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Decorative Company: SWOT and Environmental Factors

4197 words (17 pages) Business Assignment

30th Nov 2020 Business Assignment Reference this

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EXECUTIVE SUMMARY:

A case study is a part of our curriculum that gives us knowledge about real problems(situations) in any organization. A case might be used as a direct teaching vehicle taking the place of lectures, as the basis for written reports, or as the basis for tutorials discussions. The case study also helps to understand & correlate the theoretical concepts better, which remains uncovered in the classrooms for training in decision making.

The topic that has been taken for the case study is:

DECORATIVE INTERIORS INC.

It was in July 2006 that Rocco Rapini, the owner of Decorative Interiors Inc., suffers a heart attack and is advised by the doctor to lead a stress-free life and change his lifestyle. He is exploring the best future course of action regarding his business to ensure a healthy lifestyle for himself and financial stability for his family as this business was the primary source of income for his family for the last 18 years. He has the choice of selling the business, reverting to a home-based enterprise, shifting to cottage country, or recruiting individuals to run his business. After all, this business was his life. He had grown proud of it and did not want just to give it up. The profits to be earned, the risks involved, and stress levels have been taken into consideration to prepare the recommendation.

It is recommended that Rapini reverts to a home-based operation to attain maximum financial returns as this option would give Rapini more flexibility in terms of hours of operation, and he was confident that he could reduce total operating expenses to around 35 percent of the sales. It would help him a reduction in stress from current levels due to reduced working hours. He could sell his showroom for nearly $450,000, which would be financial help for him, and he can move to a rented premise. Also, he can hire employees like sales managers or part-time installers in case he sees any fall in the sales.

BACKGROUND:

Rocco Rapini founded the company Decorative Interiors Inc. in 1988. He started it in GTA as a home-based business that specialized in the sale and service of custom-made window coverings such as blinds, drapery and shutters.

This idea to start the business came in Rapini's mind after working for ten years for other companies, both as an installer and as a salesman. Although he had migrated to Canada only ten years earlier, had minimal business experience and had his family to support, Rapini believed that he had salesmanship and enough industry knowledge to succeed on his own. Finally, in 1988 he started his home-based business.

The plus point for his success was that he had a good command over the Italian language due to which the Italian population of GTA got attracted to his place. Also, the overhead cost was low due to which company earned high margins on most of the sales. He became authorized dealer to many brand manufacturers such as Hunter Douglas, Levolor, Robert Allen, Maxwell and Kravet, which gave instant credibility with the customers, and the company could compete with other retailers.

Apart from this, Rapini started providing "free shop-at-home service" advertisements in local newspapers and local telephone directories, which attracted huge customers by knocking on the doors. Although Decorative Interior charges bit high fees as compared to the competitors because of their quality and timely service, customers were willing to pay for it.

In February 1992, Rapini moved to a 14,00-square-foot showroom on the border of Vaughan and Toronto. His wife Conchetta, too, joined his as a fulltime employee after completion of a few of the interior decoration courses. Her administrative and selling skills became a plus point for the company. The showroom allowed owners to display their work because of this; more customers were attracted, and leads were closed on the spot.

Later, the company started giving free in-home consultations, which lasts from half an hour to nearly five hours. DI estimated that 50% of the estimated meetings were converted into deals.

The twist came when in early 2003, Rapini hired a very experienced decorator named Mary Morris. Although she was experienced in sales and increased the company sales to a record level at some point, she was cheating Rapini and his wife, as they were busy with some other jobs Mary used to make some important calls on their behalf. She was found saying that she owns Decorative Interiors Inc. On which when Rapini and Conchetta spoke to Morris about the concerns, she brushed off their comments by saying, "who cares what customers think? I am going to make to rich" and "it's better to make $500 then to make nothing at all" Rapini knew the concern, but he was willing to keep quiet as long as the sales kept rolling on.

In July 2004, the showroom got extended, and the new location was ready for operation in February 2005. At the point, Morris met with a car accident, and she was just coming to work and going and was not able to make any sales. Then Rapini advised her to take samples at home and contact customers by a call to complete the transactions. For this, Rapini was in drought as sales were not increasing, and the company was going in loss. After looking after, Rapini came to know that Morris was making her sales and promoting her work by selling things to the existing customers of Decorative Interiors Inc. And paying the dealers by cash. Finally, Rapini fired Morris in august 2005.

