CASE STUDY: “Building The Benetton System”, Werner Ketelhoehn. Benetton, having been around since 1965 has had some massive changes and events to respond to and so I feel that a timeline of the events since the company was founded to be of significant use. 1960’s; Development of Lucianos competitive advantage (discussed later).
1965 – Benetton was founded and the first factory was opened in Ponzano. 1966 – Widening of the existing company-subcontractor relationship. 1968 – First Italian store opened in Belluno.
1969 – First foreign shop opened in Paris. 1970’s; The Benetton Group expansion to represent a family of brands which include 012, Sisley and Jeans West. 1970 – Hasten expansion by building upon the partnership system developed in Italy. 1972 – Revolutionary production system concerning garment dyeing (discussed later).
1975 – ‘Benetton’ logo becomes a well known retail symbol and their product range is expanded to include the 30+ age group. 1980’s; The growth strategy of Benetton was based around the acquisition of subcontractors and raw material suppliers.
1983 – Advertising and sponsorship campaign in preparation for the global launch. 1985 – Marketing of children’s stationary with the Benetton logo on the product. 1986 – Marketing of Benetton watches. 1988 – Franchisees can now select from a choice of 12 shop layouts. Benetton now have 5000 shops around the world and there are plans being made to make Rocky Mount (NC) the distribution facility for the US market. 1989 – Benetton have a total of 80 agents (internally known as Centurioni).
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One thing became apparent whilst reading through the case which is the number of things that Benetton do which are seen to be unique to themselves.
Take first and foremost, right from the outset when Guiliana began to use her knitting talents producing bold, bright coloured sweaters that were revolutionary at that time. The quote I should refer you to here is the one from page 2 of the case; ‘what Luciano and Guiliana have invented was a pullover for a season or a year, not a traditional pullover for life’. Even before officially forming the company, Benetton was going against the norm of the industry and this has carried right through until present days where the ‘United Colors of Benetton’ slogan has landed them in some rather warm water with accusations of tastelessness to name but one category. Further major areas that Benetton have appeared to reap the rewards in that are unique to Benetton, are firstly technological uptake, and secondly the partnership systems in place with the Centurioni and the shop owners. I shall return to these areas later under a separate heading as I believe that these innovations were of paramount importance to the success of the Benetton Empire. In the early 1960’s, Luciano developed a significant competitive advantage by undertaking a number of slightly different ideas; selling only through specialised knitwear stores and selling his products at a 10% discount if the retailers paid cash on delivery. Furthermore, he sort to keep his costs to a minimum (because of the difficulties associated with borrowing) by establishing subcontractor agreements (revisited later) and up-taking employee suggestions, note the example on page three concerning the buying and converting of obsolete machines.
The next item unique to the Benetton system is the discovery that, if a second Benetton store opened across the street from another, sales for both expanded. This, it was believed, was due to the existence of intra-Benetton competition, which was created by the groupings of stores in one location. Agents, as reward for their commitment and motivation were earning a tidy sum but were greatly encouraged to reinvest the profits for the benefit of Benetton and for the agents. The agents note themselves that the rise to the top where you physically own shops is a quick rise. On page four of the case I refer you to the quote fourth from bottom which says that basically from September to July an agent had gone from not owning a shop to having five shops of his own. Finally, I have already briefly discussed Benetton’s revolutionary, and perhaps misunderstood, ‘United Colors’ campaign. They have also furthered their controversial image with the art director producing communications posters with images of a dying AIDS patient and a nun kissing a handsome priest. The ‘Colors’ campaign went against the initial Benetton identity of cultural diversity, racial harmony and world peace.
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In doing so the campaign had mixed success by using the medium of Formula1 and print media. The success came in the form of increased publicity and visibility but it was seen as damaging in Germany (Benetton’s 2nd largest market) where eventually the Benetton brand was boycotted partly because of the controversial advertisements. Sport continues to play a key role in Benetton with the sponsorship at Olympic Games, Italian rugby and skiing to name a handful. The angle I’ve taken for the initial stage of the analysis has been one that has made Benetton out to be unique. In agreement with this I feel that this next quote from a Benetton connected web-page is very apt; “nurturing a healthy disrespect for tradition has powered the relentless advance of Benetton.” Entrepreneurial Dynamism and the Benetton ‘Hand Shake’. Benetton’s entrepreneurs are seen to be at the forefront of the Benetton business as you would expect.
