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Home , CLUSTER, Fashion capital, Fashion in Milan, Fashion week, Italian fashion, La Rinascente

The Cluster

Industry Clusters and Firm Compeveness (6106)

Marta Cusinato 41148 Emelie Lin 22788 Isak Nilson 22732 Jannik Tiedemann 41123

Agenda

§ Macroeconomic Condions § Microeconomic Compeveness pp. 3-11 Naonal Framework – § Diamond § Industry

§ Cluster Map § Cluster Lifecycle § Compeon with Other Clusters Cluster – Milan Fashion § 7-Gap Model pp. 12-27 § Government Policies § Cluster Performance § Diamond Model

§ Business Model Company Level – § Cluster Relaonship pp. 28-31 § Strategy

§ Naonal Level pp. 32-35 Policy Recommendaons § Cluster Level

7 March 2017 The fashion cluster in Milan 2 Aer World War II, Italy went through a period of social and economic stabilizaon, but now faces polical and constuonal disrupons Italy – Country Overview1 Country overview Italy and Milan

§ Language: Italian (in South Tyrol, German and Italian are official languages) § Locaon in South- § Capital: Western Milan § Populaon: 62 million § Close Proximity to § Area: 294.140 square kilometers Europe’s economic § Polical system: Republic (since 2nd June 1946) powerhouses (e.g. & ) § Currency: Euro (since 1st January 1999) § Favorable access to § Member of the European Union since 1957 (founding member) the Mediterranean § Religion: Chrisanity Sea

History and legacy Latest developments § Became a naon-state in 1861 § Persistent problems include: sluggish economic growth, high youth and female § Era of parliamentary government abandoned in early 1920s (establishment of unemployment, North-South differences, organized crime and corrupon fascist dictatorship); alliance with Germany led to defeat in World War II § The referendum on 4th December 2016 to reform the Italian Constuon § Democrac republic replaced monarchy in 1946, followed by economic revival resulted in the resignaon of the Prime Minister, thus increasing polical instability2 § Member of NATO and European Economic Community (EEC) § Job insecuries and low incomes leading to low birth rates (1.39 children on av.) § Frontrunner of European economic and polical unificaon, joining the § Economic and Monetary Union in 1999 Immigraon: Southern Italian island Lampedusa as main point of entry for refugees arriving by sea, leading to large-scale refugee camps in § Tradional heritage of Italian crasmanship in fashion and design

7 March 2017 The fashion cluster in Milan 3 Italy is characterized by low polical effecveness, a high degree of corrupon, and great socio-economic differences between the North and the – Framework Condions Polical effecveness Standard of living Social development measures

§ Ranked last in Euro Area in 2015 World Bank polical § Ranked 27th in Human Development Index (0.873)2 § Consistently ranked as most corrupted country in effecveness ranking (index: 0,4)1 § Life expectancy of 83,1 years (above EU average)2 Eurozone, esmated to cost 4% of GDP5 § Bad percepon of public services, civil service § Public expenditure on educaon 4.3% of GDP with § Role of women: despite full legal rights under law, independence from polics, & government credibility average of 16 years of schooling2 women face considerable social discriminaon (on 6 § Inefficient legal framework in seling disputes and § Country divided into two parts:4 average earning 23% less than men) transparency of government policy making (ranked § Complex unemployment benefits system rd 2 o Highly industrialized and developed North, 143 worldwide by World Economic Forum) dominated by private firms, approx. producing (differences in eligibility requirements and treatment § One of the highest number of major tax evaders in 75% of the naons wealth duraon) Europe with tax evasion accounng for 7.5% of GDP3 § Social protecon system fragmented and skewed o Underdeveloped and subsidized agricultural South towards pensioners, burdening younger generaons7 Technological advancement Environmental awareness Rule of the law § Bureaucracy and difficult access to funding for start- § One of the largest stores of biodiversity, accounng § Ranked 78th place in terms of Judicial independence; ups have caused the small firms’ innovaon creaon for half the plant species and a third of the animal polical effort to ensure judiciary is not to lag far behind other major European countries species in Europe independent2 8 § Only 51% of all have a broadband subscrip- § 0,9% of world’s Co2 emissions, 5,5 tons per capita § Common pracce of irregular payments and bribes on, compared with the European average of 71%2 § Separate collecon of different waste streams is § 135th place in terms of favorism in decisions of § Italian government not geng involved in recognized as essenal for the effecve recycling of government officials2 procurement of advanced technology, liming the the different components of municipal waste § Ranked 132nd in terms of organized crime technological development in the public sector (e.g. § Issues of ineffecve and irregular public waste (especially Southern Italy)2 data storage and handling) management, especially in Southern Italy

7 March 2017 The fashion cluster in Milan 4 The Italian economy has been severely hit by the financial crisis and high unemployment rates in the South paralyze economic effecveness Italy – Macroeconomic Condions GDP per capita and inflaon Unemployment Italian GDP per capita1 in EUR and Inflaon2 in percent (expected figures from 2016-2020)3 Italian unemployment4 and youth unemployment5 in percent (expected figures from 2016-2020)3

32.500 17.200 20,7% 9,5% 40,000 1.6% 50% North South 1.4% 45% 35,000 North South 40% 30,000 1.2% 35% 1.0% 25,000 30% 0.8% 20,000 25% 0.6% 15,000 20% 0.4% 15% 10,000 0.2% 10% 5,000 0.0% 5% 0 -0.2% 0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

GDP per capita Inflaon Unemployment Youth unemployment

§ Italian economic performance heavily hit by the financial crisis § Average unemployment rate stable at around 10% § Significant North-South divide in GDP per capita (85% difference) § Unemployment rate much higher in South than in North (> 2x) § Inflaon development within European Central Bank targets (0% - 2%) § Very high youth unemployment (40% in 2015 vs. 18% in EU on average2)

7 March 2017 The fashion cluster in Milan 5 With the highest density of luxury firms in the world, a confusing tax system and unavailability of credit cause Italy to have the lowest ease of doing business compared with compeng host countries Italy – Microeconomic Compeveness (1/3) Overview of the major host countries for luxury firms Ease of doing business for countries hosng fashion firms Home countries of worldwide largest 100 luxury companies as per 2013 revenues1 Ranking of economies on the ease of starng and operang local firms, from 1 (easy) to 190 (uneasy)2

Country Number of firms 140 ∅ 4 29 50 32 31 7 8 120 Hongkong 7 100 France 11 80 60 Italy 29 40 5 20 11 0 Hongkong France Italy Spain Switzerland UK USA

UK 6 Starng a business Dealing w/ const. permits Registering property USA 15 Geng credit Paying taxes Trading across borders Enforcing contracts

§ 84 of largest 100 luxury firms located in 7 countries § Italy lacking behind countries with compeng fashion firms § Italy with the largest share of luxury companies § Very high perceived difficules in contact with public authories, including § Naonal compeveness has to be compared with the 6 biggest compeng paying taxes and enforcing contracts host naons for luxury firms § Limited availability of funding for firms

7 March 2017 The fashion cluster in Milan 6 While Italian educaon is advanced, efficiency in leveraging the available labor force is low

Italy – Microeconomic Compeveness (2/3) Italian compeveness Labor market efficiency Indicaon of naonal compeveness, from 1 (non-compeve) to 7 (compeve)1 Labor market efficiency, from 1 (non-compeve) to 7 (compeve)1 Instuons 7 ∅ 5,6 4,4 3,5 4,0 5,8 5,3 5,4 Innovaon 6 Infrastructure 5 Business 4 Macroeconomic sophiscaon 3 development 2 1 Health and primary Market size 0 educaon

