San Francisco State University Crisis at the Bally Wedding Dress Company Questions

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Answer these questions. The format will be answer the questions not writing an essay. Total will be 600 words!!!

Crisis at the Bally Wedding Dress Company

1.What is the difference between the business model of Bally and those of traditional foreign trade enterprises? Why could Bally develop quickly in its initial years of operation?

2.What is the crisis facing Bally? How did it happen?

3.How can Bally cope with such a challenge to resolve this crisis? What are the pros and cons of each alternative available to it? What should it do?

4.Fiona Lee’s decision to buy the factory in 2009 was an example of vertical integration. Should she revise her initial decision? Why?

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For the exclusive use of s. liang, 2020. W15553 CRISIS AT THE BALLY WEDDING DRESS COMPANY Professor Zhu Jiqing and Lu Yun wrote this case under the supervision of Professor Paul W. Beamish solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-11-27 On February 7, 2014 — the first workday after the Spring Festival (Chinese New Year) holiday — Fiona Lee, the general manager and founder of the Bally Wedding Dress Company (Bally), came to her factory in Suzhou, China, to start making plans for the New Year. The factory was very quiet, with not even one worker present. When coupled with the large backlog of orders, this made Lee frustrated. The Spring Festival period was the boom season for the wedding dress business, but the workers had all gone home for their holiday and had not returned to work yet. Past experience showed that they would not be back for at least another week. Outside, people were still lighting fireworks to celebrate the Spring Festival. Inside, Lee was in no mood for joy. The hardships and difficulties over the last two years in operating and managing the company had left her exhausted. Production costs had increased rapidly while orders had decreased significantly in the past three years. The latter was due to a variety of reasons, including difficulty in recruiting workers, increases in labour costs and costs of raw materials, and a rise in the value of the renminbi relative to the U.S. dollar (see Exhibit 1). Compared to 2012, the sales volume in 2013 had dropped 36 per cent while profitability had fallen by almost 50 per cent (see Exhibit 2). It was estimated that 2014 would be even worse. If the situation could not be changed and the company could not be turned around, Lee wondered whether it and others like it in this industry could survive. The situation was now desperate. COMPANY HISTORY The Bally Wedding Dress Company was established in October 2008 by Lee and two partners. Lee owned 67 per cent of the company stock. The company was located in Huqiu District, in the city of Suzhou in Jiangsu Province. Suzhou contained a major industry cluster of wedding dress manufacturers. Bally mainly dealt with the design, sale and manufacture of wedding gowns, dresses, bridesmaid gowns, children’s wedding clothes and wedding accessories. Its products were exported around the world, and its major clients were spread over the United States, Canada, Europe and Australia. Lee was the lead founder of the company. She had previously worked in a public service organization. In 2007, she was introduced to Jerry Chan, who was originally from Zhejiang Province. After he immigrated to Canada, he became a real estate agent. Due to the impact of the American subprime mortgage crisis, This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020. For the exclusive use of s. liang, 2020. Page 2 9B15M117 Chan’s real estate career suffered. Therefore, he started a website selling products like wedding gowns and dresses online in his free time. Chan was in charge of online promotion, marketing and sales, while Lee took charge of production, quality control and delivery in China. Later, Chan changed jobs. The new job kept him quite busy, so he had no time to devote to the wedding dress business. The orders shrank and finally, he exited the wedding dress business in 2008. In her experience dealing with factories and shipment agencies, Lee came to know the business model for online wedding dress sales. She decided to quit her job and set up her own business in the wedding dress industry due to the huge price gap between domestic and overseas markets and its easy operational model. Wedding dresses in foreign countries cost thousands of dollars each, while even a price tag of ¥800 1 (well under US$200) was rather profitable in China. In October 2008, Lee started her own online wedding dress shop, and wanted to set it up in two months. However, since she was unfamiliar with web technology and online marketing, she had only two alternatives: either organize a tech group herself or outsource the service to outside suppliers. It would take time to set up a tech group on her own