Conventionally, Benetton sold items through a web of small, independent retailers. Contracts similar to franchises were set up with retailers through agents who were responsible for a given area.
All sportswear and equipment was sold through a variety of ways, from worldwide distribution chains to small independent specialists. In each store, consumers have the ability to directly compare Benetton products with those of competitors. Therefore, Benetton has passed a lot of power from its grasp by allowing the large retailers to dictate trading relationships.
4.2 Reorganisation of Retailing and Retail Networks
To challenge larger competitors such as Gap, Benetton opened ‘Megastores’ - larger stores allowing whole product ranges to be displayed. This has been done by enlarging existing stores wherever possible, and also building new stores. When they cannot be expanded, stores are used for a focused range of products. Benefits offered by megastore retailing include 2-3 times more turnover per m2 and increased ability to monitor consumer preferences. Benetton have also invested in a new information system which records details of all sales worldwide and allows Benetton to view market trends in real-time.
Benetton aims to improve the retail of their sports products by building on their relationships with large specialist distribution chains. It is hoped that areas can be secured within megastores to sell only Benetton products. By displaying products independently, consumers’ ability to directly compare products and therefore competition is reduced.
4.3 Conclusion and Recapitulation of reorganisation
Overall, Benetton have reorganised to achieve the following common aims:
- Focus on Benetton brand as being universal, all-encompassing, innovative, and global
- Quality through innovation – not necessarily in terms of features that might go out of date, but in terms of absolute innovation and 'newness'
- Focus on internal synergies – this will primarily be between the casual wear and sportswear areas of operations, but in the future, Benetton wishes to use the universal nature of its brand to exploit synergies in terms of image and reputation to bring the sports equipment side of the sports business back into line with the firm as a whole
5.1 SWOT analysis of Benetton
Strengths
Core Business: Casual-Wear (esp. special relationship with its retailers)
Core Competencies:
- Innovative operations management techniques- e.g. delayed dyeing; Benetton postpones garment dyeing for as long as possible so that decisions about colours can reflect market trends.
- Network organisation for manufacturing-a network of subcontractors supplies Benetton's factories
-
Network organisation for distribution. Benetton used to sell and distribute its products through agents, each responsible for developing a given market area. Now they gradually sell and distribute their products through megastores, which further enhances their selling opportunities. (successful and unique franchising formula)
- High profitability of the casual wear business (around 20% on average)
- Efficient and fully industrialised production process
- A new mgt very committed to its cost savings policy
Weaknesses (internal/current)
- Retailing: slow time to market. Competitors much quicker lead time from
clothes appearing on cat-walk to selling them in stores. Design: Bland colours, cutting and design, not attractive.
- Branding: No specific target audience. Not formal enough for business wear,
not trendy enough for teenagers.
- Diversification campaign: stretching limited resources on activities that
aren't its core competencies i.e. into sports equipment.
- High cash flow requirements for the sports business
(low visibility on turnaround)
- Uncompetitive time to market vs. pure retailers
- Still limited role of retail in group’s business model
Opportunities (external/future)
- The advent of 'megastore' retailing - this will mean that it will be easier for Benetton to sell its product en masse without incurring the large start-up costs that are needed to finance its own firms. If Benetton could develop relationships with major retailers in the megastore field then it could prove particularly lucrative for sales in the future
- Given that 'sports activity holidays' have dramatically reduced in price, they have become a lot more accessible to virtually every socio-economic level of society. Owing to this, there will be an increased level of sales from across the range of sports-related clothing and equipment (e.g. from economy to high-level luxury), reflecting the greater range of people going on sporting holidays
- Since the reorganisation of the sports division of Benetton, there is a large opportunity for Benetton to capitalise on its changed profit margin levels. Since Benetton is now focusing on the sports clothing sector of the market, there is a lot more scope for Benetton to use these increased profit margins to its advantage
- Benetton's increased investment could give it a significant opportunity for exploiting sales from the market, and in addition, beating competitors to these sales. Now that Benetton has shifted its sports division to focus more on the sports clothing side of its operations, Benetton may well be able to use its existing knowledge and key competencies along with this increased investment to be increasingly more innovative than its key competitors (e.g. Zara, Gap, H&M).
