If you want to understand The Elastic Enterprise over time then take a trip to Italy. Italy is the home of what scholars of the enterprises used to call Industrial Districts (more recently they’ve been using the term ‘clusters’. Benetton, the mid-market clothing company was a prototype elastic enterprise from the Veneto district of Italy.
Veneto or the wider Emilia Romagna area of northern Italy used to be a favoured topic among business researchers. Not only is the food there particularly good, but it is also an area where two unique business arrangements held sway in the 1970s and 1980s.
The first was a type of sub-contracting arrangement where the sub-contractor’s expertise was critical to the contractor’s competitive advantage.
The second was a type of regional specialisation that ended up being copied around the world.
Italian industrial districts were characterised by a kind of vertical integration based on a large cornerstone company, like Benetton, and a range of supplier companies that do a lot of the innovation for companies like Benetton, as well as virtually ALL the production. This might not seem so radical today. We are now in a world where OEM’s do precisely that. But Benetton was a pioneer,
In fact those supplier companies develop much of the critical expertise that contributed to Benetton’s competitive advantage when the company rose to prominence, in the 1980s.
United colours of Benetton now operates in 120 countries with 18 factories (12 in Italy) and has a network of around 6500 retail points all of which were franchised. It began business in 1955 with a second-hand knitting machine. At the peak of its elasticity:
About 80 percent of production was farmed out to 450 subcontractors who employed about 20,000 workers in the Veneto region. The remaining 20 percent of value-added, capital-intensive production–quality control and cutting and dyeing–was performed in-house. By 1983 Benetton payments for contract work equaled nearly six times the labor expense for work performed in its factories, according to the Harvard School of Business.
One of its main advantages has been colour. The Veneto district of Italy is a source of expertise on dyestuffs and colour fastness. Benetton itself however did not need to be an expert in colour – it needed to be an expert in colour trends. It provided the market insights to its key specialists to allow them to develop the colours that would put Benetton ahead of the market.
This type of arrangement became known later as a ‘cluster’. Clusters in turn became a major plank of national and regional economic development, around the globe particularly following the publication of Michael Porter’s The Competitive Advantage of Nations in 1990.
Among its interesting features, the industrial district became one of the first users of Just in Time systems and electronic networks – before we called them The World Wide Web.
Elasticity has become easier to implement, relies now on much more informal arrangements between companies, looks a LOT less like vertical integration and is much more dynamic. Nonetheless Benetton is a model that shows elasticity has a venerable past. For more on the origins and development of the Elastic Enterprise see Nick’s piece on Walmart.