Billabongs Strategic Management - Research Paper Example

Billabong’s Strategic Management – Outsourcing Name Subject & Code Instructor Institution Submission Date Table of Contents Billabong’s Strategic Management – Outsourcing 1 Name 1 Table of Contents 2 Introduction 3 Situation Assessment 3 The external analysis 4 PEST Analysis 4 Political environment: 4 Economic environment: 5 Social environment: 6 Technological environment: 6 SWOT analysis 6 Strengths: 7 Weaknesses: 7 Opportunity: 7 Threats: 7 Analysis 8 Stakeholders Analysis 8 Conclusion 10 Introduction Billabong International Inc is an Australian transnational apparel manufacturer. The company considers offshoring its manufacturing processes. It is expected that Billabong would experience considerable advantages when it moves certain dimensions of its business offshore. The areas of concern that are prompting the company to consider an option of off-shoring include the rising cost of the Australian workforce in addition to the shortage of skilled workers and the globalisation trend. The key factors considered in making the decision to select a country for offshore production include the level of trade liberalisation in addition to the production and labour costs (Raman & Ahmad 2013). Current studies have showed that owning foreign production plants is not an ideal entry mode for most firms that look to cut costs because of the huge expenses involved. Instead, many apparel firms that manufacture offshore prefer subcontracting their production activities to offshore contract manufacturers, as this allows them to concentrate on improving their core competencies, and competitive advantage through a process known as offshore sourcing (Kremic 2006; Dana et al. 2007). Based on the same logic, Billabong should take on offshore sourcing for its production activities. Emphasis is placed on target countries like China, due to its location advantages. Situation Assessment The concept of offshoring is at the core of the current phases of globalisation (Milberg & Winker 2009). The concept of offshoring integrates conventional practices of outsourcing with advancements in information and communications technology, including the capability to communicate in real-time with service providers situated in a different country (Business Council of Australia 2004; Doh 2005). Given that outsourcing is considered a critical dimension of globalisation, it is also associated with Multinational Corporation’s (MNC’s) new strategy called global strategy. Andreff (2008) explains that globalisation has had fundamental economic effects, including contributing to de-industrialisation, and industrialisation of the emerging markets. This trend serves to explain the decision by Billabong to consider outsourcing its manufacturing in China and India. Andreff (2008) describes de-industrialisation as the declining share of manufacturing industry production in a country’s gross domestic product (GDP), particularly in the developed economies, such as Australia. De-industrialisation in Australia is as a result of the increasing share of the services industry in the country’s GDP and the rising emphasis on finance in capitalist development. As a result, Billabong’s production processes are not likely to survive favourably given the current trends. It, therefore, needs to consider outsourcing as part of its restructuring. The external analysis PEST Analysis Political environment: Australia is a liberal-capitalist democracy, as the parliament enacted liberalised trade policies. These policies have opened the market to imported apparel, as well as facilitated exportation of apparel. However, it implies that Billabong’s apparel is not protected from low-cost competitive imports particularly from China, which specialises in low-cost manufacturing. Australia and China have relatively friendly legal frameworks and institutions, which strive to encourage certainty in doing business in both countries. For example, starting a business in China, like Australia, has few legal requirements and can take a matter of days. This implies a potential for Billabong to experience a friendly business atmosphere in China (Tijun et al. 2012). Economic environment: Australia currently has to contend with high interest rates and rising rates of skills shortages for semi-skilled labour (Watson 2009). The high interests rates means that Billabong would have to spend more to pay its labour force, while skills shortages implies that Australia’s highly educated labour force are shunning away from semi-skilled work in the manufacturing sector (Mavromaras et al. 2013). At the same time, Australia has an ageing population, which leads to skills shortages (Siddique 2007; Watson 2009).This provides a rationale to outsource in China, which offers low-waged labour force and has a high population of semi-skilled labour (Weller 2007). In particular, the level of the differences in labour costs between Australia and China is extensive. It is estimated that the labour costs in Australia is nearly ten times that of India. In fact, the hourly wage in an Australian manufacturing company is up to 50 times greater than in China (Approx $US14.40 in Australia relative to $US0.25 in China) (Business Council of Australia 2004). For a company like Billabong that considers advancing its competitiveness, the labour cost differential is a crucial factor it should consider (Iqbal 2013). An additional challenge is the highly labour-intensive nature of the apparel industry in Australia, which is prompting many apparel manufacturers to consider outsourcing the manufacturing process in the developing countries that boast of low wages. According to Dana et al. (2007), as labour accounts for between 30 and 50 percent of the final costs of garment, significant savings are likely to be made when the labour market differentials is leveraged. Additionally, emerging markets like China also provide strategic markets for Australian apparel. On the other hand, the Australian economy has stagnated because of the high Australian dollar, which is negatively affecting the company’s profit margin. At the same time, Australian consumers are highly affected by the rise in Australian dollar, which is increasingly reducing their purchasing power (Australian Retail 2012). Social environment: The Australian society is highly diverse and has showed commitment to enhancing ethnic and racial inclusion due to its diverse cultures (McMahon 2012). The Australian population, therefore, also prefers goods such as fashion wear manufactured from overseas that are not intrinsically Australian, as it can integrate with the diverse global cultures. Hence, it is likely that the Australian consumers, who are major consumers of Billabong apparel, would minimally change their attitudes towards apparel outsourced to China. The population in Australia is ageing. Indeed, the population of Australians aged 65 and beyond is expected to reach 6.2 million in 2042 from the previous 2.5 million in 2002 (Treasury 2017). This implies a greater level of skills shortages in the country. Technological environment: Digital information and communications technologies are providing opportunities for Billabong to offshore its production processes in China. Technological advancements have opened up globalisation by reducing transportation costs and facilitating rapid dissemination of information through ICTs, which have transformed work processes, including by opening possibilities of offshoring activities (Oslen 2006). SWOT analysis Strengths: Billabong has built a global reputation as a brand that is renowned for having revolutionised the sports and casual wear apparel industry. It experiences brand loyalty in Australia, North America, East Asia, and Western Europe. The company can, therefore, rely on its brand repute to expand to China through offshoring without a need to introduce its products to consumers through significant advertising (Tijun et al. 2012). Weaknesses: Billabong products are generally considered high-end products. Hence, it can still expect limited market share in China, in spite of expecting cheaper raw materials and labour. Offshroing is associated with layoffs; it would raise concern among the employees in Australia. This may lead to greater criticism of the company by the media. Opportunity: Offshoring to China has a potential to enable Billabong to reduce cost of production and increase it profit margin. Billabong would access low–cost raw materials, which are available in the emerging markets. Therefore, offshoring will provide the company with access to cheaper raw materials. In fact, Billabong will have a broader pool of sources from which to draw raw materials and manufacture them at the same location, instead of transporting them to Australia for manufacturing (Business Council of Australia 2004). Threats: Billabong manufacturing is fundamentally fragmented in nature, as it manufactures many products. What this implies is that the company is likely to encounter difficulties in coordinating its supply chain when it outsources in China. The company also faces the risks of legal disputes and loss of commercial secrets by outsourcing (Tijun et al.2012). Analysis The underlying principle at the back offshore sourcing in the apparel industry lies in the logic that advancements in communication and transportation technologies are enabling companies to consider moving labour intensive aspects of their operations to low wage areas in the least developed countries or the emerging markets, while simultaneously retaining the capital intensive operations in the heavily capitalised industrialised countries (Dana et al. 2007). By applying such a fusion of locations and resources, the strategy would enable Billabong to increase its profit margin. Through offshore sourcing, Billabong is mainly expected to realise significant cost-reduction. The imperfections in the labour market in addition to the nature of apparel manufacturing, which is characteristically labour-intensive, imply that the company would realise significant reduction in the cost of labour through offshore sourcing (Rolstadas et al. 2012). Theoretically, imperfection in the labour market of the concept of differentials among different countries was explored by Ohlin (1933) using the factor endowment theory. The theory suggests that while countries that experience higher cost of labour are likely to be more productive in certain occasions, ones productivity is evaluated in relation to cost. The countries with low-waged labour, yet have reasonable degree of productivity, are likely to offer an optimal strategy. Within this theoretical background, Australia experiences higher cost of labour compared to India and China. In fact, when productivity is evaluated in relation to cost, because of the low-waged labour in India and China, offshore sourcing in the two countries is likely to present and optimal strategy (Rolstadas et al. 2012). Stakeholders Analysis The key stakeholders include the shareholders, employees and the larger community in Australia. Considering the effects of offshoring in these stakeholders is crucial to satisfy their expectations. Offshore outsourcing has a positive impact on the company's overall finances, as it would reduce cost of labour and access to raw materials, hence increasing profitability (Habib 2011). Additionally, offshoring may lead to greater demand for apparel in East Asia, although at lower prices. Hence, it has a potential of maximising shareholder's wealth (Abdelzaher et al. 2013). However, as it is associated with layoffs, it would raise concern among the employees in Australia. This may lead to greater criticism of the company by the media. This may also lead to loss of reputation by the Australian community, which may view that engaging offshoring is an illegitimate behaviour. Offshoring has also been seen to be linked to lower social responsibility by the company. For instance, it has led developing nations to greatly depend on developed nations, which take advantage of their markets. The dependency is linked to exploitative behaviours by MNCs, including situated where workers are overworked and paid lower wages, leading to greater wage inequality (Abdelzaher et al. 2013; Hill & Langan 2014). a number of jobs should continue to be based in Australia to prevent adverse effects of layoffs, which may lead to greater criticism of the company and loss of reputation. Indeed, Billabong has built a reputation for quality products. As there is no guarantee that, the company will employ high quality staff, whose role would be to oversee quality standards and delivery. Dana et al. (2007) proposes that firms should only outsource manufacturing when it can increase their competitiveness. For this reason, Billabong should only outsource its product range that can be produced in high quality factories overseas. If this is not possible, then only low-end products that require maximum mass quantity should be outsourced while the high-end ones that require minimum mass quantity should be retained in the domestic factories. The research and development activities should also be retained in Australia to monitor quality and protect commercial secrets. Conclusion China and India offer cheaper resources, particularly human resource. Outsourcing in these two countries would enable it to secure cheap labour. In this strategy, Billabong would duplicate its production units in China in order to access the Chinese market. In this strategy, the company would look for production economies of scale because of the great size and wealth of the host market in addition to the capability to cut on the cost of transport because of export substitution. However, a number of jobs should continue to be based in Australia to prevent adverse effects of layoffs, which may lead to greater criticism of the company and loss of reputation. Indeed, Billabong has built a reputation for quality products. 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