Harvard Business School Essay
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?Giuliani, Lucian, Gilberts, and Carlo?involved from the beginning in the company operations. The eldest brother, Lucian, 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, Lucian, who had just turned twenty, told Giuliani 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 Lucian accordion and Craws bicycle, Lucian and Giuliani bought a melting machine, and soon afterward Gallant put together a This case was prepared by Senior Research Associate J. Carols Carillon and Ion l. Martinez, as the basis for class discussion rather than to illustrate either effective or Ineffective handling of an administrative situation.
The caseworkers gratefully acknowledge the assistance of Mr.. Franco Fur¶, manager of Organizational Development at Benton S. P. A. , in the preparation of this case. 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. This document is authorized for use only in BGP – Managing Organizations 2014 by Proof.
Abbey K OSHA at MOM Bangor from June 2014 to September 2014. 389-074 collection of eighteen pieces. Lucian was immediately able to sell them to local stores. Sales increased steadily over the next few years, until Giuliani had a group of young women working for her and Lucian had bought a minibus to carry these employees to and from a small workshop the Bonnets had set up near their home. In the early nineteen-sixties, Lucian Benton 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 torts and boutiques selling a wide range of clothes), whose owners would presumably be more interested in pushing sales of his particular product. Lucian 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, Benton sweaters did not bear the family name (they used foreign names, like “Lady Goodie” or “Trees Joliet”), but they already had the Benton 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 Lucian 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. Benton was formally incorporated in 1965 as “Magnification did Pompano Veneto die Fraternal Benton. ” The small enterprise consisted of Lucian, Giuliani, and their younger brothers, Gilberts and Carlo. Gilberts was placed in hare of financial issues, while Carlo headed the production system. In the same year, the first Benton factory went up in the village of Pompano, a few kilometers outside Terries, in Northeastern Italy. In 1968, the company opened the first independent outlet in the mountain village of Belong, 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 Benton product line at the time, but it set the pattern for the stores to follow. “It was conceived on the idea of the specialized n American Journalist. He added: “From the beginning, we wanted to create an image?the right people to open our stores, the d©cord, the colors. “2 Through the late sixties and early seventies the Bonnets concentrated their efforts on capturing the domestic market.
By 1975, the distinctive white and green Benton knitting-stitch logo had become the symbol of a phenomenon in the Italian commercial scene. Approximately 200 Benton shops had opened in Italy; many of them, but not all, bore the Benton name. The idea of having other names?Sisley, Tomato, Mercuric, 012?with a different decoration and selection of Benton clothes, ere out of the intention of appealing to different segments of the market and of avoiding mass flops: if one Benton 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 Benton 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, Benton-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, NOVO. 10, 1986, up. 53-74 2 The New Yorker, pop. Cit. , p. 58 2 Scandinavian countries. In the early ass’s, most young women in Europe seemed to be buying Benton sportswear, including Princess Caroline of Monaco and Diana, Princess of Wales, which gave Benton worldwide publicity. By 1982, sales had grown to roughly $311 million.
In 1983, Benton had sales of $351 million, from 2,600 stores in Europe. Though the Bonnets still expected some growth in Europe, they saw greater opportunity farther field. 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, Lucian Benton confessed: “Being in America is like a dream?it is so big, so prestigious. If we do well, 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 Benton 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 Bonnet’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 seasons, 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. Aledo Palmers, 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 Benton, his limited experience in industrial companies obliged him to recruit an experienced manager to put them in practice. This man, in charge of personnel and organization, was Mr.. Canalling, who Joined Benton in 1983 from a similar position with MM, a large American multinational, in Italy. They proceeded to recruit experienced managers from other large companies to form a “professional team. ” The newly created organization department had to implement an organization development program to bridge the old “handshake management” culture with the new and more formal one.
This process of creating new functions and written procedures lasted three years and finished in October 1986. The Board of Directors was composed of the four members of the Benton family and Mr.. Palmer’. However, the Bonnets didn’t play the conventional, distant role of members of the board and took part in many day-to-day decisions. Although it didn’t appear in the organization chart, most of the senior functional managers had two reporting relationships: a formal one to Aledo Palmer’, and an informal one to a member of the Benton family.
Hence, there were two different groups of young adults that had to coexist at the top: the self-made Benton siblings, and the well educated communicational executives. The main task of the organization development department was to Join both cultures. According to Mr.. Franco Fur¶, manager of this department, “there has been a lot of improvement in this mutual understanding process in the last three years, but the Job is not finished yet. ” Until July 1986, the four Benton siblings shared 100% of the company’s equity. After reporting strong 1985 results (see Exhibit 1), the company offered a total of 15. Million common shares to the public. Eleven million were listed in the Milan and Venice stock exchanges, 4. 48 million in the Roommates, and the rest was offered to Bonnet’s employees, agents and clients. The total 3 “Benton: Bringing European Chic to Middle America,” Business Week, June 1 1, 1984, p. 60 stock issue represented about 10% of the company. In addition, the company sold lira- (Lobby) and Deutsche Mark-denominated bonds (Dumdum) with warrants. It was estimated that the whole financial operation represented about 20% of the company’s equity, bringing in around $200 million.
