1 Running head: CHANGE AND RESISTANCE 3 CHANGE AND RESISTANCE Change refers to the act of making something to be different in their form and state or replace their state of condition. Resistance to change refers to the acts taken by a group or an individual when they sense to change that might be threatening to them. For resistance to change to occur, the threat must be significant enough. Why do people resist change? People resist in light of the fact that they come up short on the aptitudes and skills to utilize and pick up profits by the new advances in technology. There is opposition since workers in the customary organizations and ventures do not comprehend the 'big picture' and how the use of the new advancements and latest technologies changes how business is done and processes executed (Strebel,2009). Finally, resistance, particularly in middle and upper management, originates from the fact that new advancements in technology and their interpretation into new business plans redefine the organizational structures and the force bases. Likewise, embracing change requires some serious energy and exertion that the members might not have any desire to contribute and invest in, thus in this way they will in general oppose change. It is common behavior for people to mistake taking on something new largely with giving up something else that is commonplace, agreeable and unsurprising. At long last, people resist change because they dread interruption of the normal routine may halt them from making principal strides in any event, even when it is clear the net outcomes will incredibly profit them. Role of emotion in constraining change? Emotions are rapid information processing techniques that enable us to undertake an activity with minimal thinking. Emotions play an important role in the way people make decisions. These emotions can either be associated with the social or cultural environment of the organization (Polat,2016). When the people are disgusted with the management of the organization, they tend to resist any form of change because they are blinded with their emotions and cannot see the bigger picture that comes with the changes. Organizational factors that constrain change. Organizational factors can contribute to limiting change and cause resistance to these changes. To start with, there is no preparation for a “knowledge culture”. Culture entails the beliefs and the ideologies of an organization which are now shown in actions. Ultimately, these ideas are yet to yield results. Thus, the mindset of the organization is vital in implementing change. Secondly, the lack of strong, consistent management support affects change. The quality of the top management that is in leadership dictates whether changes will be implemented smoothly (Kirkham,2009). The organization also may have a project plan that is too huge for the quickly accessible funds. What strategies do experts propose for overcoming resistance to change? Experts suggest that th.

1. 1
Running head: CHANGE AND RESISTANCE
3
CHANGE AND RESISTANCE
Change refers to the act of making something to be different in
their form and state or replace their state of condition.
Resistance to change refers to the acts taken by a group or an
individual when they sense to change that might be threatening
to them. For resistance to change to occur, the threat must be
significant enough.
Why do people resist change?
People resist in light of the fact that they come up short on the
aptitudes and skills to utilize and pick up profits by the new
advances in technology. There is opposition since workers in
the customary organizations and ventures do not comprehend
the 'big picture' and how the use of the new advancements and
latest technologies changes how business is done and processes
executed (Strebel,2009).
Finally, resistance, particularly in middle and upper
management, originates from the fact that new advancements in
technology and their interpretation into new business plans
redefine the organizational structures and the force bases.
Likewise, embracing change requires some serious energy and
exertion that the members might not have any desire to
contribute and invest in, thus in this way they will in general
oppose change. It is common behavior for people to mistake
taking on something new largely with giving up something else
that is commonplace, agreeable and unsurprising. At long last,
people resist change because they dread interruption of the
normal routine may halt them from making principal strides in
any event, even when it is clear the net outcomes will incredibly
profit them.
Role of emotion in constraining change?
Emotions are rapid information processing techniques that

2. enable us to undertake an activity with minimal thinking.
Emotions play an important role in the way people make
decisions. These emotions can either be associated with the
social or cultural environment of the organization (Polat,2016).
When the people are disgusted with the management of the
organization, they tend to resist any form of change because
they are blinded with their emotions and cannot see the bigger
picture that comes with the changes.
Organizational factors that constrain change.
Organizational factors can contribute to limiting change and
cause resistance to these changes. To start with, there is no
preparation for a “knowledge culture”. Culture entails the
beliefs and the ideologies of an organization which are now
shown in actions. Ultimately, these ideas are yet to yield
results. Thus, the mindset of the organization is vital in
implementing change. Secondly, the lack of strong, consistent
management support affects change. The quality of the top
management that is in leadership dictates whether changes will
be implemented smoothly (Kirkham,2009). The organization
also may have a project plan that is too huge for the quickly
accessible funds.
What strategies do experts propose for overcoming resistance to
change?
Experts suggest that the management should outline the major
causes for the change and establish a sense of urgency.
Nevertheless, a vision needs to be established to give a common
direction and a guiding coalition is formed. The team steering
also should craft a plan to implement the change and this should
be communicated. Nonetheless, the leadership ought, to be
honest, and involve the people in all the stages involved in
implementing the change. Also, mobilizing the workforce to
rally behind the proposed changes is key and this will be
achieved by developing structures that will empower the
employees for broad-based action.

