coronavirus Archives - Politecnico di Milano School of Management

The fundraising launched by MIP to support the San Paolo and San Carlo hospitals in Milan in the fight against Covid-19 comes to an end: thanks to all contributors.

Posted on 16 June 2020 | by Angela Leone | Leave a Comment

Unity is strength! Students, alumnae and alumni, professors and all staff of MIP and of the School of Management of the Polytechnic of Milan: together we have tried to give concrete support to the San Paolo and San Carlo hospitals in Milan, to the patients and to the medical staff who have fought relentlessly to treat patients affected by Covid-19.

The active participation in the fundraising initiative launched by MIP demonstrated that a small gesture, multiplied by 263 donors, can become a great one. With a total of 32,973 Euros, we contributed to add new posts in intensive care department, essentials for saving lives, and to meet the great need of single-use protective devices such as masks, gloves and coveralls, allowing doctors and nurses to operate in greater safety.

The fundraising campaign took place in close coordination with the management and staff of the hospitals, at the forefront to fight against the serious consequences related to the rapid spread of Coronavirus, and the funds were directly and promptly donated to them. Matteo Stocco, General Manager of ASST Santi Paolo e Carlo in Milan, warmly thanked our School and all the contributors for the donations.

“We implemented concrete initiatives to face the emergency from a educational point of view. But, at the same time, we also tried to give our contribution to face the emergency from the health point of view. Thanks to the whole community of our School, students, alumni, staff and teachers for the generosity and the solidarity spirit shown in this occasion! “ Vittorio Chiesa, Chairman of MIP Politecnico di Milano.

Industry 4.0 and relocation choices: do digital technologies reduce the need for internationalisation of efficiency-seeking firms?

Posted on 18 May 2020 | by Marta Re Ferrè | Leave a Comment

There is evidence that Industry 4.0 technologies, offsetting the low-cost or high-productivity advantages of some foreign countries, may be a valid alternative to internationalisation for efficiency-seeking firms, which in some cases happen to reshore. Will Covid-19 contribute to boost this trend?

Stefano Elia, Associate Professor of International Business
School of Management Politecnico di Milano

For several decades, firms have offshored manufacturing activities to countries offering low-cost labour and cheaper raw materials (Kedia & Mukherjee, 2009; Mudambi, 2008). Cost reductions were the primary reasons for US firms offshoring to Mexico and other emerging countries (Lewin & Couto, 2007) and for the enormous transfer of manufacturing activities by Western European firms to Eastern Europe (Fratocchi et al., 2015; Kinkel & Maloca, 2009; Schmeisser, 2013). As a result, more fragmented and geographically dispersed value chains emerged globally (e.g. Gereffi & Lee, 2012) and regionally (e.g. Arregle et al., 2009; Asmussen, 2009; Rugman & Verbeke, 2004).

While this trend is not over, we are witnessing the spatial reconfiguration of these supply chains driven by the emergence of new low-cost and high-productivity destinations, and of different cost and quality factors between countries, which modifies their relative attractiveness (Ellram, Tate, & Petersen, 2013). Companies’ intentions to change their manufacturing source is shifting from “offshore” being the predominant option, to “relocating to third countries” (i.e. moving from a first to a second host country) and “back-reshoring” (i.e., moving from the host to the home country) being viable alternatives to offshore (The Economist, 2013). Barbieri, Elia, Fratocchi, & Golini (2019) recently provided evidence that relocating to third-party countries was a preferred option for efficiency-seeking firms and suggested that by moving manufacturing between countries they adopted a “footloose” relentless search of locations to minimise costs and enhance productivity.
This trend has begun to be challenged and (at least partially) inverted by the new disruptive phenomenon. Industry 4.0, dubbed the Fourth Industrial Revolution, which denotes the emergence and diffusion of new, integrated digital industrial technologies that are widely acknowledged to hold a disruptive potential on manufacturing systems, products, and business models (Frank, Dalenogare, & Ayala, 2019; Strange & Zucchella, 2017). Industry 4.0 provides efficiency-seeking firms with a unique opportunity to use valuable digital technologies to offset the low-cost or high-productivity location advantages of some foreign countries and provide a valid alternative to internationalisation. Recent research undertaken by Politecnico di Milano in partnership with the University of Bologna (prof. Paolo Barbieri) and the University of L’Aquila (prof. Luciano Fratocchi) has provided empirical evidence of this phenomenon. Based on a sample of 118 European firms, the research showed that the development of a firm-level Industry 4.0 competitive advantage (based on the digital technology patenting) could reverse the propensity of the cost-saving firms to relocate to third-party countries, and encourage back-reshoring. Conversely, productivity-enhancing firms increase their tendency to undertake back-reshoring only when their home country adopts Industry 4.0 policies, i.e. a set of national initiatives to transform the production system by adopting digital technologies across several firms and industries.

The reasons behind the asymmetry in the drivers of back-reshoring decisions for cost-saving and productivity-enhancing firms can be found in the location advantages that are searched by these two types of firms. Firms investing abroad to save on costs are likely to exploit the lower cost of labour offered by some host locations. The development of Industry 4.0 technologies by cost-saving firms is a strategy to substitute for low-skilled labour with technology (Ancarani et al., 2019). This situation offers the extraordinary opportunity to switch from a host country-level cost-based comparative advantage to a firm-level competitive advantage based on Industry 4.0 technology intensity. Such a firm-level competitive advantage is likely to increase the degree of freedom of the firm in its relocation choice, including making it possible to return home. After obtaining similar (or a superior) level of cost-savings with digital technologies, the firm can afford back-reshoring to exploit Industry 4.0-based competitive advantages without facing internationalisation burdens such as coordination and transportation costs, institutional and cultural differences etc. (Stentoft et al., 2016; Wiesmann et al., 2017).

