Business Test

SUPER MAX LTD.

The case study is based on two companies Electrical Solutions plc and its subsidiary, Super Max Ltd..

Company profile

In 1985, Derek Gorman opened Electrical Solutions, a small retail outlet selling electrical equipment. As an ambitious entrepreneur Derek set himself the target to be a millionaire before he reached the age of 35. He was constantly looking for new business and market opportunities. There was an increasing international trend for electrical equipment, such as washing machines and televisions, to be sold in large out-of-town retail outlets to take advantage of economies of scale. Derek's market research highlighted that there were no such retail outlets in the suburbs of several large Australian cities. To take advantage of this business opportunity he developed a business plan and obtained a $1.5 million bank loan (some of which was secured against his house) to open out of town electrical retailing outlets in the suburbs of Melbourne. Sales revenue far exceeded expectations and in 1992 he achieved his ambition and earned his first million dollars in salary and bonuses.

To develop the business further Derek converted Electrical Solutions into a private limited company and by 1995 it had opened 10 further stores in Melbourne, Canberra and Adelaide and had a turnover of over $22 million. However, by 2000 turnover at Electrical Solutions Ltd slumped as large global conglomerates moved into Australia to take advantage of good trading conditions. These conglomerates were able to use their market and buying power to drive down prices making the market increasingly price competitive. Electrical Solutions Ltd was finding it increasingly difficult to match these price cuts.

Derek felt that being a private limited company was restricting further growth of the business. In 2001 the board of directors decided to float 65 % of the shares of Electrical Solutions Ltd on the Australian Stock Exchange. Derek and his family kept 30 % of the shares and the remaining 5 % was reserved for employees under an employee share ownership scheme. Derek became the chief executive officer of Electrical Solutions plc, a role he had fulfilled for the limited company since its start-up. In 2000, Derek's daughter Catherine joined the firm as director with responsibility for purchasing. Catherine had been to university in Sydney and then spent four years working for a large Japanese car company where she pioneered environmentally sensitive manufacturing techniques.

At a board meeting in 2003, the directors agreed that for the company to grow further, it needed to diversify into other areas. With the existing intense competition in the electrical equipment retail market, Electrical Solutions plc looked for alternative expansion opportunities. It commissioned the consultancy firm, Martrend, to conduct market research on its behalf and to investigate potential new markets. Martrend identified that consumers were increasingly concerned about both global warming and rising energy prices and were looking for new solutions to meet their energy requirements. This offered a significant market opportunity for companies manufacturing solar power equipment and so Electrical Solutions plc considered entering this market. Some of the board of directors had reservations about this change of direction, but Catherine's passionate belief in sustainable energy persuaded the majority of the board to support the idea.

With solar power technology still developing, this represented a very new and risky market, but the report from Martrend provided convincing evidence that the market was set to grow rapidly and that there was an opportunity to gain first mover advantage.

In February 2003, Electrical Solutions plc set up Super Max Ltd. as a wholly owned subsidiary of Electrical Solutions plc. Start-up capital was partly provided through a $1 million bank loan. Further capital was contributed by the parent company, using funds released from the sale of the worst performing out of town retail outlets.

Derek's daughter Catherine was appointed the managing director of Super Max Ltd., which is based in Melbourne along with Electrical Solutions plc. It manufactures and sells solar power equipment to generate electricity for households and small firms (see Appendix 1 for product range). Customers can use this equipment to generate power for their own needs and they can sell any surplus electricity to the national electricity provider for use by other customers.

Production

The production director of Super Max Ltd. is Tony McGregor, an old friend of Derek's. He worked for many years as a manager for one of the large electricity companies. Derek persuaded him to move with an offer of a generous financial package including shares and bonuses. Some staff resented this appointment.

Super Max Ltd. manufactures the solar power equipment to customer specification. The equipment is assembled from components that Super Max Ltd. buy from a range of suppliers, as soon as an order is received from a customer. Consequently, Super Max Ltd. holds minimal levels of stock. However, some suppliers have proved unreliable and long delivery times have resulted in some delays in delivery of the equipment to customers, causing dissatisfaction.

Significant recent growth means that the assembly area is currently running at an average 98 % capacity. Significant overtime is often required to meet demand and some of the production staff are expressing their concerns about the unpredictable nature of the hours they are expected to work.

Super Max Ltd. is also having problems with the quality of the components from one or two suppliers and in the worst case this resulted in an entire system being replaced for a customer. Tony has suggested to the board that Super Max Ltd. changes suppliers, but many of the components are highly specialized and the only alternative suppliers are located in Asia. The board has asked Tony to look at the possibility of building closer relationships with local suppliers.

These supplier problems have led Tony to look at quality issues across all their operations. Catherine is a strong advocate of total quality management and is promoting the use of quality circles and continuous improvement. By contrast Tony, who has quite a traditional management style, feels that quality control issues are the responsibility of management. He wants the employment of additional managers, with specific responsibility for quality.

Tony and Catherine are considering the possibility of buying a computer-controlled production management system. Currently, all production information is duplicated in several systems, which makes coordination difficult,