Fashion vs. Banking: 2.0-1.0

With Milan’s fashion week coming to an end, one pauses to reflect: What is going on in the retail world? And specifically, what is going on in the luxury retail world? Nothing different than what we have been observing in financial services for the last year and a half: Consolidation.

In a rather unfortunate gesture in terms of symbolism, the Milan show was moved from the 13^th century Loggia dei Mercanti (Merchants’ Palace that was founded during medieval times—think austerity) to the stately 17^th century Palazzo Clerici, a grand manifestation of baroque manners and tastes.

Admittedly, the move aimed at convenience and efficiency but the symbolism only highlights what one would like to forget. As happened within financial services, the retail world is currently going through consolidation on a big scale. This means that smaller brands either cease to exist or are bought up by larger, more powerful luxury groups. Thus the irony of the excessive and stately Palazzo Clerici is that the brands that staged their shows there are the smaller ones because names such as Armani, Versace, and Ferragamo remained on their own premises, their respective private palazzos and away from the populace.  Many brands were completely banned from the program according Luisa Zargani, WWD’s Milan-based journalist.

Considering that last minute name shuffling comes after a long summer during which European private equity firms enjoyed a composed shopping spree, one concludes that the rules of the game are changing. On one hand, fads are dying a fast death and brands that capitalized on the public’s want for more but are devoid of substance are disappearing. The ones with a solid value proposition are now great candidates for funding by private equity firms with cash in their hands and no other projects in the pipeline. Finally, blockbuster established names (such as Ferré that already got a fund infusion earlier this summer) are moving on to the next stage of development, namely Fashion 2.0.

Therefore, the current state of the luxury retail industry is not only the outcome of the prolonged worldwide recession but also the conclusion of a natural process of contracting and getting rid of the superfluous, non-substantive, and disruptive brands, the ones that murk the waters. For the rest, the recent boost of private funding reported in all sorts of mergers and acquisitions will only accelerate the industry’s evolution to a functional sector of the economy that consistently takes place online. This is exactly where operations-driven firms will launch their strategy game, trying to outperform one another in clearly defining their 2.0 customer who will allow brands to monetize on the investment they make now. Net-a-Porter’s success story has gilded all major business publications. Luxury can be sold over the internet and those who have not embraced it yet are salivating.

In Paris, Karl Lagerfeld canceled his haute couture show in favor of online sales. In New York, Tom Ford was criticized for his preference for a tightly controlled and very private show even though what this really means is that he has total control of his own online image both in terms of content but also in terms of time. In London, Burberry experimented with a combination of Lagerfeld and Ford strategy and opted for the live haute couture show broadcast in real time in Burberry boutiques all over the world. In Milan, the exclusion of some brands means that Fashion 2.0 is for big fish only or at least for small fish who have friends in the banking world.

Bankers have always shown a stubborn preference for numbers but it seems that for once they are open to the creative energy that comes from the luxury retail industry, itself in need of some rejuvenation against its own stubborn and self-indulgent nature.  Perhaps the financial services industry will soon follow suit.

The Entrepreneur as Teacher

Today, I had the privilege to attend an intimate, private luncheon, during which four recent alumni of the Leonard N. Stern School of Business joined Guillermo (Bill) Yeatts, also a Stern alum with a Master’s degree and pre-doctoral work in Economics. A Buenos Aires native, Yeatts spent several years working for multinationals in the US, Europe, and Latin America and for the last thirty years has been an active entrepreneur and successful business owner in the oil and gas business (exploration, production, refining and marketing). In addition to private equity investments and entrepreneurial projects, Yeatts has been involved in several nonprofits within the field of business education. He co-founded Argentina’s Eseade (Graduate Business School) and has been the Chairman of Junior Achievement Argentina, a position that he abandoned only to be involved on the grass-roots level and volunteer personal time and effort to teach children from Buenos Aires’s slums about basic economic principles such as the meaning of private property and the implication of citizens’ individual rights vis à vis the state.

