5. Strategic analysis
5.3. VRIO analysis
Up to the present time, the focus of this thesis has been the impact and effect of macroeconomic and industry-specific factors to ECCO’s shoemaking business. In order to develop an understanding of the company’s industry independent drivers and capabilities, it is important to concentrate on the resource-based view.
In doing so, VRIO framework is an excellent tool in examining the internal competencies and competitive advantage of a company. It stands for four characteristics that determine the competitive potential of a resource or a capability: Value, Rarity, Imitability and Organisation. Moreover, tangible and intangible, and also organisational capabilities are the main types of resources evaluated in VRIO analysis.
In the following pages, ECCO’s internal resources will be examined and its core competencies identified.
5.3.1 Financial resources
To begin with, there are three main competitive financial resources that determine a company’s current financial health and potential growth possibilities: the level of cash holdings, borrowing capacity, and cash flow.
According to (Bloomberg; Damodaran; S&P Capital IQ) latest data analysis in January 2014, the footwear companies in the US and Europe had cash to total assets, book debt to equity and interest coverage ratio median values of 12,7%, 0,47 and 19,2 respectively. ECCO’s corresponding values, on the other hand, were 7,1%, 0,22 and 31,0 as of 31 December 2013.
0 1 2 3 4 5 Threat of new
entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitutes Complementors
Competitive rivalry
Figure 29 - The strength of forces driving the competition in footwear industry
Source: Independent analysis
Firstly, although ECCO’s cash holdings are valuable, the below peer group median value of 7,1% indicates that the financial resource is not rare. Secondly, as a company’s capital structure and capability to maintain debt add to its ability to attract new funds for expansion and growth, ECCO’s debt levels display the company as relatively lowly leveraged and less risky, which in turn indicates that this feature is both valuable and rare. In addition, as equity has higher cost than debt, it is also costly to imitate similar capital structure. Thirdly, the Danish footwear company has had strong and stable operating cash flows over the years, which is valuable, rare and costly to imitate, because it is particularly hard for existing competition and new entrants to achieve such a strong financial environment.
Along with its global presence and recognised brand, ECCO is in a favourable position to capture value from its core financial competencies.
5.3.2 Production, supply chain management (SCM) and distribution
At the present time, most footwear companies that attempt to increase their competitiveness by cost reductions, have moved their production facilities or outsourcing contracting towards Asia-Pacific. This value-driven strategy is also true for ECCO as it has enabled the company to gain access to cheaper labour, raw materials, and large growing Asian market, but as we live in an era of intense global competition, the move to Asia has become more of a key issue of survival rather than a rare occasion.
Nowadays, most of the companies active in footwear industry favour the outsourcing strategy instead of in-house production. ECCO on the other hand, is leaning towards the latter strategy by controlling its vertical integration operations such as tanneries, factories, distribution and sourcing centres. Despite the fact that both strategies are valuable, in-house production model is relatively rare and very costly to imitate. Namely, it requires large capital investments and extensive expertise to integrate backwards. In addition, ECCO’s ability to capture value from its vertically integrated operations and supply chain is clearly evident from its relatively higher margins and profitability.
In like manner, ECCO’s presence in 87 markets and it’s more than 15 000 selling points around the world are noteworthy achievements that reflect the proper organisation of activities.
5.3.3 Technology and quality assurance
As ECCO is one of the few major footwear companies that owns and controls its whole shoemaking process, the company’s most valuable core competencies are within its value chain and applied technology.
Their quality-driven approach begins with the purchase of premium raw hides, which are then tanned through several stages in order to enhance and control the quality of the leather. Next, with the use of their unique
“direct injection” technology, they are able to manufacture high quality shoes with minimum lead times. Due to their full commitment to quality, ECCO has achieved a clear competitive advantage in the market, and is able to earn premium margins.
At the same time, as the technology section in PESTEL analysis revealed, 3D technology with its revolutionary opportunities may obsolete ECCO’s technological advantage. Despite the presence of this threat, it is expected not to influence the company’s position in the market in the short run, but rather in the medium- to long-run.
Human capital and innovation
In the light of ECCO’s success in the shoemaking business, their development in human capital and constant focus on innovation have enabled them to secure a highly skilled workforce and optimised operational processes.
