Strategic analysis of ecco shoes by Daisy Zhang

Strategy Analysis of ECCO Shoes

Daisy Zhang ECCO Sko A/S Words: 3802

Table of Contents

1. Introduction ................................................................................................................................. 1

3 3 4 5 6

2. Macro Analysis ......................................................................................................................... 2-6 2.1 Industry ............................................................................................................................. 22.2 Competitors .......................................................................................................................... 2.3 Customer Profile ............................................................................................................... 32.4 Distribution Channels ....................................................................................................... 42.5 Suppliers ........................................................................................................................... 53. Internal Analysis ...................................................................................................................... 7-

3.1 McKinsey 7-s Analysis ........................................................................................................

7-9 22 10 13

4. Key strategic drivers nowadays to achieve 2020 Strategy ....................................................94.1 2020 Strategy.................................................................................................................... 94.2 Strengths and Weaknesses.............................................................................................. 104.2.1 SWOT Anaysis.........................................................................................................

10 13

4.2.2 Key Strategic driver Analysis ............................................................................. 115 Responses of challenges within 2020 Strategy...................................................................... 13-

16 13

5.1 Challenges ............................................................................................................................ 5.2 Responses......................................................................................................................... 13-

16 6 Conclusion.................................................................................................................................... 16

7 References ............................................................................................................................... 1718

Introduction ECCO Shoes celebrated its 50 years anniversary in 2013. With a humble gesture, the Danish shoemaker was established by the founder Mr. Karl Toosbuy in the rural Southern part of Denmark dated back to 1963. At present, ECCO as a family-owned company, builds its worldwide presence in 90 markets across 5 continents. From ECCOâ&#x20AC;&#x2122;s annual report (2010-2014), the net revenue broke the record consecutively in the last five years and achieved successful result of EUR1169157000 in 2014. The company just spent the most glorious period in the past decade and ready for move on. Nevertheless, ECCO is facing a wealth of challenges in the mid of the dynamics of global economy in terms of its 2020 strategy.

The factory opening in 1960s Denmark The main reason of the selection of ECCO Shoes as the organization is its unique company set-up and the newest 2020 strategy.

Micro Analysis Industry: Shoe is a key component in the broadly speaking apparel and fashion industry. In a nutshell, everyone needs shoes, the global footwear industry continues to see the positive result with roughly 2% growth in 2014 (Ivan, 2014), but already step into a saturation stage without significant revolution recently. Global markets share was controlled by 33% in the USA, women was accounting for 53% of the market segments in terms of sales last year (Zhou, 2014). Apart from women, mens and kids shoes, ECCOâ&#x20AC;&#x2122;s product range also incorporates accessories and shoe care products. Overall the industry can be characterized by a high level of fragmentation and diversification, standardized shoe and accessories business is produced in large volume, exclusive collection and high-end products are produced in low volumes. With few barriers to entry, many competitors attempt to stake a claim in the multi-billion dollar industry (Sweeney, 2009).

In fact, ECCO identifies itself as a producer of shoe and leather goods (ECCO Linkedin, 2015). More interestingly, ECCO is one of the few major shoe manufacturers in the world to own and manage every step of the shoemaking process. Additionally, ECCO can be seen as a high street retailer from a consumer perspective.

Golf and running

Menâ&#x20AC;&#x2122;s casual and formal

ECCO Product Family Key success factors for the industry: Consumer demand: Consumer are looking into niche design and fast fashion trend nowadays, differentiation and availability are listed on the top index regarding customer attractiveness and retention, which requires a company to be innovative and technology-forward, as well as sustain itself with sufficient capability and flexibility upon manufacturing, logistics and marketing. Omni-channel: Connect online to offline and vice versa, what we called the new nature of the retail will seamlessly integrates different touch points and fundamentally change business models across time zone, territory and virtual reality. Globalization: The home markets for European retailers are slowing down and becoming saturated. For ECCO, its Asian performance particularly China showed double digit growth in the last few years (Annual report, 2012-2014). However, sales figure in traditional markets like UK and Germany performed a shrinking direction. Across Atlantic, USA overcame the recession since 2008, became the pilot market and a good performer due to less complexity of culture and language.

