Case Study:
TURNAROUND DECISION MAKING AT LIZ CLAIBORNE
In the 1990s, top managers of Liz Claiborne decided that the best way to improve performance at the company was to increase the lines of clothing and accessories it sold. All its competitors were adding new clothing brands and opening new stores so to expand quickly its managers decided to acquire many smaller branded clothing and accessory companies. They also decided to start many new clothing brands of their own using in-house design and marketing expertise. Top managers reasoned that increased clothing sales would lead to greater operating efficiencies so rising sales would also result in rising profits. As a result of this course of decision making, by 2005 Liz Claiborne had grown to 36 different nationwide brands. But while its sales revenues soared from $2 billion to $5 billion its profits were falling because its operating costs were not falling. In fact, costs were rising because operating efficiency was falling because its top managers could no longer handle the enormous complexity involved in managing and differentiating between so many brands.94 So, in 2006 Liz Claiborne recruited a new CEO, William McComb, to find a way to turn around the troubled company. After spending three months meeting with top managers and visiting its different operating groups, McComb decided that Liz Claiborne needed to reverse course and become smaller. He believed Liz Claiborne had become too difficult to manage because managers were suffering from information overload; a new way to organize its activities had to be found—one that would make the company easier to manage and lower costs. He believed the company had developed a “culture of complexity” that had gotten out of control. Liz Claiborne’s core merchandising culture that had made it so successful had been lost because of its rapid growth and overly complex organizational structure. The CEO’s major priority was to reduce the problems associated with managing its 36 different brands. As it grew, the company had created five different apparel divisions to manage its 36 brands; brands were grouped into different divisions according to nature of the clothing or accessories they made. For example, luxury designer lines such as 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. Each division was controlled by a separate management team, and each division performed all the functional activities, such as marketing and design, needed to support its brands. Costs were rising because of the duplication of activities between divisions, and increasing competition from other clothing manufacturers was resulting in new pressure to lower prices to retail stores to protect sales. McComb decided it was necessary to streamline Liz Claiborne. First, he decided that the company would either try to sell, license, or close down 16 of its 36 brands and focus on the remaining 20 that had the best chance of generating good profits in the future.95 To make better decisions concerning these 20 brands, he decided to reduce the number of divisions from five to two. Now, only two different teams of top managers would be managing these brands and reporting to him, the change also allowed him to reduce the duplication of marketing, distribution, and retail functions across divisions which led to major cost savings. McComb cliamed this would bring “focus, energy and clarity” to the way each division operates. The two remaining divisions are now Liz Claiborne’s retail division called “direct brands” and its wholesale division called “partnered brands.” The retail division is responsible for the brands sold primarily through Liz Claiborne’s own retail store chains such as its Kate Spade, Lucky Brand Jeans, and Juicy Couture chains. The goals of grouping together its fastestgrowing brands is to allow divisional managers to make better marketing and distribution decisions to attract more customers, he also planned to plans to open 300 more stores in the next few years to add to its 433 specialty stores and 350 outlet stores.96 On the other hand, 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. If managers of the wholesale division can find ways to improve operating efficiency, it can offer stores such as Dillard’s and Macy’s lower clothing prices to encourage them to buy its brands. Wholesale managers also began to partner with department store chains to develop exclusive lines of branded clothingt. In 2007, for example, an agreement was formed with JCPenney to launch a line called Liz & Co. that will be sold only in Penney’s stores. Thus, CEO McComb realized that to reduce complexity and allow each division to build the right merchandising culture it was necessary to change the way Liz Claiborne operated. McComb realized that the real problem was that each division faced a quite different set of opportunities and strategic problems, and now the managers of each division can focus on solving the specific set of problems to achieve the best performance from their particular brands. By the beginning of 2009, McComb realized that his new plan was not working as intended—costs were not falling fast enough, and the two remaining divisions were still experiencing major problems managing their 20 brands and responding to customers’ changing needs. So in 2009, he began a new round of decision making to find ways to shrink the company. Each division’s managers were told to form a turnaround team that should recommend which of its its remaining brands should be eliminated and how to find ways to streamline its functional operations to reduce costs. Since 2009, the company has eliminated five more brands, it has also closed down many more distribution centers, and worked to find ways to outsource its functional activities to reduce costs. In October 2009, to simplify distribution, Liz Claiborne entered into a long-term licensing agreement with JCPenney, which became the exclusive department store destination for all Liz Claiborne and Claiborne-branded merchandise. Plans to increase the number of its stores were put on hold when in the fall of 2009 Liz Claiborne said there had been declines in the 15–25 percent range at its Juicy Couture, Lucky Brand, and Kate Spade chains. As a result, it planned to further streamline its operations and said that cost-cutting efforts would focus on further distribution center consolidation and reductions in its corporate, support, and production staff. McComb believes this new round of cuts will allow Liz Claiborne to return to profitability by the end of 2010. Its new streamlined organization will finally give managers the ability to make the decision necessary to increase its efficiency and effectiveness.
Q1. What kinds of decision-making errors and biases do you think may have led its managers to grow the size of the company so much and to add so many brands that the company became too complex to control?
Q2. What main nonprogrammed decisions did McComb make to turn around the company’s performance? How did they simplify and improve the decision-making process?
Q3. Given that Liz Claiborne’s main problems were not solved, what kinds of errors and biases do you think might have led McComb to not shrink the company enough? Search the Internet to see how well the company is currently performing.
Your answer must be typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.