Firms investing abroad to enhance their productivity are likely to rely on other advantages than merely the exploitation of low labour costs while still pursuing conditions that can make them competitive on price. The primary mechanism such firms can use to enhance their productivity via cross-border investment is to “learn-by-interacting”. This occurs by gaining access to different international business networks that expose the firms to the various technological, managerial and organisational capabilities that are available in the foreign country’s ecosystem (Alcácer et al., 2016; Bertrand & Capron, 2015). In other words, firms can enhance their productivity by sourcing knowledge, resources and experience from the foreign production system by establishing economic relationships with the networks of suppliers, buyers, competitors, partners, associations and labour markets (Alcácer et al., 2016; Alcacer & Oxley, 2014; Johanson & Vahlne, 2009; Oxley & Sampson, 2004; Oxley & Wada, 2009; Pisano & Shih, 2009). This is possible when there is a technological and competitive gap between the host and the home country (Bertrand & Capron, 2015, p. 644). Introducing an Industry 4.0 policy in the home country could enable the host economy to fill any gaps as policies can be designed for many companies and attempt significant changes within the production system that increase competitiveness and technological intensity. This offers firms located abroad for productivity-enhancing reasons the opportunity to implement their learning-by-interacting strategy in the home country, reducing the need to relocate to third-party countries in favour of the probability of returning home. This allows a policy implication to emphasise the crucial role of Industry 4.0 not only in transforming the national production system but re-attracting the productivity-seeking firms located abroad and contribute to the return of manufacturing within Europe.

The Covid-19 outbreak is expected to boost the relocation phenomenon further. According to UNCTAD, this health emergency might have a potential long-term effect on the reconfiguration of the Global Value Chains (GVCs). The pandemic is demonstrating how having too many interconnected and distant countries might become a critical issue for global production networks. This is especially true when they are also dependent on one main manufacturing centre (such as China), and all nodes are asynchronously subject to an emergency that stops production activities and shuts down the entire GVC for some time. This worldwide health emergency might lead to a reconfiguration of the GVCs, and a partial relocation or de-concentration in fewer or closer countries that were less affected by the pandemic or which could ensure faster and more coordinated recovery of the production activities and the value chain. Hence, Covid-19 is expected to further accelerate some trends that were already happening, i.e. decoupling (or loosening) of GVC ties and relocation across countries, which were prompted by other forces such as the trade wars and the challenges posed by climate change. All these forces demand more regional, resilient and sustainable supply chains (Economist, 2020). This goal can be reached only through widespread adoption of digital technologies, which facilitate the reconfiguration and partial reshoring of the GVCs, and provide a strategic tool to redesign the firms and countries’ competitive advantages.

Covid-19 impact on Luxury Industry

Posted on 14 May 2020 | by Marta Re Ferrè | Leave a Comment

How the pandemic will change luxury consumers behavior

Prof. Alessandro Brun, Professor of Quality Management, Director of the Master of Global Luxury Goods and Services Management (MGLuxM)
Coauthor Cecilia Castelli Extended Faculty MIP Graduate School of Business
School of Management Politecnico di Milano

Last week, luxury groups posted their Q1 2020 results and – not surprisingly – numbers are confirming that even the industry that doesn’t know crisis capitulated to the effect of Covid-19 outbreak. Hermes proved to be “the” evergreen luxury, with “just” a single digit reduction in Q1 revenues (-6.5% vs Q1 2019). Double digit losses for LVMH (-15%), Kering (-15.4%); Moncler posted a -18%, after 24 consecutive quarters of double-digit growth.

In this scenario, brands are reflecting upon the future of luxury industry after the pandemic.

The most important reflection is that the lockdown is changing the habit of people globally. I think that, after the emergency will be over, some of the luxury consumers will change their spending pattern permanently.

Wealth, not income – If before the outbreak, HENRYs (High-Earning, Not Rich Yet) would spend a considerable fraction of their disposable income in luxury goods and experiences, after the lock-down several families may have limited cash availability for superfluous spending, while HNWI (High Net Worth Individuals) may have their spending capacity unaffected.
For those who will stay home – people will travel less – especially flights will be affected – due to governmental restriction, fear of infection, companies organizing more efficient conference calls in place of face-to-face meetings. This will impact negatively on some channels (especially Travel Retail), specific destinations (e.g. Las Vegas), specific customer segments in the flagship stores of world’s fashion capitals (Chinese visiting Milan, London, Paris, and exploiting tax free shopping), and product categories (suitcases and luggage). On the contrary, many people are rediscovering the joy of cooking (in March 2020, Bread machines was the second fastest growing category in eCommerce after disposable gloves, according to a Stackline study¹), Hence, with the reopening, socialization occasions may happen at home, and categories such as Art de la Table may benefit.
Hedonistic experiences – After the sacrifices of lock-down, customers will crave for hedonistic products and services to satisfy the need of self-indulgence and personal pampering – shifting away from the “band-wagon effect” and moving into the “luxury as a personal affair” area. Premium beauty products, but also home-spa and home-wellness, and intense sensorial experiences in the fine food and drinks territory, could benefit.
Responsible luxury – The pandemic outbreak stimulated deep societal reflections around the main theme of “where is humanity going?”. Consumers will be even more aware of sustainability, and brands and product categories allowing “responsible consumption” will be privileged. Giorgio Armani penned an open letter to WWD, in which he challenged the current fast-fashion mindset, saying he believes in an “approach to the design and making of garments that suggests a way of buying them: to make them last”².
Looking for discounts – if, on the one hand, we could expect a wave of anti-consumerism, the habit of waiting for end-of-season sales and doing pilgrimages to Factory Outlets and buying from off-price channels will be further strengthened by the self-appeal to frugality. If brand and retailers would resort to significant discounts to get rid of the unsold SS20 collection, they would risk to foster the vicious circle of off-price and bargain hunts. A recent McKinsey study revealed that special promotions were the main reason for purchasing clothing during the crisis for 56% of consumers³.
Online is the new normal – the transition to a life in the digital world was accelerated as through a time warp, and customers are buying more online as well as consuming more digital content. This represents a major change in paradigm. When we started designing the first “Master in eFashion” at MIP, 15 years ago, the online penetration in the Personal Luxury Goods segment was only 1%. In 2013, according to a McKinsey study, 44% of the 220B€ total luxury sales were influenced by digital – yet the perspective was still that the brick and mortar retail was the “normal” way to make business. Whether the perspective in the post-pandemic will turn 180 degrees, so that the online will be the norm and the brick and mortar will be a way to “support” it’s hard to say. But one think is unquestionable: a brand without a strong online presence, today, is a non-existing brand in the eyes of many a consumer.
When your own initials are enough – Economic theories say that after a “quarantine of consumption” (as Li Edelkoort defined this unprecedented period of forced fast from conspicuous consumerism⁴), consumers may switch “revenge spending”⁵.

