Ecco Market Analysis Research Paper Example

Ecco Market Analysis Research Paper Example Ecco Market Analysis Paper Ecco Market Analysis Paper EXECUTIVE SUMMARY ECCO is a Danish shoemaking and retailing company that was founded by Karl Toosbuy in Bredebro, Denmark in 1963. The company’s vision is to be the ‘most wanted brand within innovation and comfort footwear’ – which they intend to attain by constantly and courageously researching new paths, investing in employees, in core competencies of product development and production technology. While trends in the market with regards to fashion and elegance are deemed important, usability has been ECCO’s highest design priority. By 2004, ECCO had its main markets in the US, Germany and Japan and worked constantly on creation of new markets with emphasis on regions like Asia, Central and Eastern Europe. The financial ownership was kept within the company and ECCO refrained from issuing Initial Public Offerings despite financial constraints in the beginning of the 21st century as the company believed that that would inhibit their risk taking abilities. ECCO’s production strategy has been unique in that 80% of the production was in-house. The company regarded their ‘direct injected’ technology as a key asset and believed it gave them an edge over the competitors. A decade of more than satisfactory growth later, ECCO ventured towards internationalizing its operations by establishing its upper production unit in Brazil in 1974. Since then, the chief drivers of internationalization have been i) creation of new markets ii) leveraging the relatively cheap cost of labour. By May 2004, ECCO was finalizing its plans to set up production in China. The Report has covered Situational Analysis for ECCO’s present day operations and market presence. It has covered Competitor Analysis taking into account its main rivals in the international market. The report also contains valuable recommendations for future growth strategies. TABLE OF CONTENTS EXECUTIVE SUMMARY1 SITUATIONAL ANALYSIS:3 Products and Markets:4 The Global Value Chain4 Advantages of the Global Value Chain6 Drawbacks of the Global Value Chain6 Competitor Analysis6 RECOMMENDATIONS7 SITUATIONAL ANALYSIS: The internationalization program was taken up to optimize various activities associated with the value chain. Having already established operations in Portugal, Slovakia, Indonesia, Thailand ECCO was gearing up to set up shop in China as part of the internationalization of the value chain. By doing so it intended to utilize the cheap labour costs, use China as a launching pad to export finished goods to the market the world over. ECCO had one tannery located in Netherlands, and two others next to factories in Indonesia and Thailand. While the complete ownership of tanneries meant ECCO could exercise sufficient quality control over the leather used, it also means added overheads and incurring maintenance costs. Products and Markets: The ECCO group produces footwear for men, ladies and children in the casual, outdoor and semi-sport shoes categories for two different seasons – spring/ summer and autumn/winter. The distribution of sales in 2004 across the categories was as follows. Bulk of the share fell to ladies at 47%, followed by men at 30% and 11% and 12% for children and sport respectively. The year also saw the ECCO group introducing the range of golf shoes which was met with outstanding success as market research showed the brand being preferred by more than 90% of the golfers. The chief markets for ECCO were the US, Germany and Japan, accounting for more than 90% of the exports. The US remained the most important market with the shoes selling for a high price. The US market accounted for 26% of the total sales in 2004. The Global Value Chain Inbound Logistics ECCO retained a close control of the entire value chain right from procuring the leather to packaging of the shoes. ECCO had one tannery located in Netherlands, and two others next to factories in Indonesia and Thailand. The Netherlands facility handled prototyping, laboratory and ramp-up production f leather, while those in Indonesia and Thailand performed full-scale production of leather. These tanneries supplied leather to all the production units across the world. The bulk of the raw hides originated from Germany, France, Denmark and Finland. ECCO’s production strategy was well-differentiated from its competitors in that ECCO handled 80% of the production of shoes on its own (which was in k eeping with its focus of close control) whereas most of its competitors had outsourced most of the production, concentrating more on design and marketing of their products instead. The company employed a technology that they termed ‘direct injection technology’ which accounted for 80% of the total production. Because it was hard to imitate and gave them a competitive edge, the company was averse to outsource production. The remaining 20% was outsourced as these did not benefit from the direct injection method. ECCO began internationalizing operations in 1974 since it established an upper production unit in Brazil. Portugal ECCO set up its first full-scale production unit in Portugal in 1984. Initially Portugal had a significant share in both production of the uppers and shoe assembly. However, with rising labour costs, the numbers came down, as production shifted to Indonesia and Thailand. ECCO consequently reduced the number of employees and invested into technology to make the unit more high-tech. Indonesia Opened in 1991, the Indonesian production unit handled shoe uppers, accounting for 40 to 50 per cent of the demand. A distinct drawback was that obtaining raw material could take up to eight weeks and shipping the finished goods to the distribution centres upto five weeks. Thailand The Thai unit encompassed both tannery and assembling operations. This unit was a success story in terms of output, employee satisfaction and size. Employee turnover was low and the number increased progressively every year. Also, ECCO discovered that