The year 2006 was not a good year for Rapini and his wife. Although they were happy to see the new showroom, it does not increase the sales, and they were getting high pressure from dealers to improve sales. Also, the market became more competitive. After having a lot of stress about the business, Rapini suffered a heart attack, and he was advised by the doctor to change his lifestyle. Now Rapini lies in bet thinking about different options he can have because he does not want to quit the business as it was their family's only earning from the past 18 years. Various thoughts came into his mind to shift the company as a home-based, either move to the cottage country area where the competition will be less, or either hiring the staff to run the business or just to sell everything and shut down the business.

STATEMENT OF PROBLEM:

The problem started arising when Rapini and his wife hired Morris as a decoration and sales agent. They blindly had faith in her and was just looking towards the company sales growth and never noticed the other side where she used to tell people that she is the owner of the company. Due to which company had lost many of the customer's trust. It was the internal factor that was one of the failures for Decorative Interiors Inc.

Due to this, Rapini started taking tension and he suffered a heart attack due to which the doctor advised him to change his lifestyle. Now he was in dilemma what to be done with the business as he had many ideas in his mind like to shift the company as a home-based, either move to the cottage country area where competition will be less, or either hire the staff to run the business and last one was just to sell everything and shut down the business.

The second was that when Morris met with a car accident and she could take samples at home, and no one bothered to receive follow up as she was making her sales rather than the company's sales. Which eventually was noticed by Rapini due to which he fired Morris, but at this point, he was too late as he had lost many of his existing customer that reduced sales profit of the company.

Another factor was the high competition in the market due to which customers became more price-conscious and needed the services at a lower price as there were a lot of competitors in the market.

Dealers want the sales to supply the products at a cheaper rate and Raping was not able to make huge sales although he was having all the facilities.

The main problem was that even though Rapini had sales and little business experience to start a new business. His idea was fine till the time he was doing home-based business. But as he moved to a showroom and planes to extend his business so, at the point, he should have hired professionals to make sales for him. And he should have to look after them and kept an eagle eye on what they were doing rather than himself involving in making sales and blindly trusting the employees.

SITUATION ANALYSIS:

Owners of Decorative Interiors need to examine the three inter-related environments to come up with an effective strategy; the three interrelated settings in which the company operates are the geographic market, the industry environment in which the company operates and wider socio-economic/macro-environment.

SWOT ANALYSIS:

SWOT means strength, weakness, opportunities and threats. Decorative Interiors can use strengths to create a  good position  in the market, can work to reduce weaknesses so that it can compete with the competitors, look out the new opportunities emerging so that it can have more growth and meet targets in future and lastly, work on the threats from internal and external environment so that company can move on the path of success.

STRENGTHS – DECORATIVE INTERIORS INC.

Experience: Decorative Interiors have more than ten years of experience in the same field, and the business was started as home-based, where the owner learned how to handle different situations and got success because of timely project completion and higher quality provided to customers.

Providing free consultations to customers: Decorative Interiors provided free interior decoration consultations to customers by visiting their place and helping them decide what type of design would be the best shooting as per their demands. It resulted in 50% of lead closures. Hence, improving sales.

Strong Balance Sheet and Financial Statement of the company helps the company to invest in new projects thus increase the opportunity for higher profits.

Decorative Interiors Inc. has a strong marketing skill due to which it was able to make good deals with the customers. The sales person Morris was an expert in sales that became the back bone of the company to enhance its sales to the peak

Large showroom space and the way work was presented to the people was another strongest point of Decorative Interiors Inc as customers were able to see the work before they make final decision.

WEAKNESSES – DECORATIVE INTERIORS INC.

Weaknesses are the areas where the company lacks and needed to be improves as soon as possible to gain success.

Organizational culture: It seems that Decorative Interior’s organizational structure was not that good because the managers wants to just keep the information with them only. Rapini himself was looking after every happening in the company which was not that good for the growth of the company. The hiring of Morris and trusting her was the biggest weakness of the company.

Lack of critical talent: I believe that Decorative Interiors are suffering from a lack of essential skills, especially in the fields of technology and digital transformation.

