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Billabong Case Study

Managing Change
HISTORY Australias largest surfwear manufacturer, annual sales = $680 million (2003/04) Core business = marketing, distribution and retail of clothing, accessories and eyewear Sells products under other brand names including: Element (Skate wear) Von Zipper (sunglasses) Honolua Surf Company Founded in 1973 by Gordan and Rita Merchant Reputation = supplying quality surfwear = innovative product design Began with boardshorts, within a few years extended to surfboards, wetsuits and tshirts 1983 began distributing to US in order to increase sales and establish global identity o this required considerable financial resources and more formal managerial structure expanded to NZ (1985) and France (1987) Now owns retail stores o/s and manufactures many products in East Asia 70% sales in o/s markets Billabong has now diversified by selling products under different brand names (see above) 2000 Billabong became a publicly listed company one of Austs 200 largest companies SOURCES OF CHANGE External sources of change 1. Economic factors Rising levels of consumer income has improved living standards throughout the Australian economy; which has contributed to the growing popularity of surfing Global scale = incomes in East Asia and South America have helped to create new markets and encouraged companys global expansion 2. Social factors Increasing popularity of surfing and surfwear among the broader community = growth Increasing popularity of other sports, such as skateboarding, has lead to diversifying of product range and expansion into new markets where surfwear sales still have enormous growth potential

3. Financial factors Expansion of the Australian financial system in the 1990s was the catalyst for Billabong to become a publicly listed company, listing its shared on the ASX in 2000. Resulting in an increase of funding and exposing the company to greater instability as sudden shifts in investment setiment can lead to enormous swings in its share price Influenced by fluctuations in the Australian $ Eg. 2003-04 = reduced value of o/s earnings and wiped millions of dollars off the economys profits 4. Political factors Reduction in barriers to trade has made it easier for Billabong to export Deregulation of financial markets = buying of o/s businesses, establish o/s production facilities and open retail outlets outside Australia Benefited from the Australian governments continued protection of the domestic clothing and manufacturing industry through the maintenance of tariff barriers that increase the price of goods produced by Billabongs foreign competitors 5. Geographic factors On a social level the company suggests a no. of initiatives to protect the oceans and related natural environments Products associated with mainstream fashion, but popularity is greatest in areas near the ocean, where people regularly surf 6. Technological factors Cost of transport affects Billabongs ability to distribute its products between different markets IT such as cable television and internet has exposed millions of new customers to surfing and helped Billabong market its products towards a broader customer base. Internal sources of change 1. E-commerce Simplifying the logistical and organizational difficulties associated with operating in a global business Uses electronic inventory monitoring to track sales and ensure stores always have adequate levels of stock Websites showcase latest products, promote surfing competitions and other sports people whom the company sponsors 2. Internal procedures Financial management and ER changes due to transformation into publicly listed company Must now publish financial records every year with the assistance of professional accountants (auditors) to verify accuracy 3. Business culture

Greatest changes occurred since 1998 = consortium of investors led by former CEO Matthew Perrin and current chairman Gary Pemberton bought 49% of Billabong assuming management control, implementing new processes in the business and tightening control over the companys o/s subsidiaries RESPONSES TO CHANGE Billabong has responded to change in 3 ways: 1. Expanded into new o/s markets and diversified its product range, making the company less susceptible to sudden swings in demand in a single market or for a single product. 2. Expanded its presence in other youth-oriented markets through the use of strategic alliances (eg. Billabong Channel [V] tour bus) providing thousands of dollars of free publicity 3. Outsourced much of its production to o/s manufacturers, letting the company simply focus on designing new products. Outsourcing has allowed Billabong to lower its costs and maintain a competitive advantage in this price-sensitive markets REASONS FOR RESISTANCE TO CHANGE AT BILLABONG Financial costs of growth and expansion Billabongs managers have also hindered the process of change - Eg. 2001 = CEO Mathew Perrins unexpected sold $66million shares arguing this was done for personal reasons. However as a result Billabongs share price fell by 40% approx, making it more difficult for the company to raise funds to find further expansion. MANAGING CHANGE EFFECTIVELY o Identification for the need for change eg. Billabongs vital edge over competitors by expanding o/s in early 1980s and diversifying into sunglasses and skateboards o By setting ambitious but achievable goals this has encouraged staff to strive for success eg in 2004-05 CEO Derek ONeill expects the company to raise net profit by 20% or over $16 million o Management team has created culture for change. The introduction of a new management team in 1998 = great development of Billabong. Managers served as change agents. BILLABONG AND SOCIAL RESPONSIBILITY Ecological sustainability Supports a number of social and environmental issues; such as the Surfrider Foundation, which promotes the conservation and regeneration of beaches and foreshores Quality of life By being flexible with staff and having a relaxed attitude

