1 SummaryThe report prepared is a brief discussion on fashion cluster of Milan, the second most populated city in Italy.
A fashion cluster defines a group of similar and related firms (fashion industry) in a defined geographic area that share common markets, technologies, worker skill needs, and which are often linked by buyer-seller relationships.The report includes a condensed introduction on the overall economic performance of Italy, discussing different macroeconomic and microeconomic conditions over a span of 10 years.It gives a general guidance on the overall business environment and related policies. The main industries of Italy deals with motor vehicles, fashion and clothing. A brief insight on Italy’s regional position and interaction, the choice of policies for both micro (focusing more on structural, competition and privacy) and macroeconomics (monetary policies) is mentioned in the report supported by the statistics, helping in interpreting the information. A detailed analysis of a cluster helps to know more about the drastic changes in the business environment as it compares the history with the cluster today.
Further it highlights various strategic issues in parts of the diamond policies. Various policy recommendations have been mentioned for different hierarchy (national, local, regional government, different trade associations for collaborations).2 Introduction History:Italy is located in South-Western Europe having a close proximity to Europe’s economic powerhouses (Germany and France).
It has a total population of approximately 62 million having an area span of about 294.140 square kilometres. Talking about the history and legacy of Italy- Italy has been a founding member of European Union. It became a nation-state in 1861. In early 1920’s, due to establishment of dictatorship, Italy got defeated in World War II.
. After World War II, Italy went through a period of social and economic stabilization, although it faces constitutional and political disruptions now.There are various aspects considered which shapes the entire economic culture of Italy.
Also the Italian city of Milan is recognised internationally as one of the world’s most important fashion capital.Facts: Latest development reveals that sluggish economic growth and high youth unemployment rates has always been a persistent problem since a long time for Italy. Adding further to the problems, job Securities and low incomes has affected the birth rates. To sum it up, facts states that “Italy is characterized by low political effectiveness, a high degree of corruption and great socio-economic differences between the north and the south, these factors have played a major role in shaping the economic growth of Italy.”3 Overall Economic Performance”The Italian economy has been severely hit by the financial crisis and high unemployment rates in the South paralyze economic effectiveness”Macro Performance:GDP AND INFLATIONThe graph clearly depicts huge gap between North and South in terms of GDP per capita, the differences is almost about 85%.
Economic performance is heavily hit by the financial crisis. The expected figures (2016-2020) shows a constant rise in the inflation rates which will directly affect the cost of living and cost of doing business. Thus a severe depreciation in the domestic market.
There is a gradual decrease in the GDP compared to 2013 from 35000 to 32500 in 2015 which is a dip of almost 7% in county’s productivity resulting in recession thus decreasing the average interest rates in the economy.UNEMPLOYMENTThe statistics show that the average unemployment rate is stable around 10%But these numbers are much higher in South than in North, differences are more than 10% If we compare the youth unemployment rate with the entire EU employment rate, these numbers are devastating. Very high youth unemployment rate (40% in 2015) Micro Performance:National Competitiveness Survey DataAbout 84 of largest 100 luxury firms in the world are located in these countries.
The number clearly proves that Italy has the highest number of luxury companies. So for national competitiveness Italy has to be compared to the rest of the 6 competing host nations for luxury firms.But still Italy lacks in ease of doing trade. As the ranking clearly depicts that Italy is lagging far behind in terms of ease of doing the business, despite the fact it has the most number of luxury firms.
Very high perceived difficulties in paying taxes and enforcing contracts. Lack of funding for firms has always troubled Italy in expanding the business.Thus a confusing tax system and credit unavailability cause Italy to have the lowest ease of doing business compared to other hosting nations.Education: The cluster shows that Italy has got an advanced education system, especially when considering primary education. Also has a fairly advanced infrastructure but quite underdeveloped financial markets.Labour Force: As Italian education is quite advanced, this makes the efficiency in leveraging the available labour force quite low.
There is not an efficient use of talent. There are times when labour force is available but unawareness of availability affects the labour force (remain unused).Competitive Edge and Lack of InnovationItaly has a good efficiency in production of goods and services resulting in a high business sophistication resulting from high nature of competitive advantage.
Always maintained a good quality and quantity of local suppliers to support the business.Industry clusters have played a major role in economic development of Italy. Italy has almost been on par compared to USA in terms of state of cluster development.
