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This text was written by Old Dominion University Professor William Q. Judge and Harvard Business Professor Linda A. Hill for Change Management Simulation: Power and Influence V3 (HPB No. 7611 ) for the sole purpose of aiding classroom instructors in the use of the simulation . This text and the simulation are developed solely as a basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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Change Management Simulation: Power and Influence
Foreground Reading
O v e r v i e w
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 su nglasses 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 segme nt 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 dolla rs 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. Th ese 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 man ufacturing 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 H A R V A R D B U S I N E S S P U B L I S H I N G | Change Management Simulation: Power and Influence 2
expanding into other outdoor users. All sets of sunglasses feature UV -ray blocking scratch -resistant
polarized lenses and lightweight frames, and all lines are ma rketed 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 cos ts 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, accounte d for approximately 3.25% of the erosion in its earnings before interest and
taxes (EBIT) margin a 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. b 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 occ urring 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. Exte rnally,
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
for ward to growth and enhanced earnings.
a Historically, the company has had a 7.5 percent operating margin. b The interest coverage ratio is calculated as operating income divided by interest expense. H A R V A R D B U S I N E S S P U B L I S H I N G | Change Management Simulation: Power and Influence 3
Se lected Financial I nformati on for Spectrum