Technological Higher educaon and readiness training Hongkong France Italy Spain Switzerland UK USA Financial market Goods market development efficiency Flexibility Efficient use of talent Labor market efficiency

§ Advanced educaon system, especially regarding primary educaon § Difficules to match labor supply and demand, resulng in low efficiency § Fairly advanced infrastructure § Parcularly low rang (3,1) for “Efficient use of talent” § Underdeveloped financial markets § Labor oen available, but unused by firms (due to unawareness of availability)

7 March 2017 The fashion cluster in Milan 7 Italian firms are internaonally compeve, but miss innovaon opportunies as they lack collaboraon with research and fail to apply engineers’ experse Italy – Microeconomic Compeveness (3/3) Business sophiscaon Innovaon Business sophiscaon, from 1 (non-compeve) to 7 (compeve)1 Innovaon, from 1 (non-compeve) to 7 (compeve)1

∅ 5,2 5,1 4,8 4,5 5,8 5,5 5,6 ∅ 4,4 4,9 3,9 3,7 5,8 5,0 5,6

Hongkong France Italy Spain Switzerland UK USA Hongkong France Italy Spain Switzerland UK USA

Capacity for innovaon Quality of scien.research inst. Local supplier quanty Local supplier quality State of cluster development Company spending on R&D University-industry collaboraon in R&D Nature of comp. advantage Control of int. distribuon Prod. process sophiscaon Availability of sciensts and engineers

§ Fairly high business sophiscaon, resulng from the high nature of § Italian firms with second lowest score for innovaon capabilies (3,9, only compeve advantage (6,0) Spain was a worse score of 3,7) § Highest state of cluster development (5,5, on par with USA) § Bad university-industry collaboraon in R&D (3,7) § Good quality and quanty of local suppliers (both 5,3) § Fair availability of engineers (4,8), yet low company spending on R&D (3,8)

7 March 2017 The fashion cluster in Milan 8 Italy’s compeveness is moderate due to SME’s failure to innovate and low labor mobility, whereas demand condions are favorable and supporng industries are strong

Italy – Naonal Diamond Model Firm strategy, structure, and rivalry: Negave Demand condions: Posive § Micro (<9 emp.), small (10-49 emp.), & mid-sized firms (50-249 § Sophiscated consumer market & high number of industrial buyers4 emp.) represent 89%, 9,4%, and 1,4% of all corporaons, § Fashion-conscious, heritage-conscious, and naonalisc Italian respecvely and account for 77,5% of total workforce in industrial & consumers create large demand for “” products1 1 producon § Fih biggest tourist desnaon worldwide (37 million tourists p.a.)5 § SMEs are both the backbone of the Italian economy and a curbing § Demand for quality in service industries, e.g. hotels & restaurants factor for innovaon processes and compeveness § Strong trade connecons to partners in EU, esp. Germany & France § Industrial SMEs proven to be vulnerable in crises: decrease in Firm strategy, § Purchasing power p.a. (16.709€) comparable to EU28 average, with number of SMEs by 41% (637.729 firms) from 2008 to 20132 structure, large North-South difference (Milan: 22.722€ vs. Crotone: 9.996€)6 § Because SMEs disappear oen, knowledge and experse get lost2 rivalry

Factor Demand condions condions

Factor condions: Related & Related and supporng industries: Moderate supporng Moderate § Large pool of skilled labor, but low labor mobility (esp. South-North) industries § Excel in producon of industrial machinery (3rd biggest producer of § Organizaonal and product micro-innovaons generated quickly industrial machinery, aer Germany & Japan)1 § Low skilled-labor-unemployment (7,7% vs. 10% for all employees)3 § Creaon of new “Agency for Territorial Cohesion” to foster § Good quality and quanty of educaonal system, but poor cooperaon of different clusters and industries; however, very cooperaon of industrial firms with universies and R&D3 limited engagement of economic development agencies (e.g. 7 § Structural reforms allocang capital and labor resources to fast- ProMo) growing sectors (e.g. tax reducon & project financing)3 § Underdeveloped fin. sector & low compeon between banks4 § Rich coon culvaon in , , and Apulia1

7 March 2017 The fashion cluster in Milan 9 The fashion industry plays an important role in Italy and outperforms the Italian economy, while the Italian fashion is mainly composed of smaller firms Italy – Role of the Fashion Industry The fashion industry as share of the 2015 Italy GDP Global role of Italian fashion firms 2015 Italy GDP divided by sector1 and development of fashion industry sales2 Origin of global top 100 fashion companies (per 2013 sales)3 Number of Average luxury Share of top Share of top 2015 1,815 EUR billion (2% growth) Country companies goods (mEUR) 100 companies 100 sales 2.30% EUR billion /HK 7 3.251 7% 11% 61,1 64,2 +5% France 11 4.247 11% 23% 20.3% Italy 29 1.150 29% 17% 3.4% 50.2 56.2 Spain 5 599 5% 2% 74.0% Switzerland 11 2.712 11% 15% 10.9 8.0 UK 6 922 6% 3% 2015 2016 USA 15 2.755 15% 21% Agriculture Industry Fashion Services Domesc Export X% Growth Other 16 1.193 16% 10% Top 100 100 2.017 100% 100%

§ Fashion industry sales growth outperforming overall GDP growth (5% vs. 2% § Italy with the highest number of global fashion companies (29/100) from 2015 to 2016) § Yet, Italian companies only account for 17% of the Top 100’s revenues § Export (82%) dominang over import (18%) § Italian SMEs appear in the Top 100 ranking, yet do not count to the largest § Domesc fashion sales shrinking by 27% (10,9 EUR billion to 8 EUR billion) players measured in sales (only 2 Italian companies in Top 20)

7 March 2017 The fashion cluster in Milan *Luxury sector used as a proxy to represent the fashion industry 10 Italian fashion firms located in clusters outperform non-cluster firms and perform as well as internaonal competors

Italy – Fashion Industry and Internaonal Performance Italian clusters* Performance Italian vs. average fashion firms Percentage of firms grouped in industrial districts in Italy, according to industrial districts1 Performance of Italian vs. all other firms in Top 100 largest luxury firms ranking2 Tannery Footwear 10% Glasses Musical instruments 9% 9% Fashion industry Knitwear 7% 7% Apparel 7% Texle Food industry 6% Furniture Drinks 4% Leather Other Agriculture Electrical appliances Construcon material Food 0 20 40 60 80 100 FY13 sales growth FY13 net profit FY13 return on FY11-13 net sales +5% No industrial margin assets CAGR Percentage change in turnover from 2008 district areas 1 Italy Average to 2014 in the Italian fashion industry Industrial -6% districts

§ Firms in fashion industry are more likely to be grouped in clusters § Italian fashion firms grow at lower rates than their global competors § Firms that are part of a cluster on average perform beer than the ones that § However, Italian firms show very posive development of profit margins (7%) are not part of a cluster and have a high asset ulizaon (9% ROA) § Majority of firms located in Milan and clusters § Thus, Italian firms perform on par with internaonal competors

