Pintura Corporation: The Lena Launch Decision

Prof. Sreejesh
Case summary
• The Industrial Finishes Group (IFG) of Pintura Corporation
markets paints and product coatings for commercial and
industrial users. IFG is considering whether to introduce Lena, a
high-performance, environmentally friendly, powder-based
coating for hardwood. In order to proceed with the next phase of
development, Lopez must present a convincing analysis about
the product’s feasibility, along with a proposed marketing
program. The relationship of the proposed product to the rest of
the product line must be considered, along with how Lena
contributes to IFG’s corporate and divisional objectives.
What is IFG’s current position in the market for general industrial coatings
(GIC)? What is IFG’s current position in the market for wood coatings?

• IFG is a major player in the market and an important part of Pintura.

IFG generates 25% of Pintura’s sales and performs most of the
company’s research and development
• The industrial coatings market is part of a larger market for paints,
coatings, and finishings. The larger market includes architectural
coatings (e.g., household and building coatings typically applied on
site), industrial coatings (e.g., coatings typically applied in the factory),
special-purpose coatings (e.g., marine paints and roof coatings), and
complementary products such as paint removers, thinners, brush
cleaners, and pigment dispensers.
See Exhibit 1 & Exhibit 2
• IFG’s product lines are organized by end-user applications. IFG offers
product lines for applications to plastic, metal, and wood materials.
 Plastic applications in the United States account for 40% of the $6 billion in annual sales for the
general industrial coatings market ($2.4 billion). IFG’s product lines for plastic coatings account for
15% of its $1 billion in annual revenue ($150 million), which is approximately 6.3% of the total
annual sales in the United States.
 Metal applications in the United States account for 20% of the $6 billion in annual sales for the
general industrial coatings market ($1.2 billion). IFG’s product lines for metal coatings account for
20% of its $1 billion in annual revenue ($200 million), which is approximately 16.7% of the total
annual sales in the United States.
 Wood applications in the United States account for 40% of the $6 billion in annual sales for the
general industrial coatings market ($2.4 billion). IFG’s product lines for wood coatings account
for 65% of its $1 billion in annual revenue ($650 million), which is approximately 27.1% of the
total annual sales in the United States.
• Case Exhibit 4 divides IFG’s $650 million in annual revenue in
wood coatings by customer groups: furniture (30%), flooring
(25%), cabinetry (20%), and other wood products (25%). The
case also states that 80% of the annual sales to flooring and
cabinetry customers are solvent-based coatings, compared to
only 30% of furniture and other wood products. Case Exhibit 4
also provides the distribution of Pintura’s wood coating sales
across customer groups and product lines
IFG’s Objectives and Strategy

• IFG has a 5% annual target growth rate it wishes to maintain. It also has a variety of other
objectives, which are either explicitly stated in the case or can be surmised. They include:
• Maintain share in the general industrial coatings market in the United States. IFG’s total
annual sales of industrial paints and coatings in the United States are $1 billion. US paint
and coatings manufacturers represent 25% of the $24 billion global market. As such, total
sales in the United States are estimated to be $6 billion. IFG’s sales represent
approximately 16.7% of the total annual sales in the United States.
• Maintain leadership in the environmentally friendly paints and coatings market. One of
Pintura’s objectives is “to become one of the leaders in US manufacturing of
environmentally friendly paints and coatings by 2025.”
• Increase demand for powder-based wood coatings at the expense of more mature, less
effective solvent- based wood coatings. Overall, the market for powder coatings is
expected to grow 10% annually. In contrast, the market for solvent-based coatings is
expected to decline.
For industrial wood applications, Pintura’s market share is based upon solvent-based coatings as well
as company innovations in water-based coatings. Pintura is now deciding whether to emphasize
powder-based coatings over liquid-based coatings
 •It is also important to note that some customer groups appear to be relatively more willing to
adopt powder-based technologies. According to Lopez’s conservative estimates:
 20% of Pintura’s total sales to flooring and cabinetry customers using solvent-based or water-
based coatings would switch to powder-based coatings.
 40% of Pintura’s total sales to furniture and other wood products customers currently using
solvent-based coatings would switch to powder-based coatings.
 60% of Pintura’s total sales to furniture and other wood products customers currently using
water-based coatings would switch to powder-based coatings.

