Gabrielle Bonheur “Coco” Chanel (1883–1971) maintained that fashion ought to be comfortable and chic. She espoused this guiding principle at a time when the notion was totally alien to the fashion world. Accordingly, in 1916 she made the first ever proper clothes out of jersey, a material that had previously been deemed good enough only for men’s underwear. In 1918 she went on to create the first women’s pajamas, a previously inconceivable notion because during the first part of the twentieth century it was still self-evident that men’s and women’s clothing should be as different as night and day. Coco Chanel certainly challenged that convention, borrowing elements of men’s apparel to incorporate in her fashion for women. In so doing she gave women unprecedented freedom of movement as well as clothes that were no less elegant than what women had been accustomed to. The unprecedented inclusion of trousers in her collection for women sent shockwaves through the society of her day, yet women loved the clothes she made.
In the 1920s, Coco Chanel’s designs were the driving force behind French fashion. Their simple, understated elegance represented a break with tradition, their clear lines being not just innovative but almost revolutionary at the time. Furthermore, her ideas were totally in tune with the spirit of the age, because in the early twentieth century the role of women was changing radically. And her collections characterized the style of modern, emancipated women.
In business terms, however, Chanel is remarkable not just for her innovative, female customer-oriented approach, but also for her strong awareness of the need for financial independence.
To gain a better understanding of what drove her to pursue such autonomy, we first need to look at her childhood. The stories Coco Chanel spread about her upbringing were so often contradictory that it is extremely difficult to untangle myths and fiction from the truth. We know for certain that she was the illegitimate daughter of two market traders and that her mother died when she was just 12 years old. Since her father did not look after her, she was raised in an orphanage run by a Catholic order of nuns. Three of her five siblings died at a young age, and Coco later gave her two brothers financial support, demanding in return that they keep quiet about their childhood and stay out of her life in the loftier, more prosperous echelons of Parisian society. She is thought to have been ashamed of her family, and it is suspected that it was this feeling which very early on fueled her resolve never to become financially dependent on anyone. Consequently, as an entrepreneur she felt it was very important to repay her business debts immediately. And although Chanel had liaisons with some very wealthy men, who provided the capital she needed when she was starting out, she repaid them all in full. Clearly, she wanted to remain independent of men, and in addition to single-handedly financing her entire life, she also bankrolled the development of her company. Both of these accomplishments were unusual for women in Chanel’s day.
Chanel opened her first shop at the age of 27 in Rue Cambon, near the exclusive Place Vendôme in Paris, where women from all over the world still come to buy Chanel clothes today. The hats she herself designed and then sold there from 1910 onward proved so popular with sophisticated Parisian ladies that she soon expanded her collection. By 1916 she already had boutiques in Paris, Deauville, and Biarritz and had around 300 employees. In 1920 she created her soon legendary perfume Chanel No. 5, and that same year she reported taxable income of over 10 million French francs. By the end of the 1920s her company employed over 3,000 people.
During that period, she made an indelible mark on the fashion world by coming up with innovations like the now proverbial “little black dress,” which can be traced back to her design for a plain black dress in 1926, a reaction to a visit to the opera where she had been horrified and dismayed by the gaudy evening attire of her fellow opera goers. Alongside Chanel’s elegant black number, every other dress looked too glitzy. Yet such brilliant understatement was not the only thing Chanel did to change the image of the emancipated woman. She steadily hacked away at old traditions, sometimes quite literally, for example switching to a short hairstyle allegedly after singeing her long hair when a gas heater caught fire. Short hair then became the trademark of the flapper, the emancipated young woman of the 1920s.
Another of Chanel’s innovations was her introduction of costume jewelry, which she saw not as a cheap imitation of real gems, but as proudly worn artificial fashion accessories. Whereas jewelry had previously served, among other things, to indicate the social and professional status of the men behind women, self-confident women could now follow Coco Chanel in wearing what they pleased. And Chanel’s innovations included not only sophisticated combinations of real and false gems, but also the use of both precious and cheap materials. The long string of pearls became just as classic a look as the soft Chanel tweed suit, which she unveiled in 1954.
Even more important than Coco Chanel’s innovative and elegant fashion designs, though, were the modern look and lifestyle that she gave her contemporaries, setting an example for them as a professional woman of independent means. Nowadays it is virtually impossible to appreciate how much strength of will, character, and resolve this must have required in her day, when men not only dominated society and business, but also gave free rein to their prejudices and misogynistic mind-set.
Like many true greats, Chanel carried on working until the last day of her life. She died in 1971, rich and famous, at the ripe old age of 87, working on yet another new collection in Paris.
Chanel’s life history and creative output provide countless examples of entrepreneurial originality, and it would take a whole separate chapter to do justice to the individual aspects of her professional management of innovation. Here, however, I would like to highlight two other aspects of her management: profit and her aspiration toward financial independence.
Let us start out from the basic notion that Chanel’s financial success was a consequence of the fact that she understood the needs of her female clientele better and did more to fulfill those needs than any of her contemporaries. Most important of all, then, she delivered customer value. That may sound trivial, but at the time the concept was nowhere near as self-evident as it is today, because no fashion designer questioned everything as radically as Coco Chanel did. “The cut of a dress should enable its wearer to sit on a horse as well,”1 she said, at a time when for many of her contemporaries there seemed to be no alternative to the tightly laced corset. Massive opportunities have always awaited anyone or those organizations bold enough to radically question everything and try to gain a better understanding of their customers than their competitors.