7 March 2017 The fashion cluster in Milan *Industrial districts used as equivalent to clusters 11 Milan is the epicenter of the Italian fashion industry and fashion highly contributes to the city’s total turnover, with technology and process innovaons playing an important role Milan Fashion Cluster – Profile Milan Fashion Cluster Products § Diversified products offered by fashion cluster: apparel, footwear, bags, § 13.000 fashion enterprises in Milan, perfumes, watches, glasses, jewelry, and other accessories thereof 6.000 in the metropolitan area1 § Main materials involved in producon phase: fabric (coon, wool, linen, silk, 2 § EUR 13 billion average annual revenues chemical fibers), leather, and fur6 coming from the Milan fashion industry 7 (20% of Milan’s GDP )3 § Milan historically famous for silk and coon producon § 25% of the Italian fashion exports came § Italian manufacturers with long history of crasmanship, with most raw 7 from in 2015 (Milan’s region)4 materials being sourced locally § Lombardy exported fashion products for § With globalizaon (lower labor cost in developing countries), some fashion 8 EUR 11,8 billion in 2015, thereof EUR 5,6 houses started outsourcing producon of some secondary lines billion from Milan4 Technologies § Innovaon: creaon of new fabrics by combining different fibers to improve the current properes of materials and create new ones (e.g. microfiber, Gore-Tex) Milan Fashion District § Producon: advanced technology leads to economies of scale and scope and § The “”, or “Via increased efficiency Montenapoleone fashion district”, is located in the § Distribuon: e-commerce opened doors to new markets and increased ease of center of the city purchase, but Milan lacks behind in e-commerce compared to e.g. § District characterized by presence of world’s major § Markeng: made easier by TV commercials and social networks fashion houses, represented by retail stores & bouques Customers § Since 2009: annual edion of Vogue Fashion’s Night Out § Fashion-conscious consumers with taste for luxury and high quality products in Milan is organized there5 § Local and internaonal demand, e.g. from wealthy Chinese tourists9 7 March 2017 The fashion cluster in Milan 12 The Milan fashion industry is organized in a highly agglomerated cluster, which is the home of some of the world’s largest fashion houses and supported by various other industries Milan Fashion Cluster – Map SUPPLIERS & DISTRIBUTORS SUPPLIERS FASHION HOUSES FASHION HOUSES CAPITAL PROVIDERS DIRECTLY OPERATED STORES MILAN IS ITALY’S CENTER OF BANKING AND FINANCE LEATHER WHOLESALERS RAW MATERIALS ONLINE STORES

MEDIA MEDIA SUPPORTING ACTIVITIES FASHION BLOGGERS MAGAZINES SHOWROOMS MODEL AGENCIES

EVENTS AND FAIRS DESIGN MANUFACTURING DISTRIBUTION

EDUCATION EDUCATION ASSOCIATIONS ASSOCIATIONS GOVERNMENT GOVERNMENT AGENCIES AGENCIES RELATED CLUSTERSRELATED INDUSTRIES INTERIOR DESIGN ENTERTAINMENT ART and MUSEUMS PERFUMES TOURISM

7 March 2017 The fashion cluster in Milan 13 Since its early days in the 18th century, the fashion cluster has developed to a dynamic host of internaonally-recognized firms Milan Fashion Cluster – Lifecycle (1/3)1,2 CLUSTER MODEL

MILAN FASHION CLUSTER IN 2016 1935 1985

1906 1913 Dynamism FIRST ITALIAN WORLD EXIBITION FASHION MAGAZINES 1958

1949 FONDAZIONE MODA ITALIA TH 18 CENTURY 2016 Time

LIFE-CYCLE 1 EARLY PERIOD 2 HERO PHASE 3 MATURITY 4 TURNING POINT AGGLOMER. Thin: few small firms & first magazines Medium: first big firm, fair, school, assoc. Rich: many firms, schools, MFW, magaz. Rich DYNAMICS Stac: no communicaon/collaboraon Increasing: first associaon, more comm. Dynamic: many fairs/events link actors Dynamic CONST. Low: no policies/organizaons Low: no policies/organizaons Medium: gov. involv. slowly increasing Medium-high

7 March 2017 The fashion cluster in Milan 14

In the 19th century, Prada emerged as anchor firm, fashion instuons and organizaons for collaboraon established, and specialized fashion media set foot in Milan Milan Fashion Cluster – Lifecycle (2/3) EARLY PERIOD 1 MATURITY 3 : Evolvement of prêt-à-porter: Milan was already among the leading Italian cies in the manufacturing of luxury § 1950s: emergence of prêt-à-porter concept (ready-to-wear) goods and an European trendseer, together with Florence and § 1958: Naonal chamber of Italian Fashion founded in Milan, organizing the first 18th-19th century: edion of the Milan (MFW)8 è First signs of internaonalizaon § Birth of the first Italian fashion magazines: § 1965: Vogue Italia founded in Milan9 o Giornale delle Nuove Mode di Francia e d’Inghilterra (1786-1794, Milan) § 1966: Opening of IED, a new fashion and design instute10 o Corriere delle Dame (1804-1874, Milan)1 § 1970s: Increased popularity of prêt-à-porter:7 § First major department store in the country, Alle Cià D’Italia, to open in Milan o Florence focused on (mainly formal and expensive designs) (1865, later renamed to La Rinascente)2 o Milan remained prêt-à-porter focused, allowing to offer glamour and simple, § Second Industrial Revoluon: Milan becomes one of the biggest industrial high quality, and elegant clothes at affordable prices centers in Italy and aracts large amounts of capital è Milan becomes new capital of Italian fashion and officially one of the “Big Four” global fashion capitals (together with Paris, , and NY) HERO PHASE 2 Increased agglomeraon, dynamism, and internaonalizaon: 11 § 1906: First fair ground opening in Milan, for the World Exhibion (Expo) § 1973: Cosmopolitan entered Italy and establishing its offices in Milan 12 o Later, part of it will be transformed into the Milan Fair (1920)3 § 1975-1985: New fashion houses opened in Milan: (1975) , 13 14 15 § 1913: foundaon of Prada (first haute couture fashion house opening in Milan)4 (1978) , Moschino (1983) , Dolce & Gabbana (1985) § 7 § Aer WWII: decline of Paris as haute couture leader, followed by emergence 1980s: Milan takes over the leading posion of Paris in the prêt-à-porter and growth of new clusters in other cies (NY, London, Milan, and Florence) o Chamber of commerce started to provide services to SMEs (markeng, inter- § 1935: Foundaon of Istuto Marangoni, an important fashion academy5 naonal support, finance), without addressing fashion industry in parcular 16 17 § 1949: Federazione Moda Italia, an associaon represenng the fashion o New fashion academies open: Naba (1980) , Domus Academy (1982) industry, founded in Milan6 § 1990s: rise of fashion conglomerates è big fashion houses move from 7 15 § Despite that, in the ‘50s and ‘60s, Florence was the capital of Italian fashion7 producing just clothes and accessories to , perfumes, watches, etc.