Inventory management: Based on the details provided in the case it can be seen that inventory and cash cycle is not managed in proper way.. Like in 2004, the stock was $209,660, whereas, in 2005, is reduced to $157,150, which clarifies that if demand increased company cannot fulfill it on the spot.

Low profitability, which can hamper new project investment – Even though interiors Decorative financial statement is stable but going forward, Interior Decorative 5-7% profitability can lead to a shortage of funds to invest in new projects.

OPPORTUNITIES – DECORATIVE INTERIORS INC.

Opportunities can come at any point in the business. As per the Decorative Interiors it had opportunities from the political changes in government rules and regulations, opportunities from dealers providing products at lower cost, earning of customers, customers financial conditions, emerging new trends in the market and so on.

Growing market size and Evolving Preferences of customers –over the past ten to fifteen years the market has grown at the peak there were lot of changes that occurred in customer preferences and tastes. It presents interior decorative two significant challenges one was how to present the new customers as per their demands and needs another was how to handle the existing customers.

E-commerce and social media: Sharing the company’s experience by customers to their surrounding, posting the pictures on social media can give free advertisement opportunity to the company. Also, making an e-commerce site would be a on opportunity to enhance sales as customers can look the work from home and could make online orders for work.

Opportunities at an international market. Decorative Interiors could launch its product globally which could be a good opportunity for the company to enhance its sales.

THREATS- DECORATIVE INTERIORS INC.

Threats usually comes from different areas like – the economic growth, political development, and policy changes, changes in consumer preferences, an increase in customer disposable income and technological innovations.

First and foremost, threat was the increasing bargaining power of customers which was continuously decreasing the profit the company earned.

Recession can be another threat to the company as people might not be able to spend in good amount thus reducing the company’s profit.

ENVIRONMENTAL FACTORS INFLUENCING THE DECORATIVE INTERIORS INC.:

There were many environmental factors like competition among existing players, bargaining power of suppliers, bargaining power of buyers, threats of new entrants and threats of substitutes, which were influencing the Decorative Interiors Inc. directly or indirectly.

Customer activism is significantly impacting Interiors, decorative branding, marketing, and corporate social responsibility initiatives.

Environmental regulations can impact the cost structure of interior decor.

CONSTRAINTS:

There are different limitations of Decorative Interiors Inc. which may arise from either internal or external conditions.

Internal constraints were:

  • The lack of trust worthy employees.
  • Improving marketing strategy to enhance sales.
  • Mis-management at work place

External constraints were:

  • Competition among existing players
  • Bargaining power of suppliers
  • Bargaining power of buyers
  • Threats of new entrant
  • Threats of substitutes
  • Customer income.

ANALYSIS OF ALTERNATIVES:

According to Rocco Rapini, four options could help him reduce the stress level and help him improving the position of his business, along with providing financial security to his family. These were as following:

  • Sell off the business
  • Shift the company to a home-based enterprise
  • Shift the business to a cottage country
  • Recruit personnel for sales and installations

SELL OFF THE BUSINESS:

If Rapini chooses the option to sell the company (which includes all the assets such as showroom and land accounting nearly $ 535,000, liabilities amounting $196,603 including showroom mortgages), he will earn a lump sum of almost $550,000. It would be nearly seven times the net income of Decorative interiors. The problem in this arises is that Rapini would have the lump sum amount to wear the family expenses, but there will be a lack of steady income, which may cause financial difficulties for the long term. Along with this, Rapini also must sacrifice his passion for business. In the long run, it would be further stressful for Rapini and his wife as they must look for a steady income at some point in their life to feed their families.

SHIFT THE BUSINESS TO A HOME-BASED ENTERPRISE:

Rapini started his business initially from his home only. It witnessed a rapid growth because overhead costs were low while high margins were earned on most sales. Rapini may consider reverting to it. This option would give Rapini more flexibility in terms of hours of operation, and he was confident that he could reduce total operating expenses to around 35 percent of sales.

Furthermore, the showroom can be sold for $450,000 to improve the financial condition, hence, giving less stress to Rapini. However, the cost of goods would increase by two presents as the suppliers prefer giving discounts to showroom holders rather then the people having a home-based business. Also, the walk-in sales will be eliminated.

