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Environmental Analysis: Sherwin Williams

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Running head: ENVIRONMENTAL ANALYSIS: SHERWIN WILLIAMS







Environmental Analysis: Sherwin Williams
MBA580
University of Phoenix


Executive Summary
An important step in developing an effective strategic plan for Sherwin Williams Paints is to scan the organization’s external environment in order to identify opportunities for strengthening the company and threats against the current and future successes over the next three to five years. In addition to scanning the external environment, the company’s internal environment was studied to establish strengths and weaknesses of the organization.
The external environment produced many threats including potential political changes due to the upcoming elections that could see a swing to more government control over regulation of emissions from coatings. If this is to happen paint makers will need to invest more into developing products that meet tougher standards. Currently government regulations exist at the federal, state, and even the local level and this presents challenges to paint retailers since each location must be an expert in all applicable laws concerning sale and use of these products. Related to these concerns is the push for more environmentally friendly products and these demands put financial strains on paint manufacturers due to the high cost of researching and developing these products that comply with the new regulations.
Some economic threats include inflationary pressure, consumer purchasing habits, and the most significant of all would be the decline in the housing market. This has drastically changed which segment of customers purchase paint as the shift moves from painting contractors purchasing to DIY consumers who will paint their properties themselves. Other threats to be aware of include the flat predicted growth rate in labor, pending lead paint litigation that could severely impact the paint industry and Sherwin Williams in particular, and the threat of substitute products such as composite wood that is being marketed as a product that never needs to be painted.
The opportunities that exist after looking at this scan include taking advantage of the company’s economies of scale when it comes to purchasing from suppliers. Since Sherwin Williams is the second largest maker of paint in the world, the organization enjoys the benefit of receiving the best prices possible on raw material purchases and distribution costs. Another important opportunity was previously stated as a threat in society’s demand for more environmentally safe products. Although still true that these new products are expensive to research, develop, manufacture, and market, many competitors to not have the resources to accomplish this important task and are falling behind the larger companies.
Sherwin Williams is currently positioned well to take advantage of these opportunities and the shift mentioned above to safer products creates a significant competitive advantage for Sherwin Williams leading to the opportunity to capture more market share. The most significant threat of pending lead paint litigation is hard to prepare completely for since this could lead to nothing out of the company’s pocket all the way to a billion dollars worth of clean up costs if this litigation is upheld.
Analysis of the Remote Environments
Political Changes
Under the current administration rules and regulations on solvent-based products that could be harmful to people and the environment have not been as strict as they possibly could be very soon. “Some of the Bush administration's regulatory moves -- such as easing pollution control requirements for agriculture and smokestack industries under clean air and water laws -- have followed lobbying from business groups, which feared stricter rules if a Democrat is elected president” (Williamson, 2008, p.1). With a possible shift from a republican administration to a democratic one, Sherwin Williams must be prepared for a closer eye being placed on products that could be classified as harmful and eventually outlawed.
Government Regulations
When policies do shift to more government regulation on harmful products, companies need to adjust accordingly or face stiff penalties. History has shown plenty of government involvement within the paint industry dating back many decades. “The federal government outlawed the use of lead in paint in 1978, citing health concerns related to the ingestion or inhalation of lead paint chips. The paint industry had on its own initiative taken lead out of paint in 1955, responding to similar concerns. Companies such as Sherwin Williams stopped using lead-based paint as far back as the 1930s” (Taylor, 2007, p.1). If found in violation of the law sellers and users could each be fined up to $10,000 per violation (Bergmann, 2008). More recently solvent-based coatings have been under fire since oil-based coatings pose more harm than the water-based latex alternatives do. No federal mandate exists concerning these coatings, but many states have enacted their own laws banning the use of such solvents and even if a store is located in a state where they are still legal, that particular distributor must still be concerned with each neighboring state’s laws where the use is prohibited.
Environmental Impact of Products
Not only must paint manufacturers be concerned with violations of the law, they must also understand the environmental impact their products have on society. Most coatings, even water-based products, have some form of solvent that is released into our atmosphere. “As organic solvents evaporate, they release emissions of volatile organic compounds (VOC) and air toxics. These releases occur inside production facilities as well as when paint and coatings products are ultimately applied to building structures, consumer products, and other surfaces” (EPA, 2006, p.3). This has led society to push for the manufacturer and use of �Green’ products, or more environmentally friendly products, instead of traditional less costly goods and slowly trends are showing that consumers are becoming more willing to spend a little more in order to help the environment. “If you're like most people, you're willing to pay around 10 percent more to go �green,’ according to consumer research firm Mintel” (Alterio, 2008, p.1).
Inflationary Pressures
Predicated by the Fed as shown in the Table below, the expected inflation rate for 2008 will range from 1.7% to 2.0% and through 2010 stay relatively stable between 1.5% to 2.0%. This core PCE inflation rate is the personal consumption expenditures excluding food and energy (Federal Reserve, 2007).
2008 2009 2010
Core PCE Inflation 1.7% to 2.0% 1.5% to 2.0% 1.5% to 2.0%