3. References
Kirkham, M. (2009). Emotion workaround reproduction:
Supportive or constraining? Emotions in Midwifery and
Reproduction, 227-239. https://doi.org/10.1007/978-1-137-
08641-9_14
Overcoming resistance to change.
(2016). https://doi.org/10.4135/9781473980624
Polat, N. (2016). Resistance to change. Regime Change in
Contemporary
Turkey. https://doi.org/10.3366/edinburgh/9781474416962.003.
0005
Strebel, P. (2009). Why do employees resist change? IEEE
Engineering Management Review, 37(3), 60-
66. https://doi.org/10.1109/emr.2009.5235497
undefined. (n.d.). Management Theories for Educational
Change, 148-181. https://doi.org/10.4135/9781446219300.n6
1
Running head: TYPE OF CHANGE
3
TYPE OF CHANGE
change refers to the act of making a difference in something or
somebody. When change occurs, there must be a difference in
terms of state and condition.
We all need to acknowledge the fact that changes are part of an
organization and they are bound to happen. In Spectrum

4. Sunglass Company, the changes were reactive and also
proactive. Spectrum focuses on two essential roles. The first is
to shield the wearer's eyes from perilous bright light. With the
world’s ozone layer diminishing, it is indispensably essential to
ensure the wearer of these shades, in this manner a proactive
change. In light of this, the fashion and aesthetics aspects play a
role in driving the industry sales thus a reactive change would
play a major role in driving sales high. The society we live in
today is all about the glamour and how things look to play a
vital role in the success of an organization (Martin,2017).
The situation is inclined to a planned change since the company
must make deliberate internal decisions to keep it afloat. The
company offers a tolerably evaluated brand of remedy and
nonprescription glasses that are vented in the United States.
Considering the business is seasonal and having peaked in May
and December, measures are to be put in place to ensure the
success of the business. The organization has an advance term
of $10 million and a revolving credit office accessible for
working capital with an utmost draw amounting to another $10
million. Spectrum has loan pledges related to borrowings which
necessitate the company to keep an interest inclusion proportion
of 3 x.2. In case Spectrum is out of the pact for two more back
to back quarters, the bank can call for the organization to square
away the deal instantly or raise extra value capital.
References
Araújo, L., & Gava, R. (2012). Proactive innovation
management innovating to change the market. Proactive
Companies, 92-106. https://doi.org/10.1057/9780230363014_7
Martin, J. J. (2017). undefined. Oxford Scholarship Online.
https://doi.org/10.1093/oso/9780190638054.003.0035

5. Online Simulation Foreground Reading—Change Management
Simulation: Power and Influence
HARVARD BUSINESS SCHOOL PUBLISHING | ONLINE
SIMULATIONS 1
O N L I N E S I M U L A T I O N F O R E G R O U N D R E
A D I N G
Change Management: Power and Influence
Overview
You operate within Spectrum Sunglass Company, a ten-year-
old, privately held company that
designs, manufactures, and sells sunglasses. Headquartered in
Tremont, California, all of Spectrum’s
design and production capabilities are in southern California.
Two years ago, a relatively short, mild
recession caused revenues to fall nearly 7%, 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. Exhibit
1 contains selected financial information for the previous two
fiscal years.
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

6. industry has been approximately $3.4 billion.
Analysts normally divide the U.S. 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 8% of the industry dollars and
5% 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. Exhibit 2 contains a
summary of the prices, volumes, and channels involved with the
sunglass industry.
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. All sets of sunglasses
feature UV-ray blocking polarized lenses, and
all lines are marketed with an oceanic, sporty theme. Building
upon the company’s proprietary
polarization technology, the polycarbonate lenses offer superior

7. optical quality, color enhancement, and
scratch- and impact-resistance. Crafted with the company’s
proprietary production technology, the
frames are lightweight, durable, and available in a wide variety
of unique shapes and colors. Originally
targeted to swimmers and surfers, its products are expanding
into other outdoor users. Retail price points
for its nonprescription products range from $59 to $99 per pair,
and they are sold on the Internet and
through sporting goods stores. Prescription sunglasses are sold
through optical stores for $75 to $100 per
pair.
Online Simulation Foreground Reading—Change Management
Simulation: Power and Influence
2 ONLINE SIMULATIONS | HARVARD BUSINESS SCHOOL
PUBLISHING
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) margin1 in the past fiscal year. This year, as oil