- Big cost cuts in the sports business
- Delocalisation of production for basic casual lines
- Increased weighting of ‘flash’ collections on total group sales
Threats (external/future)
- Threat of competitors mimicking Benetton’s innovative manufacturing process-and so risk of losing competitive advantage in this area.
- Slow time to market (as mentioned in weaknesses). Risk of competitors releasing the latest fashions before Benetton. Implications on sales, and also image-could appear to be following competitors rather than using originality.
- If Benetton is unable to establish relationships with key suppliers in its sports business, it risks losing market share to competitors, as it does not retail products through its own outlets. These relationships create the possibility of ‘dedicated display space’ which is needed to gain competitive advantage. Without this, (and especially if competitors do gain it) Benetton will need to invest heavily (in advertising and brand awareness) to stay competitive.
- Zara entering the Italian market in 2002
- Retail division still making a loss due to the high cost of real estate purchases for the roll-out of its retail stores.
5.0 Outsourcing
5.0.1 What is outsourcing?
Outsourcing can be defined as ‘the process of transferring an existing business activity, including the relevant assets, to a third party’ (Lonsdale, Cox, 1998). Outsourcing can be seen as an alternative to vertical integration, which by its own right provides the firm with a number of advantages, but is increasingly being viewed as less flexible than this alternative.
5.0.2 How and why outsource?
Outsourcing involves identifying the firm’s core competencies, those activities that the firm performs better than competitors and that add extra value for customers. By outsourcing all non core functions and activities, the firm is able to concentrate more energy, resources and time into improving it’s core competencies and processes to such a level that gains them, or increases their competitive advantage. Outsourcing very advantageous for the firm, however these advantages also come with risks, and so potentially outsourcing can be more harmful than beneficial for the firm.
5.1 Advantages of outsourcing
5.1.1 Development of core competencies
By outsourcing, the company is able to dedicate more resources into developing their core competencies thus gaining them competitive advantages and so what could be described as a ‘shield’ from competition. Here, resources should not only be viewed as materials, technology and other tangible assets, but also valuable management and employee time, an often undervalued and underestimated commodity within the firm.
5.1.2 Cost reductions
Outsourcing can bring various cost reductions to the firm. By outsourcing, it is possible to send the firm’s workers to the outsourced firm to carry out the task, in which case wages will still be paid, but other labour overheads eliminated. If the firm chooses not to send its workers then it is able to reduce its workforce, also reducing costs. If the supplier is able to complete the outsourced task more efficiently than previously, then it is possible, but not necessarily true, that these cost reductions will be passed on to the firm. Also, the money the firm usually invests in the outsourced function will be saved if the function is carried out by the supplier at a lower cost. This is usually possible due to suppliers having greater access to networks and contacts.
5.1.3 Conversion of fixed costs to variable
For many firms, it is often the case that all components and parts are produced ‘in-house’, but not necessarily on a continuous basis. The technology needed to do this however requires constant maintenance and so incurs costs on the firm all year round, i.e. imposing fixed costs on the firm. By outsourcing these activities, the firm effectively converts some of their current fixed costs into variable costs, paying only for components as and when they are needed.
5.1.4 Ability to benefit from supplier innovation
By outsourcing, the firm gains the ability to take advantage of their supplier’s innovative capabilities. It is likely that if a supplier offering a good or service is the leader in their field, the good they supply will be a product of their core competencies. As market leader they will constantly be attempting to improve their core processes and practices and thus their core competencies, which in turn will lead to a better quality product or service for the outsourcing firm.
