Instructions for Participant

PERFECTION PAINTS

Analysis Exercise
This exercise should be kept securely when not in use at
an assessment or development centre. Please return this
exercise as soon as you have finished using it.
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INTRODUCTION

The exercise in which you are about to take part is designed to help determine
your ability to analyse information, come to conclusions, make recommendations
and justify these.

You are an employee of Perfection Paints. You have been temporarily seconded
from your current job to work as a member of the internal business improvement
team. This team has been brought together to examine the business and make
recommendations to the new Managing Director (MD) of Perfection Paints on how
to improve the performance of the company. The new MD only joined Perfection
a couple of months ago, taking over from the previous incumbent who retired
after 25 years in the job.

For the purpose of the exercise today’s date is 1st June.

TASK

You have been asked to undertake a review of the data collected by the business
improvement team so far and come up with a ten-minute presentation to give to
the MD and his associates.

Your presentation should include a review of the current business position,

(including financial analysis), together with a business strategy containing
specific recommendations to help Perfection increase profits, re-establish its
market share and build for the future.

You have 90 minutes to read through the attached background material, analyse
the information and prepare your ten-minute presentation. You will give the
presentation later today and should expect to be questioned on it.

The administrator will tell you what materials you have available for your
presentation.

Any questions?

PLEASE DO NOT TURN OVER THE PAGE UNTIL ASKED TO DO SO

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BACKGROUND

Founded 40 years ago, Perfection Paints operates mainly within Europe. Its core
business is to manufacture and sell a fairly traditional range of branded paints for
interior home decoration.

The business started small and at first was almost a trade secret amongst
professional decorators and interior designers. The quality of the paint ensured
that it soon became very popular within the decorating trade and this spread to
the public. Do It Yourself (DIY) stores, anxious to attract more affluent
customers, were keen to stock Perfection Paints, which were seen as being of
superior quality, and the business grew.

In recent years there has been a revolution in home decorating. Encouraged by

the proliferation of DIY television programmes and interiors magazines,
homeowners are now using more adventurous colours and are far more willing to
try new things out in their homes. Paint is seen as something that is reasonably
cheap, easy to put on and easy to change. The large paint companies now make
different paint colours for each season. They have come up with new ways of
applying paint to the walls – paint pads and spray guns - and advertise new
specialist paint finishes which previously had only been attempted by professional
decorators.

Perfection meanwhile has stuck with its strategy of producing quality, expensive
paints in traditional heritage colours. Whilst they too have added new colours to
their range every year, they have not been as innovative as their competitors
and this has been reflected in their market share and profits over the past few
years.

COMPETITION

Competition comes from several sources:

• Small number of large multi-national companies who offer a comprehensive

range of decorating supplies e.g. paint coverings in hundreds of colours,
wallpaper, decorating equipment such as rollers and brushes, stencils,
specialist paints and varnishes.

• DIY shops who, as well as selling branded products, sell their own-label paint.
They also sell a comprehensive range of decorating equipment. Prices tend
to be lower than the branded products.

• Small specialist paint companies – operating mainly in niche markets and

producing small runs of paint in a limited range of colours to increase
exclusivity.

Perfection doesn’t sit easily in any of the above categories. It is too large to call
itself a specialist paint company but it does not have wide enough product ranges
to compete on equal terms with the largest companies.

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PRODUCTS

Perfection products include:

• Emulsion paint in a range of 150 colours. This range is updated annually with
an average of ten new colours being added. If a paint colour has failed to
become popular enough after a year then it is removed from the range.
• Gloss paints in a range of colours that complement the emulsion.
• Satin finish paint for wood and metal.
• Kitchen and bathroom paint – suitable for areas that are likely to get wet.
• Perfection also produces a range of trade paints. These are in the same
colours as the retail range but formulated for use by professionals. Perfection
will also mix specific colours for trade customers where the order is deemed
to be large enough.
• Wallpaper - this range is based on a select number of traditional patterns.
Only relatively small amounts of each wallpaper are made. These are
popular with people who want to feel that they are buying something that is
both traditional and exclusive.

