Value Chain Analysis

Analysing ECCO's Value Chain

MGMT910 Term Paper Assignment

Group 1

Rev PA1

/ 11

Executive MBA Graduate School of Business

Koç University

Group 1 Members: (in Alphabetical Order)

Batuhan Çelik

F. Semin Bal Sözen Hakkı Karabay

Hasan Basri Akırmak Kadir Öğüt


/ 11 Koç University EMBA'12 - Group 1

Contents

1 Synopsis ...............................................................................................3

2 Overview of ECCO................................................................................3

3 ECCO’s Competitive Environment ......................................................4 3.1 “High” Existing Competitive Rivalry.........................................................4 3.2 “Low” Power of Suppliers .......................................................................4 3.3 “Medium” Bargaining Power of Buyers ...................................................5 3.4 “Low” Threat of New Market Entrants .....................................................5 3.5 “High” Threat of Substitute Products.......................................................5

4 ECCO’s Global Value Chain.................................................................5 4.1 Primary Activities....................................................................................7 4.1.1 Leather Production (Tanneries) ..............................................................7 4.1.2 Shoe Production.....................................................................................7 4.1.3 Distribution .............................................................................................7 4.1.4 Sales ......................................................................................................8 4.2 Supporting Activities...............................................................................8 4.2.1 Infrastructure ..........................................................................................8 4.2.2 Production & Logistics ............................................................................8 4.2.3 Brand and Products................................................................................8

5 ECCO’s Cost Structure ........................................................................8

6 ECCO’s Inside Out Strategy ................................................................9

7 Answers to Questions........................................................................10

8 References..........................................................................................11



1 Synopsis This report analyses the ECCO’s Competitive Advantage using Porter’s 5 Forces, depicts ECCO’s Global Value Chain, and describes the Inside-Out Strategy. It is prepared as part of the MGMT910 International Business Course. The assignment questions are answered at the end of the report.

2 Overview of ECCO ECCO, a world leading brand of shoes combining style and comfort, has built its success on uncompromising quality, innovative technology and the design philosophy: “the shoe must follow the foot” [4].

From the first day of its foundation in 1963, ECCO’s main design principle is to increase the usability of the shoes and customer comfort. Primarily, they sell high quality shoes and that is where they seek recognition. With the understanding of everyone is the target, ECCO’s customer oriented value chain became the most important tool for their success in the value-adding activities of the organization. ECCO is the only major shoe manufacturer to own and manage every step of the shoemaking process.

As a family-owned company, ECCO products can be found in 4,000 branded sales locations in over 90 countries, a growth fueled by ECCO’s consistent aim of making the best shoes in the world. ECCO is the 3rd largest producer of casual footwear in the world. ECCO is the 4th largest golf shoe supplier in the world [4].



3 ECCO’s Competitive Environment

Michael Porter's famous Five Forces of Competitive Position model provides us a simple perspective for evaluating the industry attractiveness and analysing the competitive strength and sustainability position of a corporation or business organization [1]. Therefore, Porter’s 5 Forces Analysis have been performed for ECCO:

The global footwear market is highly competitive and fragmented with a few major players and a seemingly endless array of smaller players, including designers, marketers, manufacturers and retailers, all fighting for share. By looking at each forces, we observe the following situation:

3.1 “High” Existing Competitive Rivalry

ECCO’s main competitors were evaluated by ECCO as Geox, Clarks and Timberland. Market competition and quest for catching consumer preferences resulted in investments in cost optimisation and seeking for new technologies by players. Lowering costs and reduction of supply chain time to market are the key targets to get competitive pricing. Players are investing in new technologies, improved customer services, and market knowledge.

Athletic and lifestyle casual footwear became indistinct lately. There is a direct competition in athletic products between ECCO and financially strong shoe companies like Nike and Reebok caused by ECCO’s foray into golf shoes.

Boundaries between footwear categories and sales regions are also blurred. Therefore, we concluded the threat of competitors to be “High”.

3.2 “Low” Power of Suppliers

Most of the companies in the sector have supplier networks and processes. For example, Timberland has 60 suppliers who are subject to rigid quality control management. In order to monitor this network, important resources are allocated and this resulted in extra costs for firms. What’s more, price increases affects the vulnerability of the firms. Monitoring market prices closely and more interaction with suppliers are vital for the firms outsourcing.