Like most businesses Sherwin Williams must be concerned with the rise of prices due to inflation and has historically passed on these higher costs to the customer through bi-yearly price increases that traditionally have been 1 to 2% higher than the going rate of inflation.
Consumer Purchases
Predicted growth in household goods and services expenditures are shown in the table below. A large percentage of paint sales are geared towards this buying segment either through purchases directly from the homeowners or from hired painting contractors. The trend seems to be a slow but steady increase in consumer spending on items designed for the home over the next 18 months, then a nice increase of 3.3% in the year 2010 (EIU dataservices, 2008a).
(In millions) 2008 2009 2010
Consumer expenditure: Household Goods and Services

$459,888

$468,066

$483,655
Percent change + 1.7% + 1.8% + 3.3%

Decline of Housing Market
As the United States economy takes a turn for the worse the demand patterns for coatings are directly impacted. “A downturn in the number of new construction projects not only leads to an obvious loss of turnover in the project business, but as less people move from their old into new houses this may also reduce the number of relocation-triggered renovation activities” (Wright, 2008, p.1). As the table below shows the new construction market has slowed down dramatically and the predictions through 2010 do not look much better (EIU dataservices, 2008b).
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
New Dwellings Completed (In Thousands)

1570.8

1648.4

1678.7

1700.1

1777.8

1786.0

1801.0

1809.0

1820.0

1832.0
Percent Change N/A + 4.9% + 1.8% +1.3% + 4.6% + 0.5% + 0.8% + 0.4% + 0.6% + 0.7%

The United States is currently in one of the worst economic downturns in recent memory and paint manufacturers have needed to adjust marketing tactics accordingly. This near recession forces paint retailers to focus on the Do It Yourself (DIY) customer to compensate for the lower painting contractor sales since poor economic times lead people to paint their homes themselves instead of hiring a painting contractor to do it. As lower margin contractor sales decline, higher margin DIY sales increase unless the economy hits a major recession where people will choose to skip repainting altogether.
Demographic Changes
In an opposite effect compared to the previous economic downtown example, when demographics such as the average age of paint customers rise, DIY sales fall. “The DIY sector of the architectural paint market has been forced to contend with the aging of the 'baby boom' segment of the population, which is one of its major customer segments as well. The percentage of households with the head of the household being 55 to 64 years of age will grow to 25% in 2010, up from 12% in 1995. These consumers no longer want to do work for themselves (Challener, 2004, p.1). This shift in age demographics means that companies like Sherwin Williams still need to make their paint the product of choice so that the head of households insist on the company’s paint being used when hiring painting contractors. The baby boomers have other desires than painting and if economically feasible they will contract the work out. “They desire safety and want more leisure time to enjoy themselves. Those that can afford to will hire contractors instead” (Challener, 2004, p.1)
Analysis of the Industry Environments
Paint Industry Overview
Demand for architectural paints is predicted to rise 3.9% annually through 2011 and be valued at $47 billion. Growth will slow down in comparison to the results of the 2001 to 2006 period, due to a continued decline in building construction through the year 2011. Water-based paints are expected to expand their share of the market to 73% (Coatings World, 2008). Sherwin Williams will need to monitor the housing construction data closely in order to identify indicators that would show either greater declines on the horizon or signs of the economy coming out of the current housing market slump. “The current housing and mortgage crisis in the U.S. will restrain paint sales to the new homes market” (Coatings World, 2008, p.1).
The United States labor force outlook seems to indicate a flat growth rate in available employees between now and 2010 as evidenced by the table below (EIU dataservices, 2008c).
2008 2009 2010
Working age population growth increase.
+ 0.8%
+ 0.8%
+ 0.8%
Labor force (In millions) 155.2 155.2 155.1

