Value Chain Analysis

Analysing ECCO's Value Chain
MGMT910 Term Paper Assignment
Group 1
Rev PA1
Page 1 / 11
Executive MBA
Graduate School of Business
Koç University
Group 1 Members:
(in Alphabetical Order)
Batuhan Çelik
F. Semin Bal Sözen
Hakkı Karabay
Hasan Basri Akırmak
Kadir Öğüt

Page 2 / 11
Koç University EMBA'12 - Group 1
Contents
1 Synopsis ...............................................................................................3
2 Overview of ECCO................................................................................3
3 ECCO’s Competitive Environment......................................................4
3.1 “High” Existing Competitive Rivalry.........................................................4
3.2 “Low” Power of Suppliers .......................................................................4
3.3 “Medium” Bargaining Power of Buyers ...................................................5
3.4 “Low” Threat of New Market Entrants.....................................................5
3.5 “High” Threat of Substitute Products.......................................................5
4 ECCO’s Global Value Chain.................................................................5
4.1 Primary Activities....................................................................................7
4.1.1 Leather Production (Tanneries)..............................................................7
4.1.2 Shoe Production.....................................................................................7
4.1.3 Distribution .............................................................................................7
4.1.4 Sales......................................................................................................8
4.2 Supporting Activities...............................................................................8
4.2.1 Infrastructure..........................................................................................8
4.2.2 Production & Logistics............................................................................8
4.2.3 Brand and Products................................................................................8
5 ECCO’s Cost Structure ........................................................................8
6 ECCO’s Inside Out Strategy ................................................................9
7 Answers to Questions........................................................................10
8 References..........................................................................................11

Page 3 / 11
1 Synopsis
This report analyses the ECCO’s Competitive Advantage using Porter’s 5 Forces, depicts
ECCO’s Global Value Chain, and describes the Inside-Out Strategy. It is prepared as part
of the MGMT910 International Business Course. The assignment questions are answered
at the end of the report.
2 Overview of ECCO
ECCO, a world leading brand of shoes combining style and comfort, has built its success
on uncompromising quality, innovative technology and the design philosophy: “the shoe
must follow the foot” [4].
From the first day of its foundation in 1963, ECCO’s main design principle is to increase
the usability of the shoes and customer comfort. Primarily, they sell high quality shoes and
that is where they seek recognition.
With the understanding of everyone is the target, ECCO’s customer oriented value chain
became the most important tool for their success in the value-adding activities of the
organization. ECCO is the only major shoe manufacturer to own and manage every step
of the shoemaking process.
As a family-owned company, ECCO products can be found in 4,000 branded sales
locations in over 90 countries, a growth fueled by ECCO’s consistent aim of making the
best shoes in the world. ECCO is the 3rd largest producer of casual footwear in the world.
ECCO is the 4th largest golf shoe supplier in the world [4].

Page 4 / 11
3 ECCO’s Competitive Environment
Michael Porter's famous Five Forces of Competitive Position
model provides us a simple perspective for evaluating the
industry attractiveness and analysing the competitive
strength and sustainability position of a corporation or
business organization [1]. Therefore, Porter’s 5 Forces
Analysis have been performed for ECCO:
The global footwear market is highly competitive and
fragmented with a few major players and a seemingly
endless array of smaller players, including designers,
marketers, manufacturers and retailers, all fighting for share.
By looking at each forces, we observe the following
situation:
3.1 “High” Existing Competitive Rivalry
ECCO’s main competitors were evaluated by ECCO as Geox, Clarks and Timberland.
Market competition and quest for catching consumer preferences resulted in investments
in cost optimisation and seeking for new technologies by players. Lowering costs and
reduction of supply chain time to market are the key targets to get competitive pricing.
Players are investing in new technologies, improved customer services, and market
knowledge.
Athletic and lifestyle casual footwear became indistinct lately. There is a direct competition
in athletic products between ECCO and financially strong shoe companies like Nike and
Reebok caused by ECCO’s foray into golf shoes.
Boundaries between footwear categories and sales regions are also blurred. Therefore,
we concluded the threat of competitors to be “High”.
3.2 “Low” Power of Suppliers
Most of the companies in the sector have supplier networks and processes. For example,
Timberland has 60 suppliers who are subject to rigid quality control management. In order
to monitor this network, important resources are allocated and this resulted in extra costs
for firms. What’s more, price increases affects the vulnerability of the firms. Monitoring
market prices closely and more interaction with suppliers are vital for the firms
outsourcing.
However, firms like ECCO, which have their own tanneries are less dependent on
suppliers. Therefore, we evaluated the power of suppliers to be “low”.