However, firms like ECCO, which have their own tanneries are less dependent on suppliers. Therefore, we evaluated the power of suppliers to be “low”.



3.3 “Medium” Bargaining Power of Buyers

Retailers usually order a large proportion of shoes in advance. For example, %75 to %80 of ECCO’s production is ordered in advance, while 20 to 25 percent of orders are targeted to fill up the stocks [2]. In addition to this, auto and furniture industries are also leather buyers [2]. Therefore, we determined the bargaining power of buyers to be “medium”.

3.4 “Low” Threat of New Market Entrants

Brand awareness requires different levels and combinations of brand recognition and recall. Footwear industry is working on brand identity so recognition of a brand takes time and investment costs to a new player. Furthermore, it is a very capital intensive industry so being a reputable player in this sector entails strong commitment, despite the tax benefits and government concessions which are available in countries like China. To conclude, our comment for the threat from new competitors is “low”.

3.5 “High” Threat of Substitute Products

The main threat as a substitute is the Chinese counterfeit market. These imitated products resemble the original ones and are much cheaper. Availability of fake products in regular markets impacts the brand image of the products as well. For example, During 2003/2004, ECCO had been bothered with Chinese manufacturers copying the ECCO design [2]. They tried to protect company’s brand and design via special units of attorneys.

Non-leather products are also a threat for ECCO. Protests of Animal Rights activists against leather products are also affective on diverting customers to substitute products.

Finally, certain footwear segments (open footwear, sandals etc.) became more popular recently. These segments impact the casual and leisure products segment’s sales volumes.

To sum up, we evaluated the threat of substitute products to be “High”.

4 ECCO’s Global Value Chain The value chain provides a tool that firms can use to determine their source (current or potential) of competitive advantage. Porter used the framework of value chains to assess how a firm should position itself in the market and in the relationship with suppliers, buyers and competitors either through cost advantage or differentiation [1]. We observe the following characteristics of ECCO’s Global Value Chain:



ECCO maintains focus on the entire value chain with a philosophy of integrating it from cow to consumer” globally [4]. The competitive advantage of ECCO can be summarized as producing high quality shoes so that customers are willing to pay a premium price. The main forces driving ECCOs ‘globalization’ of the value chain are the establishment of a market presence, and reduction of labor costs and increasing flexibility [2].

Following diagram depicts ECCO’s global value chain: The support activities are inferred from the ECCO’s organization chart. The primary activities are inferred from the company web site.

The diagram below depicts the value chain components’ spread into countries. The values in parenthesis indicate the year of construction:

Margin

Global Value chain

ecco

TEXT

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Sho

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Leat

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Infrastructure

Production & Logistics

Brand & Products

Margin



Netherlands

(2001)

Indonesia

(1991)

Thailand

(1993)

Portugal(1984)

Slovakia(1999)

China

(2005)

Americas

(1990)

EMEA

(1996 onwards)

Asia Pacific

(2002)

China

(2008)

Indonesia(1992?)(Uppers) (40-50%)

Thailand(Uppers, Compl. shoes) (37%)

Denmark Distribution Center

Denmark(1963)

Rawhides

Reinf.

Yarn

Accessr.

From Europe:

Local Procurement:

Granulate

Gore-Tex

USDistribution Center

Retail Sales(Shoes)

Wholesale(Leather)

Purchased Leather

Leather Production

Raw MaterialsShoe Production

Distribution Sales

Global Value chain

ecco

Each value chain component is studied below:

4.1 Primary Activities

4.1.1 Leather Production (Tanneries)

ECCO’s strategy of controlling the entire value chain includes investments in tanneries and leather production.

The 85 % of ECCO’s leather consumption is produced in own tanneries in four countries (the Netherlands, Indonesia, Thailand and China). The remaining 15 % is purchased externally. 38% of the leather production is sold to 3rd parties [3].

4.1.2 Shoe Production

ECCO’s Manufacturing facilities are spread into 6 countries. New shoes are developed and designed in Denmark and Portugal. Production takes place in four main factories in Thailand, Indonesia, Slovakia and China. ECCO Indonesia is ECCO’s largest production unit [3].

4.1.3 Distribution

ECCO has two main distribution centers (Denmark and USA) which serve the 56 subsidiaries [3].



4.1.4 Sales

ECCO products can be found in 4,000 branded sales locations in over 90 countries [4].