Companies like Sherwin Williams will continue to fight for the best available employees, as will most others within the paint industry.
The Rhode Island state Supreme Court will soon be hearing an appeal of a case that found three former manufacturers of lead-based paint guilty of creating a public nuisance in Rhode Island and damages are estimated to reach over two billion dollars. The ruling on the appeal will have a significant impact on the paint industry as a whole and if upheld will put many other companies on the defensive incurring heavy litigation costs and possibly financially crippling damages. Sherwin Williams is one of the three companies directly involved in the Rhode Island case and although many other state’s cases have been turned away over the last two decades, 15 to 25 more states are estimated to sue paint manufacturers over the next five years if the Rhode Island verdict stands.
Environmental legislation varies from state to state and even from county to county but standards that many states follow are the actions of the California Air Resources Board in enacting emission controls on products. Each year more states have added specific VOC level restrictions on many different products and paint coatings are always on the lists. These various state, county, and even city laws are too numerous to list, but all paint companies must be aware of the particulars involved in each regulation that affects where they sell paint in order to avoid hefty penalties.
Threat of New Entrants
The main barriers to entry in the paint industry are economies of scale and capital requirements. Economies of scale are present in many aspects of this industry and include production, research and development, marketing, and distribution (Pearce & Robinson, 2004). With Sherwin Williams being the largest paint maker and retailer in North America, the company enjoys these economies of scale and uses them to create competitive advantages. Capital requirements do keep new entrants away due to the vast amount of capital needed to produce paint products in an economical way. The main threat of new entrants then comes down to small hardware stores that distribute for large paint manufacturers like Benjamin Moore or California paints whom have limited company owned retail outlets.
Bargaining Power of Customers
Although the paint industry does not have organized buying organizations that drive the price of goods down, painting contractors do exert buying power on an individual basis. These customers range in size from single one man painting operations to large commercial painting companies that employee hundreds of painters. Like in many industries the larger quantity of products one has the potential to buy means a lower price point can be demanded due to the customer having multiple supplier sources to choose from. Most paint retailers are willing to take lower margin sales for the right amount of quantity that in turn increases overall market share.
Bargaining Power of Suppliers
Suppliers to the paint industry do not enjoy extreme power over the large paint retailers due to a high amount of options available to purchase from. Paint retailers can choose from at least five different spray equipment suppliers and often will sell these large ticket items based on which supplier has provided the best cost and return policy if the item does not sell within a specified amount of time. Sherwin Williams enjoys this return feature and if certain spray equipment does not sell within six months the company has the option of returning the equipment to the original vendor, without shipping charges. This is a luxury that our smaller hardware store competitors do not enjoy. Certain consolidations of vendors have occurred recently and that has slightly increased the power of suppliers and the industry expects this trend to continue, as smaller suppliers need to merge just to survive.
