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A case study analysis requires you to investigate a business problem, examine the alternative solutions, and propose the most effective solution using supporting evidence.  Case Study – Soko Jewelry, Fast Fashion, and Building a Virtual Factory Preparing the Case Before you begin writing, follow these guidelines to help you prepare and understand the case study: · Read and Examine the Case Thoroughly Take notes, highlight relevant facts, underline key problems.  · Focus Your Analysis Identify two to five key problems. Why do they exist? Who is impacted? Who is responsible for them? · Uncover Possible Solutions/Changes Needed Review course readings, discussions, outside research, and your experience. · Select the Best Solution Consider strong supporting evidence, pros, and cons. Is this solution realistic? Writing the Case Study Analysis Once you have gathered the necessary information, a draft of your analysis should include these general sections, but these may differ depending on your assignment directions or your specific case study: · Introduction Identify the key problems and issues in the case study. Formulate and include a thesis statement, summarizing the outcome of your analysis. · Background Set the scene: background information, relevant facts, and the most important issues. Demonstrate that you have researched the problems in this case study. · Evaluation of the Case Outline the various pieces of the case study that you are focusing on. Evaluate these pieces by discussing what is working and what is not working. State why these parts of the case study are or are not working well. · Proposed Solution/Changes Provide specific and realistic solution(s) or changes needed. Explain why this solution was chosen. Support this solution with solid evidence, such as: § Concepts from class (text readings, discussions, etc.) § Outside research § Personal experience (anecdotes) · Recommendations Determine and discuss specific strategies for accomplishing the proposed solution. If applicable, recommend further action to resolve some of the issues. What should be done and who should do it? This case was prepared by Anna Waldman-Brown and Georgina Campbell Flatter. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, CA 94105, USA. Soko Jewelry, Fast Fashion, and Building a Virtual Factory Anna Waldman-Brown and Georgina Campbell Flatter “Fashion is about dreaming and making other people dream.” – Donatella Versace, fashion designer “Soko saved my life.” – Veronicah Rachiedo, Soko artisan Ella Peinovich sat under a guava tree in her backyard in Nairobi, Kenya, looking out at the skyscrapers just visible over her fence. Her husband and young son had picked most of the guavas, but she still managed to find a ripe fruit which she munched on now, lost in thought. It was the summer of 2017 and Peinovich, CEO and co-founder of the ethical manufacturing platform Soko, was reflecting on how her company would position itself for future growth. Peinovich considered the difference that her company had already made in the lives of jewelry artisans across Kenya as she rubbed her fingers along her brass necklace. Soko was a medium-sized fashion company (under US$10 million) producing brass, horn, and bone jewelry for mid-tier customers worldwide. It had an average compound annual growth rate (CAGR) of 92\% between 2014 and 2017, 60 full-time employees, and 2,300 artisans throughout Kenya who manufactured jewelry on a contract basis—and Soko’s revenue had been doubling year-over-year since 2014. The firm was not yet profitable, but had very healthy margins on jewelry production, and Peinovich’s team was confident that they would break even in the next several years. Peinovich was especially proud of the fact that her artisans retained 20\% of overall revenue, as compared to the industry standard of only 5–10\%—with the exception of highly trained 3D-printed jewelry technicians who capture around 40\% of overall revenue as full-time factory employees, but these technicians do not own their tools (see Figure 1 below).1 Soko’s artisans 1 Personal phone interviews with jewelry supply chain consultant, John Croston, and founder of Au Enterprises, Linus Drogs, January 2018. July 2018 SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 2 captured roughly the same percentage of revenue per item of jewelry as fair trade artisans,2 though they were able to sell more jewelry through Soko due to its seasonal fashion changes (see the “Staying Competitive in a Crowded Market Segment” section below). Figure 1: Approximate worker revenue as percentage of company revenue Source: Case writers, using data from Ebeling, Croston, Drogs, and Soko (as cited in footnotes) Many of Soko’s artisanal suppliers received roughly a 5x increase in annual income after becoming contractors for Soko. “They’ve gone from a handful of products by the side of the road every day,” said Peinovich, “to now hundreds of products in retail shops around the world.” Most importantly, Peinovich explained how Soko was also contributing to social mobility: We see a number of people moving out of the slums. They are paying their dowries for the first time, paying the school fees for their boys and their girls, and putting three meals on the table every day. This is a huge point of pride, because we at Soko really believe that we are helping artisans to lift themselves out of poverty. Despite her success, however, Peinovich was dissatisfied with the state of her business that summer. Results from an impact analysis last year indicated that Soko’s impact, indicated by artisans’ overall share of Soko’s revenue, had decreased from 2014 to 2016 as increasing overhead costs of sales, marketing, and other key business expenses cut into artisans’ revenue: 2 Ashlea Ebeling, “Ten