NOTE: If customers switch from solvent-based or water-based coatings to powder-based ones,

they will pay higher prices per unit and reduce the number of units they purchase because
powder is more efficient.
Estimate the adoption of powder-based coatings
sales by customer group & product lines
• See Analysis_1 (Excel sheet)
Estimated annual sales for each customer
group (After introduction of powder based)
 Using the calculations provided in Analysis_1 and the proposed selling price for
each unit (i.e., $28 for solvent-based, $34 for water-based, and $38 for powder-
based), the total estimated annual sales for each customer group (in $ millions),
assuming estimated changes in total annual sales, can be calculated as follows:

 Furniture = (1.61 * $34) + (1.25 * $28) + [(2.05 + 0.69)* $38] = $193.86

 Flooring = (0.76 * $34) + (3.71 * $28) + [(0.16 + 0.77) * $38] = $165.46
 Cabinetry = (0.61 * $34) + (2.97 * $28) + [(0.13 + 0.62) * $38] = $132.37
 Other = (1.34 * $34) + (1.04 * $28) + [(1.71 + 0.58) * $38] = $161.55

 After launching new product we will get a sales figure of $653.25M (previously
$650M).
Forecasting: Annual growth rate (2017-21)
• Analysis_2, which is based on data from case Exhibit 3 and estimated
total sales per customer group using Analysis_1, calculates annual sales
forecasts for IFG’s wood coatings customer groups by using estimated
industry growth rates. Assuming no change in market share during the
five-year period, Analysis_2 shows that the annual growth rate varies
substantially across IFG’s customer groups. A program more oriented to
specific customer groups might make sense.

• Specifically, she estimates a 5% increase in sales to furniture and other wood products and a 1%
increase in sales to flooring and cabinetry customers annually for the next five years from new
customer acquisition alone
Revised forecast (based on market share
growth)
• Lopez also believes Lena will steal market share from its competitors.
Specifically, she estimates a 5% increase in sales to furniture and other wood
products and a 1% increase in sales to flooring and cabinetry customers
annually for the next five years from new customer acquisition alone.
Analysis_3 combines data from case Exhibit 3, estimated total sales per customer
group, and “steal share” estimates to calculate annual sales forecasts for IFG’s
wood coatings customer groups, using both estimated annual industry growth
rates and growth from new customer acquisitions of customers switching to
Pintura products from those of competitors.
Summary of the Analysis_3
•Using combined rates (growth and steal share), the following summarizes estimated sales for
each customer group over a five-year period:
 Furniture manufacturing total sales estimates are $1,124.76 million. The sales increase due to
annual growth and steal growth is $155.46 million (13.82% of total sales to the customer
group).
 Flooring manufacturing total sales estimates are $965.66 million. The sales increase due to
annual growth and steal share growth is $138.36 million (14.33% of total sales to the customer
group).
 Cabinetry manufacturing total sales estimates are $711.06 million. The sales increase due to
annual growth and steal share growth is $49.21 million (6.92% of total sales to the customer
group).
 Other wood products manufacturing total sales estimates are $951.21 million. The sales
increase due to annual growth and steal share growth is $143.46 million (15.08% of total sales
to the customer group).
Lena’s introduction will improve profits by increasing sales of
coatings, or decrease profits by cannibalizing existing sales.

• Case Exhibit 5 provides data about the product contributions for wood coatings.
Solvent-based coatings provide IFG with a $13.72 contribution per unit (49%) and
water-based coatings provide IFG with a $12.92 margin per unit (38%). Lena is
estimated to provide a $15.96 contribution per unit (42%).

