BU5720 Seminars in Executive Management Cynthia L.

Stuart Inner-City Paint September 19, 2011

COMPETENCIES & STRATEGIC FACTORS AFFECTING ICP
CASE SUMMARY Inner-City Paint Corporation of downtown Chicago Illinois manufactures primarily flat white wall paint and serves the immediate downtown Chicago area competing mainly on speed of production turn-around. This strategy served Inner-City Paint well for the previous five years resulting in an organization that grew from a two-person company with $60,000 in annual sales to a $1,800,000 in annual sales organization with 38 employees. As is often the case with closely held, often family owned, organizations that experience rapid growth, Inner-City Paint continues to utilize the same controls and hands-on management style as a 38 person organization as it did when it was a 2 person shop. The approach that was appropriate as a smaller start-up company is not advantageous or sustainable for a larger more complex organization. The challenges facing management include developing processes to streamline and understand production, improved cash flow management, company image and branding improvement, and finally adjustment of managements role within the organization. I will access Inner-City Paint Corporation from the point of the challenges identified and make suggestions in regards to strategic alternatives and a recommended course of action.

SWOT & FINANCIALS

CASE ANALYSIS Strengths - Inner-City Paints location, pricing and fast product turn-around has driven significant business growth over the past 5 years. Weaknesses & Opportunities - Inner-City Paint has many key issues driving poor performance. First noted is the lag between the time when they are paying their suppliers (immediately with C.O.D.) and employees versus the time to it takes to collect receivables from customers (30 60 days). The current ratio of .92 indicates an inability to pay short-term liabilities from short term assets. Cash is paramount to the financial management of a growing company like Inner-City Paint and the current cash flow situation is causing financial and production stress on the organization. 1 |Page

Secondly, lack of organizational controls is impacting many facets of the business. One area in particular is product pricing. With a current gross profit margin of .20 (($1,784,080-$1,428,730)/$1,784,080), Inner-City Paint Corporations gross margin isnt large enough to cover other expenses beyond cost of goods sold and still yield a healthy profit to sustain and put money back into the company. Other areas reflecting poor controls include inventory management, product quality management, and manual operational processes that require direct oversight by the owner to ensure quality. Also, the Presidents salary (Stanley Walsh) of $132,000 and the Office Managers salary (Stanleys mother) of $66,000 are both excessive and draining the organization of working capital. The key issues driving poor performance mentioned above are reflected in the poor facility conditions and lack of responsive service which in turn drive employee morale and customer perception of the business as disorganized, desperate, and strategically and financially uncertain. Inner-Citys company image, customer/employee confidence and overall organizational strategy and reputation also need improvement to increase profitable future sales. Threats Threats impacting Inner-City Paints include lost customer confidence, economic slowdown and possible new competition that could come into the area. STRATEGIC ALTERNATIVES Strategically, owner Stanley Walsh could consider selling the company to someone who is better equipped to handle all of the challenges facing Inner-City Paint Corporation; however, taking into account the current poor state of the company, Stanley should expect to receive at best a discounted offer for the company. Another viable option includes implementation of controls in many areas of the company to allow Stanley to strategically lead the organization. Controls assist management with oversight and direction of the organization without personally having to touch every area and aspect of the organization. Finally, the third option for Inner-City Paint Corporation is to continue to do business as they always have and in the very near future cease to exist due to a lack of cash and capital while blaming the companys demise on uncontrollable negative economic forces. This third choice of status quo is the unfortunate option many small businesses take due to an inability to adjust with changing factors such as the economy, company size and/or technology.

RECOMMENDED COURSE OF ACTION

AREAS OF FOCUS As a hired consultant of Inner-City Paint Corporation, I recommend owner Stanley Walsh work with an outside business expertise (i.e. hiring the talent or bringing in short-term consultant) to incorporate controls, processes and procedures into the organization. It is critical that someone from the outside assist with the needed organizational 2 |Page

improvements, because changing from the inside can be challenging, especially for businesses like Inner-City, that have an ingrained culture which needs drastic improvement in the following areas:

