Economic downturn hits Oz Clothing - Essay Example

?Economic Downturn Hits Oz Clothing A Case Study Case Summary The business of Oz clothing has entered a period of economic uncertainty, requiring the need for a strategic change in order to survive. The Australian firm manufactures clothing items among which are underwear lines it describes as commodity type, indicating the lack of distinguishing characteristics or brand name from other mass produced, basic clothes wear. The occurrence of the economic crisis in 2008, however, severely affected the performance of this firm such that despite government assistance, their revenues remained weak, capital is tight, their markets are shrinking and market share is being lost to cheap imports from China. Added to these are the perceived political implications that may trigger reactions by the government, and the delicacy of employee matters which may also trigger reactions from the labor union in the firm. The executives have determined that a strategic change in due in Oz Clothing. They determined that prices should be raised to improve profit margins, new products developed and manufactured that should be differentiated from the competitors, and a new image created for the company to enhance market appeal. The firm also needs an HR plan as to how these changes may be implemented. 2. External and internal influences There are a number of factors that would tend to exert influence on the dilemma of Oz Clothing and would determine the success or failure of the company in seeking to address its situation. These are comprised of factors external and internal to the firm, as follows. 2.1 External influences External influences would include the issues identified by the PEST model which includes political, economic, social, technological, legal and environmental conditions in which the business functions. Political – The government has poured hundreds of millions of dollars in order to support the industry, for which reason it would not countenance a massive lay-off of personnel which would reflect badly upon its economic policies. Authorities will particularly be sensitive to any institution of a union dispute, for which reason it is possible that additional pressure will be imposed upon the company. Furthermore, the government will most likely not favour any development at the industry level that might jeopardize its trade relations with China because of the arrest of Australian executives. In the near future, there are also indications that the government will provide further empowerment to labor unions such as the CWU in light of its newly instituted Industrial Relations policy. Economic – The global economy is experiencing a critical downturn, resulting in the cancellation of orders by large retailers who are in turn affected by poor consumer demand. The high cost structure of the firm, particularly its labor, is rendering the firm uncompetitive against rival firms operating in regimes that allow them a lower cost structure. The Australian garments industry may not be able to secure additional bailout funds from the government as it has already released a large amount of funding for this purpose, and is itself deep in public debt which it may not wish to increase further. Social – The Australian Council of Trade Unions plans to mount a campaign to “buy local” which may be joined in by other non-governmental organizations and special interest groups. The ultimate objective is evidently to create a broad-based, society-wide demand for local products in order for demand to support more profitable business operations for Australian firms. To jump start the process, however, the initial objective is to secure the commitment of federal, state and local governments to give preference to products that have been made in Australia. Technological – The industry’s production method is low-skilled and labor intensive, for which reason it is prone to easy replication in countries that have a large labor base that are able to command a lower labor cost. Such a country is China, which has successfully mass produced the type of products that Oz Clothing manufactures, because the clothing lines are of the commodity type that is not differentiated from all others. 2.2 Internal influences Factors that influence the firm from within its internal environment are usually addressed in an SWOT model, where the perceived strengths and weaknesses of the firm are matched against the opportunities and threats that are foreseen to materialize in the near future. These attributes of the firm are contained in the discussion below. Strengths While the company may be faced with the problem of “razor thin” profit margins, but in an environment where many companies are suffering losses and even shutting down, the fact that Ox Clothing is still realizing profits should point to possible efficiencies in the system which management would do well to discover and enhance. The firm has gained expertise in garments and appears to have a good following among customers, which can sustain demand for its products particularly in a recovering economy. Weaknesses The company’s organized labor group, the Clothing Workers Union (CWU) will resist a change that will be detrimental to their members, such as lay-offs, wage reductions, and significant changes in manufacturing technology that may render the skills of a large number of employees redundant or obsolete. The strong bargaining power of the CWU limits the options that Oz Clothing may consider. The company’s production process remains unchanged and undifferentiated from other firms, relying on low-skilled labor that in Australia commands a high