ECCO A/S GLOBAL VALUE CHAIN MANAGEMENT

Executive Summary: ECCO A/S is one of the most prominent player in the global shoe industry and is also one of the leading footwear manufacturer in the world. Since its inception in 1963 it aspires to produce top quality, casual comfort shoes with a perfect fit which are pleasant to wear in all weather conditions. The company s USP is top quality of its product with a coupled production of, manual and machine. The production of their leather was in-house and they had a unique direct injection technology. ECCO is a financially strong family owned enterprise and as corporation they focus on constant innovation and high quality products. They started it operations from Denmark, and in a continuous pursuit to gain a global foothold and to optimize its value chain, they have expanded their operations in Portugal, Slovakia, Indonesia and Thailand. They soon plan to invest heavily in China, to setup up a world class manufacturing unit which will cater to at least 25% of its forecasted global demand. ECCO, being a successful and closely knit family owned enterprise had a strong culture of bonding and attachment and it percolated down in the management strategies as well. They strongly encouraged that at least 80% of company s leader should come from inside the company. They were conscious of the fact that in their journey to be global leader, employees were their biggest asset and thus they invested heavily on employee trainings and career development activities, so they could upgrade their skill and capabilities with evolving time. ECCO is an exception in the industry, as it still believes that the key to maintain quality standards and product uniqueness is its in house production , which contributes to over 80% of their production. It believes in outsourcing only when it feels that the product is not aligned with their technological expertise. Despite of its growing success, ECCO as a company had to face to declining productivity and stagnant margins from 1999 to 2003 which led to increase in its debts, however 2004 brings signs of improvements in its financial capabilities and with its expansion plans in China, ECCO is looking to strengthen its integrated value chain from cow to a shoe, by making it more efficient and cost effective. ECCO realized that it needs to focus on long term sustainability and also it understood the importance of moving towards a marketing oriented path, which would help ECCO leverage on its innovation, research capabilities and its high quality products.

Situational Analysis Porter five forces

Every industry s attractiveness can be gauged from the competitive forces on the industry. To assess the industry attractiveness and long term sustainability we can use Porter Five Forces Model which analyzes rivalry, entry barriers, threat of substitutes, supplier power and buyer power. These forces affect the company s ability to serve its customers and also to generate profit. A change in any of the forces usually requires a company to re-assess the marketplace

Industry definition: Shoes now have viewed as fashion product rather than a utility product and nowadays the global footwear industry is equivalent to fashion and design industry as and all companies have to regularly innovate and make continuous changes in their designs, styles and material used. Comfort and Cost are also significant factors for ensuring success. Rivalry: The market for lifestyle casual footwear is highly competitive and is very subjective to consumer preferences. In the pursuit of completive pricing each company was looking ways to cut the costs and increase efficiency in the supply chain to reduce time to market. There was a very thin line of differentiation between casual and athletic footwear and there was a direct conflict of interest of ECCO with major athletic brands such as Nike and Reebok, case in point the ECCO s foray into golf shoes. However considering the homogeneity of the products manufactured, ECCO s

main competitors were Geox, Clarks and Timberland. With ECCO attaining roughly 12% of market the threat of competitors was HIGH. Entry Barriers: The threat of new competitors is determined by the extent to which there is a problem with high entry barriers. These entry barriers should be easy to overcome, if new entrants should have opportunities to compete against the existing players. Footwear industry is usually a very capital intensive industry and it is not very easy for an absolutely new player to establish dominance in this industry, despite the tax benefits and government concession which are available in countries like CHINA. This industry works on brand identity and for a new player to establish a brand following it takes a lot of time. Therefore the threat from new competitors is LOW. Suppliers: For most companies the supplier networks and processes are pretty well defined, few major companies have their own tanneries which makes them less dependent on suppliers, where as other companies had fixed suppliers who were subjected to stringent quality checks. For companies who outsource the leather supplies were always prone to price threats, there for the industry we view this threat MEDIUM. Buyers: There was a strong relationship with all buyers which was evident from the fact that retailers usually ordered a large proportion of production in advance and also the leather buyers have another alternate market furniture makers and car maker, there we gauge the threat from buying power of suppliers as MEDIUM. Substitutes: The competition caused by substitute s shoots from products outside the industry and the threat of substitutes typically affects an industry through price competition. In a growing trend in US and Europe, casual and leisure footwear in increasingly being perceived as open footwear and sandals, and these types of products are eating into share of such companies. Also there is a growing voice against leather products, which greatly affects the global mindsets of the buyers, and hence a large percentage of globally aware population prefers non leather products. The biggest problem of substitutes is of the Chinese counterfeit market. The counterfeit products are sold under market prices and have a high degree of resemblance to the original ones. The fakes products are sometimes also available in regular markets which undermine the goodwill of the original company. Therefore the threat from substitutes is HIGH.

