Lorenzo Zanni (University of Siena)

1. Università degli Studi di Siena Facoltà di Economia Richard M. Goodwin “Entrepreneurship and Network Organizations in the Italian Industrial Cluster: the Gucci Case Study” Lorenzo Zanni (University of Siena)

2. THREE GENERAL QUESTIONS 1) Is it possible to compete with a small scale in the international markets? What is the future for Small and Medium sized firms (SME) in a global economy? 2) In terms of organizational structures and competitive strategies what can we learn from the Italian experience? Is it possible to underline some original “glocal” (global and local) solutions analysing the Italian experience? 3) Considering fashion business, what are the main strategic changes in the competitive scenario? Is it possible to focus the attention on some case studies which can explain the recent evolution?

3. THE OBJECT OF ANALYSIS • THE MAIN CHARACTERS OF THE ITALIAN INDUSTRIAL SYSTEM • The role of SME • The industry specialization • Industry location and the role of Clusters 2) THE COMPETITIVE ADVANTAGE OF ITALY IN THE FASHION BUSINESS • Peculiarities of Fashion Business • The competitive advantage of Italy in the fashion business: the new scenario 3) ENTREPRENEURSHIP AND ORGANIZATION STRUCTURE: THE NETWORK APPROACH • Definition of Network Organizations • Characteristics of Network • Different types of Networks 4) THE GUCCI CASE STUDY • The emergence of a large global player: Gucci Group • The impact on the SME’s sub-contractors (the network)

4. I) THE MAIN CHARACTERS OF THE ITALIAN INDUSTRIAL SYSTEM (Onida 2004) 1) THE PREDOMINANCE OF SMALL FIRMS IN COMPARISON WITH OTHER EUROPEAN COUNTRIES · Recent data confirm the high number of firms in Italy (entrepreneurial attitude) · The predominance of micro-firms (less of 10 employees) · The average dimension of the Italian manufacturing firms is lower then in the other UE countries · In the last decades the importance of micro-firms has reduced only a little  The success of the “Made in Italy” during the 80’s and 90’s in the international markets is mainly based on SME’s

6. 2) THE ITALIAN INDUSTRIAL SPECIALIZATION IN MATURE OR TRADITIONAL INDUSTRIES • The Italian market share in the UE are strong in “light industries” characterized by firms with small dimension (mechanics, textile, clothing, furniture, shoe and food industry) (Tab. 1) • The Italian industry is traditionally “export oriented”: Italy is the eight country in the world in terms of export (Tab. 2-4) • Italy is still the ninth more industrialized country in the world in terms of GNP (2013: IMF data). But in the last few years Italy is loosing part of its competitive advantage in the international markets in terms of market shares  Italy is now facing the concurrence of less industrialized countries. It is interesting to describe how some Italian firms are defending and sometimes even enlarging their market shares

7. Industry specialization Tab. 2: The main actors of the Italian export (source Istat-ICE 2004)

8. The capability to compete in foreign markets

9. The impact of the crisis • Italian GNP 2009: -5% (Source Istat) • Italian Export 2009: -17,5% (Source Ice) The difficult situation in the domestic market, but strong export capability • Italian GNP 2010: + 1,7% (Source Istat) • Italian GNP 2011: + 0,4% (Source Istat) • Italian GNP 2012: - 2,4% (Source Istat) • Italian GNP 2013: - 1,8% (Source Istat - estimate) • Italian Export 2010: + 11,4% (Source Ice) • Italian Export 2011: + 5,9% (Source Ice) • Italian Export 2012: + 2,3% (Source Ice)

10. 3) THE INDUSTRIAL SPECIALIZATION INFLUENCES THE TERRITORIAL DISLOCATION OF THE ITALIAN FIRMS At geographical level the process of industrialization in Italy has not been homogeneous: in emerges a “Leopard-skin” Italian process of developmentwith three main geographical areas (Picture 1)  • North of Italy: large firms predominance, the “company-town” model • South of Italy: the failed effects of the State action (“Intervento Straordinario nel Mezzogiorno”)  the creation of “cathedrals in the desert”  they did not create other industries around their activities, neither they generated a spin-off effect of entrepreneurship • “Third Italy” (Central and North-East of Italy): predominance of small firms localized in industrial districts  Definition of industrial district: “social-territorial entities characterized by the active presence in a concentrated area of a community of people and a group of industrial firms” (Becattini 1989)  industry specialization and productive decentralization  external economies linked to the cultural heritage (A. Marshall)  in these regions there are more network organizations

11. Picture1 ‐ manufacturing labor local systems in Italy (Source: elab. Edison Foundation on Istat 2001 data)

12. THE ROLE OF CLUSTERS “Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region. Clusters arise because they increase the productivity with which companies can compete” (Porter 2001).  Instead of examining firms as isolated actors, the cluster-based analysis emphasizes the linkages among companies and supporting institutions and the synergies related both to cooperative and to competitive behaviors of belonging enterprises  Porter (2003) claims that clusters have the potential to affect competition in three ways: • by increasing the productivity of the companies in the cluster (efficient access to specific inputs, employees, services, information and public goods; facilitate coordination and transactions among companies; good diffusion of best practices) • by driving innovation in the field (enhanced ability to perceive opportunities; share of knowledge creation processes; exploitation of local resources) • by stimulating new businesses in the field (high visibility of business opportunity; commercialization of new and complementary products; starting of new companies)  Their relevant importance of industrial district in Italy (Istat 2012): • Around 200 in all Italy • 45% of workers in manufacturing industries • 43,5% of total export (years 2009-2011) of whom 13,5% are textile-leather-clothing

