Revamping An Industry: How Ecosystems Can Help The Fashion Sector Gain Competitive Agility In The New Normal
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Having had discussions with some of my friends working in fashion, I’ve been wondering about how competitive agility could play a role in revamping the sector as we know it. Besides looking at the key trends impacting the business, it’s worth looking whether the fashion landscape, like other consumer-oriented industries, can orchestrate new, innovative ecosystems to support brand and bolster value chains and competitiveness.
It is well known that over the last few decades, fashion has been facing significant disruptions. These include physical and digital interactions moving the retail experience into a set of orchestrated touchpoints, the power of “see now buy now” moving brands towards the instant buying process, and the rise of e-commerce. There have been also challenges presented by everything from innovation (which, for instance, impose a fast and furious assortment renovation within the season, or the launch or capsules, cruise, or limited-edition collections) to sustainability and circularity (which is an evolution of the “fashion with purpose” paradigm, where people do not buy based on what you do, but based on why you do it.
All of this is very interesting to observe, especially when considering this marks the evolution of an industry developed at the time of the industrial revolution with mass production uniforms, which was then elevated as one of the most egocentric (designers) and somehow unhuman (workforce) driven sectors pretending to rule the world. At the same time, the rise of fast fashion started to mix and match high value merchandise with the more affordable (like Zara and H&M), which further accelerated the fashion business as a whole. The ambiguity of fashion is difficult to describe: although, by definition, it’s oriented to set and embrace new trends, somehow defining fresh ways of being at every season, many companies are still facing some very old issues.
These challenges include deadstock allocation (Georgia State University says of 100 billion garments made every year worldwide, with 92 million tons of it wasted and incinerated) or wanton investments on fashion weeks (Gucci’s decision, pre COVID-19, of having just two catwalks per year, not necessarily aligned to the fashion week calendar, was perceived as a huge disruption). There’s also a dependency on traditional business models, which is seeing distribution footprints overlapping- think wholesalers, directly operated retail, outlets, second-hand platforms, e-commerce platforms, Instagram, WeChat, and more.
At the beginning of 2020, it was interesting to see how many fashion companies funneled much-needed funds and energies towards the global fight against COVID-19. In the heavily affected Italy, for example, brands such as Prada, Gucci, and Giorgio Armani donated millions of euros to support the creation of respirators and hospital wings. Others have mobilized their sizeable workforces -there are some 600,000 garment manufacturing workers in Italy alone- to produce masks and personal protective equipment for medical professionals. This has happened at vast corporations as well as smaller, independent design companies. Somehow, the COVID-19 emergency has demonstrated that fashion companies can revamp its operating model with agility, creating cooperation, and, last but not least, give up part of their profit to support a globally greater good.
Institutional fashion ecosystem
According to McKinsey & Co., the apparel, fashion, and luxury industry has been the highest-returning sector over the past 15 years. Total returns to shareholders (TRS) rose by 11% annually, which is faster than tech (6%), pharma (4%), or consumer basics (6%), although, from 2013 to 2018, the sector added only 4% TRS, well below the S&P 500. McKinsey also underlines that TRS in 2020 for the apparel, fashion and luxury sector is among the worst, having been highly affected by the COVID-19 pandemic much like the airline, real estate, and oil and gas industries.
Indeed, the average market capitalization of apparel, fashion and luxury players dropped almost 40% between the start of January and March 2020- 80% of publicly listed fashion companies in Europe and North America are said to be in, or expecting, financial distress. In the meantime, the impact on suppliers is huge. Bloomberg reports that about 1,089 garment factories in Bangladesh have had orders cancelled worth roughly $1.5 billion due to the coronavirus outbreak, while the AWAJ Foundation says that many factories in Bangladesh have been shut down indefinitely.
So, as we move into the future, what are opportunities for fashion from “the new normal”? How can the fashion industry look ahead and gain the competitive agility that other industries are already facing? Is the ecosystem opportunity going to represent one of the possible future scenarios for fashion’s value chain?
In a business ecosystem, companies work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations (Moore, 1993). James F. Moore (1996) explains that business ecosystems include those we have always considered to be part of a corporation, which is those inside the organization’s walls, plus distribution channels and direct suppliers. It also includes the extended enterprise that consists of direct customers, standards bodies, suppliers of complementary products, and so on. Finally, on a broader range, business ecosystems include those who can have a significant effect on the core business, but who are often considered afterthoughts or pesky outsiders- these include trade associations, regulatory bodies, unions, investors, and others.