Working conditions o/s operations has a strict no child labour policy Cultural diversity Employees encouraged to transfer between international offices to gain new experiences. Billabong hopes this will minimize the possibility that cultural differences will lead to workplace conflict APPLYING MANAGEMENT THEORIES TO BILLABONG Many theories have been applied through Billabongs existence: - Behavioural management theory . In the way they manage their employees - Classical-scientific management theory . Employed when they went into international expansion and decision making became centralised - Political management theory . When CEO Matthew Perrin left Billabong in 2002

Therefore Billabong takes a CONTINGENCY APPROACH to management as they borrow elements of each management theory

Finance
THE ROLE OF FINANCIAL PLANNING AT BILLABONG primary role of financial planning = determine the companys immediate financial position and identify any potential risks to its financial stability In the short-run = liquidity is Billabongs most important financial objective In the long-run, financial planning has a broader strategic role. Billabong seeks out projects that will allow the company to increase its sales, market share or geographical reach whilst also achieving efficiency through cost minimisation. Ultimate goal = maximize profitability whilst also maintaining an acceptable mix of debt and equity funding Financial management is the continual process of planning, monitoring and evaluation. Follows a financial planning cycle: 1. address the present financial position 2. determine financial elements of the business plan 3. maintain record systems 4. interpretation BILLABONGS RECENT FINANCIAL PERFORMANCE o revenue statement in recent years Billabongs net profit has risen significantly largely due to rising sale revenue, which grew 75% over the last 4yrs

o balance sheet assets have expanded rising by almost 30%. Growth is largely due to debt funding o cash flow statement recorded consistent cash surpluses from its core operating activities, which have been used to pay for its investing activities

How accurate are Billabongs records????


As a publicly listed company, Billabong by law is required to provide audited accounts at the end of every financial year - Auditing systems provide some guarantee that companies will provide reliable financial ratios BILLABONGS FINANCIAL RATIOS profitability and return on capital: Billabongs profitability has increased steadily in recent years net profit ratio (measure of businesses overall financial performance) = rose from 11% in 2000-01 to 13% in 2003-04 that is more than x2 the net profit ratio achieved by Billabongs largest competitor, Quicksilver return on owners equity (profitability relative to its levels of shareholder funds) = rising from 8.2% in 2000-01 to 15% in 2003-04 Gross profit ratio (revenue relative to cost of goods sold) = rose from 45.7% in 2000-01 to 49.8% in 2003-04 Improved profitability reflects: o Cost minimisation schemes o Achievement of economies of scale o Improvements in product range Also customers increasingly willing to pay higher prices for companys products Efficiency through expense ratio (operating expenses relative to sales) rose from 28.9% in 2000-01 to 30.8% in 2003-04 Marginal deterioration in efficiency reflects increased admin. costs. However as profitability has increased the marginal rise in the companys expense ratio isnt of significant concern. Liquidity traditionally operates with high level of liquidity, as demand for surfwear fluctuates throughout the year Current ratio has risen from 2.3:1 in 2001-02 to 2.8:1 in 2003-04 = exceptionally high level of liquidity for a large business indicating the company should have no difficulties meeting its short-term financial obligations

