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When Your Competitive Advantage Walks Out the Door: Gucci and Cavalli

Chairman Domenico De Sole and Vice Chairman Tom Ford had masterminded Gucci’s transformation from a near-bankrupt family firm with an over-diversified brand into one of the hottest fashion houses at the turn of the millennium. As creative director, Tom Ford had established Gucci as a style leader and hired young designers. De Sole’s astute leadership had instituted careful planning and financial discipline, and built Gucci’s expansion in Asia and global presence.

In September 2001, French retailer Pinault Printemps Redoute (PPR) agreed to acquire Gucci Group. In November 2003, the managers and shareholders of the two companies were stunned to learn that De Sole and Ford would be leaving Gucci in April 2004. How great a blow was the departure of the duo to PPR? In theory, a new CEO and a new creative director could be hired. In practice, however, talent of the sort of De Sole and Ford was hard to find; especially a combination of CEO and designer who could collaborate around a shared vision.

The stock market’s reaction was ominous. Gucci was worth US$ 1.2 billion less without De Sole and Ford.

Just this week, Roberto Cavalli CEO Gian Giacomo Ferraris has initiated a comprehensive reorganisation of the company, including store closures and severe cuts to global headcount as Peter Dundas exits. The Italian label will be closing its Milan operations and transferring all functions to its offices in Florence. Production and logistics will be rationalised and the company will close, relocate and sell stores across its retail network. Cavalli, which currently employs 672 people, will eliminate 200 positions. Ferraris expects the company to return to operating profitability in 2018. Roberto Cavalli, like many other luxury brands, faces a challenging climate. In 2015, the global market for personal luxury goods grew to €253 billion (about $284 billion), up only 1 percent on the previous year in real growth terms, according to Bain & Company, a global consulting firm.

[Source:
Articles in the Financial Times during November 5 – 8, 2003
Business of Fashion]

Weapons of Mass Migration: Forced Displacement as an Instrument of Coercion

Mass migration, it needs to be said, has long been exploited by devious entities as part of a new military genre: asymmetrical warfare.

In a powerful essay published in Strategic Insights, Kelly Greenhill (2010) defined such a tactic under coercive engineered migrations, noting: “those cross-border population movements that are deliberately created or manipulated in order to induce political, military and/or economic concessions from a target state or states.”

Asylum seekers and migrants descend from a large fishing vessel used to transport them from Turkey to the Greek island of Lesbos

Elaborating on her theory she goes on to add: “Coercive engineered migration is often embedded within mass migrations strategically engineered for dispossessive, exportive, or militarized reasons. It is likely, at least in part as a consequence of its embedded and often camouflaged nature, that its prevalence has also been generally under-recognized and its significance, underappreciated. Indeed, it is a phenomenon that for many observers has been hiding in plain sight.”

Greenhill’s insights certainly put Europe’s refugee crisis under a very different light. The real threat pose not the refugees per se, but the games of covert destabilisation so-called friendly nations are waging against each other’s governments. Qui bono?

We’ll be Run by Morons Pretty Soon!

“You look at the active value of the companies that you buy the stocks in. And it becomes a little more complex, but basically you look for a company that is cheap and the reason that they’re really cheap. And the major reason is often and usually very poor management.”

“So in a sense, it’s like an arbitrage. You go in, you buy a lot of stock in the company, and you then try to make changes at the company. […] We’re trying to get them to change the structure of the company. We think the board is very poor, and we’re trying to change what happens. The thing about corporate America is that most people in America don’t realize how poorly most of our companies are run in this country. With many exceptions. And when you get inside the companies, you realize it. The real reason is, there’s no accountability, there’s no corporate democracy. And I’ve been saying that, proselytizing it, writing about it. And the reason that we can make so much money when we go into one of these companies is – I’m not even a manager. I never took a course in management and I wouldn’t profess to really know much – but I don’t micromanage. I put in a very good manager. They cut the heck out of cost, but they changed the structure of the companies. And this is the problem in America today, in my opinion:
That we are basically under-managed. We can’t compete, because the best and the brightest don’t get to be at the top of the corporate ladder. And I, I have a sort of a metaphor that’s a little facetious, but not completely: I call it anti-Darwinian. And that means a guy goes to college and he’s the guy who gets to be the CEO. And he’s the kind of guy that was the president of the fraternity. Now all these presidents of fraternities aren’t bad guys, but basically, the normal guy that I remembered at college was always there at the fraternity of the eating club. And he’s always there to be there, if you have a bad day, you walk over to the club. And you’re feeling bad, your girlfriend left you, you did bad on a test score, or whatever. And you go over there, he’s always there. He buys you a drink, and you sit around with him. He commiserates with you. You play a little pool, or whatever. And he tells you whatever it is, yeah, my girl left me, yeah well, they’re all no good, usual conversation back and forth. And what would happen would be you liked the guy, you can’t help but like him. You used to wonder a little bit, when the hell did he ever do any work? But you know, he was always there for you. And he never made many waves. He would never said anything too obtrusive or he never showed too much intelligence. But he was a good guy. He goes, that same guy, out into corporate America. And he’s politically, he’s astute. He knows how to get along with people. And it’s he never really rocks the boat. He never comes up with any great ideas. He’s not a threat to his superior. And as a result, he moves up the ladder because in corporate America, there’s really very little accountability. So he moves up that ladder.”

