Harvard Case - ERKE: Consumption Binge Caused by Donations
"ERKE: Consumption Binge Caused by Donations" Harvard business case study is written by Weina Li, Su Liu, Chenxi Yi. It deals with the challenges in the field of Strategy. The case study is 13 page(s) long and it was first published on : Jan 25, 2022
At Fern Fort University, we recommend ERKE adopt a multifaceted strategy focused on leveraging its newfound brand awareness and customer loyalty to achieve sustainable growth. This strategy involves:
- Shifting from a donation-driven model to a value-driven model: ERKE should transition from relying on charitable donations for sales to building a strong brand identity and offering high-quality, desirable products that resonate with its target audience.
- Developing a robust marketing strategy: ERKE needs to invest in targeted marketing campaigns to maintain its momentum, expand its customer base, and solidify its position in the market.
- Optimizing its supply chain and manufacturing processes: ERKE must ensure it can meet the increased demand for its products while maintaining quality and affordability.
- Expanding its product portfolio: ERKE should explore opportunities to diversify its product offerings to cater to a broader range of consumer needs and preferences.
2. Background
ERKE, a Chinese sportswear brand, experienced a surge in popularity after donating millions of dollars worth of shoes to the Chinese military during the 2020 COVID-19 pandemic. This act of patriotism and social responsibility ignited a wave of consumer interest and propelled ERKE into the national spotlight. However, the company's reliance on donations for sales created an unsustainable business model, raising concerns about its long-term viability.
The case study highlights the main protagonists:
- ERKE's management: Facing the challenge of transitioning from a donation-driven model to a sustainable business model.
- ERKE's customers: Driven by patriotism and social responsibility, but also seeking quality and value in their purchases.
- ERKE's competitors: Observing ERKE's success and seeking to capitalize on the growing sportswear market in China.
3. Analysis of the Case Study
To analyze ERKE's situation, we can apply a combination of frameworks:
1. SWOT Analysis:
- Strengths: Strong brand awareness, positive public image, loyal customer base, cost-effective production, established distribution network.
- Weaknesses: Dependence on donations, limited product diversification, lack of marketing expertise, potential for quality control issues.
- Opportunities: Expanding into new market segments, developing innovative products, leveraging digital marketing channels, building strategic partnerships.
- Threats: Intense competition in the sportswear market, potential for consumer sentiment to shift, economic downturn impacting consumer spending, negative publicity related to quality or ethical concerns.
2. Porter's Five Forces:
- Threat of new entrants: High, due to the relatively low barriers to entry in the sportswear market.
- Bargaining power of buyers: Moderate, as consumers have a wide range of choices but may be loyal to specific brands.
- Bargaining power of suppliers: Low, as ERKE can source materials from various suppliers.
- Threat of substitute products: High, as consumers can choose from a variety of alternative sportswear brands.
- Rivalry among existing competitors: High, as the sportswear market is highly competitive with established players like Nike, Adidas, and Anta.
3. Value Chain Analysis:
ERKE's value chain can be analyzed to identify areas for improvement:
- Inbound logistics: Optimizing sourcing and procurement processes to ensure quality and cost-effectiveness.
- Operations: Streamlining manufacturing processes to increase efficiency and reduce waste.
- Outbound logistics: Expanding distribution channels and improving logistics to reach a wider customer base.
- Marketing and Sales: Developing targeted marketing campaigns to attract new customers and retain existing ones.
- Customer service: Providing excellent customer service to build brand loyalty and address any concerns.
4. Business Model Innovation:
ERKE needs to transition from a donation-driven model to a value-driven model. This requires:
- Developing a strong brand identity: Emphasizing product quality, innovation, and design to attract customers beyond patriotism.
- Building a sustainable revenue stream: Focusing on sales through retail channels, online platforms, and strategic partnerships.
- Investing in marketing and branding: Creating engaging content, leveraging social media, and collaborating with influencers to reach a wider audience.
4. Recommendations
To achieve sustainable growth, ERKE should implement the following recommendations:
1. Shift from a Donation-Driven Model to a Value-Driven Model:
- Focus on product quality and innovation: ERKE should invest in research and development to create high-quality, innovative products that meet the needs and desires of its target audience.
- Develop a compelling brand story: ERKE should build a strong brand identity that resonates with consumers beyond patriotism. This could involve highlighting its commitment to sustainability, ethical manufacturing practices, or its support of athletes and sports communities.
