Harvard Business School 9-389-074 January 19, 1989 BENETTON S.p.A. I should say the new strategy relates to our intention of structuring Benetton as a proper multinational company. That means we plan to create a complex global manufacturing system to advance our mission to reach the two-thirds of the world where we do not have a presence. It is in this light that our recent choice to diversify into the field of financial services must be interpreted. The financial services companies that we operate—generally in partnership with important banks and financial institutions—have to be considerate and provide the necessary support for Benetton’s new development policy. In addition, the new and more sophisticated system that we are going to build in the field of services (not only financial services but the service industry overall) may help us in our attempts to implement the entrepreneurial formula that I have tried to explain to you. With these words, Mr. Aldo Palmeri, General Manager of Benetton, S.p.A., outlined the strategy for the future development of Benetton, a strategy designed to keep the outstanding rate of growth the company had enjoyed since its inception. I. HISTORY OF THE COMPANY The Benetton story was a tale of huge success built from humble origins. Started some 25 years ago, the company had reached $1 billion in worldwide sales, building from its strengths in one of the most mature, labor-intensive industries in labor-expensive Western Europe. The firm was a typically Italian family concern, with four siblings—Giuliana, Luciano, Gilberto, and Carlo—involved from the beginning in the company operations. The eldest brother, Luciano, was born in 1935, and spent his childhood through the harsh times that Second World War brought to northeastern Italy. Upon his father’s death, he had to leave school at the age of fifteen to take a job in a men’s clothing store. In 1955, Luciano, who had just turned twenty, told Giuliana he was convinced that he could market the bright-colored, original sweaters she used to make as a hobby, so why shouldn’t they leave their jobs and start a business? With thirty thousand lire, obtained from the sale of Luciano’s accordion and Carlo’s bicycle, Luciano and Giuliana bought a knitting machine, and soon afterward Giuliana put together a This case was prepared by Senior Research Associate J. Carlos Jarillo and Jon I. Martínez, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The casewriters gratefully acknowledge the assistance of Mr. Franco Furnò, manager of Organizational Development at Benetton S.p.A., in the preparation of this case. Copyright © 1988 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 389-074 BENETTON S.p.A. collection of eighteen pieces. Luciano was immediately able to sell them to local stores. Sales increased steadily over the next few years, until Giuliana had a group of young women working for her and Luciano had bought a minibus to carry these employees to and from a small workshop the Benettons had set up near their home. In the early nineteen-sixties, Luciano Benetton put into practice several innovative ideas that helped turn the company from a small enterprise into a giant. The first idea was to sell only through specialized knitwear stores (as opposed to department stores and boutiques selling a wide range of clothes), whose owners would presumably be more interested in pushing sales of his particular product. Luciano made use of another idea unusual at that time: to offer retailers a 10% discount if they paid in cash on delivery of his product. At that point, Benetton sweaters did not bear the family name (they used foreign names, like “Lady Godiva” or “Très Jolie”), but they already had the Benetton characteristics of medium-high quality and stylish design at a very reasonable price. Two more new ideas emerged, this time for lowering production costs. The first was a novel technique for making wool soft, like cashmere; it was based on a method Luciano had observed while visiting factories in Scotland, where rudimentary machines with wooden paddles beat raw wool in water. The other idea was to buy and adapt obsolete hosiery-knitting machines, at a price of $5,000 apiece, a fraction of the cost of a new machine. The refurbished machines did their new job perfectly.1 Benetton was formally incorporated in 1965 as “Maglificio di Ponzano Veneto dei Fratelli Benetton.” The small enterprise consisted of Luciano, Giuliana, and their younger brothers, Gilberto and Carlo. Gilberto was placed in charge of financial issues, while Carlo headed the production system. In the same year, the first Benetton factory went up in the village of Ponzano, a few kilometers outside Treviso, in Northeastern Italy. In 1968, the company opened the first independent outlet in the mountain village of Belluno, not far from Venice. With its appealing merchandise and its spare, intimate interior, the shop was an immediate success. The store occupied only about 400 square feet, in part because of limited Benetton product line at the time, but it set the pattern for the stores to follow. “It was conceived on the idea of the specialized store, the desire for an alternative to the department store,” said Luciano Benetton to an American journalist. He added: “From the beginning, we wanted to create an image—the right people to open our stores, the décor, the colors.”2 Through the late sixties and early seventies the Benettons concentrated their efforts on capturing the domestic market. By 1975, the distinctive white and green Benetton knitting-stitch logo had become the symbol of a phenomenon in the Italian commercial scene. Approximately 200 Benetton shops had opened in Italy; many of them, but not all, bore the Benetton name. The idea of having other names—Sisley, Tomato, Merceria, 012—with a different decoration and selection of Benetton clothes, grew out of the intention of appealing to different segments of the market and of avoiding mass flops: if one Benetton store was a failure, others in the same area wouldn’t bear the stigma. Over the years, however, none of these names had achieved much importance, and many of them were being folded back into the Benetton brand. In spite of the early opening of their first foreign outlet in Paris, in 1969, international sales had remained negligible for the company for most of the seventies. In 1978, 98% of the company’s sales of $80 million were in Italy, where opportunities for continued high growth were diminishing. Consequently, the firm launched a major expansion campaign into the rest of Europe, always following their system of only selling through specialized, Benetton-named outlets. Sales boomed as the network of shops spread North into France, West Germany, Britain, Switzerland, and the 1 The biographical notes in the preceding paragraphs are adapted from “Profiles - Being Everywhere,” The New Yorker, Nov. 10, 1986, pp. 53–74 2 The New Yorker, op.cit., p. 58 2 BENETTON S.p.A. 389-074 Scandinavian countries. In the early 80’s, most young women in Europe seemed to be buying Benetton sportswear, including Princess Caroline of Monaco and Diana, Princess of Wales, which gave Benetton worldwide publicity. By 1982, sales had grown to roughly $311 million. In 1983, Benetton had sales of $351 million, from 2,600 stores in Europe. Though the Benettons still expected some growth in Europe, they saw greater opportunity farther afield. By the end of 1983, the company had already placed 31 shops in department stores throughout Japan, and 27 shops in major cities of the United States. Interviewed by an American magazine, Luciano Benetton confessed: “Being in America is like a dream—it is so big, so prestigious. If we do well, it will help us in Japan because they like whatever is big in the U.S.”3 Progress in both countries had been difficult at the beginning, however. Instead of opening European-style shops, 18 of the 27 U.S. shops were in department stores, like Macy’s, where Benetton had small boutiques from which it obtained a percentage of the profits. The “joint-venture” was short-lived, perhaps due to the Macy’s practice of quickly marking down prices on slow-moving items, which went completely against Benetton’s philosophy. The company set up some manufacturing units outside of Italy. The existing factories in France, Scotland and Spain were joined by an American facility in North Carolina in 1985. However, production outside Italy was not started for economic or technical reasons, but to bypass protectionism in those countries. The complexity of handling an ever-expanding network of shops, production volumes, materials flows and employees kept increasing. By the late seventies, everybody in the company felt that something had to be done. The decision was made in 1981 to recruit professional managers. Aldo Palmeri, 36, a highly regarded executive at the Bank of Italy (Italy’s central bank) in Rome, was hired as a consultant and after a year became the new managing director. Although he had several ideas for reorganizing Benetton, his limited experience in industrial companies obliged him to recruit an experienced manager to put them in practice.