ECCO’s top 10 markets 2003-2013, source from ECCO corporate presentation Competitors: The direct competitors are casual footwear retailers Clarks and GEOX on the high street, other dominant sports brands Nike and Adidas cannot be ignored. Timberland and Cole Hann have certain impact on some divisions under ECCO due to a similar positioning. ECCO’s price range (GBB80 to 200) is higher than what Clarks and GEOX stands currently. Consumer profile:

ECCO Campaign 2009 From outside-in, ECCO’s global brand image reflects the core demographic segment in mature to grey markets (generation X and baby boomers), who appreciate comfort with Scandinavian design and

quality. These customers have adequate disposable income, well-educated and well-travelled, they enjoy their life and without heavy life burdens at current stage, therefore they are less price sensitive and willing to pay price premium. Quality, comfort and functionality are their priorities to concern about. Even though, the loyal customers are aging, but younger generation has not been engaged very well. In different regions, for instance, ECCO has strong brand awareness has been perceived relatively young and high-profile in China, which also reflects from the affluence in Chinese young middle-class and their acceptance and confidence of western products. In West Europe, ECCO is assumes as an oldfashioned brand makes granny shoes, especially in young people, that is one of the clue why ECCO are struggling with the traditional markets. Due to the nature of the ECCOâ&#x20AC;&#x2122;s positioning as a premium shoe brand in the mid-range of the fashion pyramid, ECCO may face declining during the recession period. Result from middle-class is financially tightened affected by the economic downturn, and purchasing movement tends to the bottom of the pyramid.

Source from Apparel Supply Chain 2010 Distribution channels: Distribution channels are mainly divided by wholesale and retail channels, in offline and online formats. B2B: ECCO has approximate 9000 wholesale partners with 14000 sales points around the world (Annual report, 2014). For example, large department stores like Macyâ&#x20AC;&#x2122;s, Dillards and Nordstorms; the shoe-only retailers Zappos and the walking company, franchised and dealers controlled stores in China, and the pure e-commerce site such as Boozt.com (ECCO.com, 2015). Different customers have its own bargain powers, depend on the quantity and credit of their buying history.

B2C: ECCO’s official regional or national webshops are supported by Demandware e-commerce technology solution platform globally. In specific markets like China, ECCO collaborates with TMall merchandising and selling in the local preferred way. Its owned and operated brick-and-motars (includes full-price stores and outlets) managed by the company’s retail sector. Suppliers: Homegrown: Asian dominance, European Excellence ECCO operates 5 owned and operated factories and 5 tanneries globally. In Asia, China, Thailand and Indonesia have state-of-the-art production facilities include a factory and a tannery respectively. In Europe, Portugal and Slovakia factory were established due to its unique industry history on shoe production. At the same time, a fully operated Dutch tannery sitting in Southern Netherlands plays as the leather business headquarter. Emerging countries will improve their specialty in industrial manufacturing and the EU will strengthen its technological leadership (Europeanskills council, 2014).

Production Map, Source from ECCO corporate website Leather production: Leather production is a strategic business unit for ECCO’s current setup (Fitzroy, Hulbert & Ghobadian, 2012). In 2014, Apple introduced Apple Watch to the world with reference of ECCO leather, which tremendously brought this hidden business to the front end. Nowadays, ECCO leather procured raw materials from local area (slaughter houses in Europe and Indonesian Jungle) and import rare material like Yak raw hides from Tibet under the legal permission. Raw hides go through a series of tanning process, turn out to be various leather groups catered for different needs of the final products. The leather is widely used to supply its own shoe business and other high-end customers like fashion labels Louis Vuitton and Alexander Wang (eccoleather, 2015). Shoes production:

Shoe production plants were dedicated built for ECCO’s own shoe lines, each factory is mainly responsible for a specific product category, such as Ladies, Mens, Kids, Golf divisions and soles. The groundbreaking Direct Injection technology is ECCO’s unique selling point which other factories are very difficult to copy and implement. Direct Injection is a method that attaching the outer sole when liquid polyurethane is injected into a foot shaped mould forming a sole and bonding directly without glue and stitching and drastically improve the durability and comfort of ECCO shoes (Annual Report 2010, 2011). Outsourcing: The degree of ECCO’s external supply chain dependency is significantly lower than most of the other shoe companies. In China: A trustworthy partner Stella factory in Dongguan is responsible for producing ECCO’s cemented shoes and accessories business, which ECCO’s own factories are not capable to produce. Stella also provides final products to other big global players like Prada, Nike and Adidas. (Chun Han, 2015) In UK: A British shoe care company in Oxfordshire is commissioned to manufacture ECCO’s shoe care range, include clear, care, protect and tools. The indirect procurement department is responsible for sourcing other necessary bill of materials like machines and equipment.