But innovation, research and development has been a consistent problem for Italy.Italy has the second lowest score for capabilities of innovations. This again in turn affects the global competition, as the global competition becomes more intensified with continuous innovations.
There has been very bad university-industry collaborations for research and continuous development which makes it non-competitive.Numbers show that there is a fair availability of engineers but still the amount company spends on research has been quite low. Thus Italy has got quite a moderate competitiveness due to failures of small and medium based industries in improvising, whereas demands of goods have been in favour of Italy.4 Business Environment and Policies1657350386080Firm strategy, structure and rivalry00Firm strategy, structure and rivalryNational Diamond Model helps better to understand the competitive position of Italy in global competition.
General DiamondModel302895087376032099259271016859246356352324100416560102870090233513620751045210962025736601714500901700 Supporting Industries00 Supporting Industries3343275445135Demand Conditions00Demand Conditions209550464185Factor Conditions00Factor ConditionsFirm strategy, structure and rivalry: Overall strategic policies, firm structure and inter-rivalries have had a negative impact on Italy’s economy. Small and medium sized firms account for about 77% of the total workforce in industrial production. But due to lack of expertise and innovations the number of SMEs have decreased by 41% in past 5 years. The firm strategies and structure directly depend on several factors like labour force, unemployment rates, firms are reluctant in spending on Research and Development.Factor Conditions: Despite having a good primary education, there is a poor collaboration of universities with industries for R&D which results in lack of innovations in technology and business culture. Project financing has been a major problem for Italy.
Plenty of skilled labours remain unemployed especially in South. Supporting Industries:Despite several funding and labour drawbacks there has been a moderate growth in supported industrial production. Italy is the 3rd biggest producer of industrial machinery after Germany and Japan, also having a rich cotton cultivation in Sicily and Calabria.
Demand Conditions: Number of potential buyers has always been high. The fashion culture, heritage consciousness has helped to create a demand of MADE IN ITALY products. Italy has a strong trade connections in EU (especially Germany).The fashion industry out forms the Italian economy, while he entire fashion industry is composed of only small firms.Role of fashion industry:IN ITALYOverall GDP growth has seen a rise from 2% in 2015 to 5% in 2016, because of the fashion sales growth in a span of 1 year.
Trade connections have been good leading to more no of exports (82%) compared to import of goods (18%). But this has also seen a strange shrinking in the domestic sales (about 27%)GLOBAL ROLE OF FASHION FIRMS Italy constitutes the most number of luxury fashion firms which gives it a competitive edge over other 6 competing nations.But still it only accounts for 17% of the top 100’s revenue.Large number of SME’s have appeared in top 100 ranking, yet their sales growth have not outplayed. International Performance of fashion firmsThe graph above depicts that the firms that are grouped in clusters perform better in terms of turnover as compared to the firms which are not part of any clusters.Majority of the firms are located in Milan.
Italian firms have always been on par with its international competitors. The growth progress has been relatively slow compared globally, but profit margins show a quite positive development (7%).5 Analysis of ClusterFashion Culture in Milan:Since early days in the 18th century, fashion cluster has developed to a dynamic hosting nation of internationally recognized firms.
The fashion lifecycle has been divided into different phases giving a brief knowledge about the growth of international firms from 18th century to 2016. Early period:During the time of 18th-19th century, first Italian magazines were launched namely” Giornale delle Nuove Mode di Francia e d’Inghilterra (1786-?1794,) Milan”Also Milan become the leading industrial centre in Italy attracting a lot of capital.Hero Phase:In the year 1906, first ground opening fair took place in Milan for the World Exhibition which later got transformed to into the Milan fair in 1920’s. Within a span of 15 years, in 1935 a leading fashion academy-Prada was founded. As years passed, an association (Istituto Marangoni) was formed to represent the fashion industry.
Maturity:The period of 1950’s to 1990’s was a time of emerging fashion firms in Milan. Many fashion firms, academies, schools, magazines were developed. Vogue was founded in 1965. Dynamic fairs were organized linking the actors, models. The government involvement increased slowly and steadily.
Officially now Milan had become the “Big Four” global fashion capital along with Paris, London and New York.Turning Point:With globalization at its peak, the 21st century came with lot of opportunities and challenges for Milan.Early 2000’s saw an increase in number of projects and events promoted to help new firms to emerge and establish. In 2009 Milan was made world’s fashion capital.
