Team E wants to first thank the Board of Directors for giving us the wide range of authority to institute whatever strategic actions and operating changes we decided were appropriate.
Eight years ago my colleagues and I were given the responsibility to take charge of Ethical Wares’ rapidly expanding athletic footwear business. Through our actions we were expected:
to make the company a leader in the athletic footwear industry
and build shareholder value via both higher dividends and a rising stock price
Team E’s plan was to develop this company into a global leader in the athletic footwear industry by using Ethical Wares’ most important strength: Cost Leadership
Cost leadership through low product differentiation
Cost leadership through manufacturing and materials management
Our team began our process by considering the emerging markets in Europe and Asia. We knew that the key to producing a high quality product at a low cost was low cost labor. We also realized that our North American plant in Ohio was not allowing us to pursue our low cost strategy because of its incredibly high labor rate. After careful financial assessment we came to the decision of shutting down our Ohio plant and began building a small plant in Asia.
We believed that the excessive finances needed to build a new plant outweighed the one time extraordinary loss of the shutdown.
The cost benefits of the plant in Asia were felt almost immediately. Our labor costs were reduced tremendously, when compared to what we were paying in Ohio. This plant helped us move closer to our cost efficient strategy, but now that our team’s tenure is over we realize that we underestimated the annual growth in all three major geographic markets for pairs demanded. What we would do if we could do it all over is we would have built a larger plant in Asia instead of a small one. We understand now that we were strapped in the amount of shoes we were able to produce. As the demand for shoes grew around the world, and our capacity was at 5 million shoes a year, we were only able to capture a small amount of the market share.
Another major goal Team E wanted to accomplish was to maximize Ethical Wares’ productivity. We decided that in order to be a cost efficient industry leader, we needed to have the lowest reject rates. We believed that by spending an immense amount on quality control that we would be able to continuously lower our company’s reject rates and maximize productivity. With a strong quality control system in place we could consistently measure the amounts of pairs rejected, and had a good indication of how much quality we had built into our product.
An additional element we heeded when examining our productivity goals was compensation for our employees. Our theory was that in order for our strategic control system to be successful we needed to make sure our employees were motivated and focused on helping Ethical Wares perform better over time. The conclusion was that we needed to be very competitive in the way we compensated our employees.
This quality control system became too large. As stated earlier, we needed more capacity to keep up with the growing worldwide demand. Our quality control expenses continued to grow, but our capacity did not. What happened is that Ethical Wares was not able to see the benefits of a successfully implemented quality control system. We were not able to spread the growing costs of quality control and salaries over more shoes. When we realized that our quality control efforts were not being served, we made a move to automate parts of our plants. In reflection, we were too slow in this action. As the years passed, automation costs grew. Once Team E decided to spend the money to automate, the costs had raised immensely and our tenure had shortened and it was too late to witness the benefits of the decision.
To be successful in the industry we competed in took good and quick execution, critical spending on marketing, and a bit of luck. We felt the importance of marketing in this industry was very high. Such a large part of any brand’s success is the endorsements that it picks and it takes a genius or a prophet to accurately call exactly who the rising superstars are in any one market. Luckily for Team E, we were given such a detailed scorecard to be able to forecast the right endorsements. We concluded, that in order to have a global brand image, we must take an aggressive approach to securing some high quality endorsements.
This is one decision that Team E cannot find any faults with. We feel that our brand image was strong in all geographic areas. In consideration of the costs of these endorsements, we feel we able to achieve the quality endorsements we wanted at a low cost relative to the rest of the industry. The benefits of our high brand image were felt most in the European market. This was our most successful location.
As stated before our goal was to pursue a cost-leadership strategy. One advantage we wanted to achieve through this strategy was to be able to charge a lower price than our competitors. Unfortunately, our industry was full of companies with the same strategy. So we were unable to take advantage of this differentiation. The second advantage of a cost leadership strategy is that if rivalry within the industry increases and companies start to compete on price, the cost leader will be able to withstand competition because of its lower costs. Again, with our small capacity and expensive quality control system, we were unable to price our shoes at a lower price and make a strong profit per pair. In conclusion, we regret to announce our resignation through this memo. We have failed to meet the Board’s expectations and our own. Through ignorance and mistakes, Team E did not make the planning that was necessary for success in our chosen strategy. We were stuck in the middle because we made product/market choices in a way that we were unable to obtain a competitive advantage. As a result, we experienced below-average performance.