and it was rather hard to find suitable staff. Therefore, she contacted a company that specialized in website construction. That company built a tailored online marketing platform for her, which included products like wedding gowns, prom dresses, bridesmaids’ gowns, flower girl dresses and wedding accessories. Her products used pictures taken from foreign websites. As Lee explained: The traditional foreign trade process is like this: first, factories in China will manufacture goods and then sell to foreign importers via trading companies. Thus, when products finally reach the consumers, the price is far higher. We have built a website directly facing foreign consumers, which links manufacturers immediately with foreign consumers. This means the profits will only be shared by manufacturers and us. OPENING A FACTORY The initial stage of the business did not go smoothly due to Lee’s limited knowledge of online promotion and marketing. The company had only a few orders every day. In 2008, with the onset of the Global Financial Crisis, the demand from international markets decreased sharply and export orders for traditional trading enterprises shrank dramatically. Though the purchasing power of consumers had declined in many international markets, there was still demand. Many people were looking for cheaper substitutes or spending time searching for more suitable goods with better value. Cross-border online shops provided the products that this group of consumers sought. Compared to traditional foreign trade, cross-border online shops provided their consumers with a huge information database, customized commercial feeds, word-of-mouth reputations and diverse payment methods. Via the Internet, products could be directly sold to retailers or final consumers after being manufactured in China. This immediately reduced costs and improved efficiency. When the traditional export system faced trouble, new e-businesses had their chance. Seeing other companies’ booming business, Lee became anxious. After visiting a friend’s company, she realized that online promotion was her weakness. To strengthen marketing and promotion, she had to establish her own marketing and technology team. At the end of 2008, Lee arranged for web tech experts from outside web companies to become her business partners to specialize in online marketing and promotion. She gave these partners 33 per cent of the company shares. To increase the coverage, Bally further enriched its product categories. It operated on multiple sites, launching websites using different 1 All currency in renminbi (¥) unless specified otherwise. This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020. For the exclusive use of s. liang, 2020. Page 3 9B15M117 languages. For online promotion, the company not only focused on the traditional Google search list, but also targeted social websites and depended on social media networking service marketing via Twitter, Facebook, etc. to increase brand recognition. Thanks to the boom season and strong online promotion, at the beginning of 2009 online orders surged to 30 per day compared to only two to three orders per day at the end of 2008. The monthly turnover increased to US$300,000 in less than half a year. Lee outsourced all her orders to a wedding dress factory called Happy Time. This factory was quite small, with only a dozen workers who were all relatives. The daily capacity was 10 dresses. Due to the delicate, high-quality work and better service that Happy Time could provide (relative to other suppliers), Lee gave almost all her orders to it. Besides Lee’s orders, the factory had three other clients. Although the production capacity was far lower than demand, the factory would not enlarge its production scale for fear of having no orders in the slow season. Although the production capacity was far below demand, at the end of April 2009 Lee gave more than 1,000 orders to Happy Time. Of these, about 500 could not even enter the process of production given the lack of qualified production staff. Even if it was in the production plan, it would take at least seven days for a wedding dress to be tailored and then about five days to be delivered. One issue for her was that foreign customers were often ordering dresses close to their wedding dates. They kept pushing for shipment and some even started to complain. The other issue was the limited production capacity for the factory. Lee tried to contact some other factories, but they all had large order backlogs and their quality and service were even worse than Happy Time’s. Faced with the urgent orders, Lee had to go to Happy Time several times a day to urge the factory to speed up the process. Sometimes, she had to stay in the factory for a whole day and would not leave without taking the clothes she had ordered. Other clients of Happy Time did this too, keeping their eyes on the production of the factory. A week before the May Day holiday in 2009, several factories responsible for Lee’s