DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
Contents
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
Executive Summary:
ECCO 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. 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.
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
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.
Introduction ECCO Sko A/S is a Danish shoe manufacturer and retailer founded in 1963 by Karl Toosbuy in Bredebro, Denmark. Originally a footwear maker only, the company has since added leather production and accessories to its extensive range of men's, women's, and children's shoes. ECCO claims to be the only major shoe company in the world to own and manage every step of the production process from tannery to consumer. ECCO opened its first retail store in Denmark in 1982, and has since expanded to have more than 4,000 branded sales locations throughout the world.
Situational analysis _ Porters 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:
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
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. 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 f or 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 flowing it takes a lot of time. Therefore the
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
threat Iran 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 is 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 d the original company. Therefore the threat from substitutes is high.
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
SWOT ANALYSIS OF ECCO Strengths
Innovative products due to heavy investment in R&D increasing quality of shoes manufactured. Major players in Golf shoes market in United States Risk appetite is high as the business is Family Owned. Focus on Global operations thereby mitigating risk and lowering labour costs Provide continuous training and education of its employees R&D on environment-friendly tanning methods Supply high quality leather to furniture and auto industries Core competency in direct-injection technique which competitors cannot easily imitate.
Weaknesses
Needs to focus more on marketing operations Growth rate in United States is lower when compared to Geox It takes 8 weeks' time to procure raw materials from the placement of order until the materials were ready to be shipped and it took another 5 weeks for the sea shipment.
Opportunities
Vast potential in Chinese markets Vast potential in increasing the production capacity in the market Scope of improvement in new designs|
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
Threats
Multiple competitors Threat of substitutes in Chinese market Brand conscious people may not purchase these shoes as ECCO does not emphasize on the brand, it focuses more on the quality
The supporting activities
Structure supporting activities: Facilities: An independent configuration of global facilities with tanneries and full-scale manufacturing facilities in Europe and Asia. Distribution centers are located in the major markets of Europe and United States. The decision to open facilities in China is to access cheap labour and to serve the growing Chinese domestic demand.' Research and development is primarily carried out in Denmark. Capacity: The majority of the manufacturing capacity is located in Asia due to the low rates of labor. However these facilities have long lead times and make the supply susceptible to changes in customer demand. There are no manufacturing plants in USA, which is one of ECCO's major markets. Process technology: This is a key asset to the company and the core of ECCO's product strategy was shoes based on "direct injection". Competitors tried to copy the direct injection technique, however. ECCO performed many small tasks differently throughout the process, which improved quality and made it hard to imitate.
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
Supply network: ECCO operates a fully integrated value chain manufacturing 80% of its products in-house. The remaining 20%, mostly shoes with very thin soles, are outsourced, as they do not benefit from ECCO's core technology.
Cost base: Due to the labor intensive nature of show manufacturing ECCO locate their production facilities in cheap labor countries. However there is then a trade-off in lead times and more stock must be held in local distribution centers, which increases working capital. Infrastructure supporting activities: Planning and control: ECCO's downstream retail shops ensure full access to customer demand data. This allowed then) to plan and react to changes in demand and control the amount of inventory in distribution channels. Manufacturing control is achieved through benchmarking production and by having multiple production facilities so best practice could be shared between them.
Quality: Quality is key to the company strategy quality. Quality management is maintained by having full control of the supply chain which allows ECCO to set quality standards much higher than they could expect from external suppliers. Human resources: ECCO invests heavily in continuous training and education of its employees providing vocational training, career development and expatriation.
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
New product development: New products, prototypes and laboratory production technologies, are carried out in Denmark, where they experiment with new materials, processes and technologies. Operational R&D is carried out in the foreign production sites where they streamline processes and optimize the use of materials. Procurement: Compared to their competitors this is a very minor part of ECCO's operations. They purchase raw hides for the tanneries and they outsource 20% of their shoes (those mainly with thin soles). I assume that ECCO maintain a number of suppliers to increase competition and to mitigate redundancy issues.
Value chain analysis
ECCO 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 Et 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, raramp-up, prototype and laboratory production. The intention of the full-scale phase was
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
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.
10
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
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.
11
DELEVERING CUSTOMER VALUE
ASIA PACIFIC UNIVERSITY
References
Competitive Advantage across the Value Chain - (e.g. Creating and The Balanced Scorecard - (e.g. R. Kaplan & D. Norton, Harvard) and Operations Strategy & Management - N. Slack & M. Lewis,( 2002, FT Supply Chain Redesign Transforming Supply Chains into Integrated Value Nets - D. Bovet & J. Martha (2000, Wiley) Collaborative Event Management, Supply Chain Sourcing, etc e.g. http://www.ecco.com/en/About-ECCO Sustaining Superior Performance, M. Porter, 1985) numerous derivatives. Prentice Hall) Value Systems - R Handfield & E. Nichols (2002, FT Prentice Hall)
EQOS www.eqos.co.uk
12