But after the lockdown is over, the world will enter into a “stage 2” of the war, in which the Covid enemy will still be there in the battlefield, thus reducing the appetite for conspicuous consumption. Before the crisis, brands with a very bold visual identity (such as Gucci) were performing extremely well thanks to the enthusiasm of brand sensitive customers – but in a climate of “social thriftiness”, luxury consumers could steer towards the quality and intimacy of “no-logo brands”, as they are finally understanding the meaning of Bottega Veneta payoff (“When your own initial are enough”: there’s room for feel-good purchases even without a big flashy logo on your t-shirt).

A renewed pride for local producers – this may vary in strength on different markets and for different product categories, but we are already witnessing the first signs that are forewarning the rise of full-fledged “buy local” movements.

______________________________________________________

¹ J. Styrk. The top 100 fastest growing and declining categories in eCommerce. Stackline, March 31^st, 2020

² L. Zargani. “Giorgio Armani writes open letter to WWD”. WWD, April 3^rd, 2020

³ Amed, Berg, Balchandani, Hendrich, Rölkens, Young, Jensen. The State of Fashion 2020: Coronavirus Update. BoF e McKinsey&Company

⁴ M. Fairs. “Coronavirus offers ‘a blank page for a new beginning’ says Li Edelkoort”, Dezeen, March 9^th, 2020
https://www.dezeen.com/2020/03/09/li-edelkoort-coronavirus-reset/

⁵ N. Gopalan. “Revenge is a dish that’s off the china menu”, Bloomberg, April 21^st, 2020
https://www.bloomberg.com/opinion/articles/2020-04-20/china-luxury-revenge-spending-surge-is-likely-to-fade

It is never too late to pick ourselves up. It is never too early to prepare.

Posted on 12 May 2020 | by Promotion | Leave a Comment

Although it is not possible to predict the duration of the Covid-19 pandemic, it is essential not to be totally absorbed by the emergency and to start thinking about the most effective strategy to face the recovery phase.

Paolo Trucco, PhD, Centre for Risk and Resilience Management of Complex Systems
School of Management – Politecnico di Milano

The embers beneath the ash

With the pandemic still in full swing, and the numbers of new infections and deaths still rising, both in Italy and in other parts of Europe and the world, it seems inappropriate to think about what comes next, especially in terms of production. However, in order to live, a society, a community needs to be taken care of, it needs goods and services, which unfortunately cannot be guaranteed outside the market-economy model.
After two weeks of the government-decreed production block involving most industrial sectors, many companies have had to suspend every business activity or find temporary solutions to ensure minimal operational continuity. Even companies in the so-called essential or strategic industries are operating in emergency conditions and therefore with greatly reduced levels of performance. If we look at the typical profile of an operational disruption (Figure 1), we are currently all, for one reason or another, in the period of maximum impact. We do not know exactly how long it will last, nor how long we will be able to sustain it. However, if industry and Italian society as a whole wish to look to the future, it is important not to let ourselves be overcome by the gravity of this emergency and to start thinking about the most effective strategy for dealing with the recovery phase, so as to ensure it comes quickly and fully. The embers beneath the ash must be kept alive. We need to be prepared to seize the early signals of recovery and to turn every opportunity that may arise into value.

Figure 1. Time profile of an operational disruption with different recovery capacities.

What should we expect?

At the moment, no one is truly able to trace out how economic recovery will unfold. However, some fundamental elements seem to be clearly outlined:

The recovery of supply and demand will take place at significantly different times in different parts of the world. Speed will also be different: for structural reasons, due to the severity and breadth of the pandemic, or due to the decisions made by local governments. In short, it will be a geographically asynchronous recovery.
In every corner of the globe, national and supranational institutions will make a massive effort to stimulate the economy, but such measures may not be fully coordinated or consistent with each other. We will see a period of sub-optimal allocation of resources and not everyone will benefit in the same way.
Due to its magnitude and degree of interdependence, crucial energy and transport infrastructure will most likely suffer most from the turbulence created by the two previous factors. As a result, global supply chains and energy-intensive industries may rebound with greater difficulty.
The specific nature of the event has created both a supply shock (production stops) and a demand shock (rapid contraction in consumption and investments). The recovery phase, within the supply chain, will also be marked by the need to manage two opposing disturbances: a ripple effect, downstream, as a result of prolonged limited supplies, and a bullwhip effect, upstream, as a result of a recovering yet still highly uncertain and volatile demand.

Be ready at the (re)starting blocks

In a previous article on the impact of COVID-19 on global supply chains (Coronavirus is the acid test of global supply chains’ resilience), we already described the fundamental characteristics of resilient supply chains: the ability to sense weak signals of emerging pressures or shocks, to prepare for the unexpected and to respond rapidly and in an adaptive manner to crisis situations, by reconfiguring processes and operating models. Looking now more in depth at how to manage the recovery phase in specific contexts, we can identify three elements of resilience that we believe will play a key role:

Visibility. The recovery phase can only hope to be successful by achieving end-to-end supply chain visibility, both as regards the operational capacity of suppliers and sub-suppliers and the dynamics of demand, in terms of geographical redistribution and sales channels. Unlike in normal conditions, the magnitude and mode of response to emerging demand will have to be planned according to the actual capacity of the supply chain, until a new state of structural equilibrium is reached.
Collaboration. During a turbulent emergency, transparent, stable relations are far more important than tactical behaviour. Those who have been able to build collaborative relationships with their suppliers and distributors will find themselves in a position of greater advantage. The need to replace suppliers who have been unable to overcome the crisis can turn into an opportunity to strengthen relations with more dynamic, crucial suppliers.
Multichannel distribution. With volatile, rapidly changing demand, the opportunity to use multiple sales and supply channels will allow companies to recover faster in the short term and, in all likelihood, gain new market shares in the medium term.