orders kept working overtime, and Lee managed to deliver more than 100 pieces. She had thought this would mitigate the pressure of pressing orders and would help her relax a bit during the holiday. However, to her shock, after the May Day holiday, complaints and returns requiring refunds came to her one after another. Some customers complained about the quality while others said the dresses had arrived too late for the wedding ceremonies. The return and refund rate for the shipments just before the May Day holiday was up to 40 per cent. Facing a backlog of several hundred orders and a high return rate, Lee realized that the supply chain was the biggest issue at present. If she did not have her own factory, she would never be able to ship the goods in time, and could not satisfy customers’ requirements on materials, handcrafts and quality. Even if the factory managed to deliver the goods, they would be poorly made and result in complaints and returns. As a result, Lee decided in August 2009 to invest in her own factory, which was located in Huqiu, Suzhou. Lee took over a factory and bought eight sewing machines and other facilities, employing 16 workers. It cost her about ¥120,000 (approximately US$17,600). INDUSTRY FEATURES Suzhou was one of the key cities in the Yangtze River Delta in the eastern part of China. In early 2014, it had a registered population of 6.5 million, plus up to three million additional migrant workers. Suzhou was famous for its silk production. Local residents raised silkworms and Suzhou was called the City of Silk. Huqiu, Suzhou, was a major hub for wedding dress suppliers and occupied a 70 per cent market share of national wedding dress production. After 30 years of development, the Huqiu wedding dress market had more than 2,000 manufacturers and outlets. It had developed from dealing only with wedding dresses to selling several hundred products such as cheongsams (traditional dresses), nightgowns, veils This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020. For the exclusive use of s. liang, 2020. Page 4 9B15M117 and accessories. Nearly every store had its own design, tailor, manufacturing specialists and factory. Related industries like wedding equipment, photography studio supplies, wedding dress materials and accessories were also clustered there. Although the wedding dress industry in Huqui had a reputation in China, it was primarily known for low-end and low-price products. There were fewer than 10 high-end wedding dress stores in Huqiu which had their own brands. Most of the stores were small workshops that did not have high-quality production and management. All these small factories were clustered around Huqiu Tower. Wedding dress production was a traditional, labour-intensive industry. Processes like sample making, cutting, sewing and embroidering were almost all done by hand. In China, unit labour costs had had a great advantage for many years and products were highly competitive in the international market. Wedding dresses and other types of clothes could earn more than 40 per cent in profits, which provided the products with a great export advantage. According to statistics from “The Wedding Report, Inc.,” in 2011, the price for the average wedding dress in the United States was US$1,166, while in the same period a wedding dress made in Suzhou was sold in online shops in international markets for only US$200 to US$300. These prices were extremely attractive to foreign clients. Recently, many payment methods had been put into use, including third-party payment, so that consumers overseas could pay with local credit cards on the web. At the same time, cross-border transport and delivery had become very efficient with the entry into the Chinese market of international logistics companies like DHL, FedEx, etc. As a result, cross-border online dealers had swarmed into the wedding dress industry. In some residential buildings near Huqiu, there were numerous foreign trade e-commerce groups, most keeping a low profile. Their annual revenue was US$2 million to US$10 million. A typical cross-border online seller would do business as follows: first it would upload features, prices and pictures of its products onto a website. When it received orders from overseas, it would start the manufacturing process. The moment the products were completed, logistics services would pick up the goods and ship them to the buyers. The shipment would take about five days. The product pictures were usually copied from foreign brands. Customers could customize according to their own figures and colours as long as they could provide pictures and sizes. There was no minimum order quantity. INCREASE IN PRODUCTION COSTS The Global Financial Crisis not only brought about many more online orders, but also depreciation of the U.S. dollar. The rapid appreciation of the renminbi caused export costs to increase, which weakened the international competitiveness of Chinese export products. Small and medium-sized