Billabong: geographical features and cultural significance

Billabong is faced with a decision of how to grow the company. Their performance in the past five years has been strong, characterized by slow but steady growth. Their growth has been limited in part due to the small size of the surfwear industry. The company, therefore, is moving towards the broader activewear category. They could, however, develop their business based on geographical expansion into the relatively undeveloped North American market. The nature of competition in activewear is intense, owing to the fact that the category is further in the product life cycle than is surfwear. Therefore, it is recommended that Billabong focus on geographic expansion. This will give them access to growth and new markets, but at the same time keep them from facing direct competition with larger companies that compete both on marketing and on price.

Introduction

Billabong is one of the world's leading producers of surf clothing. Founded as a small manufacturer in Australia, the company has grown to become an international firm, with operations around the world. They compete broadly in the activewear segment and specifically in the surfwear segment. At present, the company is considering expansion options. Their strategy for the coming years must take into account opportunities both in terms of geographic markets and in terms of product lines. The company must take several factors into account. Not only must they take into account their core competencies and their fiscal and physical capabilities, but they must also take into account the value of their reputation in the surfwear industry, as some of their expansion options could compromise this reputation.

Billabong's strengths are the strong brand equity of the Billabong name within the target market, the company's financial strength, and its ability to leverage its capabilities to add value to smaller brands it acquires. The Billabong name is an established leader in the surfwear industry, both with surfers and outside of the surfer market. Both markets are important to Billabong, the former because it represents their core market; the latter because it presents the greatest opportunity for future growth. Brand equity among surfers is dependent on commitment to the surfing culture such that any firm not deemed fully committed to the culture is dismissed.

Billabong is financially strong. The company has grown revenues and profits consistently over the past five years. In that span, gross margins have improved from 19.5% to 54.7%. Net margins have shown a slight improvement as well. The company's earnings per share has doubled in that span. Billabong's liquidity is exceptional, with a current ratio of 3.07. They have a roughly 50/50 capital structure and have maintained a range around 50% debt-to-equity with some consistency over the past five years.

Another strength is that it has the ability to add value to the smaller brands it acquires. The smaller brands add credibility to the company's lineup, especially given that the brands in question are typically independent surf brands. Billabong maintains the brand's integrity by maintaining the staff. They add value by taking the brands to wider distribution, though with many small brands this is just wider distribution among surfing communities. However, such acquisitions enhance Billabong while Billabong leverages the acquisition to increase its market share.

Its weaknesses are that it has a limited target market, and the brand equity diminishes when they move away from surfing-savvy markets. The core of Billabong's target market is surfers. While there is increased interest in the sport of surfing in general, this market remains a niche market, limited in part by the geography of surfing. Many markets are simply not conducive to development as surf centers. Furthermore, as Billabong moves away from surf-savvy markets, the brand equity diminishes. The company's promotions focus on the surfing community, in part to maintain credibility, but this reduces brand equity outside of that community. This has limited expansion possibilities, in particular with respect to Asia (India, China, and Japan in particular) and Europe (especially Eastern Europe).

One opportunity is to expand growth in North America. This market is growing rapidly and will continue to do so for the foreseeable future. The media intensity, wealth and mobility of its citizens means that knowledge of surfing culture is widespread, even outside of coastal areas. They have the disposable income to purchase higher-end athletic apparel. While the athletic apparel segment is competitive, the surf apparel niche is underdeveloped outside of surfing areas, and the Billabong brand equity is often as strong as or stronger than that of its competitors. Thus, the company could have a competitive advantage if they more aggressively into the North American market.

Another opportunity is to add new brands to the Billabong line-up. This will provide a barrier to entry against competition and it will also allow Billabong to build market share without saturating the Billabong name. The company has exhibited strength in the past with respect to their ability to integrate new brands into their lineup. The new brands add value to Billabong and Billabong adds value to the brands. The big risk with this opportunity is that Billabong's reputation could be under fire if it buys too many small surfwear manufacturers.