Actions and tools to implement a resilient strategy

Below is a list of practical, albeit incomplete, actions that may help to manage rationally both the present situation, for those first companies allowed to resume operations, and the time when production resumes universally:

Continuously monitor the evolution of the pandemic and of the measures implemented by governments in the most relevant markets (Figure 2);
Segment acquired orders by degree of completion and customer reachability (status of pandemic control measures in the target country) and prioritise billable orders;
Search for possible alternative configurations to execute high priority orders waiting to be processed;
Reassess the priority of orders on a daily basis with a 1-2 week (rolling) visibility;
Map the status of crucial suppliers (i.e. those having the greatest impact on priority orders) by drawing up a questionnaire to verify business continuity conditions (include questions requesting information on the business continuity of crucial sub-suppliers).
Cross-check the business continuity assessment of suppliers (Figure 3) against the markets-orders table to identify feasible orders;
Agree operational continuity plans and production capacity allocation priorities with crucial suppliers and re-schedule delivery times based on new order priorities;
Evaluate alternative options for crucial vendors on complete lockdown;

Figure 2. Example of a market-order segmentation table based on the stages of evolution of the COVID-19 pandemic

Figure 3. Example of a table to manage the risk of supplier Business Interruption (BI)

It is no wonder that the speed with which we have been hit by the pandemic and the continuing uncertainty about how and when it will be managed by the authorities has left many feeling confused and disconcerted. However, now is the time to strengthen our evaluations and actions, leveraging on in-house skills and capabilities. It is never too late to pick ourselves up. It is never too early to prepare for what lies ahead.

Privacy and Covid: the real questions to ask ouserselves

Posted on 6 May 2020 | by Marta Re Ferrè | Leave a Comment

Applications that track citizens’ movements to prevent the uncontrolled spread of contagion raise several concerns about privacy. Yet every day we voluntarily expose and give away our data without realizing it.

Tommaso Buganza, Professor of Leadership and Innovation
Daniel Trabucchi, Assistant Professor of Leadership and Innovation
School of Management Politecnico di Milano

We are living in an unprecedented situation. The global pandemic shown in many Hollywood movies is now a reality and – without popcorns– it looks quite different.
In Italy – as hopefully will soon happen in other countries – the rate of diffusion started finally to decrease. The discussion is now moving to the management of “Phase 2”. What will “the new normal” look like? What will it be like to live in a world in which the virus is under control, but still present?

Digital experts are proposing possible “futuristic scenarios” in which mobile applications will track us to immediately inform potentially exposed people and interrupt the transmission chain (see, for example, the Pan-European Privacy-Preserving Proximity Tracing project). Recently – on April 17th – the Italian government signed a contract for the voluntary tracing app “Immuni”, aiming at developing contact tracing using the Bluetooth technology.

Meanwhile, Google is already sharing anonymous data to identify people who are breaking the lockdown (Giuffrida, 2020; Hamilton, 2020) and partnered up with Apple to develop a contact tracing technology (Apple, 2020). At the same time, the world is starting to look ahead, asking “how” – since “if” is no longer an option– this global emergency will change our lives in the years to come. In an article recently published on the Financial Times, Yuval Harari describes the possible downsides of using available technologies to track people movements and behaviors. On the one hand this would help the sustainability of the national health-care systems, but, on the other hand, the cost could be a “new normal” where our vital functions are constantly measured, stored and analyzed. It is easy to imagine how this huge data base, along with the increasing knowledge about human biomechanics and the impressive advancement of AI, might lead to a reduction of democracy and civil rights in our countries (Harari, 2020).

Humans looks frightened, not only by the pandemic but also by the loss of privacy (Brody and Nix, 2020). Are we slowly but inexorably losing our freedom?

But what do we already know about data? Data is the new oil, being considered a precious resource to be exploited. Data is valuable because they allow us to understand things that we wouldn’t otherwise. They show us something we don’t know, both as individuals and as a community. They show us things that are there, but that are too complicated for individual human brains to see.

Think about Netflix, one of the services many of us enjoy most in these lockdown days. Choosing a new movie, or a new series is an epic adventure. That’s true. But you might not know that Netflix already made it a lot easier for you. Probably you noticed that the “match score” (the percentage indicating how likely you should appreciate the content) is often very high. That’s because Netflix tracks all your behaviors, previous shows, frequency of watching and then, leveraging AI, proposes you only movies and series you should like. You can try a little experiment if curios. Search the whole catalog, you will discover many more contents…and probably don’t like them!

This is just one example of services that many of us use everyday…but the list is long. Spotify can suggest songs, Amazon products, our fitness app –Runkeeper, Runtastic, Freeletics… the next training session optimized using the data we provided through previous ones.
This may sound like something unique of the app economy, but it’s not. Google built its empire on a data-driven business model, targeting ads on the search engine, using players to tag images (with the game Google Image Labeler) and captcha to detect addresses (Perez, 2012) or street view images…possibly to help self-driving cars (Kid, 2019). Even Starbucks – a brick and mortar company – uses the data from its mobile app to get insights on their customers’ habits and tastes (Gallea-Pace, 2020).

We all know these stories but now, all of a sudden, we find ourselves more fearful and privacy sensitive. We are afraid of the impact that technology may have on our lives, but we fail (again) in recognizing that this already happened.
Major digital companies know us perfectly, they know a lot more about us than we imagine. And some of them, over the years, became extremely good in profiting and capturing value from data (Trabucchi et al., 2017, 2018).
They “pay” us back with more personalized services or, in some cases, with free services…which we like even more.
Companies – of course – must respect all privacy laws, and GDPR in Europe has played a huge role in this. However, companies can do a lot with the data we provide them because we accept the terms of use… usually without reading them.