8. 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 3 x.2 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.
1 Historically, the company has had a 7.5% operating margin.
2 The interest coverage ratio is calculated as operating income
divided by interest expense.
Online Simulation Foreground Reading—Change Management
Simulation: Power and Influence
HARVARD BUSINESS SCHOOL PUBLISHING | ONLINE
SIMULATIONS 3

9. Exhibit 1
Selected Financial Information for Spectrum Sunglass Company
Last Current
Operating Results: Fiscal Year % Fiscal Year %
Net Revenue 91,000 100.0% 101,500 100.0%
Less: Cost of Goods Sold 50,050 55.0% 53,873 53.1%
Gross Profit 40,950 45.0% 47,627 46.9%
Less: Operating Expenses 40,040 44.0% 39,195 38.6%
EBIT 910 1.0% 8,432 8.3%
Less: Interest Expense 830 0.9% 900 1.4%
EBT 80 0.1% 7,532 6.9%
Less: Taxes 0 0.0% 226 3.0%
Net Income 80 0.1% 7,306 4.4%
Last C u rre n t
Assests: Fi scal Ye ar % Fi scal Ye ar %
Cash & Cash Equivalent s 1,820 2.9% 2,030 3.2%
Account s Receivable 11,375 18.4% 12,688 19.8%
Invent ory 7,583 12.2% 8,458 13.2%

10. Total C u rre n t Asse ts 20,778 33.5% 23,176 36.2%
Net P ropert y, P lant & Equipment 41,200 66.5% 40,850
63.8%
Total Asse ts 61,978 100.0% 64,026 100.0%
Liabilities & Owners' Equity:
Account s P ayable 10,511 17.0% 10,858 17.0%
Accrued Expenses 7,508 12.1% 7,756 12.1%
Total C u rre n t Li abi l i ti e s 18,018 29.1% 18,614 29.1%
Long T erm Debt 17,854 28.8% 18,802 29.4%
Owners' Equit y 26,106 42.1% 26,610 41.6%
Total Li abi l i ti e s & O wn e rs' Equ i ty 61,978 100.0%
64,026 100.0%
Online Simulation Foreground Reading—Change Management
Simulation: Power and Influence
4 ONLINE SIMULATIONS | HARVARD BUSINESS SCHOOL
PUBLISHING
Exhibit 2

11. Adult Sunglasses Channel Report
Channel Total Dollars
%
Dollars
Total
Units
%
Units $/Unit
Sunglass
Specialty $1,046,940,000 31% 7,640,000 8% $137.03
Optical $404,550,000 12% 2,780,000 3% $145.43
Mass $379,510,000 11% 24,720,000 25% $15.35
Other $819,770,000 24% 46,310,000 47% $17.70
Sport $136,830,000 4% 2,540,000 3% $53.84
Drug $134,450,000 4% 7,810,000 8% $17.21
Grocery $12,420,000 0% 860,000 1% $14.52
Department
Stores $363,850,000 11% 3,480,000 4% $3.48

12. Warehouse $125,770,000 4% 2,160,000 2% $58.34
Total $3,424,090,000 100% 98,300,000 100% $34.83
Price Range Dollars
Units
< $25 50%
85%
$25-100 8%
5%
> $100 42%
11%

13. Source: JOBSON/VCA - VisionWatch; 12 months ending
December 2009
Business Gap Analysis
Where are we now? Vs Where we want to be?
DEFINITION
Gap Analysis is the comparison of actual performance with
potential or desired performance; That is the ‘current state’ and
the ‘future state’.
- Wikipedia
· Gap Analysis is the process of comparing two states &
determine the difference or gap that exists between them
· Once the gap is understood, the steps required to bridge the
gap can be determined
Core of the Concept-just two simple questions:
Where are we? & Where do we want to be?
Where can it be applied?
· Gap analysis can be used to compare the two different states
in any field - not only in business – public institutions,
community, class rooms and even personal finance.
· Gap analysis is the quantitative and qualitative comparison of
a company or individual’s current performance (i.e., present
state) with potential performance (i.e., future or target state).
· Broad concept, in a sense it’s applicable to any aspect of
business where performance improvement is desired.