7 March 2017 The fashion cluster in Milan 15 Having evolved as global , the globalizaon of the 21st century started to bring new opportunies and challenges for Milan Milan Fashion Cluster – Lifecycle (3/3) TURNING POINT 4 THE HOLLYWOOD MODEL 21st century: Global markets: § Early 2000s: Increasing number of projects and events promoted by the munici- With the globalizaon of the fashion industry and the develop- pality and associaons to help new firms emerge, increase communicaon ment of internaonal trends and relaons, some leading clusters between cluster actors, and improve Milan’s internaonal posion around the world start to emerge (Paris, London, New York and Milan) § 2005: foundaon of Fashion Incubator, a project founded by the Naonal Local clusters: Chamber of Italian Fashion and Milan municipality to develop emerging fashion Importance of Milan as fashion hub started due to factor condions (e.g. cras- houses (with an investment of EUR 800 million)1 manship tradion) and grew over me with the agglomeraon increasing over the § 2009: Global Language Monitor declares Milan the “world’s fashion capital”2 years, helped by the status of Milan as Italian financial center § 2016 status quo:3 Global reach: o 13.000 fashion enterprises With the cluster’s growing importance, it aracted aenon and resources: o 14 fashion fairs § At local level. fashion firms moved from Florence to Milan (e.g. )6 o More than 900 showrooms § At internaonal level, especially thanks to the , since 1958: o 15 fashion instutes o All major fashion houses and designers in the world parcipang in the New challenges with globalizaon: Milan Fashion Week (Jimmy Choo, Vivienne Westwood, CK, Louboun)7 § Rising globalizaon affects the fashion industry & Milan’s role as fashion o Large US fashion magazines opening offices in Milan (Vogue, Vanity Fair)7 capital: o Important fashion houses opening stores in the city and acquiring o Cheaper labor available in Asia, with big Italian fashion houses famous for producon sites in nearby industrial districts (e.g. LVMH, )8 “Made in Italy” (e.g. Armani) outsourcing part of producon to outside Italy4 o Talented internaonal students enrolling in fashion instutes & universies o Local manufacturers face price compeon, which might weaken the cluster § Products from the Milan fashion cluster are distributed all around the world o Fashion scene turns more mulpolar and new important centers arise: o First Italian city in terms of fashion export (EUR 5,6 bn. in 2015)8 Rome, , , Hong Kong, São Paulo and Los Angeles èGlobalizaon is not only beneficial to the cluster, but poses challenges o In 2015, Milan was ranked 6th global fashion capital previously menoned, which might lead to its decline or renaissance o Fashion weeks all around the globe make Milan lose its exclusivity5 7 March 2017 The fashion cluster in Milan 16 Milan established as leading Italian fashion cluster as it appeals to a large demand base with prêt-à-porter fashion, while Florence lost track by focusing on haute couture Milan Fashion Cluster – Domesc Compeon Milan Florence MAIN FASHION HOUSES MAIN EVENTS MAIN FASHION HOUSES MAIN EVENTS

§ Famous for prêt-à-porter and affordable, yet high-quality fashion § Famous for haute couture and high fashion § Tradion in silk and coon industries1 § Tradion in the wool industry (in the Prato district)1 § High degree of industrializaon, large companies, and number of employees1 § Fragmented: higher number of smaller firms1 § First half of the 20th century: Milan as most industrial Italian city, in which large § 50’s & 60’s: considered the birth city of Italian fashion; early promoted abroad, scale-manufacturing was first developed; cluster developing at a slower phase with exhibion in 1951, which later became Pi Immagine; fashion houses and is to expand internaonally later and Salvatore Ferragamo led promoon of the “Made in Italy”2 § 50’s and 60’s: With the establishment of the Milan Fashion Week, Milan’s § 70’s- today: missed important industrializaon staon and internaonal importance grows prêt-à-porter; pioneer of the internaonalizaon of Italian fashion, § 70’s- today: With the emergence of prêt-à-porter, Milan cluster but Florence was stuck in its “arsanal producon tracks” becomes Italian Fashion capital and sll maintains its leading posion2 § Today: lost its leading role in Italy, but is sll an important player on § Today: Milan as ”Big 4” global fashion capital internaonal level, driving domesc rivalry and innovaon

Milan hosts the leading Italian fashion cluster with a high degree of Addressing an originally more fragmented market, Florence missed the prêt-à- industrializaon and ranks as 6th strongest fashion city in the world3 porter track, but is sll a viable cluster and ranks as 11th strongest fashion city3

7 March 2017 The fashion cluster in Milan 17 Internaonally, Milan lacks behind Paris, which holds the global number one posion, as it has a longer fashion heritage and historically stronger capabilies in innovaon Milan Fashion Cluster – Global Compeon Paris New York London PARIS FASHION HOUSES MAIN EVENTS NY FASHION HOUSES MAIN EVENTS LONDON FASHION HOUSES MAIN EVENTS

§ Famous for haute couture and prêt-à-porter § Famous for educaon, and ethical producon § Famous for hip edgy fashion for trendy fashionistas § Tradion: prominent fashion since the 15th century § Tradion: fast moving consuming goods for mass § High degree of agglomeraon of educaon, § High degree of fashion house agglomeraon markets and high end fashion designers, and fashion houses § Early 20th century: dominant magazines like Vogue § High agglomeraon of designers, sample makers, § Early 20th century: agglomeraon and innovaon, and Elle established, with high agglomer. of fashion and small lot manufacturers e.g. standard sizing, and fashion companies in East houses (e.g. Balenciaga, Vionnet, Coco ) § Early 20th century: advantage in producon and End responding to mass demand for fashionable, § 50-60s: Fashion innovaons, like mass producon distribuon (producon of 70% of US clothing)2 ready to wear clothing3 of high-end fashion through prêt-à-porter by YSL § 50-70s: Fashion boom (producon of 95% of § 50s-60s: hip fashion innovaons for the youth and new look by , consolidate strong posion1 clothing for the US)2 and to market § 70s-today: Further agglomeraon and innovaon create cluster dynamism § 70s-today: receives of a more hip fashion for younger generaons § 70s-today: Outsourcing of producon to low-wage investments from the City to create exhibion § Conglomeraon under mulnaonals like LVHM countries and decline of the cluster (prod. of 3% US spaces, educaon, commercial studio spaces; clothing)2, with advantage in ethical clothing accelerators for fashion in East End4

Paris has a tradion of haute couture and prêt-à- The New York fashion cluster is younger and has London is focused on innovaon towards the young & porter, with a high degree of innovaon; in 2016 it stronger media and design presence, globally trendy, with many fashion shows & designers enriching was ranked as the no. 1 fashion capital5 ranking as 2nd strongest fashion capital5 the cluster; ranked as 3rd strongest fashion capital5

7 March 2017 The fashion cluster in Milan 18 Milan’s weakening performance is partly rooted in the gaps of the fashion cluster with other actors, in parcular research, educaon, and capital providers

Milan Fashion Cluster – Key Compeveness Issues (7-Gap Model)

Firm-to-World: 8 Firm-to-Public Authories: 5 Bridge builders: 6 Firm-to-Research: 2 § Underdeveloped e-commerce § Confusing, nontransparent, ever chan- § Linking organizaons (Polo di Via § Firms oen unaware of what channels, especially of Milanese SME ging tax system (federal vs. regional)5 Soderini, the Chamber of Commerce’s research is conducted3 firms (due to high costs and lacking § Lack of living space in central Milan3 Palazzo dell’Innovazione, and tech. § Research, on the other hand, 1 experse) § Underdeveloped public transport centres) not leveraging full bridge unaware of what innovaons are 6 § Italy (and Milan) not perceived as connecons to Milanese outskirts3 building potenal required by firms3 prime tourists desnaon for § No joint R&D facilies, which would Chinese (Paris, London, & NY with make research more efficient and beer trip organizaons)2 foster innovaon3 8 § Universies not aracng enough 5 6 § Research instutes oen lacking 3 2 exchange/internaonal students state-of-the-art resources 1 Firm-to-Clusters: 7 3 Firm-to-Educaon: 3 4 § No spillover effects between Milan 7 § Bad link between firms and and Florence cluster, caused by high universies perceived compeon (i.e. Prada vs. § Graduates (and other labor) oen Gucci)4 unaware of job vacancies8 Firm-to-Capital: 4 Firm-to-Firm: § No mutual acvies to promote 1 § Trend towards design (applicants “Made in Italy” heritage abroad, § Bad framework condions for matching § Flaening synergy effects across fashion usually requiring university degrees) 7 which would smulate reputaon firms and banks supply chain even strengthening mismatch8 and turnover for both clusters § Banks oen perceive risk of invesng in § Lile use of technology to organize § Bad career management in Italian 3 § Lile orientaon of why other uncertain fashion as too high supply chain acvies in Milan cluster compared to other universies (e.g. clusters, e.g. Paris, perform beer § Stylists & manuf. SMEs rarely connected in US and UK)9

