Course: International Business Strategies

ECCO. Strategic Analysis Example

Introduction
ECCO, a global manufacturer and a supplier of shoe products, wants to expand into the
Chinese market to increase its export to major markets and also increase product sales among
Chinese consumers. But many Chinese manufacturers imitated the product design and
features of ECCO increasing the intense competition for the company in the Chinese market.
Also, ECCO for years has a sole focus on increasing the quality of the shoes manufactured by
using its sophisticated in-house “direct injection” technology. But the company cannot only
thrive on its quality unless the company’s efforts to ensure quality are not communicated to
the consumers. Thus, the company focused less on marketing operations that is evident from
its low marketing budgets as compared to its competitors.

Also, the most of the products manufactured in four production facilities outside Denmark
were distributed through its distribution centre in Tonder, Denmark where only six to nine
percent of total production was actually sold. Thus, ECCO became inefficient to fulfill the
replenishment orders that had to be delivered within a few days’ notice. Thus, the main
challenge for ECCO is to focus more on the marketing operations of its products & remove
the inefficiencies in its in-house “cow to shoe” value chain that converts the raw hides
procured to the finished goods.

ECCO has various options to overcome the challenges and significantly increase the market
share in Chinese geography. One option can be to hire a marketing agency to increase its
marketing operations in China thus informing consumers about its unique value chain &
overall quality of products. Also, ECCO can focus on establishing a distribution centre in
China to reduce the time to ship the shoes manufactured to distribution centre and from the
distribution centre to the retailers. In addition, company decide to obtain patents for its
technologies in order to take legal action on the Chinese manufacturers who imitate the
product features and design of ECCO’s shoes.

Company’s Profile

Karl Toosbuy founded ECCO in Bredebro, Denmark in 1963. The company’s goal is to
develop shoes that are pleasant to work regardless of the weather conditions. The company
produces various types of shoes including casual and outdoor shoes for men, ladies and
children, as well as semi-sport shoes (outdoor, walking, running & golf shoes) for two
different seasons – spring/summer & autumn/winter. Although the sales of shoes for ladies
recorded the highest percentage of overall sales in 2004, the Golf shoes recorded a significant
growth & were preferred by more than 90 percent of golfers over other brands.

ECCO exported 90 percent of its production mainly to United States, Germany & Japan,
with the American market being the most lucrative due to higher selling prices of shoes.
ECCO maintained focus on the entire value chain of the shoe manufacturing by buying raw
hides and transforming them into various kinds of leather usable in shoe manufacturing,
unlike competitors in the industry that outsourced production to a large extent. The company
owned tanneries that supplied leather to production plants over the world. Leather constituted
the main material that was produced at ECCO’s production sites. ECCO’s production process
is divided into five strategic phases: full-scale, benchmarking, ramp-up, prototype and
laboratory production. Also, the company focused on R&D activities at the production sites
for optimization of materials. Tannery operations were divided into phases such as prototype,
laboratory & ramp-up production of leather. Finished Shoes were distributed via sales agents
& company’s distribution centre. ECCO has two distribution centres, one in US and other in
Denmark.

ECCO manufactured 80 percent of its shoes using “direct injection” technology which was
hard to imitate. As ECCO was willing to keep the production in-house, it began co-operating
closely with an Italian company Main Group specialized in injection machine molds &
services for footwear. ECCO also established 26 sales subsidiaries around the world and 4
international production units each in Portugal, Indonesia, Thailand & Slovakia with the main
objective to reduce labour costs & to distribute risk. The Portugal plant was more focused on
technology that transformed the plant into EECO’s leading developer within laser technology.
Production site in Thailand was successful in terms of output, employee satisfaction and size.

ECCO established production facilities in China due to 100 percent ownership of production
sites & 50 percent of world’s shoe production was manufactured in China. Access to local
manpower, not low labour costs & taxes, was the main factor to establish operations in China.
ECCO formed a sales subsidiary in China together with Aibu to increase sales of shoes to
Chinese consumers & encouraged a network approach to gain the loyalty of Chinese
consumers.