Statistics show an enormous growth in the fashion industry with more than 900 showrooms, 13000 fashion enterprises and 14 fashion fairs. Domestic market had to undergo a lot of challenges as local manufacturers faced price competition. Competition increased all over the globe with Milan coming down from world fashion capital to 6th tanking worldwide in 2015.Popular fashion houses that made Milan a leading nation in the fashion industry. Prada was the 1st haute couture fashion house founded in 1913 followed by several fashion academies to support the innovations needed.
1950’s and 1960’s considered the birth city of Italian fashion with establishment of several other haute fashion couture house.Domestic CompetitionWhile Florence was focusing on main fashion houses, Milan established a strong base as a leading Italian fashion cluster appealing a large demand with Prêt-à-porter (READY TO WEAR) affordable fashion. As a result Florence lost its track.
Large companies were established increasing the employment rate. In 1950’s with establishment of Milan Fashion Week, its importance started increasing. Addressing more fragmented market, Florence lost its track for affordable fashion but still ranks 11th as a strongest fashion city.Global Competition Paris, New York and London became major threats for Milan, Italy in the fashion Industry. In 2016 Paris was ranked the number 1 position for fashion culture followed by New York and London on 2nd and 3rd position respectively.
Innovations in the cluster helped Paris to outplay the global competitors. Milan always lacked collaborations with universities for innovations and research on latest trends.For New York early 20th century saw an advancement in production and distribution.Between 1950’s-1970’s New York fashion week created cluster dynamism.London became a popular hub for hip edgy fashion for trendy fashionistas.In 1970’s London Fashion Week started receiving investments from the city to create exhibition and commercial spaces.
Milan’s weakening performance is partly rooted in the gaps of the fashion cluster.Key Competitiveness Issues:Commonly known as the 7 gap model- a detailed focus on the key aspects leading to a fall of Milan from a world fashion capital globally.Major issues were at Firm-Firm level where the stylists and manufacturers were rarely connected for SME’s ,adding on to the problems were the lack of technological advancements to keep up the trend globally.At Firm-Research level, companies were quite reluctant in collaborating with R&D of universities. Also they were unaware of the kind of innovations required.
Firm-Education gaps were increasing year by year. Graduates were unaware of the job vacancies. Bad career management, also the trend towards design were quite a mismatch.
Lack of funding did not allow companies to meet the expectations at domestic market. At Firm-Capital level banks were quite reluctant investing as they perceived high risks of investing in uncertain fashion. A confusing taxation system, differences at regional and federal taxation system affected the Milan fashion industry badly. A weak public transport link to outskirts of the city made it difficult for the local manufacturers. These all problems resulted in a Firm-Public authority’s gap.
A huge gap was formed at Firm-Cluster level there was no mutual understanding to organize activities to promote Made in Italy heritage globally. Finally when competing worldwide Milan shifted to 6th position as the fashion capital ranking. This was due to underdeveloped e-commerce channels limiting the expansion outside the nation. The universities did not encourage exchange programs for international students. Chinese did not find Italy a better tourist attraction compared to Paris and New York.
Therefore at Firm-World level the gap were increasing over the years since 2009. Policy Choices:Government policies saw a change from no involvement in the early 19th century to strategic interest in 2016.19th Century( no interest) Level of construction of cluster was quite low as there was a minimal involvement of the government. Importance of fashion cluster was not understood by the municipality,1980’s (low interest) In 1983, Prime Minister introduces an agenda to transform Italy into a post-industrial city.
Fashion industry was just exploited for promoting tourism. 2000-2006(increasing interest)Monetary and stabilisation policies choices In 2005, General States of Fashion and private actors discuss the relationship between Milan and fashion cluster. Chamber of Commerce was ready to support through funding’s.
2006-2016(strategic interest) Liberalisation, competition and education policy choices In 2006, municipality started promoting Milan as global knowledge and creative economy. New initiatives were taken in 2015(EXPO) being one of them. Fashion incubator were set up to promote new fashion. In 2010 PROMOS (Promotional Agency of Chamber Of Commerce) launched a structural program for marketing of the city.
Milan Fashion Cluster PerformanceRevenueThe turnover saw an enormous rise. It got doubled in a span of 8 years (9% CAGR) from 2007-2015. But it saw a dip in the profit margins as it came down from 19% in 2014 to 14% in 2015.
