ECCO A/C; A Look at Vertical Value Chain, Ownership Structure, and More

The following is a paper from my international business class based off of the Harvard Business Law case on ECCO A/S Global Value Chain Management.

Competitive Environment

ECCO has a unique competitive environment and holds a distinct advantage from it's competitors. Most of ECCO's competitors are "branded marketers", who do not produce most of their offerings, they brand and market them. These competitors include Clarks, Geox, and Timberland, along with indirect competitors such as Nike and Adidas. ECCO is not a branded marketer, but uses a fully integrated vertical value chain where they produce many of their own materials. ECCO makes nearly all of their own products in different countries, but in their own facilities unlike competitors.

ECCO produces high-quality footwear that is mainly in the casual category. In the last decade, ECCO has entered the golf shoe market which has gained them one large competitor in Nike. ECCO used its superior technology in production to maintain a higher level of quality over its competitors. The many aspects of their production adds quality to their shoes that made creating a similar shoe very hard for competitors.

Changes in the industry can be met by ECCO more efficiently than their competitors because they produce their own supply. If a major change takes place, they can simply stop producing a current item, instead of having to cancel outsourcing contracts like their competitors. Close competitor Clarks at one time had many plants in the United Kingdom but has closed all but one to cut labor costs. With producing their own material, ECCO is prepared better than their competitors to adapt to changes in the industry.

Global Value Chain

ECCO's value chain is spread out through several countries. They have tanneries in the Netherlands, Indonesia, and Thailand. ECCO uses over one million cows each year for the leather used for their shoes . They were able to gain the expertise from an acquired tannery in the Netherlands and a leather research center in Denmark. Because of these acquisitions, ECCO has a huge advantage over their competitors that no longer own their own tanneries, but used suppliers outside of the company. Nike and Timberland outsourced nearly all of their manufacturing, while ECCO still produces 80% of it's products in it's own facilities. Using factories in different locations and gaining expertise from other countries has added quality and efficiency to production.

The industry for casual shoes, ECCO's main market, is driven by demand for quality, comfortable shoes. ECCO's value chain has taken advantage of this driving factor by controlling the quality and production of their own shoes to make sure quality is high. If operations were outsourced, they would not be able to oversee all aspects of production and insure that quality was high.

Vertical Value Chain Benefits

Hosting your own in-house vertical value chain has many benefits for a business like ECCO. ECCO's many facilities in different countries can take advantage of local resources and expertise in different areas like the leather research center in Denmark. Another benefit is being able to oversee operations and produce products faster. Inventory can be controlled efficiently, meaning that ECCO can wait longer to produce items to match market mean due to how long it would take to place an order with an outsourced manufacturer and to receive that order to deliver to customers.

Vertical Value Chain Cons

The main negative for ECCO in having an integrated vertical value chain is increased costs over competitors. For most shoe companies, the cheapest option is to outsource manufacturing, which is what most of ECCO's competitors have done. Another con of keeping production within the company is that when no competition is present, often production is slow and inefficient. Managing the cons is vital for ECCO, which they have been able to do.

Economic & Strategic Factors Considered with Integrated Value Chain

Economic factors that are faced with an integrated value chain include high labor costs. If producing your own shoe costs twice as much as it would if the shoe was made at an outsourced manufacturer, than the difference in quality added should at least match that difference to justify manufacturing the shoes yourself.

Strategic factors include keeping competition high and not relying on just one factory for manufacturing. ECCO has several plants that manufacture the shoes and deal with tanning, which is good for competition and to keep quality high.

Family Ownership Structure

Family ownership affects ECCO in several ways. It has allowed the company to keep executives with knowledge of the company in key positions due to their loyalty to the company. CEO Karl Toosbuy had left the company several times only to comeback because of his experience and knowledge of the company. Karl Toosbuy commented on the family ownership structure by stating that "The family can take higher risks", and "we act instead of wait". Toosbuy believes that the family ownership is a strength and not a weakness for ECCO. Having the company owner within a family means that they are not necessarily the smartest and most qualified business people, but could have ownership in the company just because of their bloodline.

Corporate Ownership

The corporate ownership structure is the most popular structure for large companies. Often when family is involved, unnecessary family issues can interfere with the business. Corporate ownership keeps employees competitive, as their jobs within the company are not guaranteed and they do not own part of the company. Strategy-making may be easier in the corporate structure because family feelings are left out, but implementation might be harder to achieve. When a family runs the structure of the business, they are the shareholders that can implement a strategy. In a corporate structure, the executives have to obey the demands of the primary shareholders when considering the direction of the company instead of taking giant risks and quickly attempting to fix bottlenecks.

Alternatives to Family Ownership

Alternatives to family ownership include taking the company public. This option was not attractive to Karl Toosbuy who believed that with the company owned by many, they would not be able to act quick enough and would not be able to take necessary risks to succeed. Other options would include a buyout where an outside group comes in and runs the company with their own executives. Although many competitors run a non-family ownership model, the current system seems to work well for ECCO and should not be underestimated.

Sources: Harvard Business Case Study "ECCO A/S Global Value Chain Management". By Bo Nielson, Torban Pedersen, Jacob Pyrndt. Read online through HarvardBusiness.Org