Strategic Problem Summary
Though Veja is trying to carve out its own market niche, it is faced by a many of problems. For example, the company’s supply of cotton is limited to a small group of farmers, which makes the firm weak. At the same time, there are many companies that are adopting Veja’s business model and thus limiting the competitive space of the company. Large firm are also competing for Veja’s market niche by either developing their own “green” line or acquiring smaller eco-friendly fashion firms. Internally, the company is faced with the challenge of skyrocketing cost of production which has the net effect of making the firm’s sneakers more uncompetitive.
External Environment/ General Environment
The fashion industry has grown massively, employing more than 26 million people, generating a global revenue of $1,334.1 billion in 2008. The sector has, however, been faced with massive allegations of unethical business practices such as child labor, unfair practices, and the disruption of natural ecosystems. Because of the focus on ethical practices in the industry, companies are now changing their model, so as to brand their products as being ethical. Because of the rebranding, organization such as Wal-Mart begun increasing its supply of cotton while big label such as H&M, have developed a “green line”. To drive the costs up, and attract customers who are eco-friendly and concerned about fair trade practices, various organizations are partnering with rights groups to develop fashion show platforms that advocate for a more sustainable lifestyle. The introduction of the internet, has made the world a global village, and more information is being shared across the world. As a result, various business practices have come under scrutiny, with consumers becoming more conscious about the products they use. Kopp and Morrilion identified this market niche and established a product that could act as an alternative to consumers who are eco-friendly. However, Veja’s market strategy is under extreme competition especially from large firms who are readjusting their businesses and rebranding themselves as ethical businesses. For example, in a bid to rebrand, Timberland acquired Howies Limited in 2004, with the aim of appealing to customers who are environmentally and socially conscious.
With the expanding value of the ecologically and socially responsible fashion, Large companies have become fully engaged in many activities that can be termed as greenwashing. To market themselves, large companies often opt to acquire small eco-fashion brands as they create much media coverage. The actions, often go a long way in hoodwinking consumers into associating a brand with environmental and social responsibility, when in reality most of its products could be contributing to greater levels of environmental damage. Apart from competition from large firms, Veja is also struggling against massive fashion brands that are copying its business model. The adoption of the models by Multinational companies such as Nike and Adidas, further reduces Veja’s market niche.
The reduction in the demand for natural rubber is another key problem that has affected the sector and has led to the adoption of more profitable activities such as wood extraction and cattle raising, dampening the sustainability efforts. Despite the efforts to partner with farmers and encouraging the conservation of rubber trees and the forest at large, the continued destruction of the forest is an impending challenge to the supply of rubber.
The Bargaining power of the suppliers is high, and this is because, there are very many companies that are involved in the shoemaking industry. In its market niche, the Veja alone is competing against 500 companies. Though the company has been in existence for a longer period, the business model is one that is still in incumbency stage. The cost of sourcing more suppliers of raw materials is very high as most suppliers have existing contracts and switching will be relatively high, especially given that the company is expanding its production process and cannot sustain large supplies.
Though the company is struggling hard to create market differentiation, to establish its market niche, there are many companies that copying the companies model. The founder of French-based firm, Loic Pollet, in his speech openly declared that the success of Veja’s business model had inspired the firm to establish their independent brand. Various Ethical fashion companies specializing on sneakers are being established in various countries. The company is also faced with the threat of substitute products. Because of its focus on quality, the company’s production process is very expensive, making their sneakers costlier. From the case study, we get to learn that the production cost is almost seven times more expensive compared to other footwear brands.
Internal Environment Resources/ Capabilities
The development process of the eco-friendly sneakers requires the use of cotton, leather, and Rubber. The handling of all the three resources is crucial as it can aid the company in reducing its carbon footprint. Efforts such as working with farmers of cotton has been instrumental in redefining Veja’s brand as a global leader in matters related to environmental conservation. Human resource is the other key resource that gives Veja a competitive advantage as the company has been able to create a working environment that motivates its employees. Given that the company is paying relatively higher than the industry average, it can easily attract skilled labor. To minimize on its carbon footprint, the company is putting all efforts towards ensuring that it’s tanning process does not use Chrome, and instead, it adopt a traditional method of tanning that is eco-friendly.
Weaknesses/ Competitive Deficiencies
As already noted, the company has been on the forefront of aiding farmers to adopt the use of agroecological principles in farming cotton, the company has failed to put up measures that would help in shielding it from the adverse effects of weather change. The company depends on countryside farmers, and this makes the company weak, as natural disasters such as insect plagues and violent rains can easily lead to halting of operations. Because of this vulnerability, the company’s level of production is unpredictable, and due to the minimal availability of organic cottons, the firm often cannot meet the orders of the retailers. The greatest challenge that the company is faced with is production cost. As noted, the company ensures that its employees are not only well paid, but can easily meet most of their basic and secondary needs. Most of the operation cost incurred stems from the high acquisition price of the raw materials. The firm purchases its cotton at almost twice the world price, while its rubber is sourced at a relatively high price in Brazil. The company pays the farmers higher prices as a way of encouraging them to adopt environmentally friendly policies. As a result, the company’s Sneakers and bags retails at a very high price. Though, there is a high demand for its product, the market for its product is relatively reduced by the cost, as not all environmentally conscious consumers can afford their products. The high cost of operation also reduces the profitability margin of the company, reducing the money directed towards research and development.