7 March 2017 The fashion cluster in Milan 19 With inially low degree of involvement, the municipality and Chamber of Commerce started to implement policies on the fashion cluster development in the 21th century to address some gaps Milan Fashion Cluster – Government Policies No interest Low interest Increasing interest Strategic interest 19th century 1980s 2004 2006 2016 Poor government involvement Fashion as a means to promote tourism Interest in Milan as fashion cluster § In the early and hero phase, there was no § 2004: Bozze, the Alderman for economy of § 2006: the municipality started the promoon of contribuon to the development of the cluster Milan, acknowledges the need to smulate the Milan as global “knowledge and creave from the government economy of Milan through cultural events1 economy”1 § 1983: Craxi, , introduces an o Public events surrounding MFW o New iniaves (e.g. ) urban regeneraon agenda to transform Milan in a § CNMI not sasfied with the effort of the § Fashion: “post-industrial” city1 municipality and does not collaborate in opening o Support of Milan Fashion Instute and finance o New office spaces for media, finance and up the fashion weeks as demanded of academic research for Milanese fashion communicaon § 2005: General States of Fashion: public (CNMI, o Fashion Incubator to promote new talent (EUR o Increased and more affordable housing for the Chamber of Comm.) and private actors discuss the 600.000 from municipal., 220.000 from CNMI)1 middle class relaonship between Milan and fashion1 o Programs to promote (e.g. o The program, meant to promote emerging o Need for spaces in the inner city for shows Enjoy Milano, Milano Loves Fashion) industries, was expanded also to the fashion o Diminishing internaonal appeal of MFW § 2010: PROMOS (Promoonal Agency of Chamber industry thanks to the involvement of o Young designers cannot emerge of Commerce) launches a structural program for § The Chamber of Commerce offers services to SMEs, § The Chamber of Commerce commits to financially the markeng of the city (e.g. NEXT GENERATION but not in the fashion industry specifically2 contribute to new talent development fashion incubator, Milan Fashion City program)1

§ The level of construcon of the cluster is low § Fashion industry not considered as a strategic acvity § Increased collaboraon between the municipality, § No communicaon between the municipality and § The government just wants to exploit the fashion Chamber of Commerce and CNMI the representaves of the industry sector to promote tourism § Smulaon of the collaboraon between § The municipality is not able to recognize the § Low collaboraon between instuons and universies and representaves of the cluster importance of the fashion sector associaons

7 March 2017 The fashion cluster in Milan 20 The Milan fashion cluster has experienced a steep climb in revenues since 2007, however margins have recently dropped and work force has only risen at lower rates Milan Fashion Cluster – Performance Revenue and profitability development* Number of employees and firms development* Revenues (in EUR million) and profit margins (in percent) of the Milan fashion cluster1,2 Number of employees in the Milan fashion cluster in thousands1,2

14,000 30% 85 27% 12,000 80 24% 10,000 75 9% 21% 8,000 18% 70 6,000 15% 65 4,000 2% 12% 60 2,000 9% 0 6% 55 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenues Margins X% CAGR Employees X% CAGR

§ Milan fashion cluster turnover more than doubled from 2007-2015 (9% CAGR) § Number of employees in Milan fashion cluster growing from 71.000 (2007) § Margins dropped from 19% (2014) to 14% (2015) to 83.000 (2015) § Globalizaon has brought new demand and turnover, but eats margins and § Average annual growth in employment (2%) lower than in revenues (9%) incurs high costs for e.g. developing new sales channels § Offshoring to rest of Italy and low cost countries likely a reason for this trend

* Proxy: 2015 actual cluster data on revenue, profits, and no. of employees used 7 March 2017 The fashion cluster in Milan to build rao for 2007-2014 development; actual 2007-2014 financial data from 8 21 largest Milan fashion houses used to represent 2007-2014 cluster development To maintain promising growth and regain a posion as leading global fashion capitals, Milan has to combine local crasmanship with technological advancement and innovaon Milan Fashion Cluster – Trends and Opportunies 1,2,3 Big data and digitalizaon E-commerce Innovaon in producon

§ Tools that enable sizing increasingly common (e.g. § Luxury brands have long refused to enter e- § Producon geng increasingly vercally integrated, augmented reality enabled, virtual fing rooms, and commerce, believing it to threaten their exclusivity making firms gaining control over the enre value 3D body scanners), as well as soware tools that § Now, visually appealing online versions of stores, chain from thread to catwalk compare sizes across brands integrated payment gateways, and efficient delivery § New way of producon sasfy new forms of demand § “Those who bought this also bought this” will trans- logiscs become the standard and producon (recycling, environmentally late into meta data points to make meaningful § Important to upgrade online experience with responsive, 3D-printed) recommendaons (e.g. in online shopping) digitalized experience (e.g. shoppers style assistance) § New methods have potenal to impact fashion, e.g. § Arficial Intelligence and deep learning to study § It gets easier for strong brands to access new by reducing costs and reliability on rare and unique tastes and predict/ personalize markets, but also opens up local market to new expensive material recommendaons at individual level compeon from foreign and niche players

Technological advancement in design Tailoring and customizaon Shorter producon cycles § Technological trends in design (e.g. kinec energy, § Segmented and customized fashion becoming a § Retailers have begun to increase the number of solar power, RFID) require responses from fashion more important driver of consumer purchases fashion cycles throughout the year houses § Customer interacons across channels increasingly § Consumers get engaged in fashion trends § Wearable technology allows to e.g. use locaon, becoming more tailor-made to offer a more § Pressure on global supply chains with e.g. shorter body temperature, and body moon to take contextual, local, and personalized experience lead mes, rapid delivery, and wasted inventory intelligent decisions based on processed data § Firms’ access to consumer data and tastes will costs § Challenging for luxury companies to board these become ever more important § High pressure on innovaon and design for fashion trends and yet remain their exclusivity § Emergence of new niche apparel brands that ulize firms, also increasing the threat of losing exclusivity technology to sell directly to consumers and consistency in fashion lines

7 March 2017 The fashion cluster in Milan 22 Milan’s context for strategy and rivalry is modest with a high agglomeraon of company headquarters, but declining producon facilies due to offshoring

Milan Fashion Cluster – Firm Strategy, Structure, and Rivalry Moderate Posive Negave

§ Milan is Italy’s most densely populated city (metropolitan region >7 million § Core of Milan progressively veering towards a service center, contribung to a inhabitants) with highest per capita GDP (EUR 35.137 in 2015)1,2 change in work force compeon (risk: loss in labor diversity)9 § Financial epicenter with strong internaonal business partners, concentrang § Large parts of producon moved outside Milan to Lombardy region or beyond >40% of FDI inflows coming to Italy (2015)3 (mainly for cost and space reasons) § Collecon of company headquarters, allowing for increased direct rivalry and § Milan as strongest economic center in Italy, yet metropolitan region only 30th quick disseminaon of best pracces strongest region (out of 78 OECD metropolitan regions) on GDP per capita9

Milan level § Yet, producve fabric mostly composed of SMEs (average size of firms has § SMEs with few incenves to patent their innovaons (Milan’s region, dropped from a 100 index in 1981 to 73.5 in 2004)4 Lombardy, with much fewer patent registraons than comparable European regions)9

§ Long-established localizaon advantage, historically enjoyed image of § Companies increasingly serving global demand, which is associated with internaonal “capital of fashion”4 tremendous costs (e.g. establishing partnerships, opening stores, etc.)10 § Turnover of EUR 13 billion5, 13.000 firms, 83.000 employees in fashion (2015)6 § Pressure on margins through internaonal compeon, both domescally and § Specialized in many segments of the fashion supply chain other than clothing: abroad: companies look for other cost saving potenal § o 60.000 workers in Province, >6.700 producon firms and >6.206 retail firms7 Outsourcing of producon to the rest of Italy as there is almost no importance of being “Made in Milan” as compared to being ”Made in Italy”4 o Milan’s styling and design acvies alone produce more than half of naonal 8 § City’s link between designers and manufacturers is challenged as a result of