RESULTS OF Analysis_4 shows how contributions might be affected if IFG’s existing

customers switched coatings. On the one hand, because solvent-based contribution
margins exceed Lena’s margins, customers who switch from using solvent-based
coatings to Lena would likely decrease total annual gross profit by $1.51 million. On
the other hand, because Lena’s contribution margins slightly exceed water-based
margins, customers who switch from using water-based coatings to Lena would
likely increase IFG’s total annual gross margins by $3.08 million.
Real Costs to Manufacturers
• It is important to emphasize that the real cost of wood
coatings is different from the selling price because of product
waste and energy use. Using only waste data, Analysis_5
shows the real cost to manufacturers, based upon minimum
and maximum estimated wasted product during the
application process. Although powder-based coatings like
Lena can reduce product waste dramatically, adoption
will be driven partially by the extent to which
manufacturers believe waste statistics.
Five attributes explain the rate of adoption by
target customers:Rogers (2003)[product market fit]
 Relative advantage: Cost. Lena’s benefits are summarized in case Table A. Although detailed
productivity savings cannot be calculated, the cost savings would probably pay quickly for adoption.
 Relative advantage: Functionality. Customers’ price sensitivity varies. For example, furniture
manufacturers that charge higher prices because they offer superior aesthetics and quality are likely
to perceive powder-coatings as being more functional than liquid-based coatings are.
 Relative advantage: Substrates. There currently appears to be no comparable wood coating on the
market that is appropriate for hardwoods. The product is likely to appeal particularly to firms
manufacturing exclusively with hardwoods.
 Compatibility and complexity. Although powder coating for hardwood substrates is innovative, the
science of powder coating has been around for metal substrates for decades and, more recently, for
MDFs.
 Trialability. A major disadvantage to adoption is the need for new and/or modified equipment. As
such, demonstrations may be more important for Lena relative to previous innovations.
 Observability. If product benefits are visible (e.g., shape and texture versatility), manufacturers may
be willing to invest to increase quality and appearance.
Product company fit
 Pintura already produces wood coatings for sale to industrial users. Lena represents an
alternative that will complement its existing lines. In the wood coatings product line, powder
coating represents a product line fill.
 While wood coatings are not innovative, the broader substrate application possibilities of Lena
make it a genuinely new product. Its introduction should add to Pintura’s reputation for
technical and market leadership in the coatings industry.
 Pintura prides itself on its innovations. Lena should generate publicity and media coverage
consistent with the company’s intended image.
 One of Pintura’s goals is to be a leader in the production of environmently friendly paints and
coatings. As a powder-based coating, Lena will not emit pollutants such as volatile organic
compounds (VOCs) typically associated with solvent-based liquids. In addition, relative cost
efficiencies from overspray reuse and energy-efficiency heating contribute positively to the
environment.
The Lena Marketing Program

Product policy:
• Should Lena be promoted as a superior substitute for solvent-based coatings,
water-based coatings, or both?
Pintura is emphasizing environmentally friendly product offerings as the basis
for its future growth.
Because water-based coatings have negligible pollutants, customer confusion
might result if Lena was advertised as an environmentally friendly substitute for
all liquid-based coatings.
Producers of hand-crafted products using high-quality, hardwood substrates—
the best potential customers for Lena—are more likely to value high quality and
versatility and are less likely to value the lower cost of solvent-based coatings.
Product Policy:
Should Lena emphasize the Pintura name brand?