SHIFT THE BUSINESS TO A COTTAGE COUNTRY:

Moving the business north to the cottage country where competition is non-existent, and the customers are less conscious of the prices may increase the profit per customer. But this would decrease the sales by 30% initially and 10% subsequently because the number of house constructions in the cottage country was one-hundredth of what it was in GTA in the previous decade. If the business relocates, the showroom, as discussed above, could be sold for $450,000. If the COGS as a percentage of sales remains unchanged, and the tax rate is same as 2005, profits, when sales fall by 30%, are expected to be $ 40,455, which will then improve to $ 55,357 when sales improve to 10% of current levels (Refer to Exhibit 2).

Since Rapini's daughter plans to live at home while attending college, the cost of her boarding and lodging can also be considered. However, he may risk losing his current customer base and sewists. The process of setting up new infrastructure and identifying suppliers may result in stress.

RECRUIT PERSONNEL FOR SALES AND INSTALLATIONS:

Another option was recruiting professionals like qualified sales managers and part-time installers to replace Rapini's involvement with salaries of $ 90000 per annum would, in the best-case scenario, improve sales by 69.24% boosting profits to a maximum of $ 60,688 (Refer to Exhibit 3). However, the $ 450,000 from the sale of the showroom cannot be realized since the showroom will be in use & costs would increase due to interest on debt and remuneration to the new employees. Hiring employees will let Rapini distance himself from the tedious tasks of installation and sales, helping him limit stress. However, since the company has had negative experiences in hiring employees so far, the risk of not finding the right candidates or the hired candidates not meeting expectations in terms of productivity is to be considered.

RECOMMENDATION(S) AND IMPLEMENTATION:

By knowing all the alternatives and solutions, it is recommended that Rapini should switch to the second option that is to a home-based business. This option would give him maximum financial returns and a reduction in stress from current levels. He already has experience in operating from home as in his initial days of business as he used to work from home so, Rapini can overcome all the obstacles and deal with them effectively.

Option one may be the least effective. Although this option will give a lump sum amount to become financially stable, it would not be recommended for long run financial conditions as there will be no income further, and it is a significant risk.

Option three would not be recommended as by relocation the business in the countryside may give him more profit individually because of less competition. Still, overall, he must invest in fractures, create his new customers, and he might have a risk of losing existing customers. Also, the market size would be less than 1% of what it is at GTA, so; this would not be providing him with enough profit; thus, again, it would lead to a stressful situation for Rapini.

 I would not recommend option four, as it would increase the cost for the company and Rapini will not be able to make a higher profit as nearly $90,000 would be going for the sales manager and installers' salaries. Also, by seeing the experience of the company with hiring employees, the risk that new employees may not be productive cannot be ignored.

EXHIBITS

EXIBIT 1: Profit earned from reverting to Home-based operation (all calculations in $):

 

Cost of goods increased by 2%

Cost of goods increased by 5 %

Sales decreased by 30%

265,120

265,120

Cost of goods (34.47% and 35.49 % respectively)

91,402

94,091

Operating expenses 35%

92,792

92,792

Profit before tax

80,926

78,237

Tax

15,133

14,630

Profit before tax

65,793

63,607

Tax

15,133

14630

Profit after tax deduction

65,793

63,607

EXIBIT 2: Profit earned from moving to cottage country ((all calculations in $):

 

2006

2008

Sales decrease by 30% and 10% respectively

265,120

340,868

Cost of goods taking same as in 2005

89,610

115,213

Gross Margin

175,510

225,655

Operating Expenses

125,750

157,565

Earning before tax deduction

49,760

68,090

Tax

9,305

12,733

Profit earned after tax deduction

40,455

55,357

EXIBIT 3: Profit earned if new employees were hired (all calculations in $)

Sales

641,000

COGS (2005 proportion of 33.8%)

216,658

Gross Margin

424,342

Operating Expenses (2005 %, i.e. 39.5%)

253,195

Salary

90,000

Profit before Interest & Tax

81,147

Interest Expense

6,500

Profit before Tax

74,647

Tax (same rate as 2005, i.e. 18.7%)

13,959

Profit after Tax

60,688

REFERENCES:

  1. Textbook- Business essentials eighth Canadian edition by Ebert griffin starke Dracopoulos.
  2. https://embapro.com/frontpage/swotcase/16525-interiors-decorative

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