ECCO Case Study - Grade: A- PDF

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Case study on ECCO company strategic management...

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1 Strategy MGBU-4441-RYN 8 April 2019 ECCO Case Study Summary & Analysis The case study on ECCO A/S gives an overview of the facets of the company’s Global Value Chain Management and details its various strengths, weaknesses, and undertakings for growth in respect to competitors in the industry. ECCO footwear company has distinguished itself from its competition as a shoe-maker built upon the principles of quality innovation and design. This is where they find their competitive advantage, as they offer consumers high quality footwear that is built with comfort in mind for working, athletics, or leisure, which will in turn allow them to charge a premium to their customers in return for a premium product. As the Executive VP of the company, Søren Steffensen, stated, ECCO “is not a fashion brand and it never will be.” This focus on the utility of the company’s products, rather than the brand image and product design is a key distinguishing factor for them, which allows them to separate their products from competing shoe-makers’. The goal for ECCO is to expand and exploit the global value chain, building upon their existing production facilities outside of Denmark, in Portugal, Indonesia, Thailand, Slovakia, and now China. As shown in Exhibit 8, ECCO has increased its presence internationally, with the vast majority of its workforce being located outside of Denmark. By continuing their expansion globally, the company will be able to lower production costs, and simultaneously expand their market share in existing and new economies, giving them a much needed boost to revenue and operating margin that has been problematic in years prior. By applying Porter’s Five Forces to ECCO, it is apparent that there is a high threat of competitors in their particular industry. ECCO regards Geox, Clarks, and Timberland to be its main competitors. Because of this tight competition, the company has invested in optimizing manufacturing processes, automating and streamlining production in order to keep up with their

2 rivals. With respect to suppliers, ECCO has developed its own tanneries and is therefore not particularly reliant on suppliers, using them mainly for raw materials and doing the vast majority of production in-house, as shown in Exhibit 3. 85% of ECCO’s leather consumption is produced in their own tanneries, while only 15% is outsourced. Buyers in this market have a medium amount of power over sellers, as they mostly consist of retailers which must stock their shelves with products, and therefore order a large sum of inventory in advance to keep in store. New market entrants are a low concern to ECCO, due to the high costs associated with starting a new business in the industry, as well as the cache that established brands have in terms of marketing. Finally, the threat of substitute products is high to ECCO, as there have been numerous cases of Chinese manufacturers copying ECCO designs and selling them themselves. These cases have been handled by the company through legal measures but still represent a significant risk to the company’s market. When analyzing ECCO’s competitive potential, the VRIO framework offers important questions that the company can use to develop its strategic mission. These revolve around the Value, Rarity, Imitability, and Organization of the resources of ECCO. Because of their controlled supply chain, the company has the potential to greatly increase the innate value of the raw materials they use to create their products and are doing so by putting together well-made footwear for their consumers. The rarity of the companies resources is not a strong suit, as raw materials are easily replaceable, but their vertical integration in the leather making process is a strength due to their long existence in the sector, allowing them to further develop their techniques and potentially expand to offering tanned and processed leather for other companies to buy for use in their own products. There is very low imitability for ECCO’s production processes, as the costs of vertically integrating in a similar matter are so high that they would not

3 be financially prudent for any competitors. In fact, most other companies are moving in the opposite direction of ECCO, instead opting to lower costs by outsourcing most production, while maintaining only design and marketing aspects of their products. Finally, ECCO’s organizational aspect is in a very good position to compete, as they have a centralized business structure and are able to quickly adapt to changes in the marketplace due to being a private, family owned company. This is a key value that the management holds dear and emphasizes as a reason for their success so far in the business. ECCO’s challenge to relate to customers can be solved with investment in marketing that emphasizes the value proposition that the company offers. In order to keep their unique focus on utility and comfort at reasonable prices, without sacrificing quality, ECCO must communicate to customers the unbeatable value they will receive if they purchase their footwear from ECCO. Up through the 1990s, the company has had a product-oriented marketing structure, but in recent times has changed to a more market-oriented company, focusing more on the wants and desires of customers, while maintaining the integrity of its founding principles. By investing in customer facing ideas and innovating their production to be more favorable to a market which is increasingly demanding a different type of product, ECCO can bring growth on par with its competitors. Furthermore, expansion into new markets is a very lucrative opportunity for the company. As stated in the opening of the case study, new investments were being made in the Chinese market, both in manufacturing operations as well as future sales. The quickly growing middle class of China, and the massive population there is an untapped market that can be used to bring exponential growth in sales. By shifting manufacturing to the relatively cheap labor of China, and also selling products directly to the domestic market there, ECCO can cut costs in production and distribution, reaping the increased profit margin.

4 ECCO’s prospects for the future are very promising considering their positioning at the time of the case study’s writing. The question remains, however, of whether they can invest in new markets, increase marketing efforts, and optimize its global value chain all at the same time. The answer to this is, obviously, not straightforward and not definitive in the slightest, but with good management, the company can utilize their existing global value chain position to expand and adapt to changing markets. In order to develop a sustained competitive advantage, several key undertakings must be completed. The company must take a detailed view at a SWOT analysis and recognize where their strengths and weaknesses lie. By minimizing risks to their business and expanding on the qualities that have led them to success thus far, ECCO can secure a foothold toward building their business to reach new heights. Furthermore, ECCO should realize that its method of business must change in order to adapt to shifting consumer needs. Though the product focused mentality of the past should not be abandoned altogether, it cannot thrive in the market of today, where people are turning toward luxury brands to meet their clothing and accessory needs. More and more of the Millennial generation are searching for design focused companies which offer quality, long lasting products. Though not a luxury company, ECCO has long been known for quality and integrity of design, and so by strengthening this sector of its marketing, it can reposition itself as a leader in the footwear industry. Finally, the Chinese market is by far the single greatest opportunity for not only footwear companies, but all consumer product companies, and the massive population with excess money, ready to spend, is an untapped potential boon for ECCO, should they act accordingly and capitalize on their existing production and distribution in that country....