The interdependency between ecosystem layers
Here are three potential models for revamping the fashion industry, considering the full value chain- each of them can be considered as autonomous, although there is a strong interdependency between the three:
1. The Institutional Ecosystem
The institutional system is composed by fashion institutions: the national organizations, and their role within each economy or international representations of it. There are different alternatives for countries to position themselves on the market: some of them have developed skills, capabilities, and brands setting the roots since centuries (France or Italy, for example), while others have more modern articulation, like Sweden or Denmark.
The role of fashion institutions would be fundamental for the future revamp of each national industry: these would include refreshing policies and regulations, supporting SMEs in planning contingency and managing risks, offering employees and workers protection, sustaining the entire value chain relaunch, offering digital platforms as a service, providing facilitations and subsidies for maintaining the fashion system alive, rationalizing the overhead spend, and facilitating the divestment on non-core assets. Together with trade agencies, foreign commerce entities, ministries of foreign affairs and international cooperation, and other industry associations, the role of every national system is fundamental.
Building up a strong platform supporting the business ecosystem, sustaining the small and medium enterprises that have managed to stay alive, driving the international development of national brands, rationalizing the overhead spend, optimizing production by reinforcing regionally integrated supply chains, facilitating the divestment of non-core assets, and, last but not least, supporting the value chain digitalization are going to be key initiatives for surpassing the disruption generated by this pandemic.
For now, the system will need support for this restart: a centralized entity orchestrating collaboration and sharing data, strategies, and insights would be a strong accelerator for the dramatic transformation that fashion has to face, in any category, and in every market. We loved how the British Fashion Council asked for help during the COVID-19 crisis, and we appreciated how the Italian Fashion Council dedicated their February fashion shows to China given how the country was affected by the pandemic. But the journey ahead is still long, especially for countries like Italy, where fashion is the second largest source of revenue.
2. The District Ecosystem
The longevity of each national fashion system is directly dependent on its ability to streamline the value chain and ensure efficient execution. The industrial districts represent one key pillar of it: they constitute a model of production organized by local communities and agglomerations of independent enterprises that, like the links in a supply chain, interact directly with each other, rather than indirectly in response to price signals generated by a competitive market. These firms specialized both horizontally, i.e. they produced different products for the same markets, and vertically, i.e. they focused on different functions of the value chain. End producers often sold their products internationally, but gained their supplies from a local supplier base.
Industrial districts, born in the 19th century originally, rests on geographical proximity: in 1998, Michael Porter published a point of view around Clusters and the New Economics of Competition, which is very much relevant at this point in time, stating that “being part of a cluster allows companies to operate more productively in sourcing inputs, accessing information, technology, and needed institutions, coordinating with related companies, and measuring and motivating improvement”.
According to a report recently issued by the European Union, the economic activities that are located in specialized clusters account for about 19% of European jobs and 22% of European wages. As such, the relevance of national industrial clusters will definitely increase after COVID-19, because the challenges generated on global supply chains would mean exploring nearshoring activities, and also because of the need of more transparent, traceable, and responsive value chains, that are possibly analytics-driven.
How, then, can districts survive this challenge? Well, once again, the development of a strong ecosystem connected to the institutional one might help: ecosystems can support a more integrated and coordinated set of actions, which can bring back the spirit of being united, rather than a fragmented number of companies that are not really connected as a cohesive system.
District level ecosystem
Thinking about the Italian industrial clusters and how to boost competitive agility there, here are the main actions a supply chain executive needs to consider over the next couple of years:
- Integrate the differentiating pieces of each value chain This is something needed especially for nearshore entities, thinking about how to support not just the integration, but also the next level of industrialization. This is something we already see happening in other industries, like consumer goods, where, say, Tier 1 and Tier 2 suppliers or bottlers are considered an integral part of the value chain. Strategic planning, manufacturing planning, packaging, logistic flows are elaborated within joint business planning sessions– the question, however, is whether fashion players leverage on the districts’ businesses as partners.
- Enable human capital optimization Sharing a clear understanding of strategic priorities and enhancing an effective demand forecasting could represent a relevant value for human capital. German retailer Aldi recently partnered with fast food chain McDonald’s for a staff-sharing deal- this should serve as an example for how fashion districts players can partner with one each other to find win-win solutions.
- Support the shift to the new The value chain across districts needs to be digitalized. This includes the use of not only tools like virtual showrooms, remote working platforms, 3D design, and integrated prototyping that can enhance productivity and optimize costs, but also digitally integrated manufacturing, smart warehouses, RFID systems, and procurement platforms as well. In the UAE, Dubai Future Foundation, for example, is bringing SMEs and entrepreneurs together to position Dubai as the leading city in the future, supporting the rise of digital and technological excellence by leveraging on the government’s support.