Thousand Villages Grows With Fair Trade,” Forbes, August 20, 2009. SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 3 Figure 2: Soko’s cost of goods as a \% of revenue (Soko company data) Source: Case writers with data from Soko As an additional challenge to Soko’s intended impact, the majority of Soko-generated gains were captured by the 20\% of Soko artisans who worked full-time, while the rest of the firm’s artisans worked part-time and 20–40\% of artisans in any given quarter were inactive. Although these artisans worked for other jewelry companies or practiced in other trades, nearly all had expressed an interest in working full-time for Soko. Could Soko provide all its artisans with a decent share of revenue, or would the firm have to shift its business model in order to actually become profitable? From Peinovich’s point of view, a shift away from supporting artisans would decrease Soko’s overall effectiveness as an ethical producer—was this the only way for Soko to compete with modern technologies and assembly- line factories? The company’s unit growth had mostly leveled out, and the increase in revenue was partially due to increased prices and better organization, rather than an increase in sales. Soko’s current demand had not allowed them to substantially increase jewelry production, better utilize their current artisans, or even bring new artisans into their network without diluting the overall amount of work. If Soko’s innovative virtual factory model hoped to globally disrupt the fashion market—which, after all, was the ultimate mission of Peinovich and her team—then the company would need a new strategy to scale up production. Peinovich furrowed her brow, wondering whether she had saturated her current market segment of fashion-conscious millennials in Europe and North America. An even bigger challenge was that 40\% of Soko’s sales took place in the last quarter of the year for the holiday season, and Soko’s overall production capacity for the rest of the year was sorely underutilized, at around 35\%. If Soko’s suppliers had consistently spent half their capacity working for Soko throughout 2017, the company could have increased its revenue by a factor of five. So, Peinovich mused, what should be the next step for Soko? Should she continue to sell jewelry to her current market segment of socially conscious consumers, or would it make more sense to diversify her product offering and/or her customer base? Most importantly, how could Peinovich’s \% of O verall R evenue SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 4 team scale up without sacrificing their mission to provide both livelihoods for their artisanal suppliers and elegant products for their customers? Ella Peinovich’s Story As far back as Ella Peinovich could remember, her primary passions in life had been art, creative problem-solving, and social impact. An architect and designer by trade, Peinovich grew up in an artists’ colony in Wisconsin. Engagement with her church brought her on several mission trips and Habitat for Humanity excursions to work with under-resourced Native American communities and rural towns in Montana, West Virginia, and Colorado. These trips focused on public service projects such as helping the visually impaired and rehabilitating natural landscapes—which led to the realization that she could harness the power of design to “organize creative thought” and generate systemic, lasting impact for underprivileged communities. “Art and math were my favorite subjects in school,” Peinovich recalled, so she found architecture to be a natural fit. She graduated with a Bachelor in Architecture from the University of Wisconsin–Milwaukee, then joined a corporate architecture firm as a designer. But Peinovich had grown up with the idea that art and design could be powerful forces for change, and she grew dissatisfied with corporate life after three years. She enrolled at MIT to pursue a Master of Architecture. There, a digital fabrication course and a class on design thinking further motivated Peinovich to apply her design expertise toward “disruptive scale and impact.” In her first year of graduate studies, she also joined the urban sanitation startup Sanergy, which provided toilets to slum communities in Nairobi, Kenya, then processed the resulting sewage into fertilizer products for farmers to subsidize the costs of toilets and sewage collection. As Sanergy’s first architect, Peinovich helped to design the actual toilet stalls. Peinovich loved her first trip to Nairobi, which was also her first time visiting the African continent. She also realized that even though designing toilets satisfied her love of impact, it would never satisfy her love of art. Visiting craft markets around Nairobi, she was astounded by the brass craftsmanship of local artisans. She started purchasing suitcases full of jewelry to sell in her family’s art gallery back in Wisconsin, and was successful enough to cover her airfare and turn a small profit. Back at MIT, Peinovich was writing her master’s thesis on “Localized Design-Manufacture for Developing Countries.” She investigated methodologies for fostering entrepreneurship among informal artisans by introducing new technologies such as friction-fit molds, fiberglass forms, and molding/casting technologies. The following year, she returned to Nairobi with Sanergy while continuing to explore her interest in art and design. Peinovich was running a workshop on design for development at the University of Nairobi—introducing 3D modeling and digital fabrication to students—when she met Catherine Mahugu, a Kenyan software engineer. Peinovich and Mahugu began discussing the idea of building a platform for Kenyan jewelry makers to sell their wares on the international market. They developed a proof of concept for what Peinovich called an “Etsy for