Giuliani Benton, with a staff of about 20 people in the Product Development Department, interpreted the “look” created by the stylists and performed the modeling phase. More than 80% of manufacturing was done outside the company, by 350 subcontractors that employed about 10,000 people. In-house production accounted for the remaining less than 20% (mainly dyeing) and was performed by 700-800 people. Logistics and distribution activities were also performed mainly by outsiders.
The company did the storage phase by using a single, huge warehouse for finished products. In addition, the Logistics Department at Benton was in charge of delivering the finished garments to the stores all over the world. Finally, the company utilized an external sales organization of almost 80 agents that took care of a retailing system of nearly 4,000 shops spread all over the world. The internal part of this activity was performed by 7 area managers that coordinated the selling system as a whole divided by territories.
The Operating Cycle There were basically two fashion seasons: Spring/Summer, beginning in February ND ending in July, and Fall/Winter, beginning in September and ending in December. The large volume of business done by the company required that production planning for woolen and cotton articles began far in advance of shipment to the stores. Roughly, twenty-one months elapsed from the preparation of clothing designs for a particular selling season to the final payment of commissions to Benton agents.
Basic steps in the operating cycle were: preparation of final designs; assembly of a few samples of each of the 600 items in the total collection; a “pre-presentation” eating was then held between Giuliani Benton, manufacturing managers, and some of the company’s 80 agents, which eliminated about a fourth of the models; the remaining were then produced in small quantities for presentation by area managers to agents and by agents to store owners; upon receipt of the first orders, the planning department “exploded” a rough production plan for the season, by fabrics and styles; purchases were made according to this plan, and capacity with the subcontractors negotiated; finally, production was started and deliveries begun Just in time for the selling season. They were scheduled so that each store could present customers at the outset of the selling season.
Although shops committed orders seven months before the selling season, giving Benton time to schedule, produce and deliver, the production plan did allow some flexibility for the retailer in three ways. First, from August through early December, as they gathered more information about color preferences, shop-owners were allowed to specify colors for woven items that had been held in “grey’ up to that point, with a limit of 30% of the total orders for woolen items on such orders. Given the popularity of colorful weaves and jacquard in the last three to four years, “grey’ stock had only represented about 15%-20% of all orders. This trend was expected to change in the coming years, which would mean a return to more “grey’ orders. The basic production plan was also adjusted through the presentation of a “flash collection” Just before the season. The flash collection corrected styling mistakes in the basic product line and usually included about 50 new designs based on “hit styles” presented by fashion houses (competitors) during the two main seasonal shows. Finally, orders could be adjusted through “reassessment,” which was the most critical hash in the production plan, requiring great coordination and follow-through by retailers, agents and producers. Reassessment occurred during the last third of each selling season, when retailers were allowed to add orders to their original ones based on sell-through of popular items.
Juggling retail orders to match manufacturing capacity for thousands of shops in a five week period was not an easy task. There was a minimum economical production batch, so sometimes when the reassessment order was not enough to fill the minimum batch, the marketing people would get in touch with shop managers to propose some alternatives. As Benton moved into new geographic areas the complexity of reassessment grew incessantly, because the best sellers for different areas tended to vary widely. Payments to subcontractors, representing a major cash outflow, were made 70 days after the end of the month in which production occurred or, in the case of the spring- summer collection, in October.
Collections from retail stores were based on a season beginning date of March 30 for the spring/summer season, with one third of payment due 30, 60, and 90 days after that date or the date of actual receipt of merchandise. This was designed to minimize retailer’s investment in inventories. Manufacturing Activities The company was divided into three divisions: wool, cotton, and Jeans. In 1983, Benton had seven plants in Italy. In 1985, the number of plants decreased to five, The reason for this reduction in the number of plants was simply a matter of the company’s philosophy of vertical De-integration and external production as a mode of organization.
All those divested plants acted in 1987 as Benton subcontractors. As shown in Exhibit 2, Benton utilized three different kinds of raw materials. In the LOL division the raw material was basically thread, no matter whether it was acrylic, cotton, or actual wool. In the other two plants, the raw materials were basically fabrics. The wool division’s technology was mainly knitting, while the other two divisions’ technology was essentially cutting. Benton was the biggest purchaser of wool thread in the world. It purchased about 9 million kilos of thread per year. The other two divisions bought raw materials (fabrics) from 80 to 90 different suppliers.
The company centralized all the purchasing activities as this was perhaps the main source of economies of scale in the industry. In 1987, 37 tons of yarn and 40 tons of fabrics entered the production system daily, to be transformed into 180,000 garments, adding up to 40-45 million garments per year. The wool division worked with 200 external production units. Benton owned a percentage of the equity of the largest of them. The cotton and Jeans divisions worked with other 1 50 external production units. Benton gave the external contractors the exact amount of raw materials (calculated by computer), technical documents, an idea of the time needed to perform each single production activity, etc.