enterprises which manufactured low-end products faced a serious threat. In late 2011, Lee began to feel the pressure from factory operations. Even in the boom season, when the factory operated at full scale, the profitability had already dropped dramatically compared to previous years, due to labour shortages, an increase in labour costs, high raw material prices, and pressure from the renminbi’s appreciation. The factory had already approached the critical point for profit and loss. When the factory was established in 2009, the pay for a skilled sewing machine worker was ¥2,500 to ¥3,000 per month, and for a hand worker it was ¥1,500 to ¥2,000 per month. In addition, the factory’s additional labour was readily available whenever more staff was needed. However, in 2014, the pay for a sewing machine worker in the busy season rose from a base salary of ¥6,000 per month to ¥10,000 to ¥12,000 per month (see Exhibit 3). As economic development in the mid-western part of China accelerated, many labour-intensive industry jobs, including clothing industry jobs, were transferred to those areas. Many workers took jobs in adjacent areas, so there were fewer people seeking clothing manufacturing jobs. Due to the unbalanced regional This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020. For the exclusive use of s. liang, 2020. Page 5 9B15M117 development in China, eastern China was highly developed but the rural areas in the mid-western part were still poor. Many migrant workers were from the mid-western part and sought jobs in the eastern part. They worked almost all year in the eastern part and usually returned home to mid-western China during the Spring Festival holiday. The pressure to quickly produce a high-quality product in this industry was high. Many young people were not willing to do it if they had a viable alternative. Many workers had also exited big cities because living expenses had risen dramatically. During the boom season for wedding dresses, especially around the Spring Festival, due to the difficulty in recruiting workers, wedding dress factories were faced with a major dilemma: too many orders but no workers. For those who were willing to continue working on holidays, they expected to receive much higher pay — usually triple the normal pay level. To alleviate this issue, though the Spring Festival holiday was not over as of February 7, 2014, all wedding factories were already trying to recruit more workers. Despite the fact that some workers would return, it would not be until the 15th of the first lunar month that normal production would start. A labour shortage was not the only problem that wedding dress factories encountered. Wedding dress workers were mostly somewhat older with families, and wanted to balance work and life. During busy periods, older workers were less willing to take on overtime work. Even so, the imbalance of supply and demand in the labour market caused the payment for labourers from other provinces to rise continually. Salary was the most vital factor in competing for employment. The Employment Information Board in Huqiu had salary statistics: workers operating sewing machines received a monthly payment of ¥6,000 to ¥8,000 (minimum plus bonus), cutters received ¥6,000 to ¥7,000, sample designers received ¥6,000 to ¥8,000 and low-skill jobs had an average pay of ¥5,000 per month. However, many factory owners still complained that it was getting harder to find someone who would work steadily. Workers would change jobs the moment they felt dissatisfied because it was easy to find another one. To avoid missing promised deadlines, factory owners would yield to workers. In the past, it would be easy to make workers work overtime, but now, the workers would not do so if they were not inclined. TROUBLES OF OPERATING THE FACTORY Lee was exhausted because of recruitment, high labour costs and difficulty in management. Although the Spring Festival had just ended, she had already started recruitment plans and posted employment ads around the streets in Huqiu. Unfortunately, high promised payment did not attract many applicants. Factory owners were all desperate to attract those workers who came back early. Some even set up recruitment desks on busy roads in Huqiu. Nevertheless, most workers were not too hasty in selling their services. Lee was trapped in a dilemma. On one hand, the cost of operating the factory was high. Even in the boom season, when the factory was in full operation, the profitability from production was very minor. But she could not lay workers off in the low season because it would be difficult to recruit more workers in the boom season next year. Huqiu was not a big place and rumours spread quickly if she did not treat her workers well. On the other hand, if Lee shut down the factory, focused only on online sales, and outsourced production, she would worry about production and quality in the boom season, as she was still scared over the complaints and returns from last