Internal: Based on McKinsey 7-s framework model(Robert, H & Tom, P, 1980) to analyze ECCO’s internal organization traits.

Strategy: ECCO is in the transition of moving toward the ideal scenario of the 2020 strategy, which is an official guideline to drive ECCO to be a consumer-centric, retail-driven, Omni-channelly premium shoe and leather goods company. The strategy will be evaluated later. Structure: The organization is designed in following departments in the matrix organizational structure (Bierman, G & , 2006, pp 180): Brand and Product(DK), Global Production(NL), Global Sales(NL), Group Finance(DK), Group Supply Chain(SG), Group IT(DK), Group HR(DK), Group Strategy and Planning(DK), Group Communication(DK), Legal and Compliance(DK) and Indirect Procurement(DK). It is consistent with the overall need of ECCO globally. The governance is dependent on the supervisory board and managing boards who represent Product, Sales, Finance, Production departments respectively, managing boards have extensive background in the industry and work for ECCO for at least 10 years. ECCO has three core business management regions includes EMEA (Europe, Middle East and Africa) based in Netherlands, EAM (America) based in USA, and EAP (Asia Pacific) based in Singapore and China. Business units under each region have its own general manager or president.

Source from ECCO corporate website

Systems: SAP Enterprise Resource Planning system has been rolled out globally, this is the internal website for ECCO all business activities, master database, employee services and so on. Shared value: passion, heritage, excellence, innovation, care. Staff: ECCO employs more than 18500 employees from more than 50 nationalities. Employees are from different cultures, who expect different motivation and reward systems. English is the corporate language, which significantly simplifies the business exchange within the company. But ECCO is in shortage of highly-skilled workers in some functions. Skills: Skills aligned with company’s operations. But ECCO is lack of resources in certain departments. Style: ECCO’s managerial style can be described as democratic, approachable but chaotic management style. Danish communication is pretty straightforward and equal, there is no hierarchy issue in ECCO’s headquarter. Board meetings occur every two weeks, however, the decision making process is centralized and internal. According to Witcher and Vihn (2010), strategy plans should be implemented incrementally rather than pre-determined by top-down master plan. Managerial attitude towards risks shows actively, as an example of 2012 ECCO Thailand flooding, the whole management team fast reacted and united, physically visited Thailand to determine the rescue, renovation and contingency plans (Annual Report 2012, 2013)

Key strategic drivers nowadays to achieve 2020 Strategy: A strategy involves a goal and an orientation for an organization, would determine the organization revolution (Robert, 2006, pp33). In the annual report 2014, ECCO came up a 2020 strategy looking ahead of company’s future outlook last year. 2020 Strategy Brand Go-To-Market Develop ECCO’s premium Become a truly vertical retailer by position and make it consistent owning and operating 50% of all Be recognized as a driver of consumer sales groundbreaking innovation in Build ECCO’s O&O digital business to the shoe industry EUR 200m Be sold through conceptual sales via brand and concept solutions Aim to invest 2/3 of all future investment funds in consumer-facing activities Transform traditional wholesale value chain into retail-driven model Products Company Become the market leader in Focus on simplicity and disciplined relevant market segments for execution ladies’shoes ECCO will have independent business Build up a credible Leather units for Leather Goods, Leather, Kids Goods business and Outdoor Drive value before volume, and increase profitability over time

In summary, Long-term Objectives (2020 strategy): To be a consumer-centric, retail-driven, Omni-channel ready premium shoe and leather goods company. Annual Objectives: Expected revenue growth, build competencies, tools and processes towards longterm objectives

Strengths and Weaknesses ECCO SWOT analysis Strengths Strong financial performance Global footprint Firm control of the value chain Strong brand image in Asia

Weaknesses Weak brand image in Europe Less flexibility in production Lack of expertise especially in IT

Opportunities Emerging markets E-Commerce and M-Commerce Leather and leather goods business Demographic development (Attract young and female consumers

Threats Mature market with severe competition Unexpected global turmoil Rising wages especially in Asia

From cow to shoe, owned and operated model means less flexibility but much control