Bill’s visit to New York followed a short trip to Washington, where a number of the nonprofits in which he serves are based. It also coincided with the publication of his latest book in English, Plunder in Latin America, a truly remarkable account of Latin America’s economic trajectory, especially during the second half of the 20th century and into the 21^st. Having managed to get a hold of the book before meeting with Bill, I realized early in my reading it that his argument on why the plunder of Latin America continues today has evolved from an earlier work of his, another book written and published in English, The Roots of Poverty in Latin America (2005). The latter illuminates the economic conditions that sprang from Latin America’s discovery by the Spanish and establishes a solid historical and social framework through which the reader can comprehend how Latin American policy was drafted, how it evolved, and why there is such disparity between South and North America in terms of poverty, economic development, and sociological trends. While Bills’s work in The Roots of Poverty is presented in a very scholarly fashion with a complete historiographical analysis of the subject, The Plunder is mostly distinguished by its modern approach to a problem of economic theory, namely that modern Latin America consists of captured economies that are subordinate to rent seeking undemocratic governments. He develops his theory carefully and with plenty of empirical evidence based on market research of, for example, how globalization and particularly technology have affected the prosperity of the Latin American population, without, however, having freed its constituents from the institutional predominance of modern-day dictatorships. 

Both books are thought provoking and a pleasure to read. Plunder in Latin America is available on Amazon and would make a valuable addition to college-level Global Economy class. It would give students a chance to compare and appreciate the legal system that derived from the Anglo-Saxon world along with the liberties that the notion of individual property imbues on all citizens of North America and Europe. Both books are remarkable in their candid presentation of the powerless of Latin American citizens vis à vis the government that can, at any time, seize private assets from bank accounts and private pension funds. Plunder in Latin America hit a chord with me because it articulates the causes behind problems that have shaken Greece’s economy recently and that can be recognized as ominous presence within the greater Mediterranean region as well.

Beyond its scholarly merit, Bill’s work stayed with me because of his own presence. He is productive, tireless, and vocal about issues that will trouble several generations in the future. He is committed to his own enterprises and while he operates within the realm of private initiative to generate business and build wealth, he is also giving back through his philanthropic work and his commitment to educate young children and teenagers in business. 

Discussion on Flaws Continued: When Emotions and Finances Mix

I recently resigned from an advisory role to a start-up of consumer goods in the luxury market. The start-up showed promise initially: the founder is a talented designer; the product is innovative and different; people showed great interest in the product. What was the flaw that led to the start-up’s demise? Mingling of emotions and financial decisions.

            A similar product line at a much lower price range by the same designer had been very successful. Customers were asking for more: more in terms of quality and not in terms of quantity, which is a very interesting factor to consider in the luxury goods market. The designer responded with ever more elaborate designs that required different materials. This is a key point that many designers miss: a good rendition of a concept calls for execution via specific materials. The design inherently dictates technique and the technique dictates type of materials. This is not written in stone of course (no pun intended) and the truth is that many designers become famous because they have overcome exactly that very sequence and managed to produce an innovative concept by using different techniques and different materials.

            The designer’s satisfaction with her market’s enthusiastic response to the evolution of her designs convinced her that it was time to completely change course and target the upmost luxury market with a product that her clientele was not in a financial position to acquire. In addition, the designer invested all her savings in acquiring valuable raw material to use in her designs and produced a whole line of products and several collections responding to the wants of the “old” clientele and aiming at the needs of a “new” one, one which she had not yet defined or tested. Finally, she priced her product to compete at the utmost top of the luxury market—albeit as an unknown entity.

            My role in this operation was external, which does not give one a lot of room to make and execute decisions that would change the brand’s strategy, for example. But even so these are the main things that I questioned and have now imprinted in both my head and heart knowing that an emotional approach to a product (whatever the product may be) does not mix well with sound financial decisions:

            Raising capital: The ability to decide how to acquire funds should come only after the market has been tested and after the customers cannot be the sole providers of cash flow for the company. Namely, raising funds should stem from the start-up’s growth and the executives' ability to forecast the need for additional funds that will support a proven strategy.

            Money management: Financial controls are crucial and should come first, especially when the market segment where the company competes is more creative. Creative mistakes that leave the drafting board and literally materialize in a new line of products cost a lot of money. They cost even more when the concept has not been tested. Build your team in a way that the creative force of the firm is accountable to its financial manager and allow plenty of time for discussions. Communication is important when two minds understand one issue from a different point of view. Numbers have the ability to prove a concept right or wrong. Design has exactly the same power. But communication needs to happen within your team in both directions.

            Financial skills: If you happen to be the creative force of the company build your financial skills in anything that concerns cash flow analysis, profit and loss, balance sheet items and return on investment. You will be able to understand what the finance person on your team is trying to tell you or you will be able to supervise the person you hire in that capacity. Whichever the case, financial models have derived from empirical evidence and you should know how to use them to your benefit and before you invest all your savings in a line of product that no one wants. 