COMPANY STRATEGY

Perfection paints are sold in most of the large DIY chains throughout Europe,
independent hardware stores and department stores. In addition their paint is
available to the trade through wholesale suppliers.

Perfection has traditionally traded on the quality of its products. Paints are made
from the best raw materials and Perfection prides itself on its safety and
environmental record.

The Perfection customer has been seen as someone who wants to spend a little
more to get a professional finish that will last for years. Perfection’s customers
are thought to be less likely to be adventurous in their tastes, people who want
classic colours that are unlikely to date.

To reflect this high quality image Perfection Paints are priced more expensively
than the majority of their competitors. It has never been part of the Perfection
strategy to try to compete on price. The products are sold in metal containers –
making them harder to reseal to prolong the life of the paint. Perfection has
resisted putting paint into plastic boxes and tubs like some of their competitors
as they think this would make them look cheap.

Two years ago Perfection set up a small facility in their factory to manufacture
high quality wallpaper. The previous MD thought it was an area where they could
trade on the Perfection reputation for quality and quickly build up a demand for
their products. He saw it as a part of their fight back after the disappointment of
the previous year’s profits.

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HUMAN RESOURCES

Pay policy at Perfection is in line with the industry. Both staff turnover and
absenteeism are not excessive, although figures have been creeping up steadily
in recent months. The company has a good training and development policy and
offers a wide range of staff benefits.

Overall staff numbers have remained fairly constant in Manufacturing over the
past two years. Over the same time period there has been a 15% increase in
staff in R & D and a 10% decline in the number of staff in Sales and Marketing.

Two months ago Perfection sent out a staff survey for all their staff to complete.
The results have just been released and are attached below.

Survey Question Scale Sales and Manufact- R & D (%) Other (HR,
Marketing uring (%) Finance etc)
(%) (%)
What is your own Low 51 4 9 22
level of morale? Moderate 39 34 38 48
High 10 62 53 30
How do you view Low 40 22 34 28
the level of morale Moderate 42 35 46 60
in the rest of the High 18 43 20 12
company?
How well do you Poorly 13 3 6 7
think you are Moderately 44 18 25 21
managed? Very well 43 79 69 72
How well do you Poorly 63 22 81 39
think the company Moderately 27 60 16 40
is managed? Very well 10 18 3 21
How optimistic are Pessimistic 74 16 4 15
you about the Neutral 23 24 17 55
future success of Optimistic 3 60 79 30
the company?
How much do you Not at all 0 22 3 0
think your A Little 34 46 59 18
department needs Some 42 27 30 57
to change ensure Quite a Lot 12 4 6 20
success? Very much 12 1 2 5
How much do you Not at all 0 2 1 3
think the rest of the A Little 2 4 1 2
organisation needs Some 3 8 1 49
to change to ensure Quite a Lot 32 14 8 28
success? Very much 63 72 89 18

SALES AND MARKETING

Sophie Miltend is the Director of Sales and Marketing. She joined Perfection from
University and has worked her way up in the company over the last 15 years.
Whilst well liked she found it hard to get the respect and support she felt she
deserved from the previous MD. Her experience is that Sales and Marketing are
always the first to be blamed when sales fall. Over the last year she has found
her job extremely frustrating. She has had a couple of approaches from
competitor companies and is starting to think that leaving Perfection might not be
such a bad idea.

The company strategy is to compete on quality but there is a growing feeling

amongst the Sales and Marketing team that they haven’t got the right products
to sell and therefore their hands are tied.

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Last year Perfection ran a television advertising campaign with a woman having a
daydream in which the inside of a stately home was being painted in Perfection
Paints – the dream then changed to her own more modest home which her
husband was painting, again with Perfection Paints. The voiceover said “you may
not own a mansion but you can feel like you live in one when you use Perfection
Paints”. This was supposed to emphasise the quality and the sort of aspirational
lifestyle that Perfection believe their customers want.

The advert was well received but does not appear to have had much impact on
sales. The sales team view is that it is hard to have an impact when Perfection
Paint is sitting on a shelf in a DIY store next to an own label paint that is a third
cheaper in price.