As mentioned at the industry chapter, ECCO hold the entire value chain firmly from the hides to high street, which is not common for a shoe company. ECCO’s founder Karl Toosbuy (1928-2004) is a visionary entrepreneur and leader when it comes to expand the businee globally and control the quality of the every single business process, the method reduces the external influence and save the cost in the long run. The company is reputable of the good treatment for local employees and environment. The newest ECCO factory is in China and traced back to 2005, that was the first foreign company ever opened a factory in the Tong’an District, Island of Xiamen, at Fujian province in China. Through a year permission battle with the Chinese government (Annual report 2005, 2006), eventually ECCO successfully surpassed the local standard because of the high-ethical code of conduct and advanced environment-friendly production. It produces quality shoes as same as other ECCO production plants, likewise benefits the local employment market and economy. In 2012, a devastated flood hit the entire ECCO production unit in Thailand and ruined more than half of the production capacity there. This resulted in splitting production load evenly in each unit signed off by the management later on (Annual Report 2012, 2013). That is each factory would not share more than 25 percent of the total production amount. The wage level is constantly increasing in Asia, especially has an effect on large-scale manufacturing. For example China is not an absolute paradise anymore for manufacturing, the average annual salary is three times more than India and two times over Vietnam (China Briefing, 2014). It’s relatively easy for companies that operate in outsourcing-model to reinvestigate the location strategy and response swiftly by changing partners and so on. But with the huge amount of CAPEX investment, ECCO are not able to afford switch to even cheaper country overnight. Strategic location deployment needs seamless communication and cooperation

ECCO’s headquarter is still located in the unknown Southern Danish town Bredebro, with only 1500 population residing over there. 50 years ago it was an undeveloped area where easily built infrastructure and took advantage of local farming labor forces. There are two ECCO subsidiaries(KT trading and Accessories unit) in the Swiss tax heaven Zug, North America regional headquarter in New Hampshire(close to Boston) was chosen for the tax-free policy as well, which was a strategic decision for a high-tax Denmark-based company. For industry oriented reasons, ECCO EMEA is based in Amsterdam Arena area, other competitors e.g. Nike and Adidas have offices nearby. New Hampshire where ECCO USA is situated along with the adjacent Massachesetts, are the base of Cole Hann, Nike and Timberland’s head office. ECCO Xiamen, in the area of Fujian province of China where is famous for shoe production and wholesale. Intelligent utilization of the unique resources in different regions benefits for the global expansion and penetration, as the same time spread the share of risks. Indispensably, it’s necessary to take time difference, cultural understanding, political issues within different departments into account for a multinational billion DKK business. An example is ECCO’s headquarter in Denmark does not contain a sales function, the Global Sales HQ based in Amsterdam and other regional and national sales people remotely deal with the daily business flow, how sales people better convey the core value of the shoe to their customer, which needs accurate and iterated spread of information. ECCO sees itself as a big family, whereas family members need to be taken care, frequent travel and constant virtual communication are largely needed, in a way it increases the cost and complexity of operation.

Danish mentality doing business Among top 10 Danish homegrown companies, 6 of them are family-owned (ProDenmark, 2013). ECCO’s owner Hanni Toosbuy who is the daughter of the Company’s founder was listed No. 5 richest person in Denmark in 2014, which to a certain extent indicates that the Danish corporates are not only more centralized and lack of openness, but also carry little debt and cautious on investment. On the other hand, regarding the succession of ECCO’s business, owner’s next generation will be appointed technically. For sure the way how they will be gradually involved in the family business and convince key stakeholders and employees by their competency and charisma and does require a carefullyplanning and implementation. Danish conglomerates like Novo Nordisk, Arla Foods, Bestseller fashion Groups and ECCO all provide a comprehensive and global rotational graduate programs and recruit talents worldwide. A welldesigned International trainee program help the young and ambitious talents to become the next generation future leaders. Selected trainees from ECCO go through the entire value chain, from production, retail, headquarter to sales in at least three countries within two to three years. The best proof is two of the ECCO’s vice presidents are recruited from the first batch of trainees traced back to the year of 1991(Annual report 2013, 2014).