COMPANY ANYLASIS A deep understanding of the ECCO brand and its strong and weak points it is essential to make a company analysis. The company analysis consists of a brief presentation of ECCO, their organization, products, financial situation etc. 5 C s with ECCO Company:  Product line The ECCO group produces an assortment of shoes which included casual and outdoor shoes for men, ladies, and children, as well as semi-sport shoes, for two different seasons spring/summer and autumn/winter. They also introduced golf shoes which were preferred by over 90% golfers.  Technology and experience the company was pioneer of direct injected technology, Production technology is their key competitive advantage and they invested heavily on training and equipment costs to upgrade the skills of their employees .  Culture Closed ownership among the family and the company encouraged that over 80 per cent of the company s leaders should come from inside ECCO  Mission To develop shoes that are pleasant to walk, regardless of the weather conditions and a vision to be the most wanted brand within innovation and comfort footwear by investing in human resources and its core competencies. Customer:  The major share of market was covered USA, Germany and Japan with American market being the most profitable.  The brand was perceived as sturdy and comfortable footwear.  Retailers favored ECCO s business model and pre ordered a large proportion in advance and the rest as replenishment orders. Collaborators:  Distributors Two main distribution channels in USA and Tonder, Denmark.  Suppliers three main suppliers in Netherlands, Indonesia and Thailand.  Alliances Operated closely with Main group, which specialized in injection machine molds for footwear, forecasted to procure cheap machines from it in China  Collaborated with Aibu to increase sales in China by leveraging its unique market knowledge in Chinese market.

Competition:  Due to blurring difference between casual and athletic footwear, Big brands like NIKE, REEBOK in sports & athletic product market focused on same line of products.  Geox was into casual footwear segment with its patented technology and had a similar business model as compared to ECCO s. However, Geox as a brand was strong in Italian and US markets.  Clarks was also into similar segment as ECCO and it banked on its air-cushioning & water proof technology. It shifted production from UK to Vietnam, China and Romania its cost advantages. It outsourced shoes from Asia and had access to expertise in technology due to extensive research but experienced some difficulties in monitoring quality.  Timberland was a major competitor in the footwear & accessories especially segment and by sales market share, it is twice the size of ECCO. They had a strong distribution network and also had dept stores & outlets in US with a franchise model. It produces only 10% in-house and with close quality monitoring & refined techniques in production. It also maintains strict quality at the supplier level which pressurizes pricing policies. Context:  The situation in China was positive which offered 100% ownership of production units in China and the fact that it was a market that produced over 25% of the total world s shoe production provided a huge potential for ECCO.  The use of direct injection technology and innovations led to production of produce high-tech products which reduced the costs involved in the value chain.  The setup of plant in Slovakia was crucial since it provided low-priced labor costs as compared to Europe and had a strategic proximity to big markets like Russia and Poland.

Value Chain AnalysisECCO focused on the entire value chain from raw hides to usable leather products which provide quality to its consumers and to maintain a long term sustainably. The company streamlined its sourcing and laid stress on the quality levels by reducing the number of vendors & fostering new partnership.From 1999 to 2003 the operating margins fell by 15% and debts also increased , but by 2004, however, improvements were brought about by streamlining logistics which freed up capital and keeping pace with the in-demand market products.  As a measure to maintain quality the company acquired tanneries & research units. To improve on the current skills new trainings were provided by the company.  As a measure to compare to its competitors ECCO outsourced only 20 % of its production and that too only for the products for which ECCO was not technologically sustainable.  The production was categorized into five roles or phases viz., full-scale, benchmarking, ramp-up, prototype and laboratory production. The intention of the full-scale phase was to produce large

volumes with quality assurance. Benchmarking was the process of retaining knowledge competency on improvements and compare to existing standards. Each product was subjected to rigorous finishing processes.  The research centre was moved from Denmark to other production sites for sensible reasons so as to directly cater to changing trends in the market.  Majority distribution was done through Denmark but only six to nine percent sales were done in Denmark. Usually 80% of the production was ordered in advance by the distributors, the rest was to be supplied for stock-keeping in a few days time. Recommendations & Analysis: ECCO should consider the industry trend of outsourcing majority of its production operations and focus more on its supply chain capabilities rather than getting into the intricacies of product production.  As a high majority of sales happens through US, Germany & Japan, ECCO must seriously consider the option of moving assembly operations to the US so that it can leverage on the drawbacks of its supplies from Europe & cater to the American styles.  For all the dominating markets, ECCO should invest heavily on marketing and promotions and focus on educating the consumer market about the superior quality of its products so as to create a unique brand itself focusing on its strong innovation and research capabilities.\  ECCO should focus on the design capabilities and create new cater to new markets which are fashion conscious.  Also, the brand Geox is growing faster in volumes, ECCO must build its brand around quality rendered counter Geox in terms of market visibility.  ECCO can also explore the possibility of releasing and IPO in the market and can safeguard its huge investment in the Chinese market.