5.1.5 Decrease in time to market
In fast moving markets where new products and updates are constantly being released, outsourcing can provide the firm with a way of decreasing its time to market. Rather than vertically integrating, the firm is able to outsource component and part development to its suppliers and so concentrate its energies on its core, value added processes, leading to a decrease in the time it takes the firm to develop and also launch a new product. The firm will also be able to benefit from increased flexibility, as suppliers who specialise in providing a variation of a certain product or component to a range of firms is likely to have greater capacity, knowledge, and experience to adapt to changing needs in the market.
5.2 Disadvantages and risks of outsourcing
5.2.1 Defining core competencies
One of the key concepts of outsourcing is that it allows the firm to concentrate more resources into improving its core competencies, however there is always the risk that the firm will mistakenly outsource those activities that are its core competencies, leading to a plunge in the firm’s competitiveness. This will usually happen as a result of the difficulty in actually identifying the firm’s core competencies in the first place.
5.2.2 Delays in supplies and decreases in quality
By outsourcing, firms risk causing delays and also a decrease to the quality of their supplies. These problems could be down to short-term supplier problems, however the problems for the outsourcing firm can become a lot more serious if a main supplier goes into liquidation, as whole functions can come to a standstill whilst replacements are found. Decreases in quality can also happen for reasons such as a decrease in innovation from suppliers and also a lack of communication between firm and supplier.
5.2.3 Powerful suppliers
Outsourcing places more dependency on suppliers, thus possibly giving them more bargaining power. By doing so, it is possible that suppliers may partake in opportunistic behaviour, for instance ‘a supplier may decrease the quality of work they undertake; a supplier may withhold the latest technology; or, most commonly, a supplier may act to raise its prices’ (Lonsdale, Cox, 1998). Problems such as delays and decreased quality in supply could be down to the reasons mentioned above (5.2.2), but the firm must be aware that as suppliers become more powerful, they are in a better position to be opportunistic.
5.2.4 Complex supply networks
Although one of the possible advantages of outsourcing is increased flexibility for the firm, strategically it can cause the firm to become increasingly rigid, due to the large chains and networks of suppliers that are built up as a result of outsourcing. Due to the complexity of these networks, it may become difficult to keep track of and manage all the firm’s suppliers.
5.2.5 Decreased worker morale
One of the advantages of outsourcing is that it may allow the firm to decrease its workforce. However, as a result of this, the remaining employees may feel unsafe in their jobs, leading to decreased morale, which is likely to affect the firm’s productivity.
5.2.6 Confidentiality risks
By involving increasing numbers of third parties in its operations, the firm risks sharing, and leaking confidential, commercially sensitive information to the public and also competitors. This could be potentially damaging to the firm and could also affect the value of the firm itself.
5.2.7 Detachment from end customer
If a function involving customer contact is outsourced, then the firm loses control over the quality of customer service. This may also lead to slower reaction to changes in customer tastes and preferences and makes it more difficult for the firm to communicate its image and philosophy to consumers.
5.2.8 Supplier cartels
If a certain function is outsourced by a large number of firms, it is possible that suppliers providing the function will collude on price and possibly form a cartel, thus eroding any extra profits, or cost savings arising from outsourcing.
5.2.9 Knowledge gap
It is likely that the supplier will have more in-depth knowledge of the skill or function being outsourced, creating a knowledge gap between buyer and supplier. This knowledge gap may lead to the supplier feeling superior, possibly making it more difficult for the buyer to strike a balanced deal. Also, this knowledge gap may make it difficult for the buyer to accurately measure the contribution of the supplier, and so there may be conflicts when agreeing on the price for the function to be completed.
5.3 Outsourcing recommendations for Benetton
5.3.1 SWOT analysis and core business
By carrying out a SWOT analysis for the Benetton company as a whole, it is possible to easier identify the company’s core strengths and weaknesses, and thus their core competencies. By doing so it is therefore clearer to see which activities, if any that Benetton should outsource.