Curiously, this isn’t even the first time that the privacy issue violently explodes. Two years ago, all the social media of the world were filled with the #LeaveFacebook movement.
The Cambridge Analytica scandal highlighted Facebook’s data-based business model and its implications for our privacy, and even the impact that data can have on our lives through micro-targeting and similar phenomena (Cadwalladr, 2019). In those days, it seemed like the world realized what had been there for years: data is valuable, companies use it. Looking at Mark Zuckerberg wearing a suit and tie in front of the US Congress, many of us thought that Facebook would become as empty as our cities are today. The reality is that it didn’t happen. After the clamor, we went back to our habits… we enjoy our free digital services too much to bother considering we actually pay them with our data currency.

And here we are again. In this unique historical moment, we think a lot about how the “new normal” will be like. If we really care about our privacy, we should ask ourselves: will our near future be different only in terms of social relationships and physical movement or will it also put into discussion our well-established digital life?
We can still get our privacy back… if we want.
But, are we ready to give up those wonderful services provided by Netflix, Waze, Amazon, Spotify, Instagram, Facebook, TikTok, Twitter, Snapchat, and all the others?

So, this is our point: is this sudden upheaval around privacy connected to the use of personal data to protect public health really justified? Perhaps we should rather accept that the “new normal” is posing even more frightening questions.

Do we value free services more than public health?
Do we trust private companies more than our governments?

Covid-19: the impact on B2C eCommerce

Posted on 4 May 2020 | by Marta Re Ferrè | Leave a Comment

Lockdown has profoundly changed consumer habits: online purchases of food and essentials have grown exponentially. The reaction of retailers has been varied and influenced by the product sector and the presence of an eCommerce initiative. In the recovery stage, profound restructuring awaits the Retail world.

Riccardo Mangiaracina, Professor of Logistics and Production Systems Management, Scientific Head B2C eCommerce Observatory
Valentina Pontiggia, Director B2C eCommerce Observatory and Digital Innovation in Retail
School of Management Politecnico di Milano

Before the crisis ….. eCommerce, a channel growing in Italy and abroad

In the more mature markets, eCommerce has become a major channel for generating consumption. In 2019 in China or the UK, for example, of every 100 euros spent by consumers, about 20 went online. In markets where eCommerce has developed more slowly, online has nevertheless accounted for a significant slice of the growth of business. In Italy, for example, eCommerce in 2019, although it still represented a small part of total purchases (7.3% of the total), generated 65% of the total Retail growth (online + offline) [1].

In recent years, the online channel has increased not only the size of the market but also its range of action and influence. In the first place, eCommerce has become decisive in the development and promotion of highly innovative new models of relations with consumers that, although starting from online, have spread throughout Retail. This transformation has involved the entire value chain: marketing, where artificial intelligence and augmented reality have allowed the consumer to “experience” the product (both online and in-store) before owning it; payments, where the use of biometrics, already fairly widespread online, has become increasingly important offline too; and logistics, where various innovations have emerged both to improve the service and to give the end customer significant control of the process.
Secondly, the success of eCommerce and the emergence of new ways of buying and interacting have changed the original significance of the physical store, which is no longer the only means of physical access to the product. In this transformation process, traditional retailers have given the store new features, mainly from a relational point of view, and entrusting the transactional stage to eCommerce. There have been many experiments in new formats in Italy too, primarily in Milan [2].

The importance acquired by eCommerce has also led to greater public and institutional attention (not always in a positive way). New regulatory obligations (PSD2 with so-called Strong Customer Authentication to authorise financial transactions online and Web Tax), attention to sustainability issues (not only financial but environmental too) and the dominant position of certain giant corporations, in particular Amazon and Alibaba, are just some of the most hotly-debated topics.

During the crisis ….. eCommerce, a tool for responding to the emergency

Business is one of the areas most affected by the Coronavirus emergency. The reaction of retailers has been strongly influenced by the presence or otherwise of their own initiatives on online channels.
Many physical stores, especially those focused on food and basic necessities, have engaged with eCommerce for the first time. The most immediate solution has been the use of third parties already online. Many restaurants have put their menu of ready-to-eat dishes online through food delivery platforms and many supermarkets have activated eCommerce solutions through alliances with platforms that have already enabled (from a technological and operational point of view) online shopping under the aegis of certain major retail chains. Even more widespread are the numerous neighbourhood stores that have started working with less advanced digital tools than eCommerce, but with are just as interesting tools, such as the many neighbourhood stores (grocery stores, pharmacies, …..) that can take orders via WhatsApp or by phone.
Players that have been online since the beginning of the epidemic have seen an increase in orders attributable to new consumers who have decided for the first time to use their services. This emergency, however, has revealed something as simple as it is important. In online initiatives, especially in food, operations have forcibly dictated rhythms and especially imposed limits. Practising eCommerce requires commitment and a perfectly functioning and efficient operating mechanism: optimised picking and transport processes, especially when we are talking about “supermarket” shopping (which, by the way, consists on average of 50 items of low unit value and which require special treatments such as temperature-controlled transport). The dependencies between the physical and digital worlds have had varied impacts: all those multi-channel retailers of clothing, beauty products, IT and electronics, forced to close their stores, have found online a valuable opportunity to maintain the relationship with customers, in some cases deepening it, and to create value (rather than sales) with their consumers. In this regard, note the sending of questionnaires to users to gather opinions and suggestions for improvement and the provision of online courses (fitness, cooking, …..) relating to products on sale.
During the crisis we have therefore seen the barriers to omni-channel integration, that had blocked the development of the digital strategy of Italian retailers for years, fall one after the other. The management of the emergency has convinced even the most reluctant to change to overcome internal interdepartmental conflicts, to define clear responsibilities and to dedicate the resources necessary to achieve a new idea of business, integrated and independent of channels. A green light therefore for investments in order to boost the eCommerce channel or to favour sales strategies founded on integration between online and offline experiences, like click&collect, drive&collect or the setting up of online ordering in store.