Threat of Substitute Products
A threat to the coating industry is the popularity of new forms of decking materials such as Trex wood, which is similar to plastic made with recyclable materials such as plastic grocery bags. This trend is similar to the vinyl siding craze that gained popularity 25 years ago and replaced a great deal of wood siding that needed repainting every five to eight years depending on the individual conditions of each building. Vinyl siding eventually proved that the need to still paint exteriors existed as the vinyl faded or homeowners moved leading to different desired colors by the new owner. Composite decking is expected to trend in a similar fashion as vinyl siding did where the industry will see a shift away from deck coatings in the short-term, but eventually this will level off and return to close to normal levels in the long-term.
Competitive Analysis
Currently Sherwin Williams retail paint store’s local market is mainly comprised of painting contractors, property managers, and DIY customers. Key factors that will be examined in the local competitive analysis table below include product and service offerings to each local market segment, delivery and on site advice offerings, hours of operation, and company reputation.
Local Competitor Analysis Table
Product and Services Sherwin Williams Central Paints Home Depot
Painting Contractor Products and Services Yes. Products and pricing are geared to this segment along with dedicated service reps to support their businesses. Yes. Products and pricing are offered to this segment with limited rep support only offered through store manager. No dedicated sales rep. Yes. Products are priced for this segment, but quality is lacking and no rep support at all offered.
Property Management Products and Services Yes. Products and pricing are geared to this segment along with dedicated service reps to support their businesses. Limited. Products and pricing are limited in how low this independent dealer will go to this segment and limited rep support only offered through store manager. No dedicated sales rep. Yes. Products are priced well for this price conscious segment and lack of quality is less of a concern to this market and no rep support at all offered.
DIY Products and Services Yes. Pricing is high and a concern to this market and all DIY services desired are met. Yes. Pricing is high and a concern to this market and all DIY services desired are met. Yes. Price is inline with this market, but quality is lacking. Limited service meets some of customer’s desires.
Delivery and On Site Job Advice Yes. Delivery available at all hours of operation and both store manager and sales rep will advice on site when requested. Limited. Delivery only available during certain hours on weekdays. No on site advice available. Limited. Extremely limited to bulk orders only and no on site advice available.
Hours of Operation Average. 7-6 Mon to Fri, 8-6 Sat, 9-5 Sun.
Low. 7:30 to 5:30 Mon to Sat, closed Sun High. 6-10 Mon to Fri, 6-9 Sat + Sun.
Company Reputation High. Good reputation through word-of-mouth referrals and nationally recognized brand. High. Good reputation through word-of-mouth referrals but relatively low brand recognition. Low. Well-known business establishment that is known for low quality and service, but survive on low price options.

