Benetton S.p.a
Why Diversification into Financial Services makes sense? HAIDER SADIK Mgmt. Policy, Rl June 30, 1995

The diversification into financial services may best be looked at as a reflex of the Benetton entrepreneurial sensibility to seek out profitable opportunities while addressing the long-term impact of global changes on its existing business. With the developed nations reaching saturation levels in industrial growth, and the developing markets experiencing a capital investment boom, the Benetton subcontractor network, primarily in Italy and Europe, will eventually get incapacitated based on cost competition. Thus, a critical element of the Benetton textile retail business will eventually go under. To hedge against this risk, Benetton would have to establish relationships with suppliers in the Asian and other emerging markets. The big difference now, however, is that the balance of power would shift more in favor of these subcontractors, who will be more competitive, making it harder to negotiate exclusive contracts and exert control on as before. Thus, a key ingredient for maintaining rapport with piece-makers would be owning shares in several of these firms located globally while helping the subcontractors with equipment and machine supply. And once the Benettons have a vested interest in these firms, they would like to monitor and exert financial control over them. The above scenario is sufficient for re-focusing the business strategy to diversify into investment banking, corporate finance, brokerage houses, and leasing firms, but then the Benettons would be expected to take a 360' view. As the developed nations like Italy no longer remain the big industry giants, banks and financial institutions will begin channeling funds abroad to reap profits in markets with high demand for capital. At the same time, information replaces capital in the developed world as a key input, with global networking and communication causing infrastructure flux and providing new business opportunities. This is where the impetus for Benetton's retail growth exists, with ambitious expansion in the number of shops planned primarily to set the stage for realizing economies of scale to implement a global communication network for marketing and financial information, perhaps leading towards a vision of creating a virtual exchange that would respond in real time. The financing of these ambitious plans would require large funds, making relationships with banks critical for securing a line of credit. Moreover, diversification into factoring and leasing services would create opportunities to manage and channel funds to develop the franchise network. This will be critical for leveraging the newly acquired information systems capability while maintaining flexibility through joint-ventures and maintaining low overheads to immunize itself from recession. Thus, the financial services are an integral part of the revised Benetton strategy to manage the relationships in its functional chain. Maybe this is a case where necessity turns out to be the mother of invention, but the essence of the idea is not unfamiliar to the Benettons either. They have a history of managing their retail and subcontractors network, only now they need to form partnerships to manage these relationships. The financial services provides the most flexible approach for integrating its multiple function roles in its value-chain, only now it can charge money for helping its network of subcontractors and retailers arrange for credit, lease machinery, or factor receivables. Moreover, the tried and tested Benetton entrepreneurial formula can be very easily extended to the financial services division. By simply replicating the old strategy of expanding globally through the use of its financial services' brand equity and credibility, Benetton Spa should rapidly generate the volume of business sufficient to move into the information business arena, the next big business opportunity ...