After the crisis ..… eCommerce, an essential element for the resumption of business

In these days of the emergency there are many questions to be asked about the effects and changes that await us in the business world. Among the few certainties, in our opinion, are the proximity that the online and physical channels are demonstrating forcefully at this difficult time and the indispensable role that eCommerce will play in the recovery of business and consumption.
During the health emergency Italian consumers have understood the value of this channel as never before: eCommerce has allowed a large slice of the population to benefit from value-added services, important and essential as they are, like food delivery. Growth of web shoppers (who at the end of 2019 amounted to just over a third of the Italian population) and greater familiarity with and confidence in online transactions and digital payments (including those shoppers already used to purchasing online) can generate a positive effect on the development of eCommerce.
The other side of the coin is that the praiseworthy efforts of supply-side players will not have been in vain. Once the crisis is over, investments in technology (to handle traffic spikes), the presence of new trained staff and the optimisation of picking and transport processes will be in place to better manage not only the current extraordinary demand but also a future in which the digital world will be increasingly fundamental.
eCommerce will be more and more the engine of Retail growth and innovation: once we have put this crisis behind us, as consumers we will be looking at a new and more digital normality. A major challenge for our Retail!

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[1] Source: B2C eCommerce Observatory – Politecnico di Milano School of Management
[2] For full Research results, “eCommerce: Retail Growth and Innovation Engine” available at www.osservatori.net

The global crisis since Covid-19 and the repercussions on international trade and global value chains

Posted on 28 April 2020 | by Marta Re Ferrè | Leave a Comment

The shock to the world economy caused by the Covid-19 health emergency has a global scope also because of the high interdependence between national economic systems. But closing borders and applying trade restrictions is not a viable solution: acting in a coordinated manner can ensure an effective restart for all economic systems, balancing the needs and production capacities of individual countries through international trade.

Lucia Tajoli, professor of International Markets and European Institution
School of Management Politecnico di Milano

It is still too early to have official stabilised data but it is now very clear that the spread of the so-called COVID-19 and the associated pandemic are having a very significant impact on the world economy, with clear implications for international trade as well.
International trade was already decelerating in the latter part of 2019, due to the general slowdown in the economic cycle in many countries. The early months of 2020 are confirming this strong slowdown in trade. The World Trade Organisation (WTO) is continuously updating forecasts for the current year, which show downward trends for both trade in goods and in services as a result of the shock to production and demand that is spreading to various countries. Given the high level of uncertainty, however, the major international institutions are not ready yet to provide precise figures. The estimates produced by the WTO in April on the possible dropoff in trade also show a very wide range, between -13% and -32%.

The fall in international trade is an inevitable consequence of the current situation, since the areas currently most affected by the health crisis with its serious economic repercussions are those of the major players in world trade: China, the European Union and the USA generate more than half of all world trade. Thus, the impact of the slowdown in these countries is felt in global trade flows, even in areas with relatively slight exposure to the contagion.

One particular aspect of trade makes the impact of the crisis more serious and concerns observers. The importance of global value chains and the role they play in world markets has grown for at least 20 years. According to a recent World Bank report, most trade flows between countries nowadays take place within the global value chains (GVCs), i.e. they are generated by production processes that cross the borders of countries and involve specialised companies located even in faraway areas in the chain of production of goods, especially complex ones. The role of these global value chains in this crisis appears crucial. According to some observers, this international organisation of production has created a fragile economic system that is more exposed to international shocks. The risk of a disruption in the supply of the inputs needed for production is greater in a production chain that is very geographically dispersed. Moreover, the presence of these production chains can amplify the transmission of shocks according to the so-called “bullwhip effect”. In the presence of a negative shock that affects many economically connected countries almost simultaneously, the slowdown in production of an economic system supplying essential production inputs is transmitted to related systems downstream, reducing their production capacity, adding a further negative squeeze to the local slowdown in production (which may be due to local supply and demand factors), and thus amplifying the shock. The areas where the spread of the epidemic has been greatest are closely linked by GVCs in many crucial sectors, from textiles-clothing to consumer electronics. As a result of this shock-amplifying effect, forecasts of the trends in the global economy and international trade are more negative than in any other crisis in the past.

It is important to remember, however, that these global production chains, although they have made the different economies more interdependent, have generated enormous efficiency gains in very many sectors and made many goods available at prices that have encouraged mass diffusion among all consumers. Without specialisation in specific stages and components of production of certain countries and companies connected with each other, many commonly used goods today would not be available or would only be available at prohibitive costs. In addition, this production organisation has also allowed emerging countries to participate in international markets, finding in the GVCs a means to access production that they could not develop independently, thus generating growth, employment and diffusion of technology.

Even before the current crisis there was talk of a trend in shortening GVCs and “reshoring“, i.e. bringing back to certain countries production cycles previously located abroad. This is because this international production organisation, even if it allows efficiency gains and cost advantages, for some companies and some sectors is too complex, with the loss of direct control over some production stages and an increase in organisational risks and costs. In fact, the phenomenon of reshoring has been limited to certain countries and certain particular production niches. Lack of control over the production cycle appears potentially risky for some countries, first and foremost for China, pushing it in recent years to shorten its international production chains for mainly geopolitical reasons. This choice has had global effects given the economic importance of this country. However, the current crisis could lead to a further downsizing of international production chains, for reasons that include reducing the interdependence of countries.

It should be remembered, however, that even in this time of crisis, trade between countries plays a fundamental role and it is essential that countries do not try to hinder it excessively. International trade often ensures the availability and affordability of vital medicines, medical products and healthcare services, particularly for the most vulnerable countries: no country is entirely self-sufficient for the products and equipment it needs for its public health systems. Much medical equipment is also manufactured within GVCs that make advanced components available that are not always easily produced in all countries. In addition, through international trade it is possible to overcome shortcomings in the production of medical equipment and drugs, as well as of various types of essential goods, distributing these goods more efficiently where they are most needed. In this emergency situation, despite the temptation of some countries to close borders and to apply trade restrictions in order to accumulate stocks, governments also realise that they need each other and that it is important to act in coordinated fashion as far as possible in the face of a problem that is absolutely global.