Palermo Valley: Where Creativity and Venture Capital May Meet

This afternoon on West 56^th Street, the Argentine Consulate was buzzing with activity. A good number of entrepreneurs, lawyers, venture capitalists, and hedge fund managers gathered for the first meet-up of Palermo Valley in New York. The host, Philip Hordijk, a Dutch entrepreneur and globetrotter, introduced the audience to Palermo Valley.

Those lucky to have visited the beautiful city of Buenos Aires, Argentina conjure up stimulating visuals with the mere mention of the name Palermo, the largest barrio of the Argentine capital. While Palermo’s urbanism dates to the 16^th century, its urbanity developed through the centuries. Today one distinguishes the palpable sophistication of Palermo’s inhabitants in the creative designs of its bars and restaurants and in the creative production of web-production agencies based in the neighborhood.

According to genuine Argentine, and co-presenter, Lucas Lopatin of United Virtualities (http://www.unitedvirtualities.com/) the world is seeing “Argentina as a digital production-outsourcing hub” thanks to Palermo Valley. Lucas demonstrated that Western agencies outsource work primarily based on reliability, then quality, and finally costs, in order of priority. When the job needs to get done, cost may even become irrelevant, while “Argentina delivers on time.” It does not hurt that Argentina is only 20% more expensive than Asia but 50% less expensive than the US. Ironically, its own financial crisis just a few years ago has helped this sector of the digital industry grow. Considering that Argentines share our Western culture and are only one hour ahead of New York, it is not hard to imagine that outsourcing projects to friendly and reliable porteños contributes to successful project management. This is the reason agencies return to the Argentine creative designers for more, either in the field of strategy and creative direction or execution and project management.

The caveat: Infrastructure in Argentina is still lagging behind. “No internet” days are common but easy to laugh off, since there are back up servers at various locations (including the US). In addition, wi-fi connections are always booming in the streets of Palermo allowing project managers to “remain on the grid.”

What distinguishes Palermo Valley from Silicon Valley is the stream of capital. There are plenty of start-ups in Palermo and vivid enthusiasm for new projects. Outsourcing has been a catalyst for this community of creative minds as they have been sharpening their skills in strategy, creative thinking, and implementation/product development. In addition, they have been absorbing new business models and their lessons as they travel to them from their clients. Despite the abundance of start-ups, capital in either form of angel investing or venture capital is scarce in Argentina. There are very few Venture Capital funds in Argentina (perhaps no more than six or eight) and only two among them are US-based. This sounds like a great business opportunity for US investors. If not anything else, the first step would be to either visit Buenos Aires or connect with the people who run Palermo Valley.

Research, Development, and Engineering: How Germans Work with Flaws

“You cannot only look at how expensive Germany is—what you get is quality, strong motivation and extreme flexibility,” Mr. Winterkorn, Chief Executive of Volkswagen told the Financial Times recently.

Yet, what the CEO of Europe’s biggest carmaker perceives as a strength, many industry analysts and investors assign to Germany’s “flawed business model: good technology and a stable of brands paired with inefficient production, a spider’s web of vested labor and political interests and an almost purely Teutonic management.” (http://www.ft.com/cms/s/0/9d83f602-7a71-11df-9cd7-00144feabdc0.html)

These observations become very relevant today when businesses are looking for ways to update their business models abandoning the old staple of “shareholder value” and seeking instead a more comprehensive approach to production, one that takes into account all stakeholders’ interests. The cohesiveness between management, unions, and shareholders in the German business model strikes a chord with those who, among business owners and CEOs, are questioning their own research, development, and engineering approaches.

Applied research: The most creative individuals on your team are drawn to long-term projects beyond the current state of your technology or strategy. Learn how to shift their focus back to short-term research and product development. This implies their ability to work on their own to develop new ideas and to supervise other production employees.

Development process: While quality is at the epicenter of the German business model, it may become destructive when it encourages perfectionism. Well-designed details and efficient engineering should not be equated with stalling perfectionism. Allow the perfectionists on your team (who are not necessarily among the most creative thinkers of the previous category) time for experimentation after the desired quality of your product has been reached.

Engineering management: Define the strengths of those on your engineering team and experiment with sub-teams that you can direct to either exploration of new technology or new heights of perfection.

Technical knowledge: One among the founding members on your team should be the expert in technology and its applications and keep current as the company is growing so that he/she is able to supervise the entire research/development/production process.

This discussion is really about your own ability to understand the research and development process as it relates to your product but also as it relates to other branches of management, for example workers’ unions, customers’ reception (and therefore marketing), and industry conditions (and therefore long-term strategy). What has been perceived as a flaw within German industrial production is actually the management’s foresight to work along various constituents and not towards increasing shareholders’ value exclusively.