14. · Effort — what MacArthur Genius Grant winner Angela
Duckworth famously dubbed “grit” — is essential to
success. However, what unlocks potential is not so much brute
force, but a wide-eyed recognition of (1) where we are and (2) a
vision for where we want to be.
Gap analysis can be used in many areas where a change is
needed, such as:
· sales
· financial performance
· human resource management
· productivity
· quality assurance
· cost control
· employee satisfaction
· energy conservation
· market competitiveness
· management skills
The list is endless….Example – Quality Level
• The product quality gap could be measured by the difference
between the quality level of products expected by customers and
the actual delivered quality level. That is the difference
between customer expectation and actual customer experience
in the delivery of a product/service.
The analysis as a tool narrows the difference between
perceptions and reality, thus enabling enhancement of customer
satisfaction Analysis of the Gap
The basic idea on the business gaps can be analyzed by asking
some specific questions, such as:
· What exactly is the gap?
· What are the consequences of the gap?
· What is the timing? Who is responsible?
· What are the options?
· What are the costs?
Once all possible reasons for a gap are known, studied, and the
root cause recognized, then suitable actions can be identified to
– remove, fill or mitigate the gapKey Components of Gap

15. Analysis
· As said earlier, Gap Analysis compares the gap between an
organization’s actual performance against its potential
performance.
· So, you typically list out the organization’s current state, its
desired state, and a comprehensive plan to fill out the gap
between these two states.
· Gap analysis is more organic and flexible than most other
tools. It can be done by using simple excel worksheets or
flowcharts.
· You have much more freedom & flexibility in choosing what
to focus on.
· At the same time, every gap analysis template must have a few
essential components.
Decide the area/business unit you’re going to do the Gap
Analysis on? That is, finalize the challenge you want to tackle:
So, start your gap analysis template with a column labelled
‘Objectives’.
Sample Areas:
· Revenue/Profitability
· Market Share
· Product Functionality/Features
· Cost Control
· Employee Performance
· Identify your ‘Current State’. That is defining where you are
right now and it has to be based on metrics or attributes.
· So, actual analysis starts with introspection, that defines your
current state.
· List out all the attributes you want to improve. Your focus can
be as wide (ex: the whole business) or narrow (ex: HR policies)
based on the objective mentioned in Step I.
· It can be quantitative (‘currently get 50 orders per day’),

16. qualitative (‘lack of employee morale in workplace’) or both.
· The key thing is to be specific, measurable and factual with an
emphasis on identifying weaknesses.
· Identify where you’d like to be over a specific time frame. The
‘future state’ represents the ideal condition you’d want your
organization to be in.
· This state can be highly specific (ex: ‘increase order count to
100 per day’) or generic (‘enhance employee morale’).
· Your gap analysis template should record all the idealized
attributes as they correspond to the current state.
· Sometimes, you may not even have a clear conception of an
idealized future state and might be conducting a gap analysis as
an exercise towards self-improvement. In this case, you can
record ‘N/A’ under the future state column.
Identify & describe the gap between ‘where you are’ and ‘where
you want to be’, based on Step III.
1. Gap Identification: Next column in the template should
record whether a gap exists or not. A simple ‘Yes’ or ‘No’ will
suffix.
2. Gap Description: The gap description should record all the
elements that make up the gap between the current and future
state.
Thus, this where you identify and describe the gap before
finding ways for remedy
Step I
Step I
Step IV
Points to be noted:
•
The gap description should be consistent with the current
and future state.
•
It can be either quantitative (50 orders/day is difference
between current and ideal state) or qualitative (employee

17. morale is below average)
•
This should only serve as a description, not as a remedy
Step V
Determining how the Gap should be filled. This is the final &
vital step in the entire process and this is where the real
challenge is.
· Factors Responsible for Gap: First you should identify the
factors responsible for the difference between your current &
future performance.
•All the factors responsible for the gap should be listed in this
column of the template
•The list should be specific, objective, relevant & exhaustive
(like ‘flawed order processing’ or ‘outdated employee manual’).
•This data will help come up with remedies and action plans
required to tackle the gap.
Based on the factors mentioned above, the remedies are to be
proposed.
· Remedial Actions & Proposals: The final & vital step in the
gap analysis is listing out all the possible remedies for bridging
the gap between the current and ideal state.
•The remedies and proposals should directly address the factors
mentioned in the previous column.
•The same should be specific, action oriented & time bound
(‘training of relevant staff or update the technology’ not just
‘effective measures to improve order processing’).
Suggested Techniques & Methods:
Effective usage of the resources
-
“
6
M
’