cost because of legislated wage. Opportunities The politically powerful Australian Council of Trade Unions has taken the initiative to push for a “Buy Local” campaign that may increase the demand for local products and services, including that of clothing and apparel. This will provide a window of opportunity for Oz Clothing and other local manufacturers to take advantage of stronger demand. Threats The company feels that it may need to cope with costs by transferring some of its operations abroad, particularly to China, where it may benefit from lower labor costs. However, the CWU is sure to object to this, which could cause the government to further exert pressure on the company and reduce chances of a further extension of support. The company also has to meet the challenges of a tighter cost structure, particularly where the government may be imposing additional taxes not linked with income, and additional labor measures to be adopted by government which will further raise the costs associated with labor. 3. Possible past strategic business objectives of Oz Clothing It is apparent that in the past, Oz clothing aimed for a strategy of high volume and low cost. This would have been appropriate in a strong economy when demand for consumer goods is high, the internal economy strong and liquid, and the government free from debt. The marketing strategy of Oz clothing rested on the production of commodity type clotheswear, thus it had foregone any branding strategy or patented manufacturing process or design which could have differentiated it from its competitors. 4. Recommended strategic business objectives for Oz Clothing From the preceding environmental study and the assessment given in the case study, it is accurate to say that a low price, large volume strategy is not a feasible option for the firm in light of the cheap imports from China. The firm must adopt a strategy of differentiation by which its products may be distinguished from the common mass of the same product that is available in the market. The firm will have to assess its competencies in order to find that particular strength that is unique to it and could not be adopted or imitated by its customers. It is recommended that the firm forms a strategic team that has the capability to design a new line of clothes wear for Australians. For this purpose, the team must identify a particular market segment or niche which it would target its designs for. The fastest growing segment of the Australian population happens to be the over 50s, with the coming of age of the “baby boomers” of the post-WWII years. This segment of the population likewise controls the greater portion of disposable income in the country, making the seniors the most attractive target market in Australian economy (Senioragency.com, 2011). The company should therefore conduct a market research to determine what clothing products this class of consumers need, and what their preferences are concerning these products. It would be advantageous for Oz Clothing if it could get endorsements from popular personalities whose names they could tag onto a particular clothing line, or probably contract promising local fashion designers who have shown some measure of success and following to create new clotheswear designs primarily for the seniors, and secondarily for the young twenties to thirties. Another option the company could explore is to set up a customized service for special occasions such as weddings where a whole entourage has to be clothed, and to market this service among the class A-B consumers. This service has the advantage of commanding a wide profit margin, a good number of customers per order, and specialization in a particular type of clothes wear designed for one particular occasion. It does not require mass processing and inventory build-up, and will enhance the product brand and company name over a small but significant segment of the consumers. 5. Discussion of the likely effects on the stakeholders of the recommended strategy The foregoing redirection of company objectives is not an easy change to make because of the sense of displacement it would certainly induce among the stakeholders, the employees in particular. The stakeholders of a business pertain to “any group or individual who is can affect or who is affected by the achievement of the firm’s objectives (Freeman, 1984, as cited in Andriof, et al., 2002, p. 30). This very broad description encompasses a good many people who are involved in either the demand or supply side of the business, and all those involved in its production processes. The stakeholders of Oz Clothing will be identified and described in the following discussion, together with the perceived effects of the recommendations made upon them: 5.1 Customers The customers are the immediate stakeholders in the business, because it is for them that the company plans and goes into business. It is incontestable that customers are the single most important consideration of the business and the raison d’etre why a business exists at all. In the re-orientation of Oz Clothing’s mainline clothing, customers will most likely welcome the improved mass produced product lines and the possible added option of having their special occasion clothing designed and executed in the Oz Clothing store (probably with a specialty brand name other than the company’s, in order to distinguish the custom service from the mass produced. This provides for a wider choice, and the fact that their needs, particular that of the target market, would be better provided for. 5.2 Employees Next to customers, the most significant stakeholder from within the company are the employees. These are the people that provide the motive power behind production, whatever their skill level; however, it is the level of skills possessed by the employees that must be addressed in order for the firm to take on new products and services. There will be a need to retrain several of them in order to equip them with the necessary capabilities to execute the new designs. The need to comply with retraining requirements will certainly be bound to encounter resistance from the present personnel. This and measures to address it will be discussed in the next section on human resources impacts. 