Case Study 3 - Liz Claiborne Refashions lts Structure Liz Claiborne, like other well-known apparel makers, embarked on a major product expansion strategy in the 1990s when it acquired many smaller branded clothing and accessory companies and started many new brands of its own. The company's goal was to achieve greater operating efficiencies so that rising sales would also result in rising profits. By 2006, it had grown to 36 different brands, but although revenues had soared from $2 billion to over $5 billion, its prots had not kept pace. In fact, prots were falling because costs were rising as operational efciency fell due to the enormous complexity and expense involved in managing so many brands. So Liz Claiborne recruited a new CEO, William McComb, to find a way to turn around the troubled company. Within months he decided to reverse course, shrink the company, and move to a new form oforganizational structure that would once again allow it to growbut this time with increasing protability. CEO McComb's problem was to find a new organizational structure that would reduce the problems associated with managing its 36 different brands. He believed the company had developed a "culture of complexity" due to its rapid growth and overly complex organizational structure. The company had created ve different apparel divisions to manage its 36 brands; brands were grouped into different divisions according to the nature of the clothing or accessories they made. For example, luxury designer lines like Ellen Tracy Were grouped into one division; clothes for Working women such as its signature Liz Claiborne and Dana Buchman brands were in a second; trendy, hip clothing directed at young customers such as its Juicy Couture line were in a third division, and so on. A separate management team controlled each division, and each division performed all the functional activities like marketing and design needed to support its brands. The problem was that over time it had become increasingly difcult both to differentiate between apparel brands in each division as Well as beIWeen the brands of different divisions because fashion styles change quickly in response to the demands of changing customer tastes. Also, costs were rising because of the duplication of activities between divisions. and increasing industry competition was resulting in new pressure to Iowa prices to retail stores to protect sales. McComb decided it was necessary to streamline and change Liz Claibome's organizational structure to meet the changing needs of customers and the increasing competition in retailing because of the grth of private-label brands. First, he decided that the company would either try to sell, license, or if necessary close down 16 of its 36 brands and focus on the remaining 20 that had the best chance of generating good prots in the future. To better manage these 20 brands, he decided to change its organizational structure and to shrink from ve different divisions to just two. This eliminated an entire level of top management, but it also allowod him to eliminate the duplication in marketing, distribution, and retail functions across the old ve divisions and so would result in major cost savings. The two remaining divisions are now its retail division called \"direct brands\" and its wholesale division called 'partnered brands.\" Its new structure is intended to \"bring focus, energy and clarity" to the way each division operates. The retail division, for example, is responsible for the brands that are sold primarily through Liz Claibome's own retail store chains, such as its Kate Spade, Lucky Brand Jeans. and Juicy Couture chains. The goals of grouping together its fastest- growing brands is to allow divisional managers to make better marketing and distribution decisions to attract more customers. For example, Liz Claiborne plans to increase targeted marketing on direct labels to 3% to 5% of annual sales and to nd ways to get new clothing designs more quickly to its store to compete with chains like Zara that are able to innovate new clothing collections almost every month. The company also plans to open 300 more stores in the next few years to add to its 433 specialty stores and 350 outlets stores. In contrast, the problem in the wholesale division, which sells branded apparel lines such as Liz Claiborne and Dana Buchman directly to department stores and other retailers, is to reduce costs to slow down the growing threat from private labels. For example, sales of Macy's private labels increased almost 10% during the 20005. If managers of the wholesale division can nd ways to improve operating efciency, it can offer stores like Macy's lower prices for its clothing to encourage them to stick with its brands. Similarly, if the division's managers can nd ways to reduce costs such as by turning inventory over more quickly, sharing marketing costs, and so forth, then even if the prices they can charge do fall, they can still increase profits. Wholesale managers are also partnering with department stores to develop exclusive lines of branded clothing so both parties benet. For example, they reached an agreement with JCPenney to launch a line called Liz & Co. that will be sold only in its stores; so far sales have been good, and both partners have enjoyed higher prots. Thus CEO McComb realized that to reduce complexity and allow each division to build the right merchandising culture, it was necessary to change Liz Claiborne's organizational structure. From grouping clothing products into divisions based on their quality or price, he changed to two market divisions where clothing brands are grouped according to the needs of each division's customerseither the people in its stores or the retail chains that buy its clothes to resell to individual customers. The real problem is that each division faces a quite different set of strategic and operational problems, and with its new structure managers in each division can now focus on solving the specic set of problems to achieve the best performance from their particular brands. In 2010, McComb's hope is that in the next decade the company's sales will grow rapidly, but this time its new structure will lead to higher efciency and effectiveness and so rising protability. Discussion Questions I. What were the problems with Liz Claibome's old organizational structure? Explain your answer. 2. How did McComb change Liz Claibome's structure to improve its effectiveness? Justify your answering by explaining and comparing between functional structure and divisional structure