18. s
” :
•
Manpower
-
human resources you need
•
Methods
-
processes you need
•
Metrics
-
measurements you need
•
Machines
-
automation or technology you need
•
Materials
-
material resources you need
•
Minutes
-
time you need
SWOT
Analysis
template and simply list out your:
•
S
trengths,
W
eakness,
O

19. pportunities and
T
hreats related to filling the gap
Develop an action oriented
Business Plan
with relevance to the above gap
Here’s a simple Gap Analysis Chart:
Objective
Current
State
Future State
Gap
Identificat
ion
Gap
Description
Factors
Remedial Action
To increase
annual
revenue
10
million/annum
25
million/annum
by next three
years
Yes
15
million/annu
m is the

20. difference
Sales personnel are
not proficient with
latest tools
Flawed processing
of orders at Sales
Office
Review &
Training based
on the same
Update the
order
processing
software
Profitability
to be @ 8%
on sales
Average 8%
on sales
Average 8%
on sales
No
N/A
N/A
N/A
Employee
morale
Lack of
employee
morale at
workplace
Employee

21. morale to be
enhanced
Yes
Lack of clarity
in HR policy
Outdated HR Manual
Update the HR
Manual in sync with
current environs
Product
feature
&functionali
ties
Limited
features &
functionalities
To improve
the same by
next year
Yes
Does not
have
uniqueness
Product just launched so
it has limited features &
functionalities
Conduct review
among existing
customers & improve
the product based
on the same

22. Top Management & Gap Analysis
· As with any strategic initiative, gap analysis can only be fully
effective if top management exhibits total commitment to the
effort towards a change.
· Top management will be solely responsible for initiating a gap
analysis planning process, for example; bringing all relevant
employees on board, overseeing the process, and making final
decisions about the analysis’ outcomes and implications.
· Management must make the gap analysis a prime issue, and
must encourage employees, at all levels of the organization, to
achieve excellence.
· Employees often emulate the behavior of top management. If
the leadership shows no real interest in the gap analysis and its
implications, managers and employees throughout the company
are likely to feel the same way. Benefits of Gap Analysis
· Gap analysis looks to improve inefficient business processes
by optimizing allocation of all resources and inputs. Many
companies are performing below their potential because they
either misuse resources or lack the correct investment in
technology or capital. Gap analysis highlights these
inefficiencies and offers options for improvement.
· Effective gap analysis should increase an organization’s
production and performance, resulting in higher-quality
products /services at a lower cost.
· Gap analysis also measures the amount of time, money and
resources needed to fulfil an organization’s potential and reach
the desired state and helps in cost reduction.
· If successfully accomplished, you can establish a competitive
advantage over your competition in the marketplace. Conclusion
· Ultimately, the analysis will outline a company’s ‘current
position’, the ‘desired future position’, and the gap in between.
· The performance of the target area should be closely

23. monitored - looking for ‘change in performance level’, which
should shed light on the effectiveness of the program.
· Gap analysis can be used in time of crisis to find solutions for
obvious problems; however, the tool has more potential than
just being a damage-control technique.
· Using gap analysis on various departments and business units
on regular basis can help organizations continually improve the
efficiency of their operations while cutting costs and delivering
a consistently higher quality product or service…
Week 1: Gap Analysis Assignment
Construct a Gap Analysis of Spectrum Sunglasses. Gap refers to
the space between "where we are" (the present state) and "where
we want to be" (the target state).
INSTRUCTIONS:
(1) Read “Business Gap Analysis” provided by your instructor.
(2) Review the Foreground Reading about Spectrum Sunglasses
and identify a minimum of four objectives and their related
current and future states. These are most likely to be in the
areas of Revenue/Profitability, Market Share, Product
Functionality/Features, Cost Control, and/or Employee
Performance.
(3) Fill out the remainder of the Gap Analysis Chart below,
quantifying/describing the gap, the factors contributing to the
gap and remedial action to close the gap.
(4) Write a one-page summary of your findings describing your
reasoning for choosing the objectives and target future states
and submit along with your Gantt chart to the Backboard
assignment link by Sunday of Week 1 at 11:59 p.m. CT.
Objective
Current State
Future State
Gap Identification
Gap Description
Factors