the Thais were good at observing minute details and exhibited high level of skill. Consequently, ECCO focussed production of golf and advanced trekking boots here. Slovakia Set up in 1998, the unit in Slovakia was mainly concerned with assembly and to a smaller degree, shoe uppers. In addition to providing lower cost labour, the unit had the advantage of being located close to the important markets of Poland and Russia. The facility would act as a backup to possible political upheavals in Asia and mitigate the uncertainties arising from unforeseen interruptions. China Although not established by 2004, production facilities had been finalized and planned to be set up in China. ECCO had chosen a site at Xiamen, just North of Guangdong which was supposedly a small yet vibrant community which showed promise and potential. Full scale units supported by an advanced tannery was what ECCO had planned for. The units would serve exports as well as cater to the local markets. Why ECCO should start production in China: * China had recently gained entry into the WTO which allowed for 100% foreign ownership of operations. This was in keeping with their core focus of in-house production and would still allow ECCO to leverage cheap and efficient labour * Chinese markets were growing steadily. Close proximity to the huge market would boost revenues while reducing distribution costs. * It could leverage the established partnership with Aibu and by enhancing the network approach could win the loyalty of Chinese customers. Possible pitfalls and challenges: There was no shortage of local manufacturers trying to copy the ECCO design. ECCO would have to constantly monitor the market scene and spend money on attorneys and litigation to ensure its design is protected against imitation. * Traditionally, ECCO had not spent much on marketing its products. However, to gain share in the competitive Chinese market it would have to aggressively market its brand to carve a nic he for itself. * Since ECCO would be partnering with Aibu for establishing market presence, Aibu would be in a position to wield a certain degree of bargaining power. Advantages of the Global Value Chain Complete ownership of the tanneries enables ECCO to exert stringent quality control on the leather to be used for the shoes. * The tanneries in Netherlands being an important research centre as well, allows access to quality expertise and technical know-how about tanning. * Also, the research facility allows ECCO to explore less polluting tanning processes which would safeguard it against future laws that might restrict polluting practices. * Held-close-to-chest technology and in-house production has given ECCO the competitive edge and allowed huge market share especially for golf shoes. Globalized operations have allowed ECCO to leverage reduced labour costs and proximity to promising markets. * Internationalization has also allowed ECCO to mitigate risk of production interruptions . Drawbacks of the Global Value Chain * ECCO has traditionally not been big on marketing its products, while the competitors thrive on a model driven by marketing. With the changing world environment, this could be risky. * With operations and procurement spread to different parts in the world it takes time to complete the manufacturing process. This leads to an increase in the time to market and could cause depletion in market share. * Bulk of the finished goods are distributed through Denmark, while Denmark accounts for only 6 to 9 % of the sales. Thus the overall cost of distribution would go up. Competitor Analysis Geox Geox owed its success to the perforated rubber soles that included a special waterproof membrane that allowed the moisture to vaporize yet preventing water from entering the shoe. The technology was different from that of ECCO’s and as such allowed Geox its own market share. The production is a mix of in-house and out-sourced while that for ECCO’s is mostly in-house. While the sales were mostly in Italy for Geox, it was increasingly registering growth in the international market. ECCO had a market share of US$ 115 million while the figures for Geox were US$14 million. However, ECCO had only posted a growth of 4. 5 per cent while Geox showed a growth of 250 per cent. Also Geox has decided to lessen its risks by venturing into apparel market. Clarks Clarks was the biggest player in the casual footwear category and displayed a better growth rate than ECCO in 2004 (10. % v/s 4. 5%). Established much earlier than ECCO, Clarks quickly became a global player. Clarks relies heavily on out-sourced production which gives it access to a variety of technologies. However, unlike ECCO, controlling quality of products and material is a significant task for Clarks. Also, this lends a lot of bargaining power to the suppliers. This also implies that Clarks has a pr edominantly marketing based business model as opposed to ECCO that relies chiefly on production of quality goods. Timberland Timberland was a late entrant in the international market. However, with products as diverse as clothing and accessories, Timberland, in 2003, was twice the size of ECCO in terms of product sales. Unlike ECCO, Timberland’s focus is on marketing and has outsourced most of its production. This has led to Timberland having ceded a lot of bargaining power to the suppliers. It lost a lot of margin to the suppliers in the process and was forced to negotiate constantly with the suppliers to achieve normalcy in the cost of goods. RECOMMENDATIONS ECCO has to improve its focus on marketing as well as on branding as with the changing business landscape, it cannot rely solely on the quality of goods especially when international competition is so fierce * Since US is the most lucrative market, ECCO should consider opening up operations in Mexico as the region is close to the US; this would help reduce shipping costs as well as time to market. * ECCO should also look into diversifying into selling accessories and clothing which its competitors have already announced their arrival in.