Perfection Paints seem to perform better in small local stores. This may reflect
the fact that there is less choice in these stores. They also do well in ‘up-market’
department stores that have home decoration departments. This is probably
because the customer profile of these stores is more in keeping with the socio-
economic profile of the average Perfection customer. Whereas DIY stores attract
a huge cross-section of people.

The wallpaper range was launched two years ago but hasn’t really been marketed
strongly as it was always seen as a bit of an experiment. The sales team have
managed to get it stocked in some small interiors shops and some department
stores but haven’t really tried to get it stocked in the large DIY chains yet,
believing that having hundreds of rolls of wallpaper stacked up in front of
customers would totally destroy its exclusive limited edition image, and hence its
appeal.

Sales and Marketing are putting a lot of reliance in the new products R & D is
developing. They would also like to see an expansion of the range of paint
colours to at least double the current number, and for them to be changed more
frequently, but suspect that Manufacturing are opposed to this idea.

Marketing recently commissioned some research to get some customer views.

The sample was large and all the different European markets were represented.
There were a few differences between the countries but the overall trends seem
to be pretty consistent.

Survey Question Scale Customer Response (%)

Perfection Paints offer value for money Agree 41
Disagree 59
Perfection Paints produce the best quality paint Agree 75
Disagree 25
Perfection Paints offer a comprehensive range of Agree 35
colours that meet my decorating needs Disagree 65
I have used Perfection Paints in the past Yes 42
No 58
Having used Perfection Paints I would use them Definitely 80
again in the future No 20
I like to change the colour schemes in my house 0-1 Yrs 8
every 1-2 Yrs 31
3-4 Yrs 48
5-6 Yrs 13
I like to decorate my home in keeping with the Always 30
latest trends Sometimes 44
Occasionally 19
Never 0

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RESEARCH AND DEVELOPMENT

Until Jean-Paul Marsaud joined as Director two years ago, the R & D function was
largely focused on improving paint mixing methods and formulas. Jean-Paul was
headhunted into the company and given the task of revitalising the function. He
has an excellent reputation for innovation and frankly was a bit of a ‘catch’ for
Perfection. He likes to do things his own way and the previous MD let him run R &
D with little interference.

Since Jean-Paul joined, the Board has been very generous with development
funds, much more so than in the past, and R & D have been able to focus on new
ideas and innovations. The R & D team believe that they have worked very hard
over the previous 24 months and now have a number of exciting products in
development. These include:

Bubble-free Wallpaper – the research says that one of the reasons wallpaper
declined in popularity was the technical difficulty of putting it up, making sure it
was straight and that patterns matched etc. In addition, there was the tendency
for air bubbles to appear shortly after the paper had been hung. R & D have
been working on a method that will solve the latter problem. They have
produced wallpaper with a chemical coating that is activated by water. The water
and coating react together to form a strong bond – and the seal means that
oxygen can’t get through and create air bubbles. After extensive testing they
believe that, if used correctly, Perfection can guarantee no air bubbles, which will
be a first in the industry.

Discussions with Manufacturing have been held about mass production and Jean-
Paul believes that if they get behind him Perfection could get the product on sale
by the start of next year.

Research suggests that with the addition of the bubble free coating total
wallpaper sales would rise to 6,000 rolls a month @ €40 per roll next year. With
a small year on year increase after that as new patterns are introduced. The
total cost of sales next year would be €1,100,000 per annum. Company
operating expenses would increase by 7% and advertising and promotion costs
by 10% next year. No further R & D investment would be needed beyond what is
already in the budget this year.

Odour Free Paint – one of the problems with paint has always been the smell it
leaves behind. This can linger for days. Perfection has found a way of adding a
masking ingredient to the paint so that there is no odour during or after the paint
is applied to the walls. So far other manufacturers have only managed to take
the majority of the odour away – they have never totally eliminated it. Most of
the testing has been done and R & D believe that the product should be ready to
launch at the beginning of next year.