Responses of challenges within 2020 Strategy Challenges Inconsistent brand positioning and brand execution globally Readiness for new channel (digital business, Omni-channel) New points of growth Underutilisation of potential in key markets and overdependence on other key markets and partners Responses Vertical Integration: Direct to Consumers By 2020, ECCO expects to reach a direct to consumer share 50% (Annual Report, 2015), which means 50% sales will come from the end consumers via own and operated shops and e-commerce. In other words, ECCO is aiming for converting the wholesale driven model into retail driven model, thereby investing aggressively on IT infrastructure to support online channel and real estate to lay a solid foundation for offline channel store opening and renovation. This implementation will be helpful to refine brand image without agreement externally and expect to have more profit in a long-term return of investment, which could be effectively reduce dependency of demanding customers. An issue need to be addressed is that wholesale business cannot be neglected, by influencing Tier 1 and 2 key accounts and upgrading agreed partners to a visually-neat and high quality point of sales, which is align with ECCO aspiring brand image as what implements in its owned and operated store. Even the company would like to hold hands with consumers, there seems no consideration in the 2020 strategy roadmap related to business intelligence and consumer insights, which has been acknowledged very important in analyzing what consumers needs and the buying trends. These are awared by some of the ECCO’s competitors (Nike, 2014). Product Diversification: Ladies and Accessories

Women purchase more frequently and spend more time on shoes than men, mentioned in the industry analysis above, the ladies shoes occupies half of the entire market value (Zhou, 2014). In 2020 strategy, ECCO will place more emphasis on Ladies division that might help ECCO to reach a broader sphere customers and increase profit. In addition to that, ECCO will be leveraging the position as a leather goods company which is not only shine shoes out. Take advantage of the ECCO Leather, with a good match of accessories and shoes, ECCO is full of potential to cross-sell the whole product line to its loyal customer and attract new customers. In this approach, it is smart to cultivate ECCO Accessories become the next strategic business unit and prioritize women division for the future growth pillar. Although ECCO is aiming for grab ladies and accessories lovers, ECCO is the top five golf shoes producer around the world, Golf is not necessarily a lucrative business but an essential section for branding and reputation. ECCO;s Kids shoes are only available in Europe, which can be taken more great jump, ECCOâ&#x20AC;&#x2122;s target consumers normally have family and kids, indirect shopping

Horizontal Expansion: Go East and Go West ECCO Net Revenue by Region (Annual Report 2013, 2014) Russia Ukraine crisis increases the uncertainty of the business. Russian tourism spending drastically dropped (Bearno, 2014). Domestically ECCO is one of the leading European brand in Russian, which had predicted to be a smooth year and produced a large quantity of stocks dedicated for Russian market in 2014, eventually caused problems in demand management and sales. The turmoil continues to have an impact in 2015, in regards to how to move the out-seasoned inventory and revive the business, and shift focus on other key markets (Annual report 2014, 2015). 2020 strategy indicates ECCO is concentrating on balance the market reliance in the future. ECCO is struggling with the current negative economy in Europe. It looks gloomy with the decrease value of Euros and slow stock movement in the European store front. In Denmark and few other EU countries, the central bank started impose negative interest rate in the early 0f 2015(The Economist, 2015). Even though, EMEA (include Russia and Ukraine) still takes up the largest market share in ECCOâ&#x20AC;&#x2122;s revenue development but is the only region demonstrates declining tendency (Annual Report 2014, 2015). The Asia Pacific region remains the point of focus for footwear manufacturers due to the cheaper cost of manufacturing and faster growth in population and disposable income of consumer groups. Put effort on the awakening North America and slowing down yet still growing Asia are more optimistic to help ECCO bridge the gap and seize the future. Apart from existing markets, Central and South America, Central Asia are other emerging and untapped regions which are calling to attention in terms of global retail development (ATKearney, 2012). ECCO has no apparent actions in the future strategy, which could be reviewed and added on the roadmap. 16

Notes: The above three highlights all require dedicated and skilled new employees on board and training for existing global workforce. A series of organizational change management is foreseen. But the coordination and effectiveness cannot be justified at this moment.

Conclusion Next 5 years is a vital phase for ECCOâ&#x20AC;&#x2122;s transformation and future growth, ECCO has great possibilities in multi-facets to achieve its internal financial and organizational objectives. The positive growth in the past guarantees ECCOâ&#x20AC;&#x2122;s financial health for investing the future, with the ambition in place and a streamlined and leaned organization governance and maintenance model to be adjusted, the continuing global development is expected to be realized by 2020.

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