Africa” mobile app, which quickly gained interest with the artisanal community. During a later visit to Nairobi, Peinovich was invited to speak at New View, a high school program implementing technology in slum communities. Her talk impressed Gwendolyn Floyd, an SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 5 American industrial designer who was teaching at the school, and the two women quickly became friends. Peinovich then brought Mahugu and Floyd together to discuss how they might work together to build upon Peinovich and Mahugu’s app. Throughout Peinovich’s time at MIT, the three co-founders continued to develop their startup which combined Peinovich’s three passions: art, technology, and social impact. As Floyd put it, Soko “was born out of a love of design, the combining of global perspectives, the desire to connect and empower entrepreneurs using technology, and the belief that women can change the world.”3 Building upon Mahugu’s proof of concept, the company Soko emerged as an effort to bring state- of-the-art technology and a global market to cottage industries. Soko’s team joined a three-month startup accelerator for MIT students called delta v, which helped them get off the ground and find investors. Kenya’s Artisanal Industries The Informal Craft Sector The global craft sector, comprised almost exclusively of “informal” enterprises, is the second largest source of jobs in emerging markets. Peinovich explained, “The artisanal sector produces about 60\% of the creative goods globally, and yet about 70\% of this population are just outside of digital connectivity so they don’t have the access to be able to sell on eBay, or Amazon, or their own web store.” Characteristics of “informality” may include operating out of households rather than dedicated shops or facilities, a lack of connections to established businesses, a failure to go through official routes for legal registration, and a general avoidance of business taxes. Across sectors, such informal enterprises make up about 90\% of micro and small businesses worldwide, and up to 75\% of non-agricultural jobs in emerging markets.4 Despite its predominance, few people actively choose to work in the informal sector. Wages tend to be low, and there are few unions or other workers’ organizations with any power. Informal businesses are also subject to exploitation, accidents, and unreliable supply chains, and there are few mechanisms for legal protections or insuring one’s property. Due to the small scale of most informal firms, as well as the general lack of literacy and education, informal workers have difficulty procuring loans and expanding their businesses, so most enterprises tend to focus on local needs.5 Such an environment leads to highly variable profits and constant stress, and most informal workers must hold several different jobs at once to make ends meet. These unfavorable conditions explain why informal firms are only about 25\% as productive as small formal firms overall.6 3 FEED, “Behind the Scenes with Soko,” FEED (blog), unknown date. 4 “Informal Economy,” International Labour Organization, 2016. 5 Ibid. 6 World Bank cited in Steve Daniels, Making Do: Innovation in Kenya’s Informal Economy, Analogue Digital, October 7, 2010. SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 6 The Kenyan National Bureau of Statistics estimates that the informal sector accounted for 83\% of Kenya’s employment in 2016, employing around 13.3 million people. Out of 832,900 new jobs created in Kenya in 2016, a full 747,300 of those jobs were created in the informal sector. That year, 2.7 million Kenyans worked in the informal manufacturing sector, including 0.5 million craftspeople, comprising the second-largest workforce after agriculture.7 The breadth of the global informal economy could provide a massive, untapped opportunity for the local processing of raw materials as well as the production of finished goods, on both domestic and international scales. Despite a dearth of full-time employment opportunities, formal jobs remain the ultimate goal for many informal workers across emerging markets; informal artisans lack social services and many other forms of support, and full-time jobs tend to be more socially prestigious. While networks of informal firms will never substitute for large-scale infrastructure development, Soko’s virtual factory would demonstrate that the informal craft sector could become integral to a new model for inclusive industrialization. “Many [jewelry] artisans are micro- entrepreneurs,” said Peinovich, “living on less than US$2 a day, and working for that day to put a meal on the table.” Like most workers in the informal industrial sector, Kenya’s jewelry artisans had historically lacked the resources necessary to innovate on their own. According to Peinovich, Nairobi lore held that one man named George launched the metal-casting industry across Kenya, building furnaces and torch equipment with local materials, and the knowledge had since spread through apprenticeships and informal knowledge sharing. However, that had been decades ago. More recently, around 1998, a collaboration between the Italian non-governmental organization (NGO) Terra Nuova and the University of Nairobi revealed that water pumps could be retrofitted into grinding machines. This led to a government-supported training program that introduced precision horn and bone work to Kenyan artisans, who, up until that time, had used machetes and other crude tools to shape their jewelry.8 By 2017, artisans were still purchasing water pumps and hiring local metal workers to convert them into grinding machines. Terra Nuova had since moved on to other initiatives, however, and innovation among jewelry artisans had mostly stagnated. To further upgrade their skills and techniques, especially to meet the demands of international clients, they would need a new intervention. While individual microfactories may have lacked the financial incentives to upgrade on their own, an aggregating company like Soko could deliver benefits via the collective improvement of all suppliers. Thus, Soko was able to provide the expertise and organization needed to keep its suppliers globally competitive, and all its artisans reaped the benefits. Policy incentives for manufacturing and small business development played a significant role in supporting, or discouraging, local production. The more that businesses saw value in informal- sector firms, the more local policymakers might pay attention to the possibilities. The government of Kenya had several legal structures in place to support small businesses; but their current “small 7 “Economic Survey 2017,” Kenya National Bureau of Statistics, 2017. 