Global challenge’s saw a great turnover but also ate the profit margins as the operating cost increased (example: development of new Sales channel).EmploymentAnnual employment growth rates went up by 2%. As the period of 2006-2015 saw a development of various fashion channels, establishment of various haute fashion couture and demands increased, the employment started growing from 71,000 in the year 2007 to 83,000 in 2015.
Milan Diamond ModelThe Milan Diamond Model constitutes of the four levels of dynamism.166687513970Firm Strategy, Rivalry and Structure00Firm Strategy, Rivalry and Structure302895087376032099259271016859246356352324100416560102870090233513620751045210962025736601714500901700 Supporting Industries00 Supporting Industries3343275445135Demand Conditions00Demand Conditions209550464185Factor Conditions00Factor ConditionsFirm Strategy, Structure and Rivalry Milan Level Cluster LevelIn 2015, Italy saw more than 40% of the foreign direct investment inflows in Millan fashion cluster.Collection of company’s headquarters lead to increased direct rivalries.
Bur with the increased demand, large part of production got shifted to outside Milan to Lombardy region for space issues. Specialized in various other segments of fashion other than clothing. Milan’s styling alone produced more than half of the national total turnover.A lot of pressure on profit margins with an increased global competition. Due to outsourcing, new challenges were faced in city’s link between designers and manufacturers.
Factor ConditionsMilan Level Cluster LevelOrganizational capabilities of the firms became stronger, attracting a lot of international students compared to the rest of the nation. Well educated and young labour market. But flow of funds and innovation capabilities lacked which was a restriction to compete globally. Long held fashion hub attracting world class designers.Generated talented workforce on basis of strong education background.
SME’s were unaware of the innovations required which build a gap between R&D of universities and the industry.Demand ConditionsMilan Level Cluster LevelHigh diversity of tastes expected from firms and Milan consists of a large number of wealthy and prosperous population. Wholesalers and showrooms became assets to display latest trends.But for Asian tourists Milan was not the attracting tourist location. 14 annual fashion events, the Milan Fashion Week alone saw a crowd of 22,500 generating huge sales.
Appealing the customers with ready to wear fashion compared to haute-couture.E-commerce faced investment issues to get hold on online market.Related and Supporting IndustriesMilan Level Cluster LevelHigh concentration of the media industry and financial services with the help of headquarters of various Italian banks.
Logistics and transport facilities improvised quite steadily. Good raw material were available to the designers with the help of string textile core.Interactions helped to encourage the creation of other cultural services like restaurants and bars. Small town like Prato used to import from China which faced prices discrimination and less interaction.Prada OverviewPrada was one of the first fashion company established in Milan in 1913, playing a major role in Milan’s fashion capital recognition. One of the leading fashion firm in Milan’s cluster and operates in an integrated value chain.
Today Prada has more than 12,000 employees and its revenue growth has been quite good with a steady progress of 38.8% since 2011.Value ChainDifferent stages of this value chain involvesDesign and development of the productdevelopment of new collections, samplesDetailed specifications for quality control outsourced production.Collection of OrdersOrders are collected from the retail channels of Prada and wholesale clients at the showrooms.
Also order collection is done at fashion shows.Sourcing and ProductionRaw materials are purchased through strong textile relationships and networking Products are divided on the bases of categories( e.g.: leather, ready to wear)Round 480 external manufacturers are there around the world with a strong control over logistics.DistributionThere are around 654 stores worldwide, with 618 directly operating stores and 36 of them are franchise based (generating 87% of the sales).Network with high multi brand stores through wholesale( generating 12.
7% of the sales)Prada and Milan Cluster Relationship:Government: government highly benefits from MADE IN ITALY concept of Prada and supports the large investments which strengthens the brand. Facts reveal that during the year 2015-2017 about 220 million EUR investments was provided.But again expanding internationally has been quite difficult for Prada because of the complex tax laws for global companies.Education Organizations: Prada has been named as one of top recruiters of students from the university programs in Fashion and Business.
But unlike Gucci, Prada does not supports funding or career development activities.Research Organizations: Only source of innovations during initial days were the strong relations with raw material suppliers. Very weak connection with the R&D department of universities.Capital Providers: Prada is registered at the Hong Kong Stock Exchange which ensures inflow of capital from global investors. Milan is a strong financial centre creating good premises for capital inflow.
