Change Management Simulation: Power and Influence Foreground Reading
Overview
You operate within Spectrum Sunglass Company, a 10-year-old, privately held company that designs, manufactures, and sells sunglasses. Spectrum is headquartered in Tremont, California, and all design and production capabilities are in southern California. A few years ago, a relatively short, mild recession caused revenues to fall nearly seven percent, to $91 million, and profitability to fall to essentially breakeven. As a result, the company initiated significant cost cutting. Last year, sales rose to $101 million after the economy emerged from the recession, and the company returned to normal profitability.
The company currently employs 580 employees. Eight people are members of the top management team, and 20 individuals help lead the overall organization. The organizational chart for Spectrum is depicted in the Prepare tab of the simulation.
In recent years, the retail value of the domestic sunglass industry has been approximately $3.4 billion.
Analysts normally divide the US market for nonprescription sunglasses into three price segments: low-end, moderate, and high-end. Low-end sunglasses are priced at less than $25 retail, and sold primarily through mass merchandisers, drugstores, grocery stores, and department stores. This segment represents roughly 50% of the industry dollars and 85% of the industry units sold. Moderately priced sunglasses range between $25 and $100 per pair. These glasses are sold through warehouses and sporting-goods stores, but they represent only eight percent of the industry dollars and five percent of the industry units sold. High-end sunglasses are priced above $100 per pair. These are sold through sunglass specialty outlets and optical stores. These glasses represent 42% of industry dollars and 11% of industry units.
Sunglasses address two basic functions in the marketplace. The first function is to protect the wearer’s eyes from harmful ultraviolet light. This is particularly important because of the earth’s thinning ozone layer, and it requires special expertise in eyewear manufacturing and sales. The second function focuses on fashion and aesthetics, and design expertise and celebrity endorsements help drive industry sales.
Spectrum offers a moderately priced brand of prescription and nonprescription sunglasses that are sold primarily in the United States. Originally targeted to swimmers and surfers, its products are expanding into other outdoor users. All sets of sunglasses feature UV-ray blocking scratch-resistant polarized lenses and lightweight frames, and all lines are marketed with an oceanic, sporty theme. Retail price points for its nonprescription products range from $59 to $99 per pair, both online and in sporting goods stores. Prescription sunglasses are sold through optical stores for $75 to $100 per pair.
Spectrum’s polycarbonate lenses require highly specialized resins, and the company has only one vendor that has been able to consistently deliver to its manufacturing specifications. As a result, the vendor has been able to pass through 100% of the incremental costs associated with rising oil prices. The rising oil prices, combined with Spectrum’s inability to effectively hedge against the resulting increases in raw material costs, accounted for approximately 3.25% of the erosion in its earnings before interest and taxes (EBIT) margin in the past fiscal year. This year, as oil prices have moderated, the company’s margins have rebounded.
The recent volatility in Spectrum profitability resulting from softening demand has alarmed both management and the company’s bank. Spectrum has a $10 million term loan and a revolving credit facility available for working capital with a maximum draw equal to another $10 million. Loan covenants associated with the borrowings require the company to maintain an interest coverage ratio of 3x. In the event that Spectrum is out of covenant for more than two consecutive quarters, the bank can require the firm either to pay down the loan immediately or raise additional equity capital.
The company’s business is very seasonal, with peaks occurring in late May and December. During both of those periods in the past fiscal year, Spectrum was at risk of being out of covenant with its loan agreements.
As Spectrum enters its second decade of operations, its immediate future is looking bright. Externally, the consumer sunglass market is growing again, and competitive pricing pressures have subsided.
Spectrum recently rehired some of the workers laid off during the last recession, and many departmental budgets have been restored to well-funded, pre-recession levels. A potential new product design has received positive focus group feedback after the first phase of development; furthermore, some exciting branding deals with Hollywood celebrities are under negotiation. Everyone at Spectrum is looking forward to growth and enhanced earnings.