Cluster level total turnover (EUR 535 million out of EUR 1 billion) outsourcing

7 March 2017 The fashion cluster in Milan 23 There is a high quanty and quality of educated fashion labor, but a lack of collaboraon between firms and research instuons

Milan Fashion Cluster – Factor Condions Moderate Posive Negave

§ Highly entrepreneurial populaon: >every 10th person in Milan is self- § Obstacles in knowledge flow, innovaon capability, funding1 employed1 § Physical space, logiscs, bad access to funding, living prices § Significantly lower unemployment rate as rest of Italy (8,4% vs. 10,0%)1 § Public goods and services (e.g. transportaon) not keeping pace with pressing § Well-educated and relavely young labor market need for accrued linkages across the enlarged metropolitan region8 § Presgious academic system with 183.000 students (13% of naonal total)2 § Universies with few incenves to collaborate, generang few spin-offs, barely § Milan aracts a higher number of foreign students compared to the naonal interacng with SMEs, failing mechanisms to trigger knowledge spillovers1 average (3.1%3 vs 11.6% in Bocconi4 and 12.2% in Politecnico di Milano5) Milan level § Excellent organizaonal capacity of firms (high quality of management and co- operaon between design and producon processes)1

§ Long- held reputaon as “fashion hub”, aracng world-class designers § Transions from a heavy manufacturing-focused cluster (where low-skilled, § Networks of SMEs form a flexible producon framework, able to produce niche manual labor is demanded) to a heavy design-focused cluster (where high- goods and adjust to change skilled, design labor is demanded)9 § Strong connecons with local and global suppliers, enabling fast and flexible § SMEs unaware of available innovaon, thus unable to express demand to shipping of small-lot clothing1 research instuons and universies § Educaonal instuons offer reputable fashion programs § In the fashion sector, the rate of foreign students is even higher (34.16%6, Cluster level 10.0007 new foreign students per year) § Educaonal efforts are a key asset for the cluster, generang talented workforce that leads the value creaon in this industry

7 March 2017 The fashion cluster in Milan 24 The sophiscated taste of Milanese and annual fashion events spur domesc and internaonal demand, yet Milanese fashion firms could expand their e-commerce presence

Milan Fashion Cluster – Demand Condions Posive Posive Negave

§ Large, wealthy, sophiscated, and prosperous populaon § Organized trips for e.g. Chinese shoppers lack behind in quality and quanty § GDP of EUR 241 billion (EU’s 4th and world's 26th richest city)1 compared to e.g. Paris, NY, and London4 § Highly diverse set of tastes and drives for increased expectaons from firms § Milan not perceived as major tourist desnaon for Asian tourists § Internaonal metropolis: people coming to Milan just for shopping (feature of especially Chinese consumers that “have to buy” with high luxury taxes in China) § Wholesale and showrooms considerable assets to display latest trends, new Milan level large-scale exhibion area in the Rho-Pero municipalies2 o Showcase “Made in Italy”, help local supply adapt to internaonal demand o Provide local SMEs with an indispensable networking service § Reputaon of the “Fashion Center” of the world spurs local consumer demand § Underdeveloped e-commerce channels in Milanese fashion:5 § 14 annual fashion events: Milan Fashion week alone aracng 22.500 o Only 15% of Italians shop online, inhibing the investment of Italian aendees and generang sales of EUR 50,5 million (2016)3 companies in e-commerce § Cluster’s proximity to fashionable Milanese's allows designers to get instant o Scarce technological culture among cizens and schools lacking behind on feedback on new designs, and iterate designs quickly modern technology § Focus on prêt-à-porter fashion, appealing to a large customers base as § Small size of fashion companies: compared to e.g. haute-couture (easier to wear and showcase) o SMEs facing difficules and high investment costs to enter online market

Cluster level 2 § Milano Collezioni, aracng thousands of visitors and tourists twice a year o SMEs oen not possessing suitable technological experse / right human resources to leverage online sales1

7 March 2017 The fashion cluster in Milan 25 The fashion cluster has a dynamic relaonship with the local texle, design, and media industry

Milan Fashion Cluster – Related and Supporng Industries Posive Posive Negave

§ Tourism strengthens brands, incr. demand, heighten learning & innovaon § Manufacturing industries have moved out to the periphery or are created § Historical skills endowment and advantageous locaon there, while specialized high-level services have agglomerated in the core § Core area of Milan generang services to improve skills of SMEs:1 § Companies specialized in heavy industries have le Milan progressively in 1 o Financial services with the headquarters of the largest Italian banks 1980s & 1990s, (e.g. , Montecani Edison, ) o High concentraon of the media industry (adversing & mass communicaon) § Design as a powerful driver: constant demand from local producon Milan level framework, including automove industry, furniture sector, fashion sector (accessory goods such as glasses, watches, etc.)1 § Logiscs and transport sector growing significantly (+6.8% in 2015)2

§ Strong local texle sector that provides good “raw material” to designers and § Early stages of ssue producon already outsourced (mainly to China), causing generates a constant flow of informaon1 a risk in knowledge transfer and supplier interacon5 § Fashion and design clusters benefit from very close interacons: § Movement of producon also to the rest of Italy for cost reasons (it is not 5 o Firms involved in design and styling of texle, clothing, shoes, jewelry and essenal to produce in Milan, Italy is enough) furniture is clustered in the area of in the Ticinese neighborhood § Some towns, e.g. Prato, have already experienced a transformaon from a 6 o Small avg. size of these firms (2,44 workers per firm), enabling broad choice3 tradional stronghold of Italian texle industry into a capital of cheap clothing: o Producon of relaonal capital and increased trust o Imporng far cheaper fabrics from China, thus discriminang prices Cluster level § Interacons encourage creaon of other cultural services (restaurants, bars, o Chinese suppliers in Prato have proven to interact less with fashion night-clubs and specialized shops), i.e. local private goods that generate a companies, pung the tradional flow of informaon at risk “buzz” environment and free exchanges of innovave ideas4

7 March 2017 The fashion cluster in Milan 26 The context for firm strategy and factor condions are overall moderate, while demand condions and supporng industries are posive for the Milan fashion cluster Milan Fashion Cluster – Diamond Model Summary

Firm strategy, structure, and rivalry: Moderate Demand condions: Posive § Financial epicenter with high representaon of firm HQs § Highly diverse set of tastes in sophiscated and prosperous § Milan as Italy’s producve fabric, mostly composed of SMEs populaon, driving increased expectaons from firms § SMEs with comparably few innovaons (measured in patents) § Reputaon of the “Fashion Center” spurs global consumer demand § Specialized in many segments of the fashion supply chain, also other § Internaonal metropolis with tourists coming to Milan just for than clothing (producon, retail, design, media) shopping, especially Chinese consumers that buy for tax reasons § Long-established localizaon advantage, historically enjoyed image § Mulple annual fashion events, aracng millions of aendees and of inter-naonal “capital of fashion” Firm strategy, (industrial) buyers § Increasing degree of outsourcing and costs incurred by globalizaon structure, § E-commerce presence can be increased rivalry