5.3.2 Strengths
In summary, Benetton’s strengths lie in their casual wear business (their core business), which typically has 20% profitability. Other strengths include it’s efficient production process, including innovative manufacturing techniques such as delayed dyeing, and also the company’s franchising network
5.3.3 Weaknesses
Benetton’s weaknesses typically lie in their less profitable sports business, which has high cash flow requirements. The company’s time to market is also uncompetitive when comparing to the ‘pure retailers’. The company doesn’t appear to have a clear target audience, being to casual for business wear, but also lacking the ‘trendiness’ required by the younger markets, and so their branding may be considered a weakness.
5.3.4 Recommendations
As Benetton’s strengths lie in their core business, casual wear, it is most likely the company would benefit most from outsourcing activities and functions from its sports business. Benetton’s entire business could also benefit from outsourcing however as it could use outsourcing to decrease it’s currently uncompetitive time to market, and so could use outsourcing to sustain greater competitive advantage.
6.0 Reorganisation of Benetton’s sports business
As part of their new strategy, Benetton have made and plan to make changes to the way their sports business is run. The implications of these changes have been broken down into ‘operational’ and ‘strategic’ to give a clearer picture of how the company is likely to be affected.
The production process of the sports business has been reorganised by Benetton based on two main guidelines; firstly the need for cost reduction, both in manufacturing and transporting materials and part finished goods, and secondly the need to improve and maintain the knowledge of Benetton’s ‘handcrafted’ style of production.
6.1.1 Ski equipment
The first change to be made to the production process is that the production ski equipment and accessories is now to be concentrated at Benetton’s Trevigano plant, a production facility similar to the Castrette pole.
Operationally, this may mean that production capacity has to be increased at Trevigano to accommodate this extra production. As these products are not currently produced at Trevigano, staff may have to be trained in the manufacturing processes used to produce them, and so there may be a lag in efficiency to begin with as employees familiarise themselves with these new products. Benetton may also have to make changes to their logistical activities, as materials must now be transported to, and finished products from the new location.
Strategic implications -
6.1.2 Delocation
Another change made to the production process has been to delocate production/parts of production of certain products abroad, in an attempt to capitalise on lower labour costs.
By doing so, Benetton will be able to reduce their workforce, as employees currently making the products will no longer be needed, and so given that labour costs abroad are cheaper, Benetton’s costs should decrease. Although labour abroad is likely to be cheaper, it’s possible this cheaper price may translate into a less skilled workforce, and so could lead to a decrease in quality. If this is the case, one of two things may happen; firstly it could lead to lower quality products being put on to Benetton’s shelves. Strategically this could seriously affect the company’s positioning in the market, and will almost certainly lead to a decrease in market share, as consumers are likely to move to competitors’ products (assuming of course that Benetton leaves prices unchanged). Alternatively, a decrease in quality could increase Benetton’s defect rate as fewer products make it through quality control. This in turn will increase costs, possibly to a higher level than they currently stand, defeating the point of moving production abroad in the first place.
Another threat to Benetton is that wages abroad are always prone to increase, especially as countries become more developed. If wages suddenly increase once production has moved, Benetton will have to advantage over their current position, and so must choose location carefully to minimise risk.
Again, logistical activities are likely to be affected, as materials and part finished goods now need to be transported to and from a different production facility abroad, which again could lead to an increase in transportation costs.
6.1.3 Sports wear production
The third way in which the sports business production process has changed is by locating the production of sportswear at the Castrette pole in an attempt to exploit the synergies between the production of casual and sportswear.
By doing this, Benetton should be able to increase efficiency due to the similarities that exist between the production of sports and casual wear, enabling Benetton to benefit from advantages such as economies of scale. All other factors remaining unchanged, this increased efficiency should lead to lower costs, and thus increased profits.