- Offer competitive pricing: ERKE should maintain its affordability while ensuring that its products offer value for money. This requires optimizing its supply chain and manufacturing processes to reduce costs without compromising quality.
2. Develop a Robust Marketing Strategy:
- Target specific market segments: ERKE should identify and target specific customer groups based on their demographics, interests, and purchasing behavior. This could involve segmenting by age, gender, income level, or lifestyle.
- Leverage digital marketing channels: ERKE should invest in online advertising, social media marketing, influencer collaborations, and content marketing to reach a wider audience.
- Build brand partnerships: ERKE should explore strategic partnerships with sports organizations, athletes, and other brands to increase its visibility and credibility.
3. Optimize Supply Chain and Manufacturing Processes:
- Improve efficiency and reduce waste: ERKE should implement lean manufacturing principles to streamline its production processes, reduce costs, and minimize environmental impact.
- Invest in technology and automation: ERKE should explore opportunities to automate certain tasks and processes to improve efficiency, accuracy, and speed.
- Ensure quality control: ERKE should establish robust quality control measures to maintain product quality and prevent negative publicity.
4. Expand Product Portfolio:
- Diversify product offerings: ERKE should expand its product portfolio to cater to a broader range of consumer needs and preferences. This could involve introducing new product lines, such as apparel, accessories, or equipment.
- Develop new product categories: ERKE should explore opportunities to enter new product categories that align with its brand values and target audience.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: ERKE's core competencies lie in its cost-effective manufacturing and distribution capabilities. The recommendations align with its mission to provide high-quality, affordable sportswear to a wider audience.
- External customers and internal clients: The recommendations address the needs of both external customers seeking quality and value and internal clients seeking sustainable growth and profitability.
- Competitors: The recommendations aim to differentiate ERKE from its competitors by focusing on product innovation, brand building, and customer experience.
- Attractiveness ' quantitative measures if applicable (e.g., NPV, ROI, break-even, payback): The recommendations are expected to generate positive returns on investment through increased sales, improved profitability, and enhanced brand value.
- Assumptions: The recommendations are based on the assumption that ERKE can successfully implement its strategy and adapt to changing market conditions.
6. Conclusion
By implementing these recommendations, ERKE can leverage its newfound brand awareness and customer loyalty to achieve sustainable growth. The company must transition from a donation-driven model to a value-driven model, focusing on product quality, innovation, and brand building. By developing a robust marketing strategy, optimizing its supply chain, and expanding its product portfolio, ERKE can solidify its position in the competitive sportswear market and achieve long-term success.
7. Discussion
Other alternatives not selected:
- Maintaining the donation-driven model: This would be unsustainable in the long term and could damage ERKE's reputation if it becomes reliant on donations.
- Focusing solely on cost leadership: This could lead to a race to the bottom and erode ERKE's brand value.
Risks and key assumptions:
- Consumer sentiment: The recommendations assume that consumer interest in ERKE will remain high. If consumer sentiment shifts, ERKE's growth could be affected.
- Competition: The recommendations assume that ERKE can successfully compete with established players in the sportswear market. Intense competition could pose a significant challenge.
- Execution: The recommendations assume that ERKE can effectively implement its strategy and overcome any internal or external obstacles.
8. Next Steps
- Develop a detailed strategic plan: This plan should outline ERKE's vision, mission, objectives, strategies, and tactics for achieving sustainable growth.
- Allocate resources: ERKE should allocate sufficient resources to support the implementation of its strategy, including funding for marketing, product development, and operational improvements.
- Monitor progress and make adjustments: ERKE should regularly monitor its progress and make adjustments to its strategy as needed based on market conditions and performance metrics.
By taking these steps, ERKE can transform its business model, solidify its position in the sportswear market, and achieve sustainable growth.
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Case Description
Hongxing ERKE Industrial Co., Ltd. (ERKE), founded in 2000, was the first large Chinese sportswear company to list overseas. Despite the difficulties it faced caused by poor management and the decline of its brand influence, ERKE donated ¥50 million worth of aid to disaster-hit areas in Henan, China, shortly after severe flooding in the province in July 2021. The donation caused an unprecedented online event in China and ignited the enthusiasm of netizens for buying ERKE products. Millions of netizens rushed to ERKE's livestreaming studios and expressed their gratitude and support for the company through "wild consumption." ERKE became representative in consumers' minds of excellent domestic products that were part of Chinese fashion trends. Why had ERKE's donation become such a hot topic and triggered a consumption binge in China? On the heels of this situation, how should ERKE use the opportunity to achieve a long-term competitive advantage in the future?
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