Factor Demand condions condions

Factor condions: Related & Related and supporng industries: Moderate supporng Posive § Entrepreneurship: >every 10th person in Milan is self-employed industries § Historical skills endowment and advantageous locaon § Strong connecons with local and global suppliers, enabling fast and § Strong local texle sector that provided good “raw material” to flexible shipping of small-lot clothing designers and generated a constant flow of informaon § Educaonal instuons offer reputable fashion programs, e.g. § Fashion and design clusters benefit from very close interacons with Bocconi “Master in Fashion, Experience & Design Management” design and styling of texle, clothing, shoes, jewelry and furniture § Universies with few incenves to collaborate, generang few spin- § Early stages of ssue producon already outsourced (mainly to offs, barely interacng with SMEs, failing mechanisms to trigger China), causing a risk in knowledge transfer and supplier interacon knowledge spillovers

7 March 2017 The fashion cluster in Milan 27 Prada Group is one of the leading fashion firms from the Milan cluster and operates with an integrated value chain

1,2,3 Prada – Firm Overview Facts and Figures Numbers of stores per region and product scope Other: 2% § Fashion company established 1913 in Milan by Maria Prada 250 Clothing: 18% § One of the leading producers 200 Footwear: 17% 150 § Current CEO 100 § Number of Employees: 12,414 50 § Annual Revenues (2015): € 3,547,771,000 0 § Revenue Growth 2011-2015: 38.8% Leather Goods: 63% Value Chain Fashion Buying Quality Shows Session Control Design & Product Collecon of (retail) Sourcing and Distribuon Development Orders producon Show Sales Logiscs rooms campaign § Development of new § Collecon of orders from Prada (Whole sale) § Material purchasing based on strong § 618 Directly operated stores (DOS) and collecons, prototypes and Group’s retail channels and relaonships 36 Franchise operated stores (87,3% of samples wholesale clients at show rooms § Divisions for leather goods, footwear sales) § Takes place at in house § Collecon of orders for Prada and ready to wear § Network of selected high end mul facilies in Italy and at Fashion shows § Samples and prototypes made in 10 brand stores and luxury department § Detailed specificaons for in-house facilies in Italy, 1 in GB stores through whole sales: (12,7% of quality control outsourced § 480 external manufacturers around sales) producon the world with ght control/logiscs 7 March 2017 The fashion cluster in Milan 28 Prada‘s business model leverages its Italian fashion credibility, targeng forward thinking consumers with luxury and diffusion brands; art, architecture, and elaborated store concepts add further value Prada – Business Model Canvas1,2,3,4 Key Partners Key Acvies Value Proposions Customer Relaons Customer Segments

§ Carefully selected § Design Prada: the Core brand § Stores § Prada brand: internaonal wholesale The Cognoscen/Elite § § Accessories: Bags, and § fashion stockists Manufacturing leather wear Online stores consumer § Vast network of § Retailing § Men's and women’s wear § Fashion weeks § Miu Miu: manufacturers and 3rd and shows Young Fashion forward § Shoes party suppliers across Italy female customers Key Resources § Fragrances and skincare Channels § Chinese manufacturers § Churchs: account for 20% of § Luxury brand identy & Diffusion Brands § Prada Internaonal Green sophiscated buyers with Prada’s collecons Fashion Credibility § Miu Miu Store Concept Brish preferences Clothes, shoes and § Starchitechts: Rem § Made in Italy accessories § Prada Epicenter Stores: § Fondazione Prada and the Koolhas, Hertzod de Cultural event stores in Epicenter Stores: The § Know-how in technology § Church’s Meuron Brish shoes for men and New York, , LA Cultural elite and handicra woman § The Royal Household § Miu Miu Global Bouque § Internaonal Store § Value adders network Fondazione Prada § Third party Vendors stores Art Space that adds cultural value

Cost Structure Revenue Streams

§ Fixed costs: § Variable Costs: § Licensing Manufacturing, exhibion, and store Fabric, Markeng, Personnel facilies § Product sales

7 March 2017 The fashion cluster in Milan 29 Prada benefits from the Milan cluster’s specialized labor, access to capital, and organizaons for collaboraon, while dynamism with educaon and research is low Prada – Relaon to the Milan Fashion Cluster1,2 Government § Government benefits from made in Italy concept gene- rated by Prada Research Organizaons § Government supports the concept by large invest- Educaon organizaons ments, EUR 220 million between 2015-2017, which in § Weak connecon to research organizaons turn strengthens the Prada brand § One of the top recruiters of students from the § Historically strong relaons to raw material § Changing and complex tax laws for global companies cluster university programs in Fashion and Business suppliers in the Milan cluster have worsen Prada´s abilies for internaonal strategy § In contrast to competors like Gucci, Prada does § Suppliers act as sources for innovaon in the not acvely support university programs through development of new materials for Prada funding and/or carrier development § Weak presence at career days

Capital Providers Organizaons for Collaboraon § Prada is registered at the Hong Kong Stock § Member of the Naonal Chamber for Italian Exchange which generated a inflow of capital from Fashion (an associaon promong Italian fashion global investors internaonally and organizing the Milan Fashion § Milan as a strong financial center creates good Other Clusters Week, the natural venue for the latest fashion) premises for capital inflow § Entered NY-fashion cluster through acquision of § Founded the Prada Foundaon Milan in 2015, for § Good relaons to local banks through Prada’s Helmut Lang, but failed due to cultural differences mul-disciplinary knowledge exchange between Chairman § Part of Northampton cluster through acquision art, architecture, and fashion of Church’s § Strong historical connecon to Italian producon clusters for leather and clothing, increasing product scope and flexibility

7 March 2017 The fashion cluster in Milan 30 Prada remains in the Milan Cluster and became a global compeng brand through product differenaon, market development, acquisions, and licensing Prada – Strategy Tracks and Internaonal Compeveness Between 1913-20161,2

1913-1978: 1978-1985: 1985-1998: 1998- 2003: 2003-today: Market penetraon track Product Differenaon track Market Development track Expansion by Acquision track Licensing & new markets track

§ Focus strategy offering § Change of leadership § Establishes wholesale account § Acquires Fashion brands: § Sells Helmut Lang and Jil leather travel accessories to § Differenaon strategy: in the U.S. and Europe Rome based , Helmut Sander due to lack of success the elite Milanese consumer ulitarian luggage collecons § Adapts the Green Store Lang in the New York cluster, § Licences Prada brand to § Main channel: Milanese in nylon aract new segments concept to local tastes in New Jil Sander in Germany. global perfume, telephone, luxury goods arcade (local § Modernized logo, in Milan York, Paris, Madrid, London, § Acquires shoe brand Church’s and sunglasses companies distribuon) sophiscated “Green Store” and Tokyo in Northampton shoe cluster, § Opens online stores § Becomes official supplier to § Competors focus on lavish § Increased product and brand and Italian The Car Shoe Co § Heavy expansion to China the Royal Household, which luxury and celebrity, Prada on scope: shoes, clothing § Epistore concept est. in and the Middle East gives naonal recognion subtle Milanese elegance § Further internaonal demand Beverly Hills, Tokyo, and NY § Gets listed on Hong Kong § Competors internaonalize, § Internaonal demand Stock Exchange to collect Prada unknown outside Italy aracon funding

Regional and Naonal compeveness Mulnaonal Increased Mulnaonal Global Naonal Compeveness internaonal demand Compeveness Compeveness Compeveness

Timeline Naonal Mulnaonal Global 1913 1985 2003 2016

7 March 2017 The fashion cluster in Milan 31 There are several gaps in the structure of Italy and the Milan fashion cluster, which can be addressed by policy makers with the implementaon of new policies