In 1961, Theodore Schultz proposed the term “Human Capital” in his article “Investment in Human Capital”, in which he claimed that quality and productivity of employees can be improved by investing in them. (Schultz, 1961) Evidently, ECCO has not only been able to enhance its stock of competencies and knowledge through family heritage, but also by training their workforce and enabling them the necessary benefits. For example, ECCO has set up in-house academies for specialised training, and they also promote lean manufacturing philosophy, in which their employees are encouraged to propose improvements.
This bundle of accumulated human capital and improvements by innovations over half a century most definitely serve as a competitive advantage for ECCO, especially as its operations span is much wider relative to most of its competitors.
5.3.4 Brand and reputation
Over the past decades, the development in marketing and communication capabilities has been remarkable.
Notably, companies are able to promote their brands globally via numerous channels, in which success depends largely on strategy, content, financial resources, and ambition. These marketing efforts, over time, evolve into reputation, which is one of the main driving forces in attracting consumers.
Based on the data from (Euromonitor), Figure 30 ranks the global share of footwear brands in 2013. Similarly to the industry concentration discussion in six forces analysis, it is estimated that ECCO was ranked as the 26th largest brand in footwear industry in 2013. Comparatively, the cumulative brand share of the top 30 is less than the industry concentration, because many multinational organisations represent several different brands.
Additionally, various awards and accolades play a significant role in increasing brand awareness and shaping the reputation of a company. On the positive side, ECCO has been awarded with numerous honours and prizes over the years, for example in 2013, the company was awarded as the best shoe manufacturer of the year by German shoe industry. (ECCO, 2014)
In spite of ECCO’s valuable and renowned brand name, it appears that there are numerous trademarks with similar rarity.
5.3.5 Section summary
For the most part, ECCO can be regarded as a role model for the footwear industry by its operational efficiencies, above normal profitability, and genuine passion for shoes. These invaluable characteristics are the reflections of the company’s resources that are shaped and managed with great effort.
23,7%
76,3%
Figure 30 - Global ranking and market share of footwear brands in 2013
Top 30 brands Other brands
Nike 6,7%
Adidas 3,7%
Puma 0,9%
Clarks 0,9%
Reebok 0,9%
Deichmann 0,8%
Asics 0,7%
Skechers 0,7%
Payless 0,6%
Converse 0,5%
Timberland 0,5%
Mizuno 0,5%
Ugg 0,5%
Grendene 0,5%
New Balance 0,4%
Belle 0,4%
Havaianas 0,4%
Jones New York 0,4%
Bata 0,4%
Centrobuv 0,4%
Daphne 0,3%
Steve Madden 0,3%
Andrea 0,3%
Brown Shoe 0,3%
Hush Puppies 0,3%
ECCO 0,3%
Aldo 0,3%
Hamm & Reno 0,3%
Zara 0,3%
Geox 0,2%
Source: Euromonitor, Independent analysis
Table 6 briefly summarises the main resources of ECCO in VRIO analysis, and also indicates their implications on competition and profitability. As a result of the analysis, it can be concluded that the company’s strong financial health, globally integrated value chain operations, advanced technology, and devotion to quality and innovation are its core competencies. The economic theory states that when a company’s resource is valuable, rare, costly to imitate and organised properly, it should secure a sustained competitive advantage over other competitors. In valuation perspective, I would argue that the satisfaction of all criteria in VRIO analysis assures the competitive advantage and above normal profits temporarily. In fact, the fast pace of technology advancement and globalisation in the 21st century is not only an issue of imitability, but also revolutionary inventions of alternative methods that transform most sustained solutions into temporary advantages.
Table 6 - Summary of VRIO analysis
R eso u r c e Valu ab le? R ar e? Co st ly t o im it at e?
Or gan ised
p r o p er ly ? Co m p et it iv e im p lic at io n s I m p lic at io n s t o p r o fit ab ilit y
Financial resources Yes Yes Yes Yes Temporary advantage Temporarily above normal
Production, SCM and distribution Yes Yes Yes Yes Temporary advantage Temporarily above normal
Technology and quality Yes Yes Yes Yes Temporary advantage Temporarily above normal
Human capital and innovation Yes Yes Yes Yes Temporary advantage Temporarily above normal
Brand and reputation Yes No No No Parity Normal
Source: Independent analysis