Write 600 words case study with min 3-4 peer reviewed references
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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 suppliersreceived 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 assemblyline 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 Overall Revenue 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 stateof-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.