Business Level Strategy
The section focuses on some of the strategies that Veja has adopted in a bid to establish and enhance its competitive advantage. Veja’s primary strategy is the establishment of a brand that is eco-friendly, in a bid to appeal to the consumers who are environmentally and socially conscious. The firm continuously invests a lot of resources in research and development in a bid to fine-tune all the units that are involved in the production process. The first step in the production process is the raw materials, which include cotton, rubber, and leather. To maintain its reputation, the company monitors the production of its raw materials and the supply chain process closely. To ensure that farmers follow to high-quality standards, the company has developed some environmental-friendly standards, and encourages farmers of cotton, to adopt this strategy by providing a ready market to all the cotton produced. On leather, the company ensures that the leather is not sourced from the Amazon, while at the same it has adopting an eco-tanning process that does not use Chrome.
Corporate Level Strategy
There are four key strategies that can be classified as corporate level strategies: resource allocation, financial performance, human resource management, and mergers and acquisition. Apart from fronting for eco-friendly products, the company also advocates for fair working conditions. The company tries to ensure that the employees, do meet all the needs as per Maslow’s hierarchy of needs. This can be seen from the fact that a majority of the employees lives far from the factory. To ensure that the employees do not struggle with making traveling plans, the organization has pre-arranged coach services, making the travel journey safe and comfortable.
Unlike a majority of companies which focus on complying with minimum requirement for certification by the International Labor Organization, Veja has gone further to guarantee its employees of dignity at work. Veja’s average pay is relatively higher than minimum wage set of the Laws of Brazil. To ensure that the future is assured for its employee’s the organization has entered into an agreement with INSS, enabling workers to contribute seven to eleven percent towards their pension arrangement. The company attempts a lot to ensure that the employees can easily get a work and private life balance.
To expand into the international market, the firm has opened more than 200 stores worldwide. To ensure that its sneakers can reach to those who can’t physically access the store, Veja opened an online store, making it possible for all its consumers to make their orders. The company has been active in marketing its brand in the European market through eco-fashion events such as the Ethical Fashion Show in Paris. To minimize on the overall energy spent in transporting its goods to the international market, the company ships the sneakers by boat to France. However, the firm is still using airplane to get its product to American and the Asian market. To easily access various customers in the international front, the company has signed contracts with companies, such as Merci, to make its sneakers available in its stores.
Corporate Governance Structure
The organization is structured into different departments. One of the most important department is the research and development. It is responsible for research and development of new products that can be adopted by the various departments. The processes in the workshop are broken down into various fabrication workshops. Within the workshops there are the cutting, sewing, soles, and assembling section. Part of the governance structure also involves the components which includes the various suppliers of the raw materials. The other aspect of the firm’s governance structure is external governance control, which is captured from the fact that the organization has an external governance control mechanism. Because of the external audit process, the organization was audited in 2008 and 2009. The structure also involves the retailers, and this is well-managed through the business agreement between Veja and Ateliers Sans Frontiers association. The organization has been responsible for the preparation of all orders, and dispatching of sneakers to retailers. In general, ASF is in charge of printing, preparing, packaging, and sending all orders.
Identification of Alternatives/ Relationship to Internal and/or External Environment
Through Research and development, the company has been able to minimize the environmental footprint of its sneakers. However, the production process is just a small unit of the whole business as the organization still left with the aspect of packaging and transportation. Whereas the organization uses boats to ship the shoes to customers mostly based in Brazil and France, the firms leaves a huge carbon footprint through the use of airplanes to move the shoes to customers based in America and Asia. Carbon footprint of the firm can be reduced through the use of Cargo ships. When transporting raw materials from the firms, the organization can adopt the use of biodegradable-driven cars. For Veja to claim it’s spot as the leading eco-friendly manufacturer of sneakers, it must drive up its sells. The organization seems to be comfortable with its sales, which is currently recording a 100% uptake. To drive its sells up, the organization must cut down on its operational cost. One of the means of cutting down on the operational cost, is the provision of cotton seeds for free to farmers, and educating them on how they can reduce the cost of production. The fabrication process uses a greater amount of cotton, and thus the company needs a regular supply of cotton. Sourcing of cotton from one geographic region in Brazil opens up the company to greater level of risks. The company sources most of its cotton from the state of Ceara, and this often becomes a challenge, as noted when farmers were forced to spray pesticides on their cotton after Caterpillar attacks. Diversifying of the suppliers of cotton would ensure that the supply line of cotton is undisrupted across the year. The final recommendation of the paper is the sourcing of cotton from more than one country or more than one geographical area in Brazil. Before the firms can direct more funds towards Research and development, it must first develop a predictable system and get rid of uncertainties. For example, because of uncertainty, Veja was forced to use more than 12 tonnes of cotton that had been treated with pesticides after Caterpillar infestation in Ceara. This meant that despite all the millions spent in research work advocating against the use of this type of cotton, the failure to anticipate and plan for such a scenario left the company with limited options but to proceed with the production of sneakers.