Last Year’s Model and Flawed: A Good Investment for the Operations Warrior

With private equity groups out and about, constantly shopping for luxury goods companies and with the economy not recovering as fast as everyone had hoped, brand valuations are a good sport for buy-out specialists. This is because at the moment most valuations reflect the brand’s profit making ability, which is very low, while private equity firms gamble on the value of the intangibles. According to the Financial Times’ “Special Report on the Business of Luxury” (June 14, 2010), there is a lot of activity in the buying and selling of luxury brands and this reflects the eagerness of several private equity firms whose main goal is to capitalize on their record-low acquisitions of yester year and take advantage of the slightest signs of economic recovery. Luxury goods make for a cyclical industry that requires finance professionals to be bold when it comes to fashion.

In the case of Ferré’s auction one hopes that the results are going to be a little bit different. Gianfranco Ferré, the Italian designer who founded the Ferré Fashion House, passed in 2007, while his firm had already been bought by IT Holding, a luxury brands group that went bankrupt last year due to the economic recession. (The Financial Times, June 17, 2010, http://www.ft.com/cms/s/0/5d55973c-796a-11df-b063-00144feabdc0.html)

But in bankruptcies of that type is when things get interesting, not so much for the sport-loving buy-out shops, but rather for the hard-core operations-driven private equity firms. These are the people who roll-up their sleeves and bring out the operations manual with the goal to turn the firm around and create economic value for the firm, their own team, and the rest of the stakeholders. Their success is based on their ability to identify flaws and work with them, around them, or against them. Whichever the case, here is what the rest of us should keep in mind for ventures of similar kind:

Manufacturing management: Production processes are key, more so than production capital (machines, manpower, or space) to produce the product. Process is what consumes time and resources to produce quality. The latter is a major differentiation point from the competition.

Inventory control: Make inventory control part of your production process or at least try to identify where the two models intersect.

Quality control: Setting standards and inspection systems should happen on both the micro and macro level. Dumb proof checklists will never amount to anything useful if you don’t give your own management breathing space for macro inspection. Rethink your systems on a regular basis. Where your processes fail is where your business model needs tweaking.

Purchasing: Identify supplier sources and work with them to add value to their business model. If you hesitate ask yourself why. This could reveal an opportunity for business expansion for you (vertical or horizontal integration).

Operations skills and management: Don’t be afraid to spend some time in the “production trenches” before holding a meeting at the senior management level. Take some time to reflect on what you learn on the trenches and ask a lot of questions even if, as the company owner or CEO, you are supposed to hold all the answers.

Working with Flaws Part II

It is important to indentify weaknesses in any plan, strategy, or venture. These weaknesses are the cause of business disruptions. If these have to take place, it is better to be the one who provoked them (you: the master planner, strategist, entrepreneur) rather than allow your competitors to disrupt your business. To be the first, you need to know where to look. If you already have a good team in place, you are most likely to identify weaknesses in the following areas: marketing and sales; operations; research, development, and engineering; financial management; general management and administration; personnel management; legal and tax structures.

Knowing that flaws in these areas can bring down a sovereign state (see entry of May 29, 2010) should be enough to motivate you to pay close attention to the specifics. Perhaps it would be best to elaborate in one area at a time, even though the CEO of a company should keep a close eye on all seven simultaneously.

Marketing and Sales

Marketing planning: How are you planning to structure your overall sales, advertising, and promotion programs? What are the determining factors in establishing distribution systems? Who are your sales representatives and why?

Market research and evaluation: Are you or someone on your team able to design and conduct market research studies and to consequently analyze and interpret the results? What is your experience with the fundamentals in the field? Have you worked with questionnaire design and sampling techniques before?

Merchandising and Sales: You must feel able to organize, supervise, and motivate your sales team. You must have an understanding of territory analysis in order to forecast account sales potential and to steadily gain market share in the target market.

Customer generation: How are you developing new customers? How are you identifying sales potential within your network and what is the strength of your sales closing record?

Service: What are the needs that arise from particular products or services you are selling? What is your strategy in handling customer complaints and what is the channel that brings these complaints to the CEO’s attention?

Channel management: Have you planned the flow chart of your product from inception to manufacturing to distribution to the customer? Do you have an understanding of the costs involved in each step of the process? How can you buffer the process if one of the parts fails?

Rethinking marketing as the sum of all the parts listed above will help you avoid pitfalls that can ruin your product, reputation, sales, and ultimately your business. Your skills as the CEO should reflect a thorough understanding across all of the aforementioned areas even if you are not an expert in each one. Someone else on your team should be.