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Rainbow Lighting Ltd manufactures a wide variety of light bulbs which it sells to lighting shops and builders merchants through wholesale distributors. It also sells direct to the big UK supermarkets. It is situated in a small town a few miles from the city of Newcastle in the north-east of England where it has been making light bulbs for domestic use for more than 40 years. Five years ago, it diversified into bulbs for industrial lighting, using its wholesale distributors, in an attempt to grow its revenue. It currently employs 550 people and has an annual turnover of £125 million, making it the fifth largest producer of light bulbs in the UK.
Just over six months ago, it was taken over by a multinational electrical products company, Eindnacht GmbH, based in Germany. Since then, the new owner has been reviewing the operations of its UK acquisition. Last week, the managing director of Rainbow Lighting received a confidential report from its parent company detailing the review?s findings. In summary, most comments were critical and highlighted areas where Rainbow?s performance has been declining. In conclusion, Eindnacht has given them two years in which to demonstrate a significant improvement in performance. If this does not happen, the manufacturing will be transferred to other Eindhacht factories in mainland Europe.
The managing director, Harriet Thompson, summoned her fellow directors yesterday to an extraordinary management meeting to discuss the report and the demands made by their new owners.
Organizational structure of Rainbow Lighting Ltd
H.M. Thompson Managing Director
-G. Williams Production Director
-E. Macauley Sales and Marketing Director
-L.T. Winston Finance Director
-G.E. Rayner Logistics Director
-D. Dell Human Resources Director
Summary of Eindnacht?s report on Rainbow Lighting Ltd
Products
Rainbow Lighting serves two distinct lightbulb market segments, domestic and industrial. No new products have been launched in either sector in the last two years. Twelve years ago, in response to a growing market, the ?Alpha? range of 20 different low-energy long-life domestic bulbs was introduced. A significant investment in new plant and machinery was made to produce this range. The traditional tungsten filament light bulbs were phased out over two years from the introduction of the alpha range which now accounts for 100% of domestic bulb production. The ?Beta? range of industrial bulbs was introduced five years ago in an attempt to achieve increased sales and profits. There are now 154 different bulbs in this range.
Production
On the basis of ?number of bulbs produced?, the alpha and beta ranges account for 73% and 27% of production respectively. Production facilities are used Mondays to Fridays from 08.00 to 17.00 with operatives allowed a morning and afternoon break of 15 minutes each and a one-hour lunch break. The factory is closed for five weeks each year during which holidays must be taken.
The last new product, the ?Everlasting Halogen Spotlight (EHS) bulb, aimed at the industrial security sector, was launched by Rainbow Lighting just over two years ago. Unfortunately, due to a manufacturing fault, the EHS was prone to overheating and had high failure rate. On several occasions, the EHS exploded causing potential physical danger to anyone in the vicinity at the time. Fortunately, only one serious injury occurred and a damaging legal case was only avoided by a significant out-of-court settlement being made to the injured person. Although much negative publicity was avoided, negative rumours concerning product safety circulated in the industry. A product recall had to be performed and the EHS production process had to be redesigned to correct the fault. This resulted in a five-month gap before the EHS was re-launched. It is estimated that this and the attendant bad publicity caused a 5% fall in annual sales revenue from the beta range for that year in addition to the very significant cost of the recall operation.
Marketing and sales
It is estimated that the domestic bulb market is worth approximately three times as much as the industrial bulb market.
Domestic: Apart form the last year, spending on advertising and promotion has shown very little variation in monetary terms (indicating a reduced spend in real terms). During this period, sales volumes have increased by an average of 2% a year. However, the market size of low-energy long-life domestic bulbs has increased by 8% a year on average over the same period. Selling price increases have generally matched general inflation at around 2% a year except for an increase of 5% two years ago in an attempt to boost revenue. Superficial changes and new packaging were introduced at this point in an attempt to reposition the alpha bulbs. Unfortunately, this strategy does not seem to have worked; the loss in volume caused by the price increase appears to have countered the extra revenue gained from higher prices in an increasingly competitive market.
Industrial: During the first three years of its life, the ?Beta? range of industrial bulbs approximately doubled its sales each year until the EHS recall. Due to an increased spend on advertising and promotion, sales have now recovered to the level immediately prior to this incident. For the last decade or so, this market sector has increased by about 3% a year.
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