24. Remedial Action

25. Online Simulation Foreground Reading—Change Management
Simulation: Power and Influence
HARVARD BUSINESS SCHOOL PUBLISHING | ONLINE
SIMULATIONS 1
O N L I N E S I M U L A T I O N F O R E G R O U N D R E
A D I N G
Change Management: Power and Influence
Overview
You operate within Spectrum Sunglass Company, a ten-year-
old, privately held company that
designs, manufactures, and sells sunglasses. Headquartered in
Tremont, California, all of Spectrum’s
design and production capabilities are in southern California.
Two years ago, a relatively short, mild
recession caused revenues to fall nearly 7%, 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. Exhibit
1 contains selected financial information for the previous two
fiscal years.
The company currently employs 580 employees. Eight people

26. 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 U.S. 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 8% of the industry dollars and
5% 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. Exhibit 2 contains a
summary of the prices, volumes, and channels involved with the
sunglass industry.
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

27. nonprescription sunglasses that are
sold primarily in the United States. All sets of sunglasses
feature UV-ray blocking polarized lenses, and
all lines are marketed with an oceanic, sporty theme. Building
upon the company’s proprietary
polarization technology, the polycarbonate lenses offer superior
optical quality, color enhancement, and
scratch- and impact-resistance. Crafted with the company’s
proprietary production technology, the
frames are lightweight, durable, and available in a wide variety
of unique shapes and colors. Originally
targeted to swimmers and surfers, its products are expanding
into other outdoor users. Retail price points
for its nonprescription products range from $59 to $99 per pair,
and they are sold on the Internet and
through sporting goods stores. Prescription sunglasses are sold
through optical stores for $75 to $100 per
pair.
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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

28. 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) margin1 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 3 x.2 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.
1 Historically, the company has had a 7.5% operating margin.
2 The interest coverage ratio is calculated as operating income
divided by interest expense.

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SIMULATIONS 3
Exhibit 1
Selected Financial Information for Spectrum Sunglass Company
Last Current
Operating Results: Fiscal Year % Fiscal Year %
Net Revenue 91,000 100.0% 101,500 100.0%
Less: Cost of Goods Sold 50,050 55.0% 53,873 53.1%
Gross Profit 40,950 45.0% 47,627 46.9%
Less: Operating Expenses 40,040 44.0% 39,195 38.6%
EBIT 910 1.0% 8,432 8.3%
Less: Interest Expense 830 0.9% 900 1.4%
EBT 80 0.1% 7,532 6.9%
Less: Taxes 0 0.0% 226 3.0%
Net Income 80 0.1% 7,306 4.4%
Last C u rre n t
Assests: Fi scal Ye ar % Fi scal Ye ar %

30. Cash & Cash Equivalent s 1,820 2.9% 2,030 3.2%
Account s Receivable 11,375 18.4% 12,688 19.8%
Invent ory 7,583 12.2% 8,458 13.2%
Total C u rre n t Asse ts 20,778 33.5% 23,176 36.2%
Net P ropert y, P lant & Equipment 41,200 66.5% 40,850
63.8%
Total Asse ts 61,978 100.0% 64,026 100.0%
Liabilities & Owners' Equity:
Account s P ayable 10,511 17.0% 10,858 17.0%
Accrued Expenses 7,508 12.1% 7,756 12.1%
Total C u rre n t Li abi l i ti e s 18,018 29.1% 18,614 29.1%
Long T erm Debt 17,854 28.8% 18,802 29.4%
Owners' Equit y 26,106 42.1% 26,610 41.6%
Total Li abi l i ti e s & O wn e rs' Equ i ty 61,978 100.0%
64,026 100.0%
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31. 4 ONLINE SIMULATIONS | HARVARD BUSINESS SCHOOL
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Exhibit 2
Adult Sunglasses Channel Report
Channel Total Dollars
%
Dollars
Total
Units
%
Units $/Unit
Sunglass
Specialty $1,046,940,000 31% 7,640,000 8% $137.03
Optical $404,550,000 12% 2,780,000 3% $145.43
Mass $379,510,000 11% 24,720,000 25% $15.35
Other $819,770,000 24% 46,310,000 47% $17.70
Sport $136,830,000 4% 2,540,000 3% $53.84
Drug $134,450,000 4% 7,810,000 8% $17.21

32. Grocery $12,420,000 0% 860,000 1% $14.52
Department
Stores $363,850,000 11% 3,480,000 4% $3.48
Warehouse $125,770,000 4% 2,160,000 2% $58.34
Total $3,424,090,000 100% 98,300,000 100% $34.83
Price Range Dollars
Units
< $25 50%
85%
$25-100 8%
5%
> $100 42%

33. 11%
Source: JOBSON/VCA - VisionWatch; 12 months ending
December 2009