Increase in current ratio indicates that Billabong is selling more goods on credit than previously, and possibly taking longer to convert its sales into cash Solvency funded expansion largely through debt financing Total liabilities have increased from $134.9 million in 2000-01 to $322.7 million in 2003-04 Debt-to-equity ratio has increased from 0.26:1 in 2000-01 to 0.56:1 in 2003-04 Despite sharp increase in Billabongs liabilities, the companys debt to equity ratio remains acceptably relative to its competitors and financial markets do not feel Billabong faces any serious solvency difficulties in the short-term Growth primary financial objective in recent years great success as sales, profits and asset values have all risen in recent years Yet there is still room for further growth in the future. After all, Billabongs total sales remain only half as large as those of its largest competitor Quicksilver Ltd. FUNDS MANAGEMENT o Largely reliant on equity finance, however in recent years its relied on external sources or raising additional funds (ASX) o Increased use of leasing as a cost effective means of getting access to assets without incurring the expense of purchasing assets outright o External funding advantages = interest payments are tax deductible, lowering the companys overall tax liability = companys financial obligation limited to sum it borrows plus any interest it incurs. Any returns the company generates above that amount will flow directly to shareholders in the form of higher profits o External funding disadvantages = faces greater financial obligations in the form of interest payments, therefore company must maintain a higher level of free cash at any given time. Also higher debt levels may lower investor confidence in business o Increase in debt levels do increase the chances that the company will face financial difficulties if sales fall expenses rise in the future FINANCIAL MANAGEMENTS STRATEGIES I. Working capital management Inventory and accounts receivable levels have both increased in recent years a natural outcome of business growth. This however

is an undesirable trend businesses usually prefer to convert their inventory into cash as quickly as possible through factoring. Accounts payable have increased in recent years, as company is taking advantage of more generous credit terms offered by suppliers, reflecting Billabongs improving credit-worthiness II. Profitability management Businesses improve profitability in 2ways: either they increase their revenue or decrease expenses Billabong has altered sales mix by expansion into o/s markets and launching new products Also Billabong has continued to modify its existing product range in order to better appeal to consumer tastes Success in strategies evident in increase in sales revenue Also minimised expenses through cost control measures savings have come through outsourcing

Marketing
THE ROLE OF MARKETING AT BILLABONG Billabong has adopted a marketing orientation Primary role of marketing = attract new customers to the Billabong brand. Achieved through fresh and memorable advertising campaigns and ensures that the product range caters to the ever changing demands of consumers. They have also expanded into new industries and markets in order to widen its customer base. Relationship marketing achieved through sponsoring of pro. surf tournaments o Cheaper to retain an existing customer base than to win a new one Marketing strategies - aim to maintain the companys strong position in niche surfwear and skatewear markets, while also exposing its products to a broader mass market BILLABONGS MARKETING STRATEGIES Early days = word-of-mouth and occasional advertisement were enough to drive sales Now = relies on a powerful mix of product, price, promotion and placement strategies Product Broad range of products Product development = continual process. Company employs separate design teams in Australia, N. America and Europe to create products that will appeal to individual market places

Product branding est. a brand identity that represents its heritage as an Australian surfwear company wave logo widely recognisable creating new brands gives Billabong greater freedom to tailor its products to meet the needs of specific market segments Positions its products as high-quality, cutting-edge, fashionable items however ultimately products positioning is determined by its customers

Price While charging higher prices will increase Billabongs revenue per item sold, it may lower the overall sales revenue if customers choose to buy competitors products. Therefore Billabong operates with a competition based pricing method (setting prices with reference to those of its competitors) Rarely uses pricing strategies such as price skimming or loss leadership to raise market share In the short-term these strategies might have a temporary boost in sales Long-term; strategies could have a devastating impact on consumer perceptions of the quality of Billabongs products and on the desirability of brands Promotion Advertises its products widely in retail outlets, on billboards and in magazines (eg. Aust Surfing Life) and on their website Est. a range of below-the-line promotional campaigns organises pro. surfing events and sponsors a team of pro. surfboarders and skateboarders Publicity from the appearance of products in a number of TV shows and movies (eg Blue Crush). Also produces videos (such as Billabong Odyssey) that appeal to they companys traditional customer base Billabong does a number of things that reinforce customer perception of the company as a socially responsible company, such as: o Supporting local surfboard ridding clubs o Donated $500,000 to the relief fund for victims of the Tsunami is Asia Place Products sold in over 2,500 retail outlets in Aust. and throughout the world Company adopted a selective channel choice, selling its products through specialty surf and skate shops, but generally avoiding department stores and discount outlets - Strategy allows then to sell products through a wide distribution network while reinforcing its image as a serious manufacturer of surfwear and skatewear Recently established its own retail outlets - Represents a fantastic advertising opportunity in their own right - 2005: plans to open flagship store in NYs Time Square which will raise awareness of the brand in the crucial American market Distributing products on a global scale is a complex logistical exercise. Billabong = generally efficient

