Mikael Thinghuus had plans of constructing a shoe factory in china known as ECCO. He later made a decision that the factory would be constructed in January 2005 and the first shoe would leave the factory in march 2005.ECCO had tanneries in Netherland, Indonesia and Thailand which enabled the company to control leather processing and ensure the quality of the leather is utilized.
The most wanted brand within innovation and comfort wear is ECCO’s vision and can only be attained by researching new paths, product development, product technology and investing in employees. ECCO is known because of its quality shoes and not fashion brand. The company sold casual and outdoor shoes, ECCO aimed at creating new markets, and their sales increased from year to year.
ECCO’s productivity stagnated and operating margins declined between 1999 and 2003 that lead to increase of debts as the company could not meet their operation expenses. The company had to streamline logistics, monitor the market and focus on production of more modern shoes with an aim of increasing their revenue.
ECCO needed employees with international mindsets and adaptability skills to enable them to operate on a global scale. The company decided to invest on career development, vocational training, developmental conversations and expatriation of its employees. The company leaders came from within the company, as they knew the company’s culture inside out.
ECCO transformed rawhides to shoes and it was among the largest companies that produced leather products. It also supplied leather to auto and furniture companies. ECCO produced 80% of the shoes unlike its competitors like Nike who outsourced all their products. Full- scale, ramp up, benchmarking, laboratory production and prototype were ECCO’s strategic roles. Demand, quality, high volume production and operational reliability were upheld by the full-scale production. Benchmarking aimed at improving opportunities by gaining more knowledge. Ramp up encouraged the use of new technology in production of products to meet the demand and supply. Full scale took place in the tanneries in Indonesia and Thailand while laboratory, ramp up and prototype production took place in Netherlands. Product development took place in Denmark. Production technology implemented by ECCO lead to production of high quality products. Competition was the major challenge that ECCO faced. ECCO is supposed to implement one of the following to outdo the competition and increase revenue: new distribution program or new marketing or new production plant.
Given the profits and probabilities of the three projects are accurate the projects have to be considered according to their priorities. Decision making under risk is the best choice as we are not sure about the risks that the projects will face. The decision tree approach is the best method to determine which the best project is as the following criteria can be used to place the projects in order. Financial, technical, risk-related, resource related, experience and contractual conditions criteria. Where financial criteria will analyze the cost of capital the expected return and if a profit is made. Technical criteria will analyze whether a project considers technology so that the production of products is fast and efficient and if quality products are produced. Risk related analyses the projects in terms of the available risks and their returns where risky projects that give low returns should not be considered. Projects with high returns should always be considered under these criteria. Resource related analyses if the resources required for a project are readily available or not and whether other competitors produce the same product and if the expected returns of the project after selling, the product will be higher. The experience criteria comes in when an investor had first tested the project before and it brought up high returns hence it can easily be implemented. Contractual conditions considers the terms and conditions available for the projects if the products are being outsourced and if it will favor the operations of the project or it will be expensive (Frame, 2003).
However, the best criteria here is the financial criteria of the decision theory as it will consider the profits and the probability so that one can easily predict the expected profits of the project and the type of risks expected. After the expected profits have been determined, the cost of capital can be subtracted from it so that one can be able to know what amount of loss or profit can be made by the different projects. The cost of capital will determine whether a projects are worth investing in or not because the amount of profit of loss will be known after subtracting the cost of capital because cost of capital is an expense. The goals and priorities of each project must be analyzed before implementing the projects, the risks related to the different projects must also be considered and the cost of capital of the projects must be analyzed to know the most affordable projects. The expected return of each project must also be calculated and the profit or loss be determined. A project with high profits is the best project to be considered.
Factors that one should prior consider before implementing a project is the strength, weakness, opportunities and threats of the project. One should know their customers are and what their wants are to satisfy them. One should also know whether the product of the project is well known or some marketing has to be done. The competitors of the project should also be known what they offer and what they do not offer. One should also know whether under a certain project some product and services can be innovated and implemented to increase the revenue. The amount of taxes needed for each project should also be known. The technology that best fits each project should be implemented to improve effectiveness, efficiency and accuracy.
As per the finance criteria in the decision tree approach, the cost of capital has to be subtracted because it is an expense.
Alternative investment cost and tax consideration to reduce the cost of capital expenses. The type of risks to be considered are foreign investment risk, market risk, liquidity risk, inflation risk, credit risk and concentration risk (Baker & Filbeck,2015). These risks affect the profit rates of an investment. In addition, the technology, competitors, quality of product and the availability of the product affects the amount of revenue, as it will lead to fluctuation of the demand and supply level.
New marketing is the best project that ECCO can imply, as it is affordable and its profit is higher than the rest of the projects. New marketing will attract new customers, the amount of revenue will increase, and ECCO would have an ability to venture in to other opportunities in the future. This will support the long-term viability of ECCO.