• Although there is some internal concern about increasing

cannibalization if Lena emphasizes the name brand, the benefits of
family branding are likely to outweigh independent branding:
• Pintura is an established industry leader in high-quality, factory-
applied, water-based coatings for wood substrates. Because water-
based coatings are more environmentally friendly than solvent-based
coatings are, Pintura is already associated with environmentally
friendly wood coatings.
…………….continued
 Using the Pintura brand name prominently on packaging and labeling would provide a constant
reminder of the Pintura name at the point of product use.
 Cannibalization of Pintura’s existing line of water-based coatings for wood substrates would
only increase IFG’s annual contribution margins.
 Although cannibalization of Pintura’s existing line of solvent-based coatings for wood would
decrease IFG’s annual contribution margins, solvent-based coatings are declining in favor of
water-based and powder-based coatings across the general industrial coatings market.
 There is no reason to expect product failures with Lena. As such, there should be minimal
concern about spillover effects from product failures with Lena wood coatings.
Product policy:

Should IFG offer guarantees and trial offers (or both)?

Although there is some internal concern about guarantees, benefits from both guarantees and
trial offers (when possible, given equipment requirements) are likely to have positive net results:
Both are designed to reduce the risk associated with purchase.
The risk-reducing nature of a trial offer can permit IFG to charge a higher price for Lena because
manufacturers are likely to reduce coating waste.
For some manufacturers, even a limited guarantee is a more dramatic promotional feature than a
trial offer is.
Direct responses for trial offers provide opportunities to (1) obtain information on customers;
• (2) profile actual and potential Lena purchasers; and (3) compile a list of purchasers for
follow- up sales efforts.
Pricing:
Should Lena’s price be higher or lower than the $38.00 suggested
end-user price?
• Costs of goods sold (COGS) of $22.04 per unit effectively sets the minimum price
unless Pintura intends to use Lena as a loss leader.
• COGS for Lena per unit ($22.04) is higher than are the COGS for both water-based
coatings ($21.08) and solvent-based coatings ($14.28).
• Perceived economic value to the customer theoretically sets the maximum price a
customer is willing to pay, but this cannot be calculated without additional details
from each manufacturer.
• Setting the right price involves more than just perceived economic value to the
customer. Price setting should also consider a customer’s perceptions of superior
functional value and customer lifetime value (CLV).
• The real cost of wood coatings to manufacturers exceeds the coatings’ end-user
price because of overuse due to waste.
For example, assume that a wood products manufacturer purchases and uses 1,000
units of coatings over a specified period. Assume the following information
comparing this manufacturer’s calculations for each type of wood coating
Cont……
• These calculations (See the last slide) provide a simple example in which Lena is
slightly more cost effective than water-based coatings are, yet considerably less
cost-effective than solvent-based coatings. In calculating costs, however, the
manufacturer might also consider the relative functional superiority of Lena
compared to both liquid-based coatings
Distribution Policy Issues
should IFG sell to customers through its existing network of distributors (indirect
distribution channel), through IFG’s own sales force (direct distribution channel), or
a combination of both (hybrid distribution channel)?
 Distributors are likely to disdain selling product lines that require specialized equipment and training.
 Distributor salespeople are less technically qualified than IFG’s salespeople are, and they must handle
a much broader product line. They have little time to learn how to demonstrate Lena.
 They may be reluctant to stock Lena due to inventory financing costs.
 Distributors account for higher selling costs (21%) as compared to IFG’s own sales force (7%). This
holds true even if direct selling costs increase to 8% with Lena’s introduction (See page 7).
 In 2016, selling costs through distributors were more than three times as high as the costs of selling
through IFG’s sales force were. Analysis_6 provides total wood coatings sales by distribution channel
for customer groups.
 In 2016, distributors sold considerably more wood coatings to flooring and cabinetry manufacturers
than IFG’s salespeople did. See Analysis 6.
 Distributors’ primary customers—flooring and cabinetry manufacturers—are far less likely than
furniture and other wood products customers are to consider switching from liquid-based coatings to
powder-based coatings.
Cont….
To persuade distributors to carry Lena, IFG might consider:

 Offering a temporary increase in selling and fulfillment costs;

 Offering market development allowances;
 Offering volume rebates; and/or
 Providing exclusive rights to sell Lena within a geographic region to a specific customer group.