Organizations for Collaborations: Member of the National Chamber for Italian Fashion (an association primarily focusing on promoting Italian fashion globally) Founded Prada Foundation Milan in 2015, with a motive of knowledge exchange between art, architecture and fashion.6 Strategic Tracks and International CompetitionPrada became a global competing brand through various product differentiation and marketing development strategies. Numerous strategy tracks were implemented from 1913-2016 to achieve a global brand name.
Time Span Strategies Implemented Targets1913-1978 Market Penetration Track- Elite Milan customers were offered luxury leather accessories. Became official supplier to Royal Household, gaining national recognition Majorly focusing on regional and National completion.1978-1985 Product differentiation Track- while competitors were focusing on lavish luxury and celebrity attracting goods, Prada kept subtle Milanese elegance as priorities. Luggage collections in nylon attracted new segments National Competition and international demand1985-1998 Market Development Track- increased the brand scope (shoes and clothing). Adapts green store concept to local stores in New York, Paris, London (the major competitors).
Established a wholesale account in U.S Multinational competition1998-2003 Acquisition Track- focused more on expanding via acquiring other international brands. In the entire span of 5 years acquired various fashion brands. To name few of them: Rome based Hendi, Jil Sander in Germany. Acquired shoe brand in Northampton shoe cluster. Increased multinational competition2003-present Licensing and New Market Track-For a long time Chinese were not that attracted to fashion cluster of Italy. But Prada expanded heavily in China and Middle East, narrowing the gap between China and Italy fashion cluster globally. Gets listed on Hong Kong Stock Exchange for getting funds. Competing globally Major focus shifted from competing nationally, to achieve international recognition throughout the entire timeline from 1913-20167 Policy RecommendationsThere were several gaps between Milan Fashion Cluster and the business environment of Italy which was addressed by the policy makers and some recommendations were implemented. The policy recommendations also varied from level-level.There were different policies implemented at:Milan and Fashion cluster level- addressing problems of low collaborations between industries and R&D, outsourcing productions.Firm-World level- implementations for attracting Chinese tourists.National Level- confusing tax system, corruption problems, supply and demand matching, raising funds.These policies were drafted and implemented based on the key aspects of global competition and reducing the 7-Gap model.Policy Recommendations at National LevelThe thought behind these policies being implemented was to improvise the national conditions by promoting “MADE IN ITALY” concept and increasing the ease of getting loans.Areas RecommendationsFunding System Establish facilitating banks to back up bank loans to fashion companies. Investment in new technologies. Banks can also provide their own funding.Infrastructure Focus was more on creating affordable office spaces in Milan. Improving student facilities. Public transport connection to be made simpler connecting the suburbs.Organization and Taxes Simplify the complex and confusing tax laws by making the tax laws more transparent. Educate people at fashion shows about tax education. Establish tax contact persons at every organizations.Innovation Fund university chairs, researching on new designs and technologies. Promote Made In Italy via campaigns. Support more exchange programs and granting international students. Policy Recommendations at Fashion Cluster LevelAreas RecommendationsFunding for technical advancement and development Increase e-commerce presence among SME’s especially at international level. Create website tools to create online stores. Aware education departments of importance of digital media.R&D of SME firms Establish incubators creating a link for exchanging existing knowledge and new ideas( funded partly by government and firms) Employment Opportunities Launch job matching profile search engines to reach out to the talented individuals and skilled labours required for firms. This would solve the problem of shortages of skilled labours. Create awareness on changing labour demand( from production to design)Innovation Case Challenge Create forums for some out of the box ideas, create awareness programs for fashion firms. Policy Recommendations for tourist attraction Areas RecommendationsFashion trips Organized trips to luxury boutiques introducing traditional knitting techniques. Support of art and culture heritage of Milan. Encouraging more heritage and educational trips. Various cultural programs were organized.Collaborations of authorities, cities and trip organizers Smooth cooperation between authorities, cities and trip operators ensured a simple easy procedure during the trip.Ensure easy visa process, negotiate more on direct flights from China to Italy. Offer coordinated transport (rail and airport transfer). Attracting Chinese tourists Chinese groups were the biggest group of tax free spenders in Italy, accounting for 35% of luxury sales.The tour operators hired more Chinese speaking staff.Italy became the favourite tourist spot for Chinese. The brands were 30% cheaper in Italy than in China, create a willingness amongst Chinese to pay.