These agents were essentially separate entities as they were not directly employed by Benetton. This yielded some handsome rewards for them as it meant that the agents were responsible for their own franchises and success or failure was always down to them. Having said this, it doesn’t seem like failure for an agent is an option with the detailed stages Benetton went through to get the right people to be agents. The agents arranged their own finance but in return they didn’t have to pay royalties. Luciano spent lots of time studying the various choices of agents and firmly believed that “Choosing the right person guarantees results” (page 4).
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The Benettons’ were such believers of the agents role that it progressed through time to include a plethora of additional tasks. By the Benetton ‘Hand Shake’ I am referring to the various partnerships they have in place. The major agreement to note is the one between the agents and Benetton, with the following quote summing up what I am trying to show, “We are Benetton agents and we are at the disposal of the shop.
We work Saturdays and we work 12 hours a day” (page 4).
Luciano also devised subcontractor agreements. In return for their investing in fixed assets and a promise to work solely for Benetton, he provided the subcontractors with a constant stream of work. Pages five and six are full of examples of the development of subcontractor relationships, one of which is where the Benetton management persuaded some of the girls’ mothers to form groups and establish themselves as independent contractors. The agents, subcontractors retailers and Benetton formed quite a formidable partnership throughout the 1960’s and onwards and continue to grow and prosper. Benetton have remained competitive in Italy due to the massive exploitation of technology resulting in a lot of the competition being forced to relocate abroad. Referring to the case, the revolutionary production system in place at Benetton was only one aspect of the business subject to technological advance. Colour became the most critical fashion factor which led Luciano to adopt a system that would manufacture complete garments in off-white wool allowing them to dye them at a later date according to the market information. Though more expensive, it was also more profitable.
Finally I will take a brief look at the technological innovation employed at the plant in Castrette. An automated distribution centre containing a system capable of dividing deliveries into the finest of detail such as individual client is in place. Automatic packaging and an automated distribution system have meant that efficiency and speed of customer service has improved combined with a reduction in the transport costs. A state of the art manufacturing system adds value by doing design, cutting and quality control. This is just the tip of the iceberg but adequately reflects Benetton’s stance on new technology. Directions of Development at Benetton.
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The Italian market is now saturated and the Benetton empire is not content, they have no choice if they want to develop, they must go further afield onto the rest of Europe, the Americas and indeed the world. Benetton in order that they developed, chose to diversify into new markets and explore new areas in existing ones. With this strategy in mind Benetton undertook both related and unrelated diversification. The distinction between the two types of diversification above is simply that related diversification refers to development within the confines of their existing markets and unrelated is the opposite. Examples of such diversification’s can be seen with firstly, the introduction of Nordica or Killerloop which arguably can be viewed as an expansion of their existing market. Although these markets could be seen as more specialist and sports orientated, I still believe that there is a great deal of overlap in this and the fashion market. As Luciano says on page 3 of the case ” We wanted to compete with department stores in sportswear”.
Looking at the diversification into areas such as merchant banking, this is far beyond their existing markets and so is an example of unrelated diversification. Synergy is a common reason for related and unrelated diversification and is said to occur when two or more complementary activities, do so to the extent that their combined effect is greater than the sum of the two parts. Benetton claimed that there were synergies to be exploited from their diversification following the saturation of the Italian market. Benetton wanted to find new frontiers in old markets and to diversify into completely new markets. Benetton’s acquisition of supermarkets and hypermarkets meant that their synergies came from the fact that there were consumers who would purchase from all three. Everything that has been covered in the analysis from technological uptake to the more theoretical notions of Synergy has all contributed to the success of the Benetton Empire across the globe. Coming back to the unique idea in the initial stages of my analysis, I think in summary the whole Benetton system is the key factor of its success. The unique entrepreneurial system that is so different from the type in place at ‘The Body Shop, with Anita Rod*censored*, created the drive and commitment of the non royalty paying entrepreneurs. Not the stereotypical franchise, a great deal of time and effort went into the selection process for the entrepreneurs – one of the Benetton success factors.
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