RECEIVABLES Management and oversight of receivables to automate and speed up the billing process with the use of technology can improve overall cash flow. Suggested techniques to improve receivables include automating the billing process, discounts for rapid payment, application process for noncash customers, deposits at time of order and timely contact of slow paying customers with avoidance of slow payment situations in the future with a C.O.D. (cash on delivery) policy used in appropriate instances. PAYABLES In a rapidly growing company, expenses that are growing faster than sales can indicate a control problem. Expenses should be examined carefully to take advantage of creditor payment discounts and terms. Open communication with suppliers helps to facilitate a relationship of cooperation that can be beneficial during challenging times. Examination procedures for payables need to be implemented. INVENTORY AND PRODUCTION MANAGEMENT When employees know that inventory and production management controls are in place, with clearly communicated procedures and expectations, they will strive to meet these expectations. If there is additional incentive, beyond a weekly salary, to meet these expectations, the employee focus on performance and goal achievement will intensify. Conversely, if there is no focus on a particular area, the opposite will occur which has proven to be costly to Inner-City Paint. Establishing an electronic inventory control system will allow for older inventory to be used quicker, improving quality, while controlling accountability for raw materials coming into the facility and finished product leaving the facility. These controls should reduce expenditures which directly impact net income. GROSS MARGIN & NET INCOME Both gross margin and net income need improvement for company sustainability. This can be done by raising prices, at the risk of losing business, or cutting expenses. The Presidents salary and Office Managers salary needs to be closely analyzed and reviewed. With a family owned business, this can be a challenging area to improve for obvious reasons. Stanley should seriously consider re-distributing some of his and his mothers salaries back into the company for working capital needs. Stanley should also evaluate the wages, benefits and abilities of his current employees and invest back into his workforce to encourage longevity and expertise within the company. MORALE, BRANDING AND EMPLOYEE/CUSTOMER PERCEPTION Improvements as outlined above will help to enhance morale, and employee/customer perception of management and the organization. However, a

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concerted effort should be focused on this area after the other improvements are made. To improve the overall perception by current and prospective customers, improvements and initiates to consider include facility improvements, marketing and sales initiatives, short and long range goal development, and employee incentive plans for performance and achievement. With an all company effort, and managements oversight, Stanley Walsh will be pleasantly surprised by the future profitability, sales and growth potential of Inner-City Paint.

SHORT & LONG TERM ACTION PLAN With any strategy, there is always a certain degree of risk. For Inner-City Paint, making the operational control changes is relatively easy compared to the overall cultural changes necessary to bring about true transformation of the company. For this reason, I recommend bringing in someone from outside the company to guide the new initiatives outlined. This outside force will need to manage the changes and receive employee buyin at all levels of the organization. I recommend an action plan as follows: Step 1 Investigate and invest in technology to stream-line the financial and inventory functions of the organization. At the same time, assessment of current employees abilities to utilize the new technology also needs to occur. If employees are unable or are unwilling to utilize the new system, then difficult management decisions need be considered. Training will need to be considered and outlined at many levels. Step 2 Discuss upcoming changes with all employees to review new procedures, equipment, training schedules and future expectations. Ask employees to participate in the changes with input and guidance from many areas of the company. It will be critical for Stanley to participate in the technology selection process and implementation process (below). Step 3 Implement new software and procedures accordingly. Step 4 Discuss with Stanley needed changes in salary and benefits of key family members, including Stanley, to help turn the company around and improve future profits. As owner of the company, Stanley needs to see that his company is also an asset which needs to be cared for and guided to stay strong and healthy and grow accordingly. Step 5 Initiate a branding campaign to improve overall company image and perception. This should include some basic cost effective facility improvements, outreach to customers and prospects in the form of marketing and evaluation of the overall customer experience. Management expectations concerning employee performance should be evaluated and expectations documented. This step really works to change the overall image and perception of the entire organization.

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CONCLUSION
Inner-City Paint, like many family owned and closely held businesses, experienced significant business growth without making the necessary operational and strategic adjustments to ensure profitable and sustainable expansion. Overexpansion is often confused with business success and can ultimately lead to a lack of working capital, as it did for Inner-City Paint. Managed, slow and steady growth is optimum for a business like Inner-City Paint to allow for necessary cultural and organizational fine-tuning to occur simultaneously with business growth.

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