13. II) THE COMPETITIVE ADVANTAGE OF ITALY IN THE FASHION BUSINESS(Porter 1990; Saviolo-Testa 2000) • The importance of Italian clusters in the fashion industry: a national system of value which allows to control different stages in the whole filiera (see Picture 2) • Creativity combined with functionality • High quality in small scale production (craftsman) • Flexibility (division of labor and specialization) • Demand pull innovation (Italian clients are very exigent) • Original market segmentation (houte couture, prèt à porter, diffusion, bridge and mass)  The emergences of a new scenario for the Italian fashion business: • Market changes and new factors affecting the “Made in Italy” • Difficulties in the export capabilities of fashion industry • Italian clusters are good incubators of new entrepreneurship but they do not help the dimensional growth of the firms

14. Picture 2: The Fibres-textile-apparel filiére Fibres Industry (natural and man-made) R&D, raw materials supplying, fibers processing, fibers marketing Greige goods yarn mills Yarn spinning (spun yarns and filament yarns) Fabric construction: weaving, knitting, embroidering, or processing solutions (e.g., films, foam) or directly fibers (e.g., felt, nonwoven fabrics) Textile mills Equipment producers/ suppliers Finishing treatments: bleaching, shearing, brushing, embossing, dyeing, glazing, crinkling, printing, etc. Converters Service suppliers (trend forecasters, fashion press, consultants, etc.) Supplier/buyer intermediation, communication Selling/buying agents Cutting, trimming, spreading, bundling, sewing, sticking, pressing, packing Apparel manufacturers Wholesalers Time and space transformation, communication, services Retailers End users Evaluating, purchasing, innovating, communicating

15. The Italian Diamond: the old and the new scenario

16. III) ENTREPRENEURSHIP AND ORGANIZATIONS STRUCTURE: THE NETWORK APPROACH (Lorenzoni, 1990) • The predominance of external growth processes (alliances vs. internal growth) • Different entrepreneurial profiles: “general and serial entrepreneur” (Mc Millan) vs. “limited and diffused” entrepreneurship •  1. Different definitions of “Network” in the managerial literature • The totality of all the units connected by a certain type of relationships (Aldrich and Whetten) • An aggregate of relations existing among individuals (or “units” or “members” or “nodes”) (Kaneko and Imai) • Our point of view: an heterogeneous aggregate of firms, linked by multi-faceted and cooperative relations, organized around a focal firm and instrumental in achieving at least partially common objectives

17. 2. Main Characteristics of Network - Advantages for leading firm: quality; innovation; more flexible production and shorter production runs; not necessarily a dimensional growth - External firms: a semiautonomous position (dependent for certain parameters); independently owned and not exclusively dependent on the focal firm for business -   Different links among the partners of the network: strong relationships: the focal firm can influence the external firms with a “non-hierarchical power” (non conventional mechanism of coordination, equity or non equity) using: trust among partners; reciprocity; mutual adjustment; multiple line relationships (horizontal, vertical, lateral) weak relationships: among external firms (without intermediation of the focal firm) -   The process of innovation in a network organization: interplay among different partners (see Japanese literature); even small firms can innovate; some obstacles for innovation in Italy (difficult access to funds and to information) 

18.  3. Different types of networks (see Picture 3) • Different stages of evolution from informal relationships to planned networks. During this evolution it emerges: a higher level of systematic activities; changes in memberships; a more deliberate consciousness in the patterns of the inter-company relationships; • At the beginning: strong influence of the focal firm • Later: mutual relationships; less coordination functions and more strategic crossroad of the information flows

19. Picture 3: Different types of networks – a possible evolution a) Simple and informal constellation b) Planned and formal constellation

20. In brief, NETWORK ORGANIZATION: 1) ALLOW TO REACH SOME PECULIAR ADVANTAGES     - Time savings   - Quality improvements    - Innovation     - More flexible production     - Reduction of costs (external growth) 2) IS CHARACTERIZED BY DIFFERENT RELATIONSHIPS AMONG THE PARTNERS     - Equity     - Non-equity 3) HAS A WIDE APPLICATION VERSATILITY     - Research & Development     - Marketing and distribution     - Financial     - Coupling different networks

21. III) THE CASE HISTORY: GUCCI AND THE LEATHER TUSCAN NETWORK (Bacci 2004) • Different actors in the leather Tuscan cluster • The Gucci case history • The network organization and the main changes in the SME cluster