Those unknown market leaders or “hidden champions” demonstrate a particularly impressive and profound understanding of their customers’ needs. Such world-beating companies are characterized, among other things, by their pronounced proximity to customers, which almost automatically yields competitive advantages. Yet at the same time they have other things in common with Coco Chanel, like placing the emphasis on innovation, knowingly focusing their resources, exploiting the positive aspects of globalization, deploying unusually capable and effective employees, and exhibiting a strong will to succeed.
The market leaders in question tend to hold innovation in very high regard, because in their eyes it is the most effective way to stave off the competition. Chanel would have seen things exactly the same way. Hidden champions focus their resources and concentrate on clearly defined markets and target groups, but they are also very clear about what they do not want. They exploit opportunities arising from the fact that they are in a position to offer their wares worldwide—just as Chanel did. For instance, Jackie Kennedy chose to wear Chanel outfits, landing the French style icon a perfect representative to showcase her designs in the United States.
Chanel always hired excellent staff, a tradition that her company’s management continued to cultivate after her death, bringing in Karl Lagerfeld, to name but one example. Chanel’s dogged determination to succeed sometimes gave her contemporaries the impression that she was inexorably tough, not only when it came to looking after her own interests, but above all being hard on herself—another factor she has in common with many great individuals.
But let us now return to Chanel’s desire for financial independence, because here too there is a parallel, albeit a less obvious one, with the aforementioned hidden champions. Scrutinize the finances of these low-profile world-beaters, and the one factor that sticks out is their unusually high equity ratio, meaning the remarkably high relative proportion of equity used to finance a company’s assets. Studies suggest that the actual figure lies somewhere between 36 and 42 percent, more than one-third of hidden champions even have equity ratios above 50 percent! These figures are multiples of the average for small and medium-sized German companies. So either the craving for financial independence is indeed very strong, or the correlation is purely coincidental—which would be very strange, to say the least.
One thing is certain: striving for financial independence almost inevitably entails the adoption of a different mind-set regarding profits. This is because the question asked by independent-minded entrepreneurs is not what their desirable maximum profit would be, but rather what minimum profit they need to generate to remain financially independent after deducting all their costs, taxes, and dividend payments.
In virtually all cases, that minimum profit will be considerably higher than the maximum profit that most entrepreneurs would have been willing to accept at the outset. Indeed, this is one reason to take a very critical view of discussions about excessive profits by companies, for the decisive issue about profits is not so much how high, but how sustainable they are. High profits can be achieved relatively easily in the short term by making savings, though this will almost always be at the cost of the organization’s future well-being. However, the aim must be to ensure that the business remains strong and healthy in the long term, capable of withstanding even relatively major crises. Hidden champions have provided ample proof that such a company can also generate sustainable profits. The key is to do things in the right order: first build up strength, then generate profits on the basis of that strength.
In addition to viewing profit in a different light, striving for financial independence also induces a different way of dealing with customers. Come what may, customers must take center stage, for it is they who pay for a business’s products or services, enabling the generation of profits which, in turn, secure the company’s financial freedom. So in simple terms Chanel’s success can be summed up as having been based not on products (after all, her rivals also produced great clothes), but on understanding contemporary women’s needs for elegance, simplicity, clarity, and comfort.
Ultimately, where financial independence is concerned, profit should be seen for what it essentially is: proof of a correctly chosen and competently implemented business mission.
The discussion about aspiring to generate profits in an effort to secure financial independence should not lead us to conclude that this was Coco Chanel’s overriding or, indeed, sole driving force. Nobody knows what ultimately prompts individual entrepreneurs to act as they do. Some want to become rich; some want to leave a legacy; others want to become powerful or famous. We know for certain that Chanel’s financial independence was very important to her and that she herself attributed a large part of her success to coincidence. Almost too modestly she said of her career:
“What did I know back then about my profession? Nothing. Was I aware of the revolution I would start? Not in the least. One world was dying and another had to be born. I merely happened to be there, when an opportunity came my way, which I duly seized. I was as old as the century. Somehow it became my destiny to develop a new style of attire. Women wanted simplicity, comfort, and clarity. I had always made those things my priority, without having an agenda. True success stories always contain an element of chance.”2
While the tremendous success story of Coco Chanel may in retrospect seem to have been self-evident, natural, and easy, she nonetheless had to steer the company through successive difficulties, especially in the 1930s and 1940s. And later on, when she was 70, the press greeted her announced intention to launch a new women’s suit with nothing but hurtful derision. Undeterred, she continued working on it, with the impressive outcome that the suit in question became a classic, the Chanel suit. In 1955, Life magazine devoted a full double spread to the “Chanel look,” heaping praise on its simple elegance. If Chanel were still alive today, would she be surprised that the current crop of superstars still wears her clothes?
Carefully consider whether you have set your minimum profit correctly. Discuss this with your colleagues.
On which activities should you focus your resources in order to make progress for which customers will be willing to pay? Which activities should you drop?
If you generate healthy profits, ask yourself the probing question of whether you are investing enough in the future.