Dearn Shoes Ltd. Pre-seen Analysis

Strategic Business Leader Pre-Seen Information - June 2025 Exam

This document provides pre-seen information for the ACCA Strategic Business Leader (SBL) exam applicable for June 2025, focusing on Dearn Shoes Ltd (Dearn) and the shoe manufacturing and retailing industry in Lucland.

Shoe Manufacturing and Retailing Industry in Lucland

Overview

The industry in Lucland consists of organizations that manufacture and sell adult's and children's shoes through retail outlets or online stores. Export sales are made via distributors.

Traditionally, shoes were made from leather, but cheaper man-made materials, including synthetic leather, are now widely used.

In 20X4, the industry revenue in Lucland was $3,750m$. The average annual growth since 20X0 has been $1.71\%$, and the forecast average annual growth for the next five years is $1.06\%$.

The Lucland market is dominated by five manufacturers: Flamingo Ltd (Flamingo), Rigo Shoes Ltd (Rigo), Parrish and Co Ltd (Parrish), Dearn Shoes Ltd (Dearn), and Betterby Shoes Ltd (Betterby). Together, they hold over $45\%$ of the market share. The remaining market share is distributed among over 200 smaller organizations.

Production

Shoes in Lucland are produced using mass production techniques or handcrafting.

Mass Production

Mass-produced shoes utilize machines at almost all stages, requiring human supervision or operation. The four main stages include:

1. Cutting: Parts of the upper shoe section are cut from materials.
2. Stitching: Parts of the upper are sewn together.
3. Lasting: The finished uppers are molded on a last, and soles are added.
4. Finishing: The shoe is quality checked and packed.

Many Lucland-based manufacturers have transferred some or all of their mass production to third-party manufacturers in other countries to leverage lower production costs using mass production techniques and man-made materials.

Handcrafting

Handcrafting involves the same four stages as mass production but uses skilled labor for tasks typically performed by machines. Handcrafted shoes are usually made from leather and are valued for their high quality and craftsmanship. These shoes are more expensive due to the leather quality and the higher proportion of skilled labor. Handcrafted shoe production remains in Lucland and has not been outsourced.

Types of Shoes

The four types of shoes manufactured and sold in Lucland are:

• Formal: Handcrafted leather shoes for adults.
• Semi-formal: Mass-produced shoes for adults made from leather and synthetic materials.
• Casual: Mass-produced informal shoes for adults made from synthetic materials.
• Children’s: Mass-produced shoes made of leather or synthetic materials.

Market Structure

Sales Channels

Approximately $85\%$ of revenue for Lucland shoe manufacturers comes from domestic sales through branded retail outlets and online stores. In 20X4, retail outlet (offline) sales accounted for $2,260m$ (approximately $60\%$ of total industry revenue), while online sales accounted for approximately $25\%$ ($926m$).

Online sales are limited to Lucland addresses. Historically, Lucland had a strong reputation for quality, leading to exports. Increasing demand for handcrafted shoes from markets with rising disposable incomes has driven export sales. $15\%$ ($564m$) of revenue came from export sales via distributors, mainly of handcrafted shoes, in 20X4.

Lucland footwear manufacturing revenue split for 20X4:

• Offline sales (Lucland): $60\%$
• Export sales: $15\%$
• Online sales (Lucland): $25\%$

Challenges within the Industry

Competition is based on price, product range, quality, marketing, brand name, and distribution channels. Speed to market has become more critical due to fashion and price-conscious consumers. Flamingo excels in this area.

Household disposable income is a key demand driver. Economic slowdown in Lucland is evident, with growth falling from $5.1\%$ five years prior to $1.1\%$ in 20X4 and an expected $0.8\%$ in 20X5. The proportion of mid-priced shoe sales is decreasing, while low-priced shoe sales are increasing.

Forecasted industry growth is driven by sales of handcrafted shoes in both export and domestic markets, due to increasing awareness of poor employment protection legislation and negative environmental impact in countries where third-party manufacturers are based.

Shoe manufacturing significantly impacts the environment, releasing large amounts of carbon dioxide; the industry contributed $1.4\%$ of global greenhouse gas emissions in 20X4. Shoe disposal in landfills and the slow biodegradation of materials further exacerbate environmental concerns.

High online purchase return rates due to sizing issues, inaccurate descriptions, damages, and multiple orders contribute to environmental issues. This is compounded by the lack of universal foot sizing standards and retailers not charging return postage.

Innovation and Developments

Growing environmental and ethical awareness has led to the development of ethical shoes by Kind Shoes Co, using sustainably sourced materials. Recycling initiatives are being trialed in other countries but are not yet significant in Lucland.

Technological changes in the industry include using 3D printing for prototypes and custom-made shoes. Technology-enabled ‘intelligent’ shoes are gaining traction, measuring athletic performance and providing personalized feedback via Bluetooth to smartphones. Customisable athletic shoes and the use of virtual and augmented reality for online ‘try-ons’ are also emerging.

Industry Body, Industry Standard, and Legislation

The Lucland Shoe Association (LSA) promotes the industry and provides expertise and support to its members. Accreditation by the ‘Made in Lucland’ campaign indicates compliance with quality, safety, labor standards, and sustainability guidelines. Accredited manufacturers can use the ‘Made in Lucland’ (MiL) mark.

Shoe manufacturers must comply with employment, health and safety, consumer protection, competition, and data protection legislation. Lucland has strong copyright protection.

Legally required health and safety tests ensure materials are non-hazardous. Most staff are members of the National Shoe Union (NSU), which negotiates pay and conditions with employers.

