturing and the car industry. The management team should try to obtain three year economic forecasts to help them assess the accuracy of the estimated made in Bonar Paint’s accounts fo the next two years.

In terms of the value chain/system the buyout team needs to get a much better understanding what aspects of its operations are valued by customers. Costs can be justified if the company can make a margin on those costs. For example, operational costs are clearly affected by the extensive product range and the financing of large stocks of paint but it might be Bonar Paint’s reputation for range and flexibility that customers particularly value. The viability of the enterprise will clearly be affected by

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the departure of the founding brothers. The impact of their exit on customer loyalty and on strategic decision-making is likely to be significant.

In summary, the attractiveness of Bonar Paint to a senior management team buyout depends on its economic viability determined by its ability to retain its key customers and generate an appropriate profit margin, which will reflect the teamís ability to maintain current prices, reduce costs and continue to innovate in a competitive market.

(b) Divestment of products or parts of the business is one of the most difficult strategic decisions. As apparent in Bonar Paint a reduction in the products and customers served by the firm is likely to cause significant changes to the firm’s value chain. Currently Bonar Paint supplies its customers, regardless of size, directly and this inevitably means that their distribution costs are increased. The reduction in products and customers may allow a choice to be made about the costs of supplying customers directly as against using distributors to handle the smaller customers.

In using the value chain one is looking to identify the significant cost activities and how those costs can add value and allow the firm to make a margin. The change to fewer products will lead to a number of positive consequences for costs:

bigger batch sizes and therefore lower unit production costs;•smaller inventories;•perhaps fewer product failures and lower consequent warranty claims. •

In terms of operational disadvantages, these therefore are largely in terms of the impact on customer service levels seen in terms of product range availability. Once again it is important to have accurate information on the sales and profitability of each product so informed divestment decisions could be taken. Care must be taken to identify any paints, which though ordered infrequently, and in small quantities are a pre-cursor for customers ordering other paints. Some important customers may require that the full range of their paint needs are met in order to continue buying from Bonar Paint.

A good understanding of its value chain will let the company know the likely consequences of changing activities, both to the cost of other activities and the margins that can be made.

In terms of reducing the product range, before such a decision is taken Bonar Paint must carry out a thorough analysis of the pattern of customer demand for each paint type. In all probability it will find that 80% of its sales come from 20% of its product range.

(c) A management buyout represents a change in ownership rather than a change in strategy. However it should, as suggested above, lead to a comprehensive review of the customers and product groups the firm chooses to supply and the basis on which it seeks to achieve competitive advantage. In terms of the strategy pursued prior to the buyout, Bonar Paint seems to be trying to achieve a differentiation focus strategy but without being able to achieve the higher profit margins associated with the successful implementation of such a strategy.

If as seems likely Bonar Paint chooses to become a more focused company through product range reduction and serving fewer customers, implementation of such a strategy will have clear implications for the whole of the organisation. There might need to be changes to:

S• tructure of the organisation. The departure of Bill and Jim Bonar will have major repercussions for the roles taken by the three senior managers. Decisions will be needed on who is to lead the company and the responsibilities of the other two managers. Bonar Paint has a very traditional functional structure with the managers being responsible for discrete areas of activity. The change in ownership gives a major opportunity to see whether this structure continues to be an appropriate one for handling the challenges of an increasingly competitive environment. For example, product divisions may need to be set up if there is a decision to enter the market for D-I-Y paints.

Systems• will also need to change to accommodate any reduction in the product range and numbers of customers. Clearly, the lack of marketing information on product sales, customers and profitability needs to be quickly addressed before any divestment decisions are taken. Making strategic decisions using poor or inadequate information is a recipe for disaster.

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Decisions on new product development also will require a system that better integrates the interests and information of the key functional areas.

Staff• are the critical resource without which the buyout will not succeed. The change in ownership will cause uncertainty and the buyout managers will need to spell out the changes that are both necessary and needed. Changes to the product and customer portfolio will have a significant impact on some members of staff.

Skills. T• wo important staff members - the founders - will have left, and their skills and expertise have to be replaced.

Style• concerns the way the three buyout managers carry out their new roles and communicate with staff. There is a significant difference between leading and managing the business and each of the buyout managers will need to communicate a clear sense of where the firm is going and inspiring staff to follow their vision and mission.

Shared values• and the overall culture of the firm. The exit of the founders of the business could potentially create a cultural void, which could lead to staff uncertainty. Unless quickly addressed good staff may leave the firm and adversely affect the strategic change the new owners and managers are trying to introduce. In implementing a chosen strategy there is a danger that the ‘hard’ Ss of strategy, structure and systems are attended to while the soft Ss of staff, skills, style and shared values are largely ignored. There is compelling evidence to suggest that it is the soft Ss which will determine the success or otherwise of the management buyout.

(d) A mission statement usually expresses:

The purpose of the business; why it exists.•Its position (in the market)•Culture, ethics and values•

A formal mission statement is likely to be a public document (seen by customers, staff suppliers and lenders) and great care will need to be taken to ensure that no group of stakeholders feels alienated. Customers need to be convinced that they should stay with the firm and staff that there is a future for them in the new set up. Bonar Paint needs to ensure that its reputation for customer care is part of the statement.

The strategy of the firm in terms of where and how it is going to compete again should create confidence in the key stakeholders. Developing this clear sense of where Bonar Paint is going and how it is going to get there will be of particular interest to its financial backers. Expressing the mission of the business will be a key part of any business plan. Bonar Paint may also choose to emphasise the standards of behaviour that will underpin the way it does business. This may include an explicit commitment to innovative products and customer service. Once again the impact and relevance to both internal and external stakeholders is important.

Finally, the buyout managers have to convince stakeholders that the culture and values associated with that culture will be retained after the change in ownership. A succinct and meaningful mission statement may be an excellent way to communicate the new ownership and sense of purpose in Bonar Paint.

Creating mission statements that convey a sense of purpose will take time and if the time spent creating the statement has to have positive outcomes or it will be time wasted. Creating such a statement with no previous experience increases the difficulties. Seeing it as an integral part of a strategic planning process is important.

Care must be taken to involve other stakeholders in the process or statements may be made with little meaning for them. The degree of involvement is also significant; most stakeholders are more likely to be useful as “sounding boards” for testing and refining the statement. The danger is that a statement is produced that few stakeholders buy into and does not affect attitudes or behaviours toward Bonar Paint.