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THE SCENARIO Gulf Electric Inc. (GEI) is an established mid-sized electrical manufacturing firm that supplies electric utility products, parts and...

Is global warming a opportunity or a trap
THE SCENARIO Gulf Electric Inc. (GEI) is an established mid-sized electrical manufacturing firm that supplies electric utility products, parts and equipment in the southeastern United States. GEI’s business had been stagnant in the last five years due to good weather and recent competition in the industry. The firm had traditionally supplied electric utilities in the southeast with all types of electrical equipment through long- term contracts. Thus the demand and the revenue stream were steady over a number of decades. The electric companies had performed maintenance and upgraded lines on a steady and predictable basis. In recent years foreign firms had taken steadily taken market share from GEI due to lower raw material and labor costs. GEI found itself in a position where it was losing its traditional market and had little ability to fight back. As a result GEI leadership met to discuss a number of proposals that looked promising. In order to smooth their revenue stream and diversify their business GEI expanded into the higher margin business of consumer products. PRODUCT DIVERSIFICATION Due to the ingenuity of its research and development team GEI had a few patents that gave it a core advantage over the foreign competition. The patented technology allowed GEI to build a line of gasoline and diesel powered electrical generators with smooth power flow. Marcia Gonzalez, the Vice president of Marketing at GEI promoted these items as being safer for consumer products. She labeled the full line GEI products as “PowrFlo” to point out the smooth transfer and flow of power. GEI was able to offer a guarantee that “PowrFlo” products would not damage accessories that were plugged in. Marcia advertised the “PowrFlo” line as being vastly superior for this reason. Since these products virtually eliminated electrical spikes and they were patent protected GEI was able to overcome the cost advantages of the foreign competitors. GEI also had the advantage of being first to market with these newer products that were really in a class by themselves compared to earlier generators. The generators were introduced in 2004 and they were an instant hit taking much of existing competition by surprise. The result was a steady sales increase in 2004 and 2005. Even the power companies bought them as a backup for emergencies. GEI had intended the product line for consumers and they also offered a service plan for only $100 annually that included a GEI technician testing the unit semiannually and replacing the fuel filter and adding fuel stabilizer annually. The sales contract was very popular and provided peace of mind to consumers. Over 80% of new generators were sold with the sales contract. Demand was increasing about 10% per year on a steady basis. GEI marketing research revealed that 2% of customers were replacing older generation equipment while 8% were customers that had never owned a generator before. GEI also designed special pumps to operate alone or with GEI generators. Like the generators these pumps were made in many sizes and came in 110 volt and 220 volt versions. To make them more flexible they were designed to run on direct current from batteries as well as alternating current. GEI THE GREEN COMPANY GEI also created the option of running the pumps on batteries charged by solar cells mounted on rooftops. The entire line of green products was called “SunnyFlo” and they were promoted heavily by GEI as an alternative to traditional operation. They were practical due to the lack of electricity in some areas such as places were generators could not be placed for safety reasons. They also appealed to the public because of their environmental friendliness. An additional feature of the GEI generators was the low emissions that they produced. All GEI generators came with a small catalytic converter integrated into the exhaust system of the generator. The GEI patented technology was capable of emission reductions of 90% over conventional and competing generator models. Because these generators were designed with a patented cylinder head design GEI’s competitors could not easily duplicate their environmental performance. These generators were also marketed with the environmentally friendly “SunnyFlo” label. 1 MGT 5002 – Capital Budgeting Case Study (Group)
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HURRICANE KATRINA In August of 2005 one of the strongest hurricanes on record struck the gulf coast of the south east United States. Hurricane Katrina caused more than 1800 deaths and caused over 80 billion dollars in property damage. All of the areas hit by the storm lost all electrical power as well as many locations nearby that were not hit by the storm. DEMAND GOES WILD After the storm the entire Southeastern United States was in a panic. The news showed many pictures of the devastation along coastlines and the wrecked homes and businesses. Most reports focused on the damage in New Orleans and showed how the dramatic failure of the levy system led to widespread misery. Almost immediately, after the storm, demand for GEI generators exploded. First there was great demand for generators in the storm areas. However, after a few days of incredible television coverage orders began to come in from areas in the Gulf and Atlantic regions in the Southeastern United States in record numbers. It seemed that word of the product had been well received and that Katrina had served as a lightning rod for consumers. Paradoxically, the storm that had caused so much misery and destruction for individuals and businesses, was a tremendous opportunity for GEI. The question was if the company could move quickly enough and in the right direction tactically and strategically to capitalize on the opportunity. THE MEETING Doug Smith, CEO of Gulf Electric immediately called a senior staff meeting. Doug was looking for solutions and he needed some quick answers. Obviously GEI had to come up with some additional capacity to meet what seemed to be rapid and permanent demand. This was a problem GEI had before Katrina due to the success of the “PowrFlo” and “SunyFlo” products. However, Katrina had given the entire product line a new measure of urgency. The senior staff meeting that the CEO called included the Vice president of Marketing Marcia Gonzalez, the Vice president of Human Resources Amy Johnson, the CFO Alan Wills and the COO Frank Criss with his Chief Engineer John Amer. Doug summarized the issue at hand regarding product capacity. Marcia had been proclaiming that the demand for the various product lines was a permanent trend. In past meetings Alan had resisted many of Marcia’s ideas in favor of large capital budgeting efforts arguing for outsourcing instead. Amy Johnson, who was familiar with costs of recruiting, training and maintaining a work force supported Alan. Amy feared that changes in demand might cause GEI to have too many employees that it could not easily 2
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