From an operations perspective, by increasing production at the Castrette plant, the company may have to invest to increase capacity at the plant, improving, or increasing production factors such as labour and technology, to allow the production of sports wear to take place simultaneously with that of casual wear. Although this may be costly to begin with, it is likely Benetton will make bigger savings in the long term, assuming they take full advantage of the benefits that become available from making the change.
6.1.4 From equipment to clothing
As well as changes to how products are to be produced, Benetton are have also made plans to change what is produced. Currently in the sports business, the company derives 88% of sales revenue from equipment and 12% from clothing. The company aims to tighten this ratio in the short-medium term to 60% equipment and 40% clothing, and in the long term to mirror the world market production ratio of 80% clothing and 20% equipment. The main reason for this change in production direction is due to the large difference between profit margins of equipment (8%) and clothing (20%).
Due to the large gap between profit margins in clothing and equipment, tightening and eventually almost reversing this production ratio of equipment to clothing should provide Benetton with an opportunity to vastly increase their profit margins in the long term. To achieve these profits, Benetton may have to invest to increase the production capacity of their clothing production; this however will of course be offset by the decrease in production of sports equipment, and so shouldn’t prove too costly for the company.
6.2 Overall implications of reorganising the sports business
As shown above, there are numerous cost cutting, and profit maximising opportunities open to Benetton through the reorganisation of their sports business production process. Many of these opportunities come with risks and costs, however there are very few dangerous threats to the company from making the changes, and so it is likely the company should be able to take full advantage of these reduced costs and expect profits to increase, if not in the short-medium term then almost certainly further into the future.
Reorganisation of Benetton’s Sports Business
Since 1997, the Benetton group has been producing and selling sports equipment under the names Nordica (ski boots, skis and bindings), Price (tennis rackets, Rollerblade (in-line skates) and sportswear under the brand names Killer Loop and Playlife. In 1998, Benetton merged with Benetton Sportsystem, This diversification is fatal, in which Benetton would have faced competition in an industry that was very different from the casual-wear industry.
The poor performance of the sport segment in 2001 had led Benetton to a series of reorganisations both in Sportswear and Sports Equipment. Though the overall results for the sportswear sector were positive, the equipment sector has been particularly hit by the downturn on the in-line skates market. It was stated in Benetton Group 2001 Annual Report that as a result it was necessary to implement a targeted program of reorganisation, which already started to take effect from the second half of 2001. (1)
In order to maximize the profit from sports clothing, Benetton has been investing heavily in sportswear development, offering items in its Playlife and Killer Loop collections that are priced from top levels to very economical to draw in a wider range of customers.
In the sports equipment business, Benetton is trying to consolidate the images of its brands through three initiatives: “ investment in high-tech systems for designing sports equipment, reorganisation of the production process, improvements to the retail network.”(2)
9.0 Development since article
Comparing with Benetton’s major competitors, notably Spain’s Zara (cool and minimal for the working women) and Sweden’s H&M (over-the-top trendy for teen fans) which have clear images and targeted customers, “the Benetton is out of fashion, it lacks a clear position,” says Sagra Maceira de Rosen, retail analyst at J.P Morgan Chase & Co. in London.
In response to this, Benetton’s chief executive Silvano Cassano made it clear that Benetton was going to refocus on the core business --- apparel business, which encompasses the Sisley and Benetton brands. It’s said that Benetton’s core casual wear business has suffer neglect, and the launching of the sports equipment was an ill-fated diversification, resulted in deteriorated quality and fell market share. In year 2002, Benetton sold the equipment division, Sportsystem, booking $190 million in write-offs. (23rd June 2003, “ Has Benetton Stopped Unraveling?”)
More recently, it was reported that Benetton returned to profitability in 2003 with a net income of €108 million, having disposed of the sports equipment business that lead its first ever full year loss in 2002. (31st March 2004, “Benetton back in profit”)
References
1. .
“Benetton Group 2001 Annual Report”
2. MIT Sloan Management Review: Fall 2001 “Back to the future: Benetton Transforms Its Global Network”