A drastic downsizing of global value chains would have very serious consequences, both during the crisis for the effect this would have on many goods and services supplied, and after the crisis impacting many key sectors that have developed as a result of this interdependence. However, the current crisis may be an opportunity to rethink certain organisational aspects of these production chains, accepting a rebalancing between risks and benefits, perhaps leading to a partial reduction in efficiency in order to achieve a reduction in risk, for example by accumulating larger stocks or further diversifying suppliers, distributors or logistics channels. Yet it is precisely this acute crisis and the need to ensure an effective recovery of economic systems that underlines the importance of not abandoning a mode of international organisation of production that has produced fundamental economic improvements, and of keeping international trade open precisely as a means of balancing the needs and production capacities of individual countries.

Figure 1 – Participation of countries in global value chains (2015 data)

Source: World Bank, World Development Report 2020

Figure 2 – Increasing trend of the involvement of GVCs in production sectors

Source: World Bank, World Development Report 2020

Logistics sector changes resulting from Covid-19 pandemic

Posted on 24 April 2020 | by Marta Re Ferrè | Leave a Comment

More than other areas, the Covid-19 pandemic forced the logistics sector to adapt quickly to the new regional, supply chains and consumer needs and test new flexible, digital and shared organisational models. The starting point for the next challenges.

Prof Marco Melacini, professor of Logistics Management, Director of the “Gino Marchet” Contract Logistics Observatory
School of Management Politecnico di Milano

The health system is at the forefront of the emergency response which work with other sectors providing essential services. Logistics, with its roots in military supply systems, provide the foundation to meet today’s challenge, ensuring these sectors’ operations by supplying necessary products. Although we are still in full emergency, it is useful to start thinking about “phase 2” and how the logistics will change, especially as it is unlikely that the country will return to normal in the medium term and there may be several “stop and go” moments, perhaps by limiting the “red zones” to smaller areas.

The best way to answer the question of how logistics will adapt, is to observe the last month’s reaction to the crisis which disrupted the lives of people and companies, and particularly the logistics of the pharmaceutical and food supply chain, which remained fully operational.

Adopting a “smart” rather than a cost-minimising strategy to handle the foreseeable demand, was seen as important. Practically this meant greater resource redundancy (firstly warehouses) to quickly locally reallocate stocks and overcome critical issues, such as stoppages. Implementing this strategy requires quicker decision-making, with increasingly dynamic and data driven choices. The smart working method was adopted for planning. This was more effective for companies that had experienced remote working and adopted cloud technologies and software. The latter allow remote access to computer systems and increase visibility along the supply chain.

However, there were some activities which must remain on site, such as order picking and transport. For these, it was essential to use social responsibility for workplace safety. Practically, this meant Personal Protective Equipment (PPE) distribution for workers, frequent workplace sanitisation (warehouses, transport cabins, and terminals or handling aids such as drugs delivery boxes), body temperature monitoring of everyone before site access, and reviewing operating procedures (e.g. to reduce the resource sharing, such as voice picking headsets, and increasing operating distances between operators). Reducing physical “contact” was a good reason to move to supply chain digitisation — making it possible to avoid printing and paper handling of transport documents.

The “smart” strategy is based on flexibility and allows quicker implementation of the most suitable solutions to respond to any change. The logistics tertiarisation and the related model used across the country enabled companies to be flexible. Some logistics operators quickly reallocated goods across more than 25,000 sqm of warehouse space. Horizontal cooperation between contract logistics operators (a sector worth more than € 84 billion in turnover) is and will be essential to a sharing economy. This cooperation consists of the use of stationary trucks/drivers from other supply chains to manage the high growth in demand especially sudden consumption peaks generated by fears in the population. It was possible to move warehouse personnel from mothballed sites making up for the reduction in operating capacity in the face of a physiological rise in absenteeism. The close relationship between company and worker, typical of the cooperative model, favoured communication within the company, reducing potential risk areas, and providing greater operational flexibility, to partially offset the inevitable productivity loss. We started daily planning, working closely with customer companies to align logistics capacity as closely as possible to market demand. This was essential to ensure economic sustainability in a low-margin environment such as contract logistics.

The situation we are experiencing led to a specific coordination model for emergencies: frequent alignment meetings, adoption of choices that in the short term do not always optimise costs (for example the greater difficulty of finding return trips or mandatory distances in the warehouse, to the detriment of productivity) but ensuring service continuity, cooperative customer company relationships that go beyond an outsourcing contract, an open book approach while sharing market signals and operational choices.

At the strategic macro-choice level, alongside the critical analysis of the future service to be provided based on contingencies (some companies have reduced the number of deliveries per point of destination to reduce order fragmentation), we noticed the centrality of delivery capacity in urban areas. This included home deliveries (e-commerce has made the definitive leap forward in its Italian development and grown by more than 50 per cent) and the individual sales point, with the rediscovery of the value of proximity stores (often used as omnichannel preparation points for urban deliveries). These urban logistics, with their city-centred origin and destination, will be increasingly important. In the transportation field there has been the development of road-rail inter-modality, which is fundamental to overcome transport blockages between EU countries, and future management of the crossing and supply of new “red zones”. Lastly, warehouse automation, which is still underdeveloped, will be increasingly important to promote work in protected areas with a lower concentration of people.

“Border” crossing times between European states (source: sixfold.com/covid-19)

In conclusion, it is not simply a matter of returning to a logistical “normality”, but finding new balances that will allow us to face this and future challenges, such as any economic recession and the need to increasingly focus on climate change.

Responding to the pandemic: what’s required is a (new) industrial policy

Posted on 17 April 2020 | by Mirja Calgaro | Leave a Comment

The ongoing pandemic is bringing the global economy to its knees, but history teaches us that it is possible to recover from the blow: the essential stepping stones to starting afresh are attention to new business opportunities, flexibility and innovation, backed by an active industrial policy

Massimo G. Colombo, professor of Entrepreneurship and Entrepreneurial Finance
School of Management Politecnico di Milano

The coronavirus pandemic promises to bring the world economy to its knees, with devastating consequences for the GDP of every country, no matter how developed.
However, scientific literature analysing the economic impact of previous “perfect storms” gives us some hope. The capitalist system is resilient, and rapid collapses in demand and production are more or less quickly followed by recovery, which can be more or less vigorous (see the Economist, 21-27 March, “Free exchange: From v to victory”).