Page 5 / 11
3.3 “Medium” Bargaining Power of Buyers
Retailers usually order a large proportion of shoes in advance. For example, %75 to %80
of ECCO’s production is ordered in advance, while 20 to 25 percent of orders are targeted
to fill up the stocks [2]. In addition to this, auto and furniture industries are also leather
buyers [2]. Therefore, we determined the bargaining power of buyers to be “medium”.
3.4 “Low” Threat of New Market Entrants
Brand awareness requires different levels and combinations of brand recognition and
recall. Footwear industry is working on brand identity so recognition of a brand takes time
and investment costs to a new player. Furthermore, it is a very capital intensive industry
so being a reputable player in this sector entails strong commitment, despite the tax
benefits and government concessions which are available in countries like China. To
conclude, our comment for the threat from new competitors is “low”.
3.5 “High” Threat of Substitute Products
The main threat as a substitute is the Chinese counterfeit market. These imitated products
resemble the original ones and are much cheaper. Availability of fake products in regular
markets impacts the brand image of the products as well. For example, During 2003/2004,
ECCO had been bothered with Chinese manufacturers copying the ECCO design [2].
They tried to protect company’s brand and design via special units of attorneys.
Non-leather products are also a threat for ECCO. Protests of Animal Rights activists
against leather products are also affective on diverting customers to substitute products.
Finally, certain footwear segments (open footwear, sandals etc.) became more popular
recently. These segments impact the casual and leisure products segment’s sales
volumes.
To sum up, we evaluated the threat of substitute products to be “High”.
4 ECCO’s Global Value Chain
The value chain provides a tool that firms can use to determine their source (current or
potential) of competitive advantage. Porter used the framework of value chains to assess
how a firm should position itself in the market and in the relationship with suppliers, buyers
and competitors either through cost advantage or differentiation [1]. We observe the
following characteristics of ECCO’s Global Value Chain:

Page 6 / 11
ECCO maintains focus on the entire value chain with a philosophy of integrating it from
cow to consumer” globally [4]. The competitive advantage of ECCO can be summarized
as producing high quality shoes so that customers are willing to pay a premium price. The
main forces driving ECCOs ‘globalization’ of the value chain are the establishment of a
market presence, and reduction of labor costs and increasing flexibility [2].
Following diagram depicts ECCO’s global value chain: The support activities are inferred
from the ECCO’s organization chart. The primary activities are inferred from the company
web site.
The diagram below depicts the value chain components’ spread into countries. The values
in parenthesis indicate the year of construction:
Margin
Global Value chain
ecco
TEXT
Distribution
ShoeProduction
LeatherProduction
Martketing&Sales
Infrastructure
Production & Logistics
Brand & Products
Margin

Page 7 / 11
Netherlands
(2001)
Indonesia
(1991)
Thailand
(1993)
Portugal
(1984)
Slovakia
(1999)
China
(2005)
Americas
(1990)
EMEA
(1996 onwards)
Asia Pacific
(2002)
China
(2008)
Indonesia
(1992?)
(Uppers) (40-50%)
Thailand
(Uppers, Compl.
shoes) (37%)
Denmark
Distribution
Center
Denmark
(1963)
Rawhides
Reinf.
Yarn
Accessr.
From
Europe:
Local
Procurement:
Granulate
Gore-Tex
US
Distribution
Center
Retail Sales
(Shoes)
Wholesale
(Leather)
Purchased
Leather
Leather
Production
Raw Materials
Shoe
Production
Distribution Sales
Global Value chain
ecco
Each value chain component is studied below:
4.1 Primary Activities
4.1.1 Leather Production (Tanneries)
ECCO’s strategy of controlling the entire value chain includes investments in tanneries
and leather production.
The 85 % of ECCO’s leather consumption is produced in own tanneries in four countries
(the Netherlands, Indonesia, Thailand and China). The remaining 15 % is purchased
externally. 38% of the leather production is sold to 3rd parties [3].
4.1.2 Shoe Production
ECCO’s Manufacturing facilities are spread into 6 countries. New shoes are developed
and designed in Denmark and Portugal. Production takes place in four main factories in
Thailand, Indonesia, Slovakia and China. ECCO Indonesia is ECCO’s largest production
unit [3].
4.1.3 Distribution
ECCO has two main distribution centers (Denmark and USA) which serve the 56
subsidiaries [3].