“There’s a good show “How to Succeed in Business” that was out many years ago – that sort of sums it up. If a genius has an idea in corporate America, they give him an idea to resign.”

“And so the guy moves along the ladder, and he gets up slowly to the top. And he has three attributes: He’s likable, he’s politically astute, and he’s a survivor. And he knows when he’s threatened. These are the attributes of today’s CEOs for the most part, with exceptions. You know, he doesn’t ruffle feathers, he doesn’t get the board upset. And as he moves up the ladder, he finally gets to be number two to the CEO. Now the CEO has the same same attributes where he doesn’t want to be threatened and is a survivor. So the CEO will never let anybody be number two who’s smarter than he is. By definition, the assistant of the CEO is a little dumber than the CEO. Now this guy now is the assistant, and the board likes him. The CEO eventually retires and they make this guy the new CEO. The fraternity president we’re talking. Now he’s the head guy. And he’ll bring in a number two guy that’s a little dumber than he is, because he doesn’t want to be threatened. So by definition, we’ll be run by morons pretty soon. And we’re not too far from that point right now in our economic history.”

[Carl Icahn, 2011]

Motorcycle Myopia

During the 1960s, BSA was the leading motorcycle manufacturer in Britain (Triumph, BSA), while Harley-Davidson was the leader in the U.S. Both markets experienced increased import penetration from Japan. Given the emphasis by Honda, Suzuki, and Yamaha on smaller motorcycles, the Japanese challenge was largely underestimated. Eric Turner, chairman of BSA Ltd., commented in 1965:

The success of Honda, Suzuki, and Yamaha has been jolly good for us. People start out by buying one of the low-priced Japanese jobs. They get to enjoy the fun and exhilaration of the open road and they frequently end up buying one of our more powerful and expensive machines.

Similar complacency was expressed by William Davidson, president of Harley-Davidson:

Basically, we do not believe in the lightweight market. We believe that motorcycles are sports vehicles, not transportation vehicles. Even if a man says he bought a motorcycle for transportation, it’s generally for leisure time use. The lightweight motorcycle is only supplemental. Back around World War I, a number of companies came out with lightweight bikes. We came out with one ourselves. We came out with another in 1947 and it just didn’t go anywhere. We have seen what happens to these small sizes.

By the end of the 1970s, BSA and Triumph had ceased production and Harley-Davidson was barely surviving. The world motorcycle industry, including the large bike segments, was dominated by the Japanese.

[Sources:
Pascale (1983) Honda (A), Harvard Business School Case No. 9-384-049
Advertising Age (1965) Issue December 27
Forbes (1966) Issue September 15]

Distressed Debt at CS

Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business.

“This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank” when the firm laid out a strategy in October, Thiam said Wednesday in a Bloomberg Television interview. “There needs to be a cultural change because it’s completely unacceptable,” adding that there had been “consequences” for some employees.

The bank’s holdings of distressed debts, leveraged loans and securitised products, including collateralised loan obligations, triggered $258 million of writedowns this year through March 11, after $495 million of losses in the fourth quarter, according to a presentation. The bank said it sold off a quarter of its distressed holdings and more than half of its CLO positions and is exiting some of those businesses.

Trading revenue may drop 40 percent to 45 percent in the first quarter, the bank said. The drop could have been worse, as Thiam said he found out about the positions in January and moved to limit the damage. If he had known the extent of the issues in October, the plans he laid out at that time would have been affected, he said.

“A lot of the problems in the investment bank have been that people have been trying to generate revenue at all costs,” Thiam said in a Bloomberg television interview. “People were reluctant to reduce it because it would’ve exposed their cost problem.”

[Source: Bloomberg, March 23, 2016]