PROCESS OF DEVELOPING A MARKETING PLAN AT BILLABONG 1. situational analysis to examine current product range and marketing strategies SWOT analysis 2. Est. the marketing objectives for its marketing strategies - Billabong may also set quantitive targets for goals such as sales growth 3. Identifying its target market - Traditionally = young people who live an active lifestyle and enjoy sports such as surfing and skateboarding. Many customers however do not fit this description and the company must ensure that its marketing strategies do not alienate particular market segments 4. Develop markets strategies 5. Implement market strategies. Then monitor sales levels to gauge the success of its strategies in addition company conducts market research to determine customer impressions of its brands, products and marketing strategies research = primary and secondary

ETHICAL AND SOCIAL CONSIDERATIONS policies limit the ability of businesses to use marketing strategies to deceive consumers eg. Trade Practices Act 1974 (CTH) = products must perform the task they are intended for. Also cannot force distributors to sell products at a particular price, although allowed to specify recommended prices

Employment Relations
NATURE OF EMPLOYMENT RELATIONS AT BILLABONG most important stakeholders = company and its employees external stakeholders = trade unions Billabong is a relatively non-unionized workforce; a number of employees are members of Trade unions such as the Textile, Clothing and Footwear Union of Aust. Influenced by governments directly through the introduction of the new employment relations legislation and indirectly through industrial tribunals Billabong is not a member of Austs largest employer associations; however the role these organizations play in lobbying governments to allow more business friendly employment practices has a significant impact on Billabong INFLUENCES ON ER AT BILLABONG o External trends have forced Billabong to reassess its approach to employment relations, and modify the strategies it uses to create an efficient and successful workplace

Economic development and globalisation o Billabong is now a truly global business 1,300 employees around 500/40% offshore o Globalisation has increased cultural diversity = fresh ideas and perspectives = changed employee roles outsources much of its product manufacturing = Australian workforce increasingly concentrated in higher-value work, such as design, finance and distribution o Attracting and keeping staff has been made easier through: - Rapid population growth - Increasing participation of women - Rising use of part-time employment Benefited Billabong which traditionally operated with relatively informal and flexible work practices as well as a flat management structure. o Government ER laws have effected Billabongs business: - Workplace Relations Act 1996 - Racial Discrimination Act 1975 - Affirmative Action Act 1986 - Also safe workplace legislation OHS STRATEGIES TO ACHIEVE EFFECTIVE EMPLOYMENT RELATIONS Billabong always sought to maintain a flexible workplace environment to increase job satisfaction and productivity of employees Flat organizational structure = constant flow of information between employees and managers Training Induction training Continual education and training programs to help employees become multi-skilled and advance up the management chain within the company Important role of communication = ensures industrial conflict is resolved quickly and efficiently. Billabong attempts to do this through Grievance Procedures. Rewards = Financial Wages and salaries Bonuses of cash and shares used to senior employees Non-financial Lifestyle benefits = living on the Gold Coast =opportunity to work at one of Billabongs o/s offices =productive but relaxed, workplace culture

Developed the Since 73 Club To recognize long term employees (15years +) Hopes in increase staff loyalty and minimize staff turnover ETHICAL AND LEGAL CONSIDERATIONS o Must confirm to all relevant state and government legislation in its workplace o Fulfill ethical responsibilities towards its employees Company employs external consultants to review its production facilities and suggest measures the business ca take to improve safety performance Regularly sends managers to inspect o/s operations and ensure all workplaces conform to legal and ethical guidelines (evaluate issues such as the physical condition of workplaces as well as the working hours and wages of all employees) o Encourage employees to spend time working at one of Billabongs o/s operations to enhance cultural understanding and create unified business culture MANAGING INDUSTRIAL CONFLICT Billabong has maintained a successful ER record in recent years, with falling levels of labour turnover and no major outbreaks or industrial action