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Research suggests that if all Perfection Paint is changed to the odour free formula
sales would rise to a total of 26,000 tins of paint a month @ €30 per tin next
year. There is likely to be a small year on year increase in sales if new paint
colours are added to the range. The total cost of sales next year would be
€2,700,000 per annum. Company operating expenses would increase by 5% per
annum. Advertising and promotion costs would only need to increase by 5% per
annum.

Having reviewed the situation the current MD does not believe that he can risk
going ahead with both products at the moment, nor does he believe that the
factory has the capacity currently, and he will be looking for advice from you as
to which to launch.

MANUFACTURING

The view from Manufacturing is that things are going well with no particular
problems to report. They have hit all their production targets and their health
and safety record is excellent. They believe that Perfection has the best paint
product on the market and the only issue is getting customers to buy the paint
and use it. The Director of Manufacturing, Jon Grimand, believes that once
customers have seen how good it is they rarely want to go back to other brands
and the rate of repeat purchase backs him up on this. He does not believe that
Marketing has got their advertising strategy right and he has been forthright in
saying this to a couple of his fellow directors. He believes that Perfection should
be trying to attract a wider spectrum of customers – those living in apartments
and professional couples in starter homes for example. His view is that the
company needs advertising that appeals to all these people.

He would like the Sales function to be much more proactive and thinks that they
would benefit from more targets and performance related pay. All the people in
Manufacturing have production targets and this appears to work well in
motivating them.

Manufacturing have recently had a few disputes with R & D. Manufacturing

believe that R & D should give priority to working on continuous improvement of
quality and incrementally expanding the range of paints and wallpapers. They
are, however, impressed by the work done on the bubble free wallpaper and are
pulling out all the stops to iron out the manufacturing process.

They are less impressed by the odour free paint and have expressed concerns
that the paint seems to be less durable than normal paint and that the finish
won’t last as long as the current formulation. R & D appear to have dismissed
this concern – but Jon wishes to delay further work on the paint until his
concerns are satisfied.

Jon has been with Perfection for 25 years and is well-liked. He gets on well with
everyone except Jean-Paul. He feels that Jean-Paul has deliberately kept
information on new products from him until the last moment and has found the
testing R & D have been doing on his production lines, often without warning,
extremely disruptive.

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FINANCIAL REPORT

A financial overview of Perfection’s performance for the last four years and
predictions for the current year are given below. You should assume that we are
currently in June of year 1. Last year was year -1, the previous year was year -
2, the year before that year -3 etc.

Perfection Paints
FINANCIAL OVERVIEW
Year -4 Year -3 Year -2 Year -1 Year 1
(∈) (∈) (∈) (∈) Predicted
Turnover - Paint 9,385,180 8,917,696 8,889,692 8,172,588 7,170,678
Turnover - Wallpaper 0 0 819,956 818,148 779,566
Total Turnover 9,385,180 8,917,696 9,709,648 8,990,736 7,950,244
Cost of Sales - Paint 1,714,300 1,731,592 1,735,956 1,810,192 1,812,787
Cost of Sales – Wallpaper 0 0 612,152 319,592 323,898
Total Cost of Sales 1,714,300 1,731,592 2,348,108 2,129,784 2,136,685
Gross Profit 7,670,880 7,186,104 7,361,540 6,860,952 5,813,559
Gross Margin 82% 81% 76% 76% 73%
Operating Expenses 1,129,150 1,194,798 1,480,886 1,498,482 1,502,887
Advertising and Promotion
Costs 1,131,148 1,136,908 1,133,796 1,481,596 1,002,002
R & D Investment 1,095,592 1,009,960 2,539,592 2,840,006 3,008,434
Operating Income 4,314,990 3,844,438 2,207,266 1,040,868 300,236
Operating margin 46% 43% 23% 11.6% 3.8%
Taxation (30% of OI) 1,294,497 1,153,331 662,180 312,260 90,071
Profit for the financial 3,020,493 2,691,107 1,545,086 728,608 210,165
year
Net Profit Margin 32.18% 30.2% 15.9% 8.1% 2.6%

The forecast for next year is that turnover, cost of sales and operating expenses
will remain at the current level unless the company does something to change
this i.e. launches new products.