Dearn Shoes Ltd

Background

Dearn Shoes Ltd (Dearn) was founded nearly 100 years ago by Dermott Dearn. It has a reputation for well-made, reasonably priced shoes. They were one of the first to be awarded the MiL mark for their formal shoes.

Fifteen years ago, Dearn transferred most of its manufacturing to Totland, retaining a small factory in Layne, Lucland, to reduce production costs. X Co Ltd (X Co), a Totland-based manufacturer, produces shoes for Dearn. Dearn’s head office, the small factory, and its warehouse remain in Layne. Shipping from Totland to Lucland is managed by DT Global Transport.

Most of Dearn’s shoes are mass-produced by X Co. Only formal shoes are handcrafted in its Lucland factory. Shoes are sold direct to customers via 75 branded retail outlets and a website within Lucland. Dearn does not export.

Ownership

Despite the Founder's family owning the majority of the shares, the family is not involved in any managerial or directorial role in the company.

Dearn is a non-listed company but adheres to good corporate governance practices. It does not have audit, nomination, and remuneration committees. It has an internal audit team which reports directly to the CFO.

Key Stakeholders

Key stakeholders include shareholders, staff (head office, factory, warehouse, retail outlets), customers, third-party manufacturer (X Co), distribution partner (DT Global Transport (DT)), suppliers, bank, trade union (NSU), and the Lucland Shoe Association.

Staff loyalty, commitment, and satisfaction are high, resulting in low employee turnover. The relationship between Dearn and X Co has deteriorated recently due to quality issues and delays. Quality checks in Lucland have revealed poor production quality, leading to rising customer returns. Shipping between Totland and Layne provided by DT is excellent.

Board and Organisational Structure

The board structure includes positions such as Executive Chair, Chief Executive Officer (CEO), Chief Finance Officer (CFO), Chief Operations Officer (COO), Chief Commercial Officer (CCO), Chief Product Officer (CPO), Chief Information Officer (CIO), Chief Human Resources Officer (CHRO) and Non-Executive Directors.

• Chief Finance Officer (CFO): Financial strategy, financial reporting, risk management, factory and warehouse in Lucland, relationship with outsource partners.
• Chief Operations Officer (COO): Retail outlets, e-commerce sales, business development.
• Chief Commercial Officer (CCO): Research and development, product design and development, marketing.
• Chief Information Officer (CIO): Head office systems, website and e-commerce platform and processes, communication links with outsource partners.
• Chief Human Resources Officer (CHRO): HR function, staff recruitment, retention, training, and development.
• Executive Chair: Leadership of the board, governance, specific strategic initiatives.
• Chief Executive Officer (CEO): Executive team, strategy implementation.

Directors have worked at Dearn for over 20 years and maintain positive relationships. They have a risk-averse approach to decision-making.

Dearn has a functional, top-down, hierarchical structure with defined communication lines and authority. Processes are well-defined, and the company focuses on efficient day-to-day operations. Departments include finance, purchasing, business development, human resources, IT, research and development, customer service, the warehouse, factory, and retail outlets. Department managers report to members of the board.

Products

Dearn sells four types of shoes: formal, semi-formal, casual, and children’s shoes. Formal, semi-formal and children's have been manufactured for many years, casual has been manufactured for just ten years. Except for formal shoes produced in Lucland, all shoe production occurs in Totland by X Co.

Dearn produces 20 different styles of each type of shoe. Styles are reviewed annually and updated based on fashion trends. Poorly performing styles are discontinued and replaced.

Dearn differentiates itself by using both handcrafting and mass production, offering all four types of shoes.

Manufacturing and Sales Process

Fifteen years ago, Dearn closed all Lucland manufacturing except for the Layne factory, which continues to produce formal shoes and perform research and development. Most output is sold through 75 retail outlets throughout Lucland, known for high levels of customer service.

Dearn does not have retail outlets outside Lucland and does not export. All products are available online to Lucland customers only. Customers must collect online purchases from local retail outlets, restricting online sales. Online sales currently account for $12\%$ of total sales.

Dearn’s manufacturing and sales process includes:

1. Research and design
2. Create lasts and produce prototypes
3. Laboratory tests (durability, safety)
4. Manufacturing process (mass production or handcrafting)
5. Quality check
6. Ship to Lucland warehouse (by DT)
7. Transfer to Lucland warehouse
8. Quality check
9. Pick (select) items for retail outlets’ orders and customers’ online orders and pack them for despatch to retail outlets
10. Distribute to retail outlets
11. Sell to retail customers
12. Enable collection of online orders

Information Systems and Use of Technology

Head office uses off-the-shelf finance and human resources systems that have been in place for years. The HR system is adequate, but the finance system needs upgrading. A new inventory system was recently introduced but lacks transparency over the supply chain, showing real-time inventory in retail outlets but only weekly updates for the rest of the supply chain.

Dearn has invested in advanced manufacturing technology in its Lucland factory and an automated picking process in its warehouse for retail outlets. A manual picking process is used for online orders. The e-commerce platform has limited functionality, impacting digital marketing efforts. An intranet provides information for staff and a comments area.

Risks

The risk register includes supply chain disruption, a potential economic downturn in Lucland, Dearn’s limited online offering, product recalls, product quality issues, environmental impact, and customer reactions.

Dearn Website Extracts

• Mission: To provide our customers with well-made, reasonably priced shoes and an enjoyable customer experience.
• Vision: To become the first choice for shoes for the whole family.
• Values:
  • Respect for our history
  • A focus on quality – of product and service
  • Long-term commitment to our staff

Financial and Non-Financial Information – Selected Summary