According to the analysis of key competitive factors in the table above, Sherwin Williams does have certain competitive advantages over local paint retailers with the best delivery and on site advice available in the area. This is important to both the painting contractor and property management customer segments and less to the DIY consumer. However, this analysis has shown areas that the company can improve upon including a product offering of lesser quality and low price that would capture the lost business that Home Depot enjoys with the price conscious consumer.
Analysis of the Operating Environments
The strengths and weaknesses in Sherwin William’s operating environment can be observed through analyzing the local competitive position of the operation, the reputation and relationships with suppliers, the relationship with all customer segments, the ability to recruit and retain quality employees, and the local unit’s financial outlook. The local competitive position of Sherwin Williams in the Seacoast region of New Hampshire is strong and expected to grow from 19% in 2007 to 25% by 2010, but as the projected market share percentage chart below shows, the opportunity still exists to take much more market share from the competition.



Two of Sherwin William’s strengths in particular will aid in this market share growth since the company is known to lead the industry in product innovation at a time when society is demanding changes in paint products and the overall high quality of products will appeal to all segments outside of the low price only customers who traditionally shop at Home Depot.
The reputation and relationship with suppliers is important to any business in the industry, but to a certain degree less for Sherwin Williams or Home Depot in comparison to the smaller independent dealers such as Central Paints or Houghton’s Hardware. The large organizations enjoy economies of scale purchasing power and suppliers infrequently play hardball with the larger companies in terms of payment or return features due to the large amount of supplier options out there. That being said, Sherwin Williams does develop a strong working relationship with suppliers whenever possible and many of our spray equipment vendors such as Graco or Titan Tools are more of partners with us in the selling process to painting contractors. Many times the spray equipment sales rep will join us on visits to job sites and at our company held pro shows in an effort to work as a team in making the sale of large equipment purchases. Overall these relationships with suppliers form an important strength for Sherwin Williams.
The relationship between the organization and customers proves to be both a strength and weakness. The established strong working relationships with painting contractors has proved to be a solid strength and all indicators point to this continuing due to the dedicated sales reps assigned to painting contractors and property managers. Until local competitors decide to invest in such a position this will remain an important strength. On the other hand, the relationship with our DIY segment is proving to be a weakness that the organization is trying to turn around through extensive marketing. Two roadblocks exist in achieving success in this area with the first being price. Home Depot will sell some products that they claim are equal in quality, for nearly half of the retail cost of paint at Sherwin Williams. When price is significantly lower many consumers will choose the lower priced alternative regardless of the drop in quality. The second roadblock is the organizational culture within the local Sherwin Williams stores that sees most of the focus on larger dollar sales to painting contractors and unfortunately, not enough attention is spent on the higher margin, low dollar sale to the DIY consumer.
Like in just about any industry the ability to recruit and retain quality employees continues to be a weakness for most, but has proven to be a strength for the local Sherwin Williams outlet due to the five store employees all being at this Southern New Hampshire location for over three years with one employee going on her 17th year. Having a knowledgeable workforce is by far one of the most important strengths for Sherwin Williams, but unfortunately, that could change within a matter of days if employees choose to leave for other opportunities. Working in a paint store is considered a retail job and the retail industry is predicted to have flat growth in available workers as shown in the labor force trends earlier. The organization has been named one of the best 100 places to work in 2008 by Fortune magazine mainly on the company’s commitment to employees (Fortune, 2008).
Another strength for Sherwin Williams would be the financial outlook of this business unit. Profit margin of 10.9% is below the company budgeted amount of 12%, but still considered healthy within the industry. This comes at a time when companies are struggling to turn a profit as the economy is near recession level. Although active charge accounts declined by 10 to 112 accounts in 2007, the average dollars spent per account did increase 13.9% leading to a 4.6% improvement overall in active account spending. A weakness in the financial results is displayed in DIY sales numbers, which only comprise 22.8% of this unit’s overall sales. As trends shift from hiring painting contractors to DIY customers buying and applying the paint themselves during tough economic times, this will be an important customer segment to focus on over the next three years.

Sherwin Williams Local Unit Financial Results and Key Metrics
Financial Statement (In thousands)

2007
Sales:
DIY Sales 278
Contractor Sales 666
Property Management Sales 276
Cost of Sales 634

Gross Profit: 586

Expenses:
Total Service Expense 192
Controllable Expenses 162
Non-Controllable Expenses 99