4.2 Supporting Activities

4.2.1 Infrastructure

Quality is the key differentiator to the company. Quality management is maintained by full vertical integration. ECCO sees employees as a core asset and invests into their competence development by regular trainings and collaboration among different units.

4.2.2 Production & Logistics

Coordination among many production units are handled by use of technology. ECCO owns distribution centers for delivery of final products to retail stores.

4.2.3 Brand and Products

New products, prototypes are carried out in Denmark and outcomes are shared with production sites.

5 ECCO’s Cost Structure As ECCO is a family owned company, there was no disclosed information about the value chain cost structure. Our efforts to contact ECCO Corporate Communications contacts also did not yield any results.

In our internet research, we found out a cost structure for the shoe industry [5].



Figure 1 - Cost of a Shoe Sold in US & Made in China

We do not have evidence that it is fully applicable to ECCO, however, we assume that this is the case.

By looking at the production activities, the relatively high cost of materials (8%) compared to the production costs (1.5%) indicate why leather production is of importance to ECCO. The distribution costs (5%) are high, because our source assumes that the production takes place in China [5]. The retail stores incur 50% of the total costs.

The shoe industry’s average margin is 13.5%. This is inline with ECCO’s Operating Margin for ECCO (2010 value is 10.7 %) [3].

6 ECCO’s Inside Out Strategy ECCO group is known selling for high quality shoes instead of being a fashion brand in the market. Inline with this strategy, ECCO has a limited product range (casual, formal, sports for men, ladies & kids).

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8 % 1.6 % 13.5 %58.5 %5 %



Although the market trends were changing and more elegant products were being asked at the end of 1990's, ECCO group could be deemed as still conservative to move on their original path of ECCO's top priority of usability and quality.

However, following the death of Karl Toosbuy in 2004, ECCO's move on becoming a more market oriented company is observed. The main reason behind this might be the new CEO, Dieter Kasprzak, who had spent 23 years in ECCO, primarily as design, product development and branding lead. Kasprzak's vision was to make individually based shoes fine-tuned to each customer. ECCO would produce individual shoes as per consumer's preferences with its technology. For this reason, firms like Nike, Reebok, Adidas, Clarks & Timberland, which have market oriented business models, have been followed, however ECCO's main philosophy was being kept as same.

Therefore we concluded that ECCO follows a product oriented marketing strategy until the end of 1990's. And, due to the changes in consumer preferences pertaining to casual footwear, searching for much elegant products and excitement of customers and marketing budgets and margins, ECCO intends to act as a market oriented company starting from early 2000's with the new CEO.

7 Answers to Questions 1. Describe the competitive environment of ECCO and determine how well ECCO is

positioned (vis-à-vis the competitors) to take advantage of changes in the industry.

As can be seen from our 5 Forces Analysis in Chapter 3 ECCO’s Competitive Environment, there is a high industry rivalry. ECCO follows a differentiation strategy and full vertical integration, which brings several advantages such as full control over quality, maintaining end to end shoe expertise, having direct interface with customers through ECCO owned brand stores.

2. Design ECCO’s Global Value Chain.

Please refer to Chapter 4 ECCO’s Global Value Chain and Chapter 5 ECCO’s Cost .

3. Is ECCO following the inside--‐out or outside--‐in strategic perspective? What are the implications of this choice and how can ECCO increase their sales/marketing efforts?

We believe that ECCO is following an inside out (product driven) strategic perspective. But we also believe that with the new CEO, ECCO investigating the outside in (market driven) strategic perspective (such as producing customizable shoes for the individual). For a detailed analysis, please refer to Chapter 6 ECCO’s Inside Out Strategy.



8 References [1] Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard

Business Review, January, 2008, p.86-104. http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

[2] Nielsen Bo B., Torben Pedersen et.al, ECCO A/S — Global Value Chain Management, Ivey Management Services, http://hbr.org/product/ecco-a-s-global-value-chain-management/an/908M14-PDF-ENG (Harvard Business School CASE Study)

[3] ECCO A/C Annual Report 2010, http://www.ecco.com/en/Media-Center/Annual-report

[4] ECCO Press Kit, http://ecco.com/en-XI/Media-Center/Press-Kit

[5] Costs of a Shoe Sold $100 in the United States and Made in China, The Geography of Transportation Systems, Hofstra University http://people.hofstra.edu/geotrans/eng/ch5en/appl5en/costs_shoe_China.html

Value Chain Analysis

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