1 Policy Recommendaons – Assessment of Compeveness and Gaps 7-Gap Model Challenges Gap dimensions How to address challenges with regards to the fashion cluster Diamond level 1 Naonal level: Nontransparent, ever-changing tax system Firm-to-Public Actors Simplify tax system, run tax promoon campaign, and hire fashion tax consultants for clusters Firm strategy, structure, Mistrust in government and corrupon Firm-to-Public Actors Introduce authority contact person within chamber for fashion, educate on taxes (fashion events) rivalry Factor Demand Bad access to capital Firm-to-Capital Act as a broker between banks and fashion SMEs; support SMEs financially conditions conditions Related & supporting Low innovaon capabilies of SMEs Firm-to-Firm Run internaonal campaigns to promote “Made in Italy” and aract skilled foreign labor industries Bad collaboraon of research instutes & firms Firm-to-Research Create forum where firms, research, and educaon instuons can exchange knowledge and ideas Bad matching of labor supply and demand Firm-to-Educaon Promote the use of job engines that link firms with job searching labor 2 Milan and fashion cluster level: Producon outsourcing Firm-to-Firm Make local sourcing more convenient in terms of taxes (or increase the taxes on import) Firm strategy, structure, Underdeveloped infrastruct. & public transports Firm-to-Public Actors Improve public transport connecon to outskirts rivalry Factor Demand Expensive housing (distance to cluster) Firm-to-Public Actors Supply cheap living space in central Milan, close to fashion cluster conditions conditions Related & supporting Low collaboraon between firms and R&D Firm-to-Educaon Launch joint R&D labs for firms, universies, and other research instuons industries Shi of labor demand from producon to design Firm-to-Educaon Launch a job engine that promotes vacant posion and helps bring skilled designers to Milan Underdeveloped e-commerce sales channels Firm-to-Global Market Help firms develop online stores and educate them on digitalizaon

Firm strategy, structure, 3 Other factors: rivalry

Factor Demand No percepon as prime tourist desnaon Firm-to-World Offer tailored fashion trips for wealthy Chinese tourists conditions conditions

Related & supporting No mutual acvies between the clusters Firm-to-Clusters Collaborate between Milan and Florence for tourism trips industries

7 March 2017 The fashion cluster in Milan 32 Naonal framework condions can be improved by promong the concept of “Made in Italy”, reducing bureaucracy complexity, increasing the ease of geng business loans, and improving infrastructure Firm strategy, structure, – rivalry Policy Recommendaons 1 Naonal Level Factor Demand conditions conditions

Related & supporting Infrastructure & organizaonal framework industries Innovaon & Organizaon Financial system Infrastructure crasmanship & taxes & funding § Fund university chairs, re- § Simplify tax reforms, espe- § Establish facilitang bank § Create affordable living searching on new designs & cially regarding split of that backs bank loans to space in fashion clusters technologies for fashion federal and regional taxes fashion companies like Milan (e.g. 1-room § Run campaign to promote § Make tax system more § Bank can also provide own studios in fashion district) “Made in Italy”, which will transparent funding (e.g. funding of § Provide more affordable ulmately benefit firms § Establish tax contact pers- commercial banks +50%) Student facilies (popularity) and Italy (taxes) ons in organizaons on § Create a fund for fashion § Improve public transport § Advance Italian cras- cluster levels (e.g. in the companies, e.g. for connecon of suburbs to manship abroad by funding fashion cluster); could be in investments in new fashion clusters universies to grant more the form of a fashion forum technologies and § Foster expansion of broad- intern./exchange students § Be present at fashion shows digitalizaon band internet and make to educate on tax issues Italy more tech-conscious

Promote “Made in Italy” concept Simplify contact with public (tax) Facilitate/iniate granng loans Facilitate designers and other fashion- abroad, bringing talented labor to authories, prevenng firms to leave and provide firms with secu- related labor to move to clusters, thus Italy and smulang demand Italy for bureaucracy reasons ries for loans to fashion firms improving the knowledge exchange

7 March 2017 The fashion cluster in Milan 33 The creaon of a Milan Fashion Innovaon Lab can reduce the supply and demand mismatch, as well as foster innovaon and e-commerce Firm strategy, structure, – rivalry Policy Recommendaons 2 Milan and Fashion Cluster Level Provide funding and run acvies in cooperaon Factor Demand between municipality, firms, and universies conditions conditions Related & supporting Milan Fashion Innovaon Lab industries

Launch job matching engine specific Run joint R&D facilies of Provide funding for technical Establish innovaon case challenge for the fashion cluster SME firms & digital development § Link students and other skilled labor § Perpetuate brainstorming dynamics § Increase e-commerce presence of § Case challenge in cooperaon with to firms via establishing an incubator for Italian SMEs, especially on universies and firms § Create an overview of vacant jobs in exchanging exisng knowledge and internaonal level § Create awareness among students the fashion cluster and provide creang new knowledge (funded § Create standardized website tool of fashion firms, especially SMEs labor with the opportunity to jointly by firms and government) for SMEs to create online stores § Offer firms plaorm to promote iniate contact § Act as innovaon broker for firms, § Launch educaon facility to educate their firm as potenal employer § Fight skilled labor shortage for R&D instuons, and universies SMEs on digitalizaon, creang § Create forum for firms to fashion firms § Create synergies across fashion sup- internal tech. knowledge that can incorporate “out of the box § Address the issue of changing labor ply chain by facilitang linkages be used to leverage e-commerce knowledge” by students demand (from producon to design) between stylists and manuf. SMEs

Fight the supply and demand mismatch Create awareness on research level of Foster e-commerce sales channel of Awake the interest of students in fashion between fashion companies and (skilled) what innovaons firms require and on Milanese firms, thereby opening new and provide “out-of-the-box” fashion labor firm level of what research is conducted opportunies for SMEs to sell abroad soluons for SMEs

7 March 2017 The fashion cluster in Milan 34 Offering tailored trips for wealthy Chinese tourists in cooperaon between authories, cies, and Firm strategy, structure, rivalry trip operators can boost internaonal demand for Italian fashion products Factor Demand conditions conditions

Related & supporting Policy Recommendaons 3 – Organized Fashion Trips for Chinese Tourists industries Organized fashion trips to Milan and Florence…1 …tailored by authories, cies, and trip operators…1 …specifically for wealthy Chinese tourists. 2,3

Authories Cies Trip operators

§ Organized visits to luxury bouques and crasmen in Authories: § Chinese tourists were the biggest group of tax-free the fashion clusters, introducing e.g. tradional § Ensure easy Visa process, e.g. within 36 hours spenders in Italy in 2014, accounng for 35% of

kning techniques § Offer easy tax declaraon process at the airport Italian luxury sales § Bouques to offer special opening hours § § Negoate more direct flights from China to Italy Chinese tourists spent EUR 468 million in Italy in 2014 § Supplemented by: § Cies: Italy within top 10 desnaons for Chinese tourists o Art and culture heritage of Milan and Florence (more than 477.000 in 2014) § Chinese police to ensure safety (bilateral police o Custom ineraries ranging from educaonal § cooperaon agreement already negoated) Average stay of 6,3 days ideal to offer tailored trips of tourism to heritage tourism ca. one week § Offer infrastructure and coordinated transport (Milan o Exhilarang experiences like watching the § - Florence rail-way, airport transfer, etc.) Imported luxury brands are oen as much as 30% F1 race or the Seria A football league matches live more expensive in China than in Italy, ensuring high Trip operators: o New tourist products such as the Pilgrims' Paths willingness to pay among Chinese tourists offer a large variety of experiences to places not § Offer tailored trips for Chinese well known to the general public § Employ Chinese-speaking staff

There could be fashion trips offering special visits to A cooperaon between authories, cies, and trip Chinese tourists are an ideal target group to boost the bouques and other places in the fashion clusters, operators ensures a smooth procedure during the trip, sales of Italian luxury fashion products as they are supplemented by other cultural programs incenvizing the willingness to spend thirsty for luxury products

7 March 2017 The fashion cluster in Milan 35