Pacific Brands Case Study
This step change was driven by a number of internal and external factors. These included falling profit and share price, increasing costs and the pressure of the worsening Global financial crisis. Added to this was the need to stay competitive in a market that has significantly shifted to cheaper imports. (TCF Review 2008, pp. 9-10) Pacific Brands restructure and the sale/discontinuation of unprofitable brands generated a focus towards core brands and the implementation of a profitable, streamlined structure that would guarantee the most cost efficient model.
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The disadvantage of such an aggressive restructure was the immediate media backlash and ensuing reputation damage caused by the outrage of employees, politicians and general public. 1. Problem identification 1. 1 Cost reduction As in all developed markets the Textile, Clothing and Footwear industry that Pacific Brands encompassed had been impacted by the dramatic rise in imports. Compounding this was the growing consumer demand for cheaper product, a rising Australian dollar, and the Global Financial Crisis further adding pressure on an already falling share price.
For the achievement of future success and reversal of falling share prices, Pacific Brands needed to implement a programme of cost reduction initiatives and a focus towards their core profitability. 1. 2 Structural Reorganisation The most integral part to achieving the decrease in costs was the “off-shoring” of manufacturing to Low Cost Countries. Over 2000 jobs were made redundant whilst another 940 employees were transferred through the sales of underperforming non core brands. (Pacific Brands FY2010 presentation, p. 12-17) 1. 3 Ethics and social responsibility
At a time of wide sweeping redundancies and plant closures the move to increase executive remuneration packages by up to 170% was seen as unethical by the community and media commentators. Inside the closures no provisions were made for the $15million dollars of Commonwealth subsidies received for retraining and re-tooling throughout 2007/08. 2. Problem analysis 2. 1 Cost Reduction With falling share prices ($3. 20 July2007 to $0. 10 Feb 2009) (ASX share data 2007-2012) and diminishing profits Pacific Brands was under pressure to propel the organisation in a new direction.
After the removal of the previous CEO, Paul Moore, direction was given for Sue Morphet to undertake a comprehensive review of the Pacific Brands Business to ensure its ongoing sustainability. This identified that manufacturing in Australia was no longer a sustainable option for Pacific Brands. The Australian Textile industry had seen an increase in imports from 28% in 1980 to 91% in 2006. (TCF Review 2008, p. 9) This trend and increasing labour costs in Australian manufacturing formed the Organisational Strategy for Pacific Brands.
The labour component, being generally low skill tasks, allowed for off-shoring of manufacturing to low cost countries to be the key to the turnaround of profit growth. It also identified the need to delete all non-performing product lines and sell assets where possible. This would see an increase in profitability but a decline in overall sales performance. 2. 2 Structural Reorganisation The decision to restructure the organisation was brought about to stop Pacific Brands larger problem of declining returns.
In an obvious risk environment, the direction to close all 11 factories and cull around 3000 employees would be seen as a satisficing decision. The direction followed previous examples of successes with off-shoring models, such as Blundstone. (K. Barlow, ABC Radio, 2007, 17 January) The short term benefits of implementing radical cost reduction were approximately $50million year on year. The long term damage to the Pacific Brand reputation due to the reaction of consumers and employees was underestimated.
With Social media more prevalent than ever, brand reputations built over 100 years were decimated within minutes as calls to boycott product and services went global. Even a brand as strong as Coca Cola understands the importance of protecting your brand. As Coca Cola CEO, Muhtar Kent stated “It has taken us 125 years to build this brand to what it is today, but it can be destroyed in 125 seconds. “(Muhtar Kent, www. thecoca-colacompany. com/leadershipviews, 2011) Redundant employees used payouts to form a new company, BNB Group Australia.
Utilising ex-Pacific Brand assets, BNB markets their products online in direct opposition to the Pacific Brands to retain Australian manufactured products at a competitive price. 2. 3 Ethics and social responsibility Salary increases to the Pacific Brands senior executives, especially Sue Morphet’s, also damaged the Pacific Brands reputation. The media portrayal became the focus rather than facts that the increase was part of her promotion from Divisional GM to the CEO position and not part of a bonus structure.
Communicating that the previous CEO remuneration was almost half was lost in the noise around the job losses and factory closures. This was shown with ACTU president, Sharan Burrow, quoted as saying “It’s obscene, Corporate Australia, it would seem, has lost its moral compass. ” (theage. com. au, Feb 27, 2009) As a corporate entity the lack of concern for employee and public perception over profits definitely showed the individualistic needs, in essence ‘running roughshod over other individuals to achieve one’s objectives’.
Recommendations While time has showed that radical action taken was unsuccessful, as Pacific Brands is currently in a vulnerable takeover position (M. Janda, ABC news, January 10, 2012), there were more efficient methods to achieve long term results. The initial focus on core brands was by far the most risk adverse, with solid cost reductions and focussed spend an improved return would be achieved. A more tactful approach to offshore manufacturing would have been to step change a dual supply model.
This would incorporate development of centres of excellence in Australia where R&D would be at the forefront, while economics of scale could be gained from offshore. This would give short term gain cost savings and long term development opportunities. While a head count reduction would be necessary, it would be more palatable than the closure of all sites.