22. 1) THE ACTORS(leading firms and SME’s) • Large global player (as Gucci, Prada, Ferragamo) • New model of corporate governance: the role of the international finance; luxury groups; • New strategies: multi-business activities (brand extension in different related industries as cosmetics, glasses, shoes, watches, etc.); multi-brand groups; • New organizational formula: decentralization of production; national production platform; transnational network • New sources of competitive advantage: have a craftsmen production organized at an industrial level; the role of brand; the importance of communication; direct control of distribution channels (flagship stores; franchising network) 2. Medium local leader (small groups) • Decentralization of production • Different market segmentation but similar marketing strategies (the importance of design, communication and direct control of distribution) • The micro and small business (the “distrectual firm”) • Simple sub-contractors (they produce part or components) • Specialized sub-contractors (they produce products) • Partner supplier (they have designer capabilities) • Mixed producer (in part sub-contractor and in part autonomous) • Autonomous small firms (they sell with their own brand)

23. 2) Gucci: a brief case history

28. 3) The influence of leading actors on the SME’s sub-contractors (the network) • Growth of the local network (see table 1):small and high qualified firms (luxury supplier) while firms specialized in mass markets are increasingly reducing • Higher selection of local supplier: acquisition of some supplier (see table 2) and opening the relationships outside the local system • Differentiation of supplier and of local network relationships (see picture 4): in the case of Gucci we can find around 9 partner supplier (co-development partnerships); 13 sub-contractor (integrated relationships); 30 simple supplier (market relationships) • Not simple “predator” strategy: in some case the relationships imply a transfer of knowledge above all in the partner supplier(see table 3). • Weakening the autonomy of SME’s: network hierarchization (less market knowledge, less projectual role) (see table 4).

29. Table 1: Changes in number of employees in the local unit in the period 1991-2001 (in %) (Source: Istat)

30. Trussardi Pelletteria Zetati (Bagno a Ripoli) 2003 Buyer Gucci Firm acquired (comune) Conceria Blutonic (S. Miniato) (51%) 2004 Year of acquisition Celine (LVMH) Marcus (Impruneta – FI) 1994 Dior Mardi (Scandicci) Nd Gruppo Dolci Gherardini (Scandicci) 2000 Mariella Burani Braccialini (Pontassieve) 2000 LVMH, Pucci (Firenze) 2000 LVMH Fendi (Bagno a Ripoli - FI) 2001 Gucci Conceria Caravel (Fucecchio) 2001 Gucci Calzaturificio Tiger (Monsummano Terme-PT) 2002 Gucci Calzaturificio Creazioni Bartoli (Monsummano T.-PT) 2002 Gucci Calzaturificio Paoletti (Pistoia) 2002 Gruppo Dolci Pelletteria Only Leather (Scandicci) 2003 Gruppo Dolci Nuova FGF- minuterie metalliche (S: Piero a Sieve) 2003 Table 2: Acquisition of small-medium firms in the fashion industry in Florence by leading firms

31. Picture 4: Network structure: relationships between SME and leading actors in Florence-Arezzo leather cluster IRPET Istituto Regionale Programmazione Economica Toscana

32. Type of change Total (%) Total a) Product portfolio 58 a) I have changed product 13 b) Plant dimension 51 b) I do not use my own brand any more 24 c) Number of employees 46 c) No more design 17 d) Employees’ competences 76 d) I have introduced new technologies 50 e) Total revenues 71 e) I used new materials 36 f) Earnings margin 53 f) Outsourcing of some phase of production 52 g) Number of supplier 32 h) Number of clients 19 Table 3: leather/shoes firms in Florence and Arezzo which have increased the following factors (%) Table 4: changes in leather/shoes firms due to cooperation with leading firms (%)

33. The impact of the recent crisis on SME (2010 Unioncamere data) • Different performances in the 3 main industries, in 2009 high reduction of turnover, but at the beginning not too bad consequences in terms of reduction of employees (fig. 1.2) • Reduction in the number of firms, stronger for micro artisans by comparison to industrial firm (fig 1.3) • Despite the crisis the importance of the 3 main industrial district in the local economy remain high in terms of: number of firms (45%), employees (53,4%) and export (52,8%).

35. CONCLUSIONS • SME companies continue to play an important role in the international business, but the new competitive scenario obliged them to change their strategies and firm structures • Network organizations are only a small piece of the Italian puzzle, but they are important to understand the process of entrepreneurial development in certain area of the country • In the industrial district is quite common to find network organizations, but it is not easy to replicate this model of development in other regions. • At the moment the Italian fashion cluster are facing new competitive challenges that will probably change some of their original characters (it becomes strategic the role played by leading firms; increasing role played by advanced services) • More researches are needed to understand better the nature and the evolution of network organizations (key variables, stages of evolution, competition, etc.). Only the future will tell us if network organizations will continue to be important or will move into some new consolidated forms (medium or large firms, small transnational groups)  • The Gucci case history is a good example of leading firm that was able to overcome family succession problems and to develop “a glocal strategy”. Its local network shows high capability to support the crisis, but future challenges are approaching (in 2009 De Marco said: “at 1 billion Euro it’s easy to remain Made in Italy, at more than 2 billion it’s much more difficult!”

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