Billabong in the Global Marketplace


REASONS FOR BILLABONGS INTERNATIONAL EXPANSION Billabong expanded in order to increase sales and find new markets Aust. has small population therefore placed significant restrictions on Billabongs growth ambitions Expansion helped boost Billabongs sales o In 2003-04, o/s sales accounted for over 70% of Billabongs totals sales revenue Increased sales have also allowed Billabong to lower its cost base by achieving economies of scale In 2003, Billabong installed video conference technology in its overseas offices to make the exchange of ideas around the world easier Global expansion has allowed Billabong to lower risk levels through diversification of its markets and products o By working in 90markets = cushion impacts of economic cycle/ the entry of a new competitor into any of their markets Diversification has encouraged Billabong to diversify its product range Global expansion = the extension of the product life cycle for many products Global expansion has also provided greater access to resources and technology METHODS OF EXPANSION

Billabong initially began exporting products to the united states (this is a low risk method as it does not require business to alter its operations in a significant way) also effective way to see if there is a demand for products o/s. Also licensed so it could manufacture and sell o/s (low risk method) Billabong relocated production offshore. Today approx. 98% products manufactured outside Aust. Recently, global expansion strategy = Foreign Direct Investment (FDI) bought back o/s licenses to take control of global operations. Also acquired businesses existing in o/s markets. INFLUENCES ON BILLABONGS GLOBAL EXPANSION Financial Influences Fluctuations in currency values and interest rates o Affect the competitiveness of Billabongs exports in o/s markets o They affect the COGS and services Billabong imports for use in its production processes o Affect the revenue Billabong receives from selling products overseas Billabong borrows money from o/s to take advantage of lower interest rates or more generous payment conditions Political Influences Ability to expand into o/s markets is a result of government decisions to lower their barriers to international trade and investment flows Bilateral trade agreements negotiated through the World Trade Organisation (WTO) have also affected Billabong 2005 onwards all Australian businesses required to prepare financial reports that conform to International Financial Reporting Standards o cost of implementation = significant. However they will bring Australian accounting standards into line with global practices and make it easier for Australian businesses to attract finance from o/s sources Legal Influences International contract enforcement = serious legal issue for Billabong o Company therefore ensures contractors supply products of the appropriate quantity and quality Protecting intellectual property rights such as logos, trademarks and brand names from unauthorized piracy is another major legal issue for Billabong. Socio-cultural influences Different markets = different traditions, cultures and consumer tastes o 2004 = US were favouring products in bright colours = Australia preferred faded and weather beaten colours Differences in language also hindered Billabongs ability to operate in global markets

o Complicate the act of writing business contracts . Must ensure that the translation of contracts does not create ambiguities that could lead to future conflict Difference in business practices and ethics = major concern o Aust = relaxed o US/Japan = intense o Europe = gov. impose limits on working hours GLOBAL STRATEGIES Billabong uses a range of derivatives such as forward exchange rate contracts to hedge against adverse exchange rate movements Cannot cushion itself against long-term exchange rate movements, these derivative contracts provide the company with some protection against short term fluctuations Foreign debt portfolio inc. debt with a range of lengths and maturity dates, which provide some protection against interest rate and exchange rate movements Creates differentiated marketing strategies in its o/s markets and tailors its products to local customer tastes and preferences. - Maintains certain common features; wave logo, youthful, energetic and fashionable advertising campaigns Operates global business with a global web structure Adopted a polycentric staffing model and generally seeks to hire local managers and designers as they often posses a more comprehensive knowledge about their home markets. Can lead to conflict between head office and local managers who have different goals and not familiar with head office culture - To solve this problem = encourages employees to work in o/s offices - Most senior managers already have extensive experience in industry Labour law variations - Introduced a global quality assurance program to ensure that contracted suppliers provide reasonable work environment for workers - Annual evaluation of all contractors - Zero-tolerance policy to child labour

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