There are threats however. One is competition, as there are many brands in the surfwear segment, any of which could emerge as a major competitive threat at any time. Many brands have equity as strong or stronger within the community relative to Billabong. If any of these competitors were to emerge with sufficient capital, they could become a significant threat in a short period of time.

Another key threat is brand dilution. Brand equity is the surfwear business derives in part from authenticity. Billabong may lose this if they are perceived as being too 'corporate'. That would diminish sales from the core surfing markets. This could occur on account the company's size; if they move into too many non-surfing markets; or if they swallow too many small surfwear firms; or if they employ too many non-surfers.

Current Strategy

The company's current strategy so far is strong. The use of smaller brands helps to mitigate any damage caused by the mass market commercialization of the Billabong brand. Also, the focus on North American growth is a sound strategy, since the market is relatively underdeveloped by Billabong and the company has acquired some good North American properties.

Another positive aspect of Billabong's currents strategy is its focus on incremental growth. The firm has experienced steady growth over the past several years. They have not subjected their brand equity to compromise as a result. Moreover, they have been able to focus their efforts on improving their operations. This has been reflected in their improving margins and their improving balance sheet. Billabong appears to be a details-oriented company that employs a conservative approach to their business. This strategy has served them well over the past five years.

The company at present is moving into the mainstream. They are diversifying into other activewear, adding skateboard companies for example (07-08 Billabong Full Financial Report). They have begun to place increased marketing emphasis on the lifestyle aspects of their brand. This move has been gradual for some years now, but Billabong is pushing forward, having long left behind the potential to exist as a small, surf-only firm.

Rating of Strategic Planning

Historically, Billabong's approach to growth has served them well. Their emphasis on lifestyle as a central theme in marketing is the next logical step. It is somewhat risky, given the power of community legitimacy in the surfwear industry and the fact that such marketing tactics threaten this legitimacy. However, it is a logical extension of Billabong's past. It accurately reflects the trajectory that the brand has been on for several years. Despite the apparent threat to brand equity the current strategy represents, the benefits of the strategy likely far outweigh what could well be only minor losses within the core surfing market. There is simply more opportunity outside of the surfing market.

Porter's Generic Strategy

Porter's generic strategies appear as a matrix. One on axis is the target scope of the strategy, characterized either as industry wide (broad) or market segment (narrow). On the other axis is the advantage that the company is seeking to exploit, either low cost or uniqueness. Billabong has built their strategy around their considerable brand equity, and charge a premium price for their brand. However, they are also moving out of their niche into a broader strategy, encompassing the entire activewear industry. As a result, their strategy in terms of Porter's generic strategies is the differentiation strategy.

Firms that seek to undertake the differentiation strategy depends on the development of products that have unique attributes as perceived by the customers. In this case, the Billabong brand is the unique attribute for which the customers will pay extra, and from which the company derives its competitive advantage. This will require Billabong to develop a strategy that focuses on some key strengths. One is a strong marketing team. In this case, leveraging brand equity successfully and over the long-term will involve a substantial marketing effort that is timely, efficient, and accurately hits the target market. Another strength is product development. Billabong must continue to fill stores with new, innovative product that shows leadership in the field. This can come from in-house development or from the purchase of smaller brands. The brand equity of Billabong also comes into play with respect to their reputation. They must be able to maintain their reputation, which can be done in part by retaining some credibility within the surfing community. This will require the ongoing development of products specific to that market, as opposed to just general athletic apparel.

Classification of other Competitors

There are two types of competitors that Billabong faces. In the surfwear segment, the company typically faces competition that operates a focus strategy - differentiation. These firms are more focused than Billabong, being specifically surfwear firms. The other type of competitor is the differentiation strategy and the low-cost strategy. Billabong faces this as a result of their move into the broader activewear category. This puts them in competition with larger firms such as Nike, Adidas and others than have cost, distribution and product line advantages.