Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/eBack Matter Cases © The McGraw−Hill
Companies, 2002received its highest credit rating and was able to borrow work-
ing capital ($5 million to meet seasonal can and wage
requirements) at the lowest rate ever.
The fact that the firm isn’t unionized allows some compet-
itive advantage. However, changes in minimum wage laws
have increased costs. And these and other rising costs have
squeezed profit margins. This led to the recent closing of two
plants as they became less efficient to operate. Rainbow ex-
panded capacity of the remaining two plants (especially
warehouse facilities) so they could operate more profitably
with maximum use of existing processing equipment.
Shortly after Christian’s retirement, Hans Fleming re-
viewed the company’s situation with his managers. He
pointed to narrowing profit margins, debts contracted for new
plants and equipment, and an increasingly competitive envi-
ronment. Even considering the temporary labor-saving
competitive advantage of the new cooker system, there
seemed to be no way to improve the status quo unless the firm
could sell direct—as they do in the local market—thereby
eliminating the food brokers’ 5 percent commission on sales.
This was the plan decided on, and Niels Sondergaard was
given the new sales job. An inside salesperson was retained to
handle incoming orders and do some telemarketing to smaller
accounts.
Niels Sondergaard, the only full-time outside sales rep for
the firm, lives in Riverside. Other top managers do some sell-
ing but not much. Being a nephew of Christian, Niels
Sondergaard is also a member of the board of directors. He is
well qualified in technical matters and has a college degree in
food chemistry. Although Niels Sondergaard formerly did call
on some important customers with the brokers’ sales reps, he is
not well known in the industry or even by Rainbow’s usual
customers.
It is now five months later. Niels Sondergaard is not doing
very well. He has made several selling trips, placed hundreds of
telephone calls, and maintained constant e-mail contacts with
prospective customers—all with discouraging results. He is
unwilling to continue sales efforts on his own. There seem to
be too many potential customers for one person to reach. And
much negotiating, wining, and dining seems to be needed—
certainly more than he can or wants to do.
Sondergaard insists that Rainbow hire a sales force to con-
tinue the present way of operating. Sales are down in
comparison both to expectations and to the previous year’s
results. Some regular supermarket chain customers have
stopped buying—though basic consumer demand has not
changed. Further, buyers for some supermarket chains that
might be potential new customers have demanded quantity
guarantees much larger than Rainbow Packers can supply. Ex-
panding supply would be difficult in the short run—because
the firm typically must contract with growers to ensure sup-
plies of the type and quality they normally offer.
Christian, still the controlling stockholder, has asked for a
special meeting of the board in two weeks to discuss the pres-
ent situation.
Evaluate Rainbow’s past and current strategy planning. What
should Hans Fleming tell Mr. Christian? What should Rainbow do
now?
Plastic Master, Inc.Nora Hall is trying to decide whether to leave her present
job to buy into another business and be part of top manage-
ment.
Hall is now a sales rep for a plastics components manufac-
turer. She calls mostly on large industrial accounts—such as
refrigerator manufacturers—who might need large quantities
of custom-made products like door liners. She is on a straight
salary of $35,000 per year, plus expenses and a company car.
She expects some salary increases but doesn’t see much long-
run opportunity with this company.
As a result, she is seriously considering changing jobs and
investing $40,000 in Plastic Master, Inc.—an established
Chicago (Illinois) thermoplastic molder (manufacturer). Mr.
Hanson, the present owner, is nearing retirement and has not
trained anyone to take over the business. He has agreed to
sell the business to Steve Burton, a lawyer, who has invited
Nora Hall to invest and become the sales manager. Steve
Burton has agreed to match Hall’s current salary plus ex-
penses, plus a bonus of 2 percent of profits. However, she
must invest to become part of the new company. She will get
a 5 percent interest in the business for the necessary $40,000
investment—almost all of her savings.
Plastic Master, Inc., is well established and last year had
sales of $2.2 million but zero profits (after paying Hanson a
salary of $40,000). In terms of sales, cost of materials was 46
percent; direct labor, 13 percent; indirect factory labor, 15 per-
cent; factory overhead, 13 percent; and sales overhead and
general expenses, 13 percent. The company has not been mak-
ing any profit for several years—but it has been continually
adding new machines to replace those made obsolete by tech-
nological developments. The machinery is well maintained
and modern, but most of it is similar to that used by its many
competitors. Most of the machines in the industry are stan-
dard. Special products are made by using specially made dies
with these machines.
Sales have been split about two-thirds custom-molded prod-
ucts (that is, made to the specification of other producers or
merchandising concerns) and the balance proprietary items
(such as housewares and game items, like poker chips and crib-
bage sets). The housewares are copies of articles developed by
others and indicate neither originality nor style. Hanson is in
charge of selling the proprietary items, which are distributed
through any available wholesale channels. The custom-molded
products are sold through two full-time sales reps—who re-
ceive a 10 percent commission on individual orders up to
$20,000 and then 3 percent above that level—and also by
three manufacturers’ reps who get the same commissions.
The company seems to be in fairly good financial condi-
tion—at least as far as book value is concerned. The $40,000
investment will buy almost $60,000 in assets—and ongoing
operations should pay off the seven-year note (see Table 1).
Steve Burton thinks that with new management the company
has a good chance to make big profits. He expects to make
some economies in the production process—because he feels
most production operations can be improved. He plans to keep
custom-molding sales at approximately the present $1.427736 Cases