Assignment task:
The leather tanning industry In the United States converts animal hides and skins into leather, a durable and versatile material used downstream for footwear, clothing, furniture, automobile upholstery, and accessories. Most businesses in the industry are small to medium-sized. They get their materials from a small number of raw skin suppliers. While smaller manufacturers cannot press suppliers for low-cost hides, skins, and other materials, larger manufacturers are better positioned to negotiate with suppliers for lower-cost and higher-quality hides. Larger players can also pass on some cost savings to customers. Since transportation and storage costs can be high, companies that are farther from the delivery destination of their products incur higher overhead costs. Many downstream manufacturers are loyal to long-standing leather tanners, making it difficult for new operators to attract downstream buyers.
The industry has faced competition from synthetic substitutes and low-cost imports (meeting 58% of domestic demand in 2022). Profit, measured as earnings before interest and taxes, was 9.6% of industry revenue in 2014 and dropped to 3.4% in 2022. Imported goods from low-labor-cost countries have dropped selling prices, driving some operators out of the industry and some relocated abroad near low-cost downstream manufacturers. The remaining players increasingly focus on producing value-added leathers, preferring to compete with imports on quality rather than price. For example, Eagle Ottawa LLC (the industry's largest player) primarily makes leather for automobile upholstery. Exports of high-quality leather to countries with significant automobile and clothing manufacturing industries have historically contributed to industry revenue. Due to current trade disputes, exports to China (the leading leather export destination) have decreased over the past five years.
The Chrome-based chemical tanning process is used for 74% of leather products. The process is inexpensive and takes a day to process a hide into leather. Still, it consumes significant water and chemicals that pollute the environment, so discussions about regulations are ongoing. Specialized eco-friendly vegetable tanning takes approximately two months and requires significantly more resources and skilled workers. Although all operators use machinery during tanning, the industry still relies on skilled labor to produce high-quality leather. In 2022, wages accounted for 14.2% of industry revenue, up from 8.6% in 2017. High-quality vegan leather that mimics the look and feel of genuine leather has recently emerged as an eco-friendly and cheap substitute. Because consumers prefer eco-friendly and less animal-cruel products, some fashion houses are actively looking for leather substitutes. At the same time, as genuine leather costs fall, some apparel and footwear manufacturers are using fewer substitutes and opting to incorporate genuine leather.
1. Use Porter 6 forces model to analyze the industry
2. Based on your analysis,
a. What strategic advice would you provide for the average incumbent firm?
b. What strategic advice would you provide to a firm considering entering the industry?