What should the Italian government do to make the post-pandemic recovery as quick and vigorous as possible?

First of all, regardless of the measures that the European Commission will put in place, we must not repeat our past mistakes and we must be prepared to do “whatever it takes”. The first essential step, on which everyone agrees, is to support those suffering from a significant decline in income, in order to sustain aggregate demand and avoid the country’s social disintegration. Italy’s production must also be ensured the liquidity required to avoid closing down healthy firms facing temporary difficulties, thereby preventing a long-term reduction in production capacity. The loan guarantee facility supporting access to finance by SMEs is a step in the right direction. The important thing is to reopen the taps should this facility be insufficient.

However, we must go further still and draw up an active industrial policy for recovery. Apart from the negative shock on supply and demand, the pandemic also generates exciting new business opportunities, connected with transformed consumer models and new ways of doing business. Clear examples are the unique advantages of teleworking and the increased, albeit forced, interest in home shopping and entertainment services.

In this situation, small businesses, especially young ones, are ideally positioned to capture these new business opportunities, due to their flexibility and the spirit of initiative of the entrepreneurs who manage them. Moreover, they can prove to be a fundamental element of strength and dynamism in the national production system. However, to express their growth potential, they must be able to restructure and alter their resource portfolio, investing with a long-term perspective in innovative products and services and in the ability to market them globally. A study on the strategies of a sample of 340 high-tech Italian start-ups during the global crisis of 2008, carried out by the School of Management of the Politecnico di Milano and coordinated by Professor Colombo, confirms this point of view. Despite the average decline in demand that these firms experienced between 2008 and 2010, start-ups that invested massively in product and service innovation and in market internationalization experienced a 20% higher than average growth in turnover during this period.

It is the responsibility of the Italian Government to support and facilitate the transformation processes of such companies. On the one hand, the government must ensure that these companies have access, at competitive conditions, to the financial resources – in particular in the form of risk capital – necessary to support these processes and to scale their business. The CDP Innovation Fund is ideal for this purpose.

On the other hand, it is likely that high-skill human resources (managers, technicians) will have to leave large and small businesses adopting business models rendered obsolete by the pandemic, and will become available on the labour market. These human resources are invaluable for the growth of innovative small businesses. The government can facilitate their absorption into such firms, for example by temporarily suspending social security contributions for newly recruited qualified personnel.

«Thanks to my EMBA, today I know how to handle the mask emergency»

Posted on 17 April 2020 | by Veronica Rafaniello | Leave a Comment

PierPaolo Zani, MIP alumnus and general manager at BLS, a company that manufactures protective devices for the respiratory tract, tells us about the impact the coronavirus has had on business on a human and organizational level. Explaining that, with solid foundations and a clear mission, even the hardest stress test can offer an opportunity

Can a moment of great stress, for a company, translate into an opportunity? Yes, if the company has solid organizational foundations and a clear strategic vision of its business. In the space of just a few weeks, BLS, an Italian company that manufactures protective devices for the respiratory tract, more commonly known as “masks”, found itself in this position. «Already at the end of January, before the Covid-19 contagion had extended to Italy and the rest of the world, orders shot up in a way that until that moment would have been unthinkable», says PierPaolo Zani, general manager at Bls and alumnus of the Part Time EMBA at MIP Politecnico di Milano. «Until a few months ago, the demand for masks came from customers who needed to protect from pollutants in industries. This posed a problem for us: what to do, in this moment, to satisfy the demand of our long-time customers, and at the same time help out the civil protection authority and the country?»

The challenge of BLS between today’s emergency and tomorrow’s trends

Not a small dilemma, on which Zani and his team had to reflect deeply before coming to a decision: «We managed to find a balance. And we did it by going back to our corporate mission: protecting people and doing it well». The jump in orders risked generating a series of organizational difficulties: «I must say, however, that we had already been observing the situation for some time. It’s essential to pay keen attention to all signals that could have an impact on your business, even if they are small signals».

From a strategic point of view, then, it also becomes important to take into consideration the changes that could result from the coronavirus epidemic: «We don’t know how long this emergency will last, at a global level. However, we do know that the use of masks in the West could follow that which is the Asian model, characterized by a greater use of these devices at the consumer level, regardless of the pandemic. Throughout this period, the challenge will be to maintain a straight course, but we will also have the principles of our mission guiding us». And it’s possible to do so, explains Zani, also because the company has made far-sighted choices: «We have worked hard to enter long-term contracts, that ensure our operations, and we can count on back-up suppliers. This situation is an authentic stress test: but our foundations are solid, that’s why we’re holding up».

But for Zani there’s an element that’s even more important, that truly makes the difference: «People. Never so much as now have we been repaid by our ethics, which require us to protect all people in general, as well as those that work with us. In this period, it’s essential to establish a dialogue with production, reinforce hygiene standards, guarantee a secure workplace».

An EMBA to test your dedication

Indeed, Zani has always had a strong interest in the role the human element plays in a company. «This was perhaps the aspect that above all else pushed me to enrol in the Part Time EMBA programme at MIP. I felt the need for improvement. I needed new, more effective and fine-tuned instruments. I wanted to delve into the principles of organizational behaviour. And from all these points of view the master’s was truly helpful». The part-time format of the EMBA also put the commitment and the dedication of Zani to the test. A sort of small, personal stress test: «The advice I give to those who are preparing to begin this master’s is to face it with the maximum commitment. It can be challenging to find a balance between work, private and academic life; but the return, in terms of skills and career opportunities, is very high. It’s truly worth the effort of devoting yourself completely to the programme. I also like to remind people that BLS has a very close relationship with the Politecnico di Milano, with which we are supporting the creation of a startup, a spin-off from the university, and have already worked together with on different workshops. And we always keep a close eye on the talented people we meet in the classroom», concludes Zani.

Tag: coronavirus