Page 8 / 11
4.1.4 Sales
ECCO products can be found in 4,000 branded sales locations in over 90 countries [4].
4.2 Supporting Activities
4.2.1 Infrastructure
Quality is the key differentiator to the company. Quality management is maintained by full
vertical integration. ECCO sees employees as a core asset and invests into their
competence development by regular trainings and collaboration among different units.
4.2.2 Production & Logistics
Coordination among many production units are handled by use of technology. ECCO
owns distribution centers for delivery of final products to retail stores.
4.2.3 Brand and Products
New products, prototypes are carried out in Denmark and outcomes are shared with
production sites.
5 ECCO’s Cost Structure
As ECCO is a family owned company, there was no disclosed information about the value
chain cost structure. Our efforts to contact ECCO Corporate Communications contacts
also did not yield any results.
In our internet research, we found out a cost structure for the shoe industry [5].

Page 9 / 11
Figure 1 - Cost of a Shoe Sold in US & Made in China
We do not have evidence that it is fully applicable to ECCO, however, we assume that this
is the case.
By looking at the production activities, the relatively high cost of materials (8%) compared
to the production costs (1.5%) indicate why leather production is of importance to ECCO.
The distribution costs (5%) are high, because our source assumes that the production
takes place in China [5]. The retail stores incur 50% of the total costs.
The shoe industry’s average margin is 13.5%. This is inline with ECCO’s Operating
Margin for ECCO (2010 value is 10.7 %) [3].
6 ECCO’s Inside Out Strategy
ECCO group is known selling for high quality shoes instead of being a fashion brand in
the market. Inline with this strategy, ECCO has a limited product range (casual, formal,
sports for men, ladies & kids).
Distribution
ShoeProduction
LeatherProduction
Martketing&Sales
8 % 1.6 % 13.5 %58.5 %5 %

Page 10 / 11
Although the market trends were changing and more elegant products were being asked
at the end of 1990's, ECCO group could be deemed as still conservative to move on their
original path of ECCO's top priority of usability and quality.
However, following the death of Karl Toosbuy in 2004, ECCO's move on becoming a
more market oriented company is observed. The main reason behind this might be the
new CEO, Dieter Kasprzak, who had spent 23 years in ECCO, primarily as design,
product development and branding lead. Kasprzak's vision was to make individually
based shoes fine-tuned to each customer. ECCO would produce individual shoes as per
consumer's preferences with its technology. For this reason, firms like Nike, Reebok,
Adidas, Clarks & Timberland, which have market oriented business models, have been
followed, however ECCO's main philosophy was being kept as same.
Therefore we concluded that ECCO follows a product oriented marketing strategy until the
end of 1990's. And, due to the changes in consumer preferences pertaining to casual
footwear, searching for much elegant products and excitement of customers and
marketing budgets and margins, ECCO intends to act as a market oriented company
starting from early 2000's with the new CEO.
7 Answers to Questions
1. Describe the competitive environment of ECCO and determine how well ECCO is
positioned (vis-à-vis the competitors) to take advantage of changes in the industry.
As can be seen from our 5 Forces Analysis in Chapter 3 ECCO’s Competitive
Environment, there is a high industry rivalry. ECCO follows a differentiation strategy
and full vertical integration, which brings several advantages such as full control over
quality, maintaining end to end shoe expertise, having direct interface with customers
through ECCO owned brand stores.
2. Design ECCO’s Global Value Chain.
Please refer to Chapter 4 ECCO’s Global Value Chain and Chapter 5 ECCO’s Cost .
3. Is ECCO following the inside--‐out or outside--‐in strategic perspective? What
are the implications of this choice and how can ECCO increase their
sales/marketing efforts?
We believe that ECCO is following an inside out (product driven) strategic perspective.
But we also believe that with the new CEO, ECCO investigating the outside in (market
driven) strategic perspective (such as producing customizable shoes for the
individual). For a detailed analysis, please refer to Chapter 6 ECCO’s Inside Out
Strategy.

Page 11 / 11
8 References
[1] Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard
Business Review, January, 2008, p.86-104. http://hbr.org/2008/01/the-five-
competitive-forces-that-shape-strategy/ar/1
[2] Nielsen Bo B., Torben Pedersen et.al, ECCO A/S — Global Value Chain
Management, Ivey Management Services, http://hbr.org/product/ecco-a-s-global-
value-chain-management/an/908M14-PDF-ENG (Harvard Business School CASE
Study)
[3] ECCO A/C Annual Report 2010, http://www.ecco.com/en/Media-Center/Annual-
report
[4] ECCO Press Kit, http://ecco.com/en-XI/Media-Center/Press-Kit
[5] Costs of a Shoe Sold $100 in the United States and Made in China, The
Geography of Transportation Systems, Hofstra University
http://people.hofstra.edu/geotrans/eng/ch5en/appl5en/costs_shoe_China.html

Value Chain Analysis

More Related Content

What's hot (20)

Viewers also liked (20)

Similar to Value Chain Analysis (14)

More from Hasan Basri AKIRMAK, MSc,ExecMBA (6)

Recently uploaded (20)

Value Chain Analysis