3. The Enterprise Ecosystem
The third and last piece of this supply chain is the enterprise, the driving source of change. In this context, the brand renews its role becoming the center of an effective ecosystem, orchestrating many of the actions taken by the institutional and value chain partners, and playing the leading role in building and maintaining trust among all parties.
According to BCG, "a luxury ecosystem helps reduce the risks and costs of innovation, because many more sources are contributing to the pool of new concepts. It helps companies overcome the challenges of scale that affect many luxury brands today. It also provides an unmatchable advantage: agility.”
The role of enterprise-based ecosystems is fundamental for facing the new normal and bringing competitive agility at the top of the executive’s agenda. This is how Apple developed its 360-degree platform idea, this is how Corning moved from being a glass manufacturing company to a global technology player, and this is how global asset-light players like Uber and Airbnb won the market in the past decade. Imagine then the heights fashion and luxury companies can reach by building ecosystems.
One great (and almost unique) example of a fashion ecosystem is the Hong Kong-based multinational Li&Fung (LF). LF’s business model holds remarkable resemblances to Uber’s. Both are ecosystem-based business models; neither company directly creates the product that their customers use. Instead, they coordinate interaction between groups. While Uber connects drivers with people needing rides, LF coordinates the production of goods via a vast global network of providers to arrange for private-label manufacturing, primarily for US and European apparel brands. LF connects the providers, which handle product development, sourcing, production, and shipping. If issues occur at any stage, LF can quickly shift from one provider to another.
An interesting conversation with LF’s VP of Strategic Initiatives, Nir Poleg, clarified the company’s strategic objectives: “Leveraging our extensive global reach of 10,000 suppliers around the world, depth of experience, market knowledge and technologies, we help brands and retailers respond quickly to evolving consumer and production trends. Using our convening power, we bring together diverse players in the supply chain. This ecosystem is a powerful platform to enact change in the supply chain for the benefit of our industry.”
Not only has LF built up a humble and adaptable model where technology and automation are supporting the continuous innovation engine, it has also created a community: as for every partnership-based model, trust and integrity are the cornerstones of their long-lasting relationships, which have been proved essential to foster loyalty and teamwork. The purpose is clear: “We are an entity that cares about our people, our customers, suppliers, and communities, and about creating a sustainable future together.” LF’s commitment to the communities is remarkable: with a 50% gender mix workforce, in 2019, the company dedicated 10,800 working hours for volunteering in 18 countries, which brought incredible results such as, for example, a 64% reduction in paper consumption globally.
LF is an example on how fashion could also enter the ecosystem-driven attitude, in a dramatically complex environment where capex investment is going to be tricky, given that the optimization of fixed expenditures is needed all over the value chain. Brands could thus really focus their medium- to long-term strategy on identifying and developing partnerships, sustaining a prompt time to market, reducing financial and market risks, supporting the boost of innovation, and, finally, supporting them to get closer to channels and consumers.
Li & Fung ecosystem
The COVID-19 crisis will provide proof for a much wider adoption of digitally driven collaboration tools, which will reduce team travel for suppliers. End-to-end digital creation and collaboration will be established as a new normal, further emphasizing the importance of trust and communication across the value chain in all directions. In this perspective, designing a digitally enabled ecosystem strategy could represent the long-term strategic answer for the fashion system shareholders to build a sustainable and agile competitive advantage. Here’s how:
- Set the North Star The big question here is: “What competitive space are we going to occupy over the next 10 years?” Reimagining the vision and the mission according to competitive and market trends is the first milestone for setting the pillars for a revamped business model and future strategic positioning.
- Define agility The second step is related to operating model redesign. Understanding what differentiating capabilities are going to ensure competitive agility, and how to source them is key. The ecosystem shape starts from here, considering how partners and startups can be plugged in into the value chain for making it nimble, fast, and, of course, sustainable in the long term.
- Sew the net The research of a network of long-term partners is to be focused on a set of principles linked both to the level of disruption that the target market is keen to embrace, and to the propensity towards building continuous innovation, together. It is fundamental to identify and orchestrate partners that complete and complement the existing value chain by having a strong cultural fit. Virtual organizations are generally flat, so values like the respect of non-inter-partners competitiveness and exclusivity are important pillars to be considered.
- Activate Depending on the nature and the dimension of the ecosystem, it might be needed to light up the partners’ network with a modular approach by setting up a phased plan. Dismissing existing internal capabilities might have an impact on the existing financial and operational configuration, so choosing a big bang approach might generate a negative impact on the business model.
- Revamp The nature of any ecosystem is dynamic, as well as the nature of each business. Because we cannot think about a static environment, the model is to be measured and controlled, refined, and revamped over time. This implies the existence of a piece in the organization that’s responsible for the ecosystem transformation and evolution- this is how we define agility and sustainable competitive advantage.