Operating Profit: 133

2007 Key Performance Metrics:

1. Profit Margin 10.9%
2. Average number of active charge accounts 112
3. Number of employees 5

Long-Term Objectives
After analyzing the remote, industry, and operating environments of Sherwin Williams, four long-term objectives are created that provide motivational goals for the organization to achieve over the next three to five years. These long-term objectives will also aid in measuring the overall success of the new strategic plan that will shortly be put into place. The four long-term objectives will address sales growth, customer satisfaction improvement, employee morale improvement, and specific DIY market share increases.
1. Increase local paint unit sales by 10% each year for five years as measured by profit and loss statements.
This goal is attainable through the continued focus on promoting new and innovative green paint products that give Sherwin Williams a competitive advantage over local competition whom do not have similar offerings. A direct marketing focus on the DIY segment along with organizational culture change that accepts these customers the same as painting contractors will aid in the pursuit of this objective.
2. Increase DIY market share each of the next three years by increasing DIY sales and DIY cash accounts each year by 15% as measured by customer segmentation reports.
Currently Home Depot has the largest share within this market segment and Sherwin Williams has the opportunity to capture a large chunk of this through service that Home Depot does not provide. One such service would be setting up DIY cash accounts that are different from painting contractor charge accounts since credit terms do not exist, but other features remain the same such as records of past purchases are maintained for each account. This feature allows customers to easily find past color formulas, sheens, and products purchased and these records are classified by room titles or property locations.
3. Create a high focus on customer satisfaction as measured from random customer satisfaction survey scores, with a goal of at least 95% satisfied each of the next three years.
This long-term objective will spill over into many other areas such as sales gains and profitability increases. As customers become more satisfied and feel like they all are being treated equally and fairly word of mouth will spread and business will continually grow. The surveys mentioned will be distributed through various channels such as product return address capturing, cash and charge account distribution, and e-mail surveys.
4. Attain high employee morale, as measured by HR survey scores specifically administered to the retail paint store employees with an annual increase in performance by 15% over the next five years.
The surveys will be marked as successful if the score averages a 90% or better. Similar to the last objective, as these scores rise the productivity gains will be contagious and lead to strong financial performance in other areas as well. An important financial gain from this will be reduced hiring costs as a result of lower turnover since the need to rehire will decline.
Conclusion
This environmental analysis provides the foundation to build a successful new strategic plan for Sherwin Williams as this scan looks at factors from the remote, industry, and operating environments that directly impact the organization. Opportunities such as becoming the choice of the highly demanding and environmentally conscious customer through threats of damages from lead paint litigation all test the company’s strengths and highlight the weaknesses. Leading the industry in research and development knowledge, along with having the most resources available to devote to creating, producing, and marketing new and innovative paint products, puts Sherwin Williams in a strong position within the paint industry for many years to come.

References
Alterio, J., M. (2008). Consumers pay green to go green. LoHud.com. Retrieved April 25, 2008, from http://www.lohud.com/apps/pbcs.dll/article?AID=2008804220355
Bergmann, J., M. (2008). Lead Based Paint. Frascona, Joiner, Goodman and Greenstein, P.C. Retrieved April 25, 2008, from http://www.frascona.com/resource/jmb896lb.htm
Challener, C. (2004). Decline in DIY: contractor paint sales are growing while DIY paint sales are on the decline as consumers choose to enjoy more... All Business. Retrieved April 25, 2008, from http://www.allbusiness.com/sales/sales-forecasting/148047-1.html
Coatings World. (2008). Global demand for architectural paints to exceed 21 million metric tons in 2011. Retrieved April 26, 2008, from http://www.coatingsworld.com/news.php
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EIU dataservices. (2008c). United States – Market Indicators and Forecasts: Competitive Labor Forces. Retrieved April 26, 2008, from http://secure.alacra.com.ezproxy.apollolibrary.com/cgi-bin/alacraswitchISAPI.dll
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Federal Reserve. (2007). Minutes of the Federal Open Market Committee. Retrieved April 26, 2008, from http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20071031.pdf
Fortune. (2008). 100 Best Companies to Work For 2008. Retrieved April 27, 2008, from http://money.cnn.com/magazines/fortune/bestcompanies/2008/snapshots/98.html
Pearce, J. & Robinson, R. (2004). Strategic Management: Formulation, Implementation, and Control, Chapter 3: The External Environment. The McGraw-Hill Companies.
Taylor, J., M. (2007). Lead Paint Showdown Looms in Ohio. The Heartland Institute. Retrieved April 25, 2008, from http://www.heartland.org/Article.cfm?artId=20633
Williamson, E. (2008). Political pendulum swings toward stricter regulation. Greenchange. Retrieved April 25, 2008, from http://www.greenchange.org/article.php?id=2309
Wright, T. (2008). Exterior Architectural Coatings Market. Coatings World. Retrieved April 25, 2008, from http://www.coatingsworld.com/articles/2007/10/exterior-architectural-coatings-market.php

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