8 “Our Story,” Terra Nuova, 2015. SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 7 and medium enterprise” category required a minimum of 15 full-time employees, so Soko did not initially qualify. Peinovich admitted that Kenyan startups preferred “to remain under the radar” for as long as possible, and in 2015 it was “practically impossible” for a Kenyan startup to get its paperwork correct the first time. Indeed, Peinovich had to hire a tax attorney to deal with the bureaucracy of Kenya’s accounting scheme for locally manufactured products—and then she needed to navigate import/export regulatory systems both in Kenya and in Soko’s countries of import. In contrast, the US African Growth and Opportunity Act reduced the taxes of some imported products from certain African countries by 25\%, and even eliminated some taxes altogether. These tax cuts played a key role in helping Soko to reach the American market. Networked Craft Production One historical example of Soko-style networking across cottage industries was the practice of “putting out,” in which a large manufacturer delegated work to a number of geographically distributed artisanal workshops. Although most decentralized production along these lines had disappeared with the advent of the Industrial Revolution, select industries found putting out to be competitive with traditional mass production in certain regions. The Italian knitwear industry in the 1990s, for example, was one case in which contracting to microfactories provided higher overall profits for clothing manufacturers than traditional mass production. Production-rate asymmetries in various stages of knitwear manufacturing naturally led to substantial inventory costs for large factories, giving an advantage to the microfactories that produced their wares just in time.9 Indeed, networked craft production maintained several advantages over traditional large-volume production: minimal inventory, low upfront capital costs, the ability to utilize existing microfactories rather than build new facilities, the creation of local employment and expertise, increased factory agility, and potential savings on transportation costs. Upholding traditional rural industries could also help to mitigate unsustainable urban migration by providing more jobs in disenfranchised regions. As indicated by the high-end local food movement across the United States and Europe, some consumers were demonstrably willing to pay a premium for ethically produced and/or locally made goods. Although Soko’s artisans used only manual tools, Soko’s production model bore similarities to the supposed promise of distributed microfactories employing on-demand 3D printing and CNC machining. Most importantly for emerging markets, networked craft production did not require the extensive infrastructure needed for traditional industrialization. “We can aggregate small-batch production into high volume,” Peinovich said, “and this allows us to compete in mainstream consumer fashion markets.” Just as Bangladesh “leapfrogged” landline telecommunications networks by jumping straight to infrastructure-light mobile phones, some foresaw a similar trend for manufacturing. Why would emerging markets—which already suffered from costly and convoluted supply chain logistics— burden themselves with the outdated infrastructure of traditional, high-volume manufacturing in sectors where distributed production could be equally competitive? Soko’s model offered a more 9 Mark Lazerson, “A New Phoenix?: Modern Putting-out in the Modena Knitwear Industry,” Administrative Science Quarterly 40, no. 1 (March 1995): 34–59. SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 8 inclusive and sustainable manufacturing paradigm for sectors that did not benefit from traditional economies of scale: specialized components like airplane engines, customized or on-demand products such as medical devices, and labor-intensive handicrafts like jewelry and apparel.10 Soko V1: Etsy for Africa Soko began as a simple platform for informal jewelry artisans in Kenya to sell their own products on the international marketplace—an Etsy.com with additional marketing support for Kenya’s less technically savvy informal sector. While Peinovich and Mahugu built the mobile-to-web marketing platform, Floyd curated a high-quality selection of jewelry sourced from artisans around Nairobi. This platform became a virtual marketplace for informal artisans to sell their goods directly to international consumers, so artisans wouldn’t have to rely upon locals, tourists, and middlemen. Unexpectedly, Soko’s team found themselves unable to consistently grow sales for their products after six months—and, as with many marketplace solutions, Peinovich struggled to properly manage everyone’s expectations. None of the co-founders had ever run a retail business, and Soko’s early days involved many challenges. The team knew how to find and market excellent products, but they lacked a sustainable