5.3 Suppliers There may be a realignment of suppliers that Oz Clothing will be dealing with. The new product designs may be expected to require new materials which may or may not be within the capability of suppliers to provide, in which case Oz will have to undertake accreditation of new ones. Where possible, quality control should ascertain that better quality textiles be used appropriate to the purpose for which they shall be used, in line with the company’s push towards improving product quality and building a brand name that will be highly regarded. 5.4 The community The immediate community is also affected by the company’s fortunes, and it is a fair guess that a good number of the company employees are residents of the locality. The firm also acquires some of its materials from local suppliers. As far as these are concerned, then any change in the manner the firm does business that would cause a change in them too will likewise also meet with resistance. Since there is no contractual relationship in this case, unlike those of customers, employees and suppliers, the firm should just take case to ensure that elements in the community are not adversely affected by its operations, and displacements undertaken only where necessary if the community will tend to suffer for it. 5.5 Shareholders Finally, of great importance are the company shareholders, the investors who have put up the resources for the firm to operate. Traditionally, shareholders are thought to be interested only in the enhancement of their wealth out of the company’s operations, such that a substantial return on their investments may be realized. More recently, it was observed that shareholders would be willing to forego cash returns in favour for longer-term benefits to the company, such as maintaining good client relations that will eventually pay off in constant returns over the long term (Brigham & Gapenski, 1994, p. 495). Shareholders are concerned about the present problems the company is facing in terms of decreased profitability and continued search for viable options. Investors with their holdings in other companies or businesses may be persuaded to provide business to Oz Clothing as clients, with the incentive of a slight discount. 6. Impact on the Human Resources of Oz Clothing and remedies recommended 6.1 The status quo Presently, the employees of Oz Clothing are described as possessing low-level skills, which is the appropriate skill level needed in the company’s present production processes. Despite the low level qualifications needed, the workforce is benefitted by favourable Industrial Relations law (now termed “Fair Work Act 2009” which contains the stipulations of the National Employment Standards, or NES, in force in Australia). The standard of pay is also high, which is favourable to the employees presents challenges on the side of the company particularly during periods of economic crises. 6.2 Motivation theory considerations At this point, it would be helpful to consider a motivational theory that is appropriate to the situation, such as Herzberg’s Two-Factor Theory. Herzberg suggests that motivation has two dimensions, each comprised of a particular set of factors. The first set is called the hygiene factors, maintenance factors or dissatisfiers (Thompson, 1996, p. 13). These factors are so called because their presence in the worker-employer relationship does not necessarily create employee satisfaction with his/her job, but if taken away or perceived as insufficient, would be the cause of employee dissatisfaction. The factors maintain the workers at their jobs but do not necessarily motivate them to do better or try harder. Examples of these are workers’ wages and salaries, as well as their regular benefits, job security, and other things promised in their contracts of employment. A person will come to work in order to earn his pay, but he will not derive greater satisfaction because of his pay. If the salary or wage is diminished or withheld, however, extreme dissatisfaction results. The other set of factors is termed the motivators or satisfiers. When these factors are not present in the workplace, then there is no dissatisfaction, as they are not needed to maintain the worker at his work. On the other hand, if motivators or satisfiers are sufficiently found at their jobs, workers feel a sense of job satisfaction that encourage them to perform exceptionally, for no other tangible or monetary return. These motivators include achievement, advancement, the nature of the work itself, recognition of a job well done, professional and personal growth, and responsibility (Thompson, 1996, p. 14). While critics will be quick to point out that Herzberg’s two factor theory is not perfect, it provides a sufficient framework for this discussion on Oz Clothing. The company will be instituting some very important strategic changes that will affect the workforce, and the management must be prepared to meet the challenge of instituting these changes. 