year. Lee was particular about quality. She told the workers that a wedding ceremony was an important occasion in a woman’s life, and hence the bride had every right to wear the most beautiful wedding dress. This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020. For the exclusive use of s. liang, 2020. Page 6 9B15M117 Another issue that worried Lee was copyright violation. Almost all the photos on her wedding dress websites were directly copied from well-known foreign designers’ websites. Since 2012, many foreign wedding dress designers had worked harder to protect their copyrighted designs. The biggest wedding dress chain stores in the United States had filed complaints against a large number of China-based wedding dress websites. As a result, these domain names under complaint had been forced to close. Lee herself had consistently received complaints about copyright from a number of foreign wedding dress designers, asking her to stop using their photos for online sales. Some of the 20 profitable website domains she used had been forced to close. On multiple occasions, Lee had had to close down operations under one company name and reopen under a new name. Even worse, PayPal, a third-party payment tool, had permanently closed her account. This had severe financial implications since she could not even withdraw the US$500,000 in her account. To avoid legal proceedings in court, Lee had thought of building her own brand, designing with her own designers and hiring models for the photos to be uploaded to her websites. However, after doing some calculations, she had concluded that the cost for every piece would be about ¥180 — from design, to sample, to photo — and this did not even include the cost for a sample dress itself. One website needed to have about 2,000 products, which meant the total cost of going this route would be up to ¥360,000. This was more than Lee could afford. Some bigger companies and more wealthy entrepreneurs in this industry did invest in designing and taking photos of their own products. But it proved to trigger a much lower sales volume than using foreign brands’ photos. Lee also considered the possibility of relocating her factory to a city in inland China, such as Hefei in Anhui Province or Zhengzhou in Henan Province, because there was plenty of lower-cost labour there and hence production costs would be comparatively lower. However, the related industries were not mature there. Unlike common clothing, wedding dresses were a special category. Wedding products were not goods that had a high repurchase rate, and they could not be mass-produced. They needed to be customized according to different styles, designs and sizes. As for the procurement of fabrics, laces, crystals and flower pieces, this could only be done in small units with high frequency. Unlike Huqiu in Suzhou, Henan and Anhui did not have mature wedding dress industry clusters and would pose a great challenge for raw material purchases. Lee had no idea what to do. In several days, workers were due back and she needed to make a decision as soon as possible. This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020. For the exclusive use of s. liang, 2020. Page 7 9B15M117 EXHIBIT 1: EXCHANGE RATE OF U.S. DOLLAR TO ¥, 2007–2014 7.5 7.39 7 6.85 6.81 6.62 6.61 6.5 6.25 6.07 6.05 6 2007 2008 2009 2010 2011 2012 2013 2014 Source: Created by authors. EXHIBIT 2: SALES VOLUME OF BALLY WEDDING DRESS COMPANY BY YEAR IN U.S. DOLLARS 2008 (2 months) 9,460 2009 2010 2011 857,760 1,646,700 2,412,000 2012 1,853,280 2013 1,188,000 2014 (1 month) 89,000 Source: Company files. EXHIBIT 3: COMPARISON OF AVERAGE PAYMENT FOR SKILLED WORKERS IN WEDDING DRESS INDUSTRY BY COUNTY (¥/MONTH) Suzhou Zhengzhou Hefei 2008 2,500 2,000 2,000 2009 3,000 2,200 2,200 2010 3,800 2,500 2,400 2011 4,500 2,800 2,600 2012 5,000 3,000 3,000 2013 6,000 3,500 3,500 Source: Company estimates. This document is authorized for use only by simin liang in Doing Business in Greater China Fall 2020 taught by Lihua Wang, San Francisco State University from Aug 2020 to Dec 2020.
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Question 1
Billy’s business model was much different from that of traditional foreign trade processes
in that; traditional foreign enterprises depended on a systematic process where Chinese industries
would first manufacture their products, then use other trading companies who would help them to
sell the products to foreign importers who would then directly reach the consumers, and this means
that the consumers would obtain the products at a much higher price. Billy’s business model was
unique because they had established an e-commerce platform that enabled them to directly face
the consumers and provided them with huge information and multiple payment methods and it
also connected manufacturers directly with foreign consumers thereby meaning that returns would
be high and would only be shar...


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