business solution to reach profitability. They realized that they were solving the wrong problem: Connecting Kenyan artisans to international markets would never be enough, since the key challenge for artisans was the fact that they didn’t know what international customers wanted to buy. After exhausting their market of friends and family, Soko’s team had to come to terms with their stagnating sales. They initially expected that wealthy North Americans and Europeans would be willing to pay far more than Kenya’s local market for handicrafts, but Soko’s estimated price of its handmade goods and the actual price that customers were willing to pay (given the proliferation of similar machine-made goods) were, in Peinovich’s words, “completely misaligned.” As she discovered through this failed Etsy model, it was very difficult to sell large volumes of diverse products—especially when the artisans creating these products had little exposure to international trends, no concept of foreign customer preferences, and no experience with quality control standards. Every item in Soko’s online store turned out differently, and traditional Kenyan designs were not always attractive to young, fashion-conscious consumers. In other words, Soko’s Etsy for Africa would never amount to a profitable business. Peinovich, Mahugu, and Floyd applied their design expertise to the problem and, after several harrowing brainstorming sessions, they pivoted toward developing their own fashion brand rather than relying upon local artisans as designers. Peinovich explained, “There’s a spectrum: At the far end you have art, one-of-a-kind individual pieces [Soko V1]. Soko [V2] is somewhere between art and small-scale manufactured products… Can we meet the volumes that we’re seeing in retailers?” 10 Anna Waldman-Brown, “Exploring the Maker-Industrial Revolution: Will the Future of Production Be Local?” (working paper, Berkeley Roundtable on the International Economy, Berkeley University of California, 2016–17). SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 9 Soko V2: Creating a fashion brand Soko’s team never set out to develop a revolutionary production model, but they were not going to waste an opportunity. “It’s not just simply product being sold to customers,” said Peinovich. “There’s an entire value chain, an entire ecosystem that frankly we had to develop in order to make Soko successful. But we did not start there.” Soko’s co-founders always knew that their ultimate goal was large-scale distribution and competition with major fashion brands; they did not intend to limit themselves to local craft markets or niche fair trade companies, but they were unsure of how to stay competitive while employing informal artisans. Peinovich’s passion for problem-solving eventually led Soko’s team to revive a pre-industrial model of geographically distributed production, with the addition of modern networking technology and smart algorithms to select the right artisans for the right jobs. Soko’s eventual business model matched talented artisans with both an international marketplace and highly competitive jewelry designs. Since Soko began with a strong commitment to supporting existing brass artisans, the co-founders wanted to leverage their current ecosystem of skilled jewelry artisans rather than build their own infrastructure or train unskilled workers. This also allowed them to save on capital costs by contracting out to existing microfactories rather than building their own factory. Nonetheless, as befits a new production model, Soko had to invent its own manufacturing system. Peinovich said, “We’re building the next-generation supply chain: more distributed, more agile, and more ethical. I see this as a necessary step in revolutionizing retail and the fashion space as we see it today.” Many fashion manufacturers viewed cottage industries as a potential liability in their supply chains, due to a long history of factories outsourcing handicraft production (especially beadwork and embroidery) to informal-sector subcontractors at exploitative rates.11 Peinovich, however, saw these informal cottage industries as a potential asset. Soko eliminated middlemen through vertical integration and direct interactions with suppliers, and further trained artisans so they were able to earn above-market wages by manufacturing jewelry for a discerning global audience. Soko’s business model turned semi-skilled informal artisans into highly skilled manufacturers for the global jewelry market, providing them with the skills and resources to compete with the formal sector on their own terms. “Formalization,” said Peinovich, “is not the answer. Rather, networked infrastructure will bring progress.” Indeed, Soko’s virtual factory model of networked craft production combined the scale, efficiency, and collective intelligence of high-volume manufacturing with the benefit to local economies provided by small, artisanal businesses. Peinovich explained: We really asked ourselves: With the way that the retail sector is going and consumption is leading us down this fast fashion path, the way that artisans are really marginalized due to access, not talent, what if fashion and consumerism could work for the poor rather than against it? At Soko, we believe that we can enable human capital through the use of technology. And this is in contrast to mass manufacturing, where technology is automating people out of the supply chain. We at Soko believe that humans are our best asset! 11 “Standards for Ethical Compliance in Homes and Small Workshops,” Nest, December 2017. SOKO JEWELRY, FAST FASHION, AND BUILDING A VIRTUAL FACTORY Anna Waldman-Brown and Georgina Campbell Flatter July 2018 10 The technical innovation behind Soko’s operations, and its key piece of intellectual property, was its mobile-to-web virtual resource planner (VRP), …