6.3 Expected impact of the recommended changes Before the changes could be made, it is imperative that the management confers with the entire workforce about the changes to be made, and why they have to be made. That the firm may be suffering financial setbacks will not be surprising to them or the authorities because of the economic crisis; candor in admitting the firm has its troubles is the first step in gaining the trust and confidence of the work force (Kramer & Tyler, 1996, p. 46; Hurst, 2008, p. 48) Need for employees to acquire new skills The cornerstone of the new strategy to be undertaken is the creation of new products and designs and adoption of new services and channels, in a bid to enhance the firm’s competitiveness against the flood of cheap foreign imports. The firm will not be able to compete in price, but it has a chance to compete on the basis of quality, product differentiation, and brand perception. Because there will be a change in product design and even adoption of new products, there is a need for the employees to learn new skills which will enable them to work in the new environment. The employees will have to be carefully matched to the new skills they are to acquire, and provided the proper motivation. The lure of learning something new and fulfilment of a new challenge should motivate staff, and recognition may be granted to the more outstanding of them (i.e., satisfiers). The table shown here presents a concise view about the two factor theory and what comprises each factor: Accessed from https://wikispaces.psu.edu/download/attachments/41095621/Herzberg+1.jpg?version=1&modificationDate=1269485337000 Possible lay-offs for redundancies It is a real possibility that lay-offs may well be done, particularly for those whose skills will become redundant or obsolete in the new direction. In this case, it will be necessary to keep all matters transparent particularly in the selection of those who are to remain and those who have to go. The reasons must be clear and unequivocal, and their application must not only be fair, but must also be perceived to be fair. Most importantly, for those who will be separated, the firm must provide some safety net, if possible in addition to the notice of termination and redundancy pay which is the entitlement of every worker, and specified in the National Employment Standards (NES) (Fair Work Ombudsman, 2010). The company will have a difficult time in accomplishing this particular task, but complete honesty is necessary so that the employees shall not be severely disheartened, while at the same time maintaining a sense of trust and confidence in the management of the firm. Possible pay cuts or reduction in work hours Before it becomes necessary to lay off personnel, however, it may be possible for the firm to be able to strike amicable arrangements with employees in temporarily giving up a valuable entitlement in order to enable the company to survive through the economic crisis. This is not unusual, particularly since it is in the interest of everybody in the company that the firm does not close down. For instance, employees at airline caterer Gate Gourmet, in response to the weak business turnover on flights after the WTC attack on September 11, 2001, voluntarily offered to give up a part of their salaries and suffer a reduction in work hours in the week in order for the company to tide through the economic crisis, with as little employee separations as possible (Unitehere.org, 2010). 7. Conclusion Oz Clothing will be undertaking a bold, risky, yet in the long run necessary, strategic change that promises to create short-term uncertainties for the company, but greater stability and growth in the distant future. A shift of market focus may prove beneficial; it is suggested that the firm design products for the senior consumers (50 years old and above), which is the fastest growing and most wealthy segment of society. The change will involve dramatic alterations in the firm’s products, for which its old manufacturing processes may no longer be applicable. A change in the skills set needed will therefore have to be acquired by the employees, for which training and mentoring will need to be done. Secondly, the firm will need to create a bond of trust between itself and its employees, and conduct business in a transparent way with its employees, in case there will be a need to engage them to agree to a pay reduction or shorter work week for the duration of the crisis. Furthermore, in order to avoid demotivation or labor union disputes, it will be necessary to frankly approach the matter of possible layoffs and work stoppages if such will be warranted by the firm’s financial situation. References Andriof, J; Waddock, S; Husted, B; & Rahman, S S 2002 Unfolding Stakeholder Thinking: Theory, Responsibility, and Engagement. Greenleaf Publishing, Sheffield, UK Brigham, E F & Gapenski, L C 1994 Financial Management: Theory and Practice. Atlantic Publishers and Distributors, New Delhi Fair Work Ombudsman 2010 Fair Work Information Sheet. Accessed 9 December 2011 from http://www.fairwork.gov.au/FWISdocs/Fair-Work-Information-Statement.pdf Hurst, K 2008 Primary Care Trust Workforce: Planning and Development. John Wiley & Sons, Hoboken, NJ Kramer, R M & Tyler, T R Trust in Organizations: Frontiers of Theory and Research. Sage Publications, London Senioragency 2011 “Australia’s fastest growing consumer segment.” Our network: Australia. Accessed 9 December 2011 from http://www.senioragency.com/australia.aspx Thompson, D P 1996 Motivating Others: Creating the Conditions. Eye on Education, Inc., Princeton, NJ Unite Here 2010 Gate Gourmet. Accessed 9 December 2011 from http://www.unitehere.org/about/airports.php Read More