The industry was highly competitive & subject to frequent changes in consumer preferences
that sparked investments in both cost optimization and new technologies. Although
pinpointing ECCO’s competitors was a challenge, ECCO regarded Geox, Clarks and
Timberland as its main competitors.
PORTER’S FIVE FORCES STRATEGIC ANALYSIS

Threats from new entrants * Medium threat of new entrants. * New entrant will take some
time to manufacture and distribute products globally * Many manufacturers imitated the
ECCO’s design of products * Entry of new players easily available in China. | Competition
and Rivalry * Threat of New Entrants

Competition and Rivalry is intense as many competitors provide the same set of products. *
Industry is also subject to changing consumer preferences * Company forced to focus mainly
on optimizing costs and explore new technologies * Many Chinese manufacturers were
copying the ECCO design of products * Company ventured into new segments of shoes
giving rise to new competitors |

Bargaining Buyer Power

Bargaining power of buyers * High bargaining power of buyers * Many players manufacture
the same line of products * Threat of Substitutes

Bargaining Supplier Power

Bargaining Power of Suppliers * Low bargaining power of Suppliers * 80% of the production
is in-house only 20% is outsourced * Many suppliers providing the raw hides or finished
goods * The company has alternatives to find other suppliers who charge lower price Threats
from substitutes * Medium threat of substitutes * The difference between athletic & lifestyle
casual footwear diminished slowly. * Consumers can switch to either line of products when
required. |
Competition and Rivalry
Consumers has many options to select from the same line of products * Consumer can easily
switch to competitor’s products when required * Consumers are price sensitive and are well
informed about the products |

Outcomes of Porter’s Five Forces

* ECCO should focus on differentiating itself from competitors in the market by marketing
its products as high bargaining power of buyers can attract new consumers and thus gain a
significant market share.

* ECCO should devise a strategy to avoid the imitation of its product features and design by
Chinese manufacturers.

* ECCO should also focus on reducing costs in its “cow to shoe” value chain as it can thereby
decrease the cost of shoes sell to the consumers. As consumers are price sensitive, ECCO can
have a significant growth in the industry.

SWOT ANALYSIS

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 | 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 |

Evaluation of Alternatives

* Increase Focus on Marketing Operations: ECCO should focus more on marketing

operations by hiring a marketing agency to develop a marketing strategy that focuses on the
in-house production that leads to high quality shoes.

Pros: Company will be able to differentiate itself from the competitors and thus able to gain a
significant market share.

Cons: Company will incur higher marketing expenses in addition to the present investment in
setting up production facilities in China.

* Improve Efficiency of Distribution System: ECCO should open distribution centres in

China in addition to production facilities in China so that the transportation time of finished
goods from production facilities to distribution centres and from distribution centres to
retailers is reduced.

Pros: Overall transportation cost will be reduced and thus company will better be able to
serve Chinese and Japanese Markets.

Cons: Cost to build and operate a distribution centre will be incurred by the company.

* Strategic alliances: Company should form strategic alliances with local retailers to
understand the local consumer needs of the market such as Japan, European countries it
operates in.

Pros: EECO will be able to understand changing consumer preferences and gain a significant
market share in the region.

Cons: Wrong Strategic alliance can lead to loss of market share and can deny further entry of
the company in the region.

* Procurement of other raw materials: ECCO should procure raw materials like Granulate &
Gore-Tax from local suppliers of China or other nearby Asian countries.

Pros: Transportation time and cost to send the raw materials to the production facilities
located mainly in Asian countries such as Indonesia, Thailand and China.

Cons: Company needs to employ more staff to negotiate with local suppliers and also need to
ensure the quality of such raw materials that may affect the quality of finished goods
produced.

* Register Patents: ECCO can register patents for their “direct-injection” technology that is
known to many players in the market.

Pros: Company can take legal action to the Chinese manufacturers who are imitating the
product design & features of ECCO’s shoes.

Cons: Company will encourage innovate only in-house and will thus avoid any innovations
from person outside the company’s environment that may enhance the technology in near
future.
Recommended Strategy

ECCO focused mainly to offshore their production facilities to reduce labour costs but are
now planning to operate production facilities in China in order to also gain a significant
market share in the Chinese market.

EECO can capture the Chinese market by reducing several costs in its production value chain
by following steps:

* Hire a local Chinese marketing agency to market the shoes manufactured in the Chinese
market and inform consumers about their unique in-house production value chain that
enhances overall quality of products.

* Operate a distribution centre in China to distribute the manufactured goods from Chinese
production facilities in lesser time to retailers.

* Procure raw materials such as Granulate & Gore-Tax from China to reduce transportation
cost from suppliers to distribution centre and from distribution centre to the retailers.

* Obtain patents of their “direct-injection” technology to avoid imitation of the technology by

the Chinese manufacturers.