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ECCO A/S-Global Value Chain Management

Jean-Christophe Gedeon Lacrampe

ECCO is a Danish company founded in Bredebro in 1963 by Karl Toosbuy with the vision of producing the worlds most confortable and modern footwear for work and leisure. In order to accomplish this long-term goal, the company decided to control every aspect of its production where most of its competitors were outsourcing parts of the production. Consequently, ECCO achieved a fully integrated vertical value chain where its competitors, Clarks, Geox, Timberland and later on Nike or Adidas, were viewed as branded marketers meaning that they were in charge mostly to develop the brand and distribution while outsourcing many steps from the production process. The ECCO group produces high quality footwear for ladies, men and children mostly in the casual style. The group has also developed a sport division to its offering that accounted for 12 per cent of their sales in 2004, with golf shoes experiencing a substantial growth. However, Ecco, as stated by its executive vice-president Soren Steffensen is not a fashion brand and never will be. High quality has been attained though their specific and unique production system which is almost fully owned and ultimately totally controlled. Ecco has developed a distinctive expertise compared to its competitive environment by creating special technology in the production process, such as the direct injection. Production technology is considered as key asset to the company. The creation of a global value chain has been implemented during the internationalization of the company. The internationalization of ECCO started in Brazil in 1974 by exporting and moving some part of its production. The objectives of this process were to establish a market presence internationally while striving to reduce labors cost and increase flexibility. Later on, the group relocates part of its production in Portugal in 1984 due to cheap labor cost. In 1991, ECCO expand to Indonesia to produce the upper part of shoes. Thailand was the next step in 1993, this expansion was really successful thanks to the quality of the employees who were able to deliver first class workmanship, leading ECCO to concentrate the production of its most complicated model there. In 1998, the company opened a facility in Slovakia, motivated by low labor costs and to gain access to Russian and Polish markets. In addition the increasing labor cost in Portugal pushed ECCO furthermore to this relocation. Finally after extensive research and Chinas recent membership of the World Trade Organization, which allowed 100 per cent foreign ownership of the production sites, ECCO decide to establish production facilities in China. This decision was motivated by the access to local manpower with low wages and taxation and also to develop sales in this immense growing market. The ECCO Chinese move is huge and risky, the plan was to build fives factories over the next five years which represent a total investment of approximately DKK 500 million. Ultimately, the Chinese production site should become the largest one for the company. Over 25 years, ECCO has established 26 sales subsidiaries worldwide and has permitted to create may be the first global integrated value chain in this industry. The family ownership structure kept by ECCO might also explain certain of their decision such has the vertical value chain. In fact as previously said, ECCO is mostly the only company who had chosen this strategy to strive for high quality by integrating a global vertical value chain. This choice might not have been made if the company had decided to go public and faced the pressure from its shareholders who usually are more into short-term return than a long-term vision. In addition, having a vertical value chain increased ultimately costs over its competitors. As explained by Karl Toosbuy, this structure allows the group to take higher risks and to act

ECCO A/S-Global Value Chain Management

Jean-Christophe Gedeon Lacrampe

instead of wait. Most key positions were kept internally, structure were developed to improve the flow of expertise through the group. However the family structure doesnt have only advantages, which might explain why corporate ownership is highly more popular for MNE. Indeed, this structure allows keeping employees more competitive and to avoid unneeded family issues but it let also the company to possibility to leverage more financial resources, which could be crucial and needed for MNE to expand, especially in this highly competitive industry. The competitive landscape for ECCO is defined by intense competition in both cost optimization and new technologies. The main competitors are the Italian company Geox, the English shoemaker Clarks and the American Timberland. However, with the development of ECCOs sport line and the growing blurring distinction between casual and athletic footwear, ECCO is now also competing with Nike, Reebok and Adidas. So now, what could be done in term of strategy for ECCO to develop or sustain its position? Several concerns have emerged in regards of ECCOs future, even of no one is discrediting ECCOs global value chain strategy, some members of the committee think that ECCO world-class production technologies wont last forever, others are afraid to cease to exist in 20 years if nothing is done to excite customers, which could be the case due to smaller marketing budget. At the end ECCO need to improve at telling and selling its story. As Thinghuus said: We need to be more concrete about the process towards market orientation. Ultimately the question is to know if this objective could be achieved with ECCOs structure. In my opinion, changing ECCOs organizational structure is definitely not the right strategy. First, it would most probably represents substantial losses in regards of the immense investment made and would destroy the core value of the company that strive for high quality products. Secondly, what could become ECCOs competitive advantage if the company wants to copy the same organizational structure than its competitors? Ultimately the timing seems not appropriate to make any of theses changes knowing the competitive landscape of the industry. Consequently, ECCOs organizational structure seems appropriate to me, nevertheless as previously said the company needs to become better at telling story and more market oriented. In order to do so, ECCO need to increase its marketing budgets, which will impact in the short run its operating profit. In addition, in order to offset ECCOs superior producing cost, the company should adopt a more premium high-end positioning, which is matching the historical desire of high quality products. This approach would allow ECCO to gain margins to improve and increase its marketing campaign. By moving towards more premium products, the group should as a result emphasize markets with higher buying power and withdraw from markets that dont match the new philosophy. One other strategic option for the company would be now to become public since it will help them leveraging cash in order to implement theses adaptations and at the same time wouldnt affect the historical organizational structure that have been chosen. To conclude, developing a transnational firm with a fully integrated global value chain is obviously very challenging and becomes even more difficult when you are mostly the only company who chose this organizational structure. But at the end, it was successful for ECCO; the company should only focus on finding even more efficiencies through its structure and adapt the brand image to meet its goals so it can be able to survive and develop in this extremely competitive industry.