Kering – A path towards sustainable luxury Carolina Fernandes Dissertation written under the supervision of Patricia Amaro Machado Dissertation submitted in partial fulfilment of requirements for the MSc in Management with Specialization in Strategy and Entrepreneurship, at the Universidade Católica Portuguesa, 4th January 2019 Abstract Dissertation Title: Kering - A path towards sustainable luxury Author: Carolina Fernandes Keywords: strategic change, dynamic capabilities, firm performance, sustainability, luxury goods Organizations are affected by exogenous shocks such as changes in consumer preferences through time, making it crucial to face these challenges in a way that will lead to a competitive advantage, as well as long-term survival. In order to overcome these situations, firms need to actively change their strategy to successfully adapt to the external environment, by altering, for instance, its technology, structure and processes. Scholars have studied the importance of strategic change, as well as dynamic capabilities, in firm’s success, highlighting the impact of an active process of change and its positive effect on performance. This dissertation focuses on showing a real-life example of a company that changed its processes in order to increase its fit with the external environment. The teaching case focuses on Kering’s path towards becoming a luxury leader in environmental sustainability, transforming its governance structure as well as operational practices. The luxury conglomerate used dynamic capabilities successfully in order to adapt, not to a crisis, but to a gradual change in consumer preferences. This case is a clear example of how important it is for companies to sense potential changes in the external environment, and to take action in order to address those situations in a way that will improve performance in the long-run. 2 Resumo Título da dissertação: Kering - A path towards sustainable luxury Autor: Carolina Fernandes Palavras-chave: mudança estratégica, dynamic capabilities, desempenho da empresa, sustentabilidade, produtos de luxo As organizações são afetadas por choques exógenos, tais como alterações nas preferências dos consumidores ao longo do tempo, tornando-se crucial enfrentar esses desafios de uma maneira que leve a uma vantagem competitiva, bem como à sobrevivência a longo prazo. Para superar essas situações, as empresas devem mudar ativamente a sua estratégia de modo a se adaptarem com sucesso ao ambiente externo, alterando, por exemplo, aspetos tecnológicos, estruturais e os processos. Académicos estudaram a importância da mudança estratégica, bem como das dynamic capabilities no êxito das empresas, destacando o impacto de um processo ativo de mudança e o seu efeito positivo na performance. Esta dissertação tem como propósito apresentar um exemplo real de uma empresa que alterou os seus processos com vista a melhor se adaptar ao ambiente externo. O teaching case foca-se no percurso do grupo Kering percorreu até se tornar um líder da indústria do luxo em sustentabilidade ambiental, transformando a sua estrutura de governação, bem como as suas práticas operacionais. O conglomerado de luxo utilizou com sucesso as dynamic capabilities para se adaptar, não a uma crise, mas a uma mudança gradual nas preferências do consumidor. Este caso é um exemplo claro de como é importante para as empresas detetar possíveis mudanças no ambiente externo e tomar medidas para lidar com essas situações de modo a melhorar o seu desempenho a longo prazo. 3 1 Contents 1 INTRODUCTION ....................................................................................................................................... 6 2 LITERATURE REVIEW ........................................................................................................................... 8 STRATEGIC CHANGE ........................................................................................................................... 8 DYNAMIC CAPABILITIES ................................................................................................................... 10 LUXURY GOODS CONSUMPTION - CONSUMER PREFERENCES .......................................................... 12 3 CASE STUDY: KERING – A PATH TOWARDS SUSTAINABLE LUXURY .................................. 15 3.1 INTRODUCTION ..................................................................................................................... 15 3.2 KERING GROUP ..................................................................................................................... 15 3.3 THE OVERALL LUXURY MARKET .......................................................................................... 16 3.4 LUXURY GOODS MARKET .................................................................................................... 19 3.5 SUSTAINABILITY CONCERNS ................................................................................................ 22 3.6 KERING IN 2017 .................................................................................................................... 22 3.7 KERING FIGHTING FOR SUSTAINABILITY .............................................................................. 25 3.7.1 Environmental P&L ...................................................................................................................... 26 3.7.2 The 2025 Strategy - Crafting Tomorrow’s Luxury ........................................................................ 30 3.7.3 In Action – Examples of Brands .................................................................................................... 34 3.8 THE KERING FOUNDATION .................................................................................................. 35 3.9 OUTLOOK FOR THE FUTURE ................................................................................................. 36 3.10 TEACHING NOTES ................................................................................................................ 42 3.10.1 Overview ................................................................................................................................... 42 3.10.2 Teaching objectives .................................................................................................................. 42 3.10.3 Intended contribution ............................................................................................................... 43 3.10.4 Pedagogical overview .............................................................................................................. 43 3.10.5 Assignment questions & Analysis ............................................................................................. 44 3.10.6 Board plan ................................................................................................................................ 50 4 DISCUSSION ............................................................................................................................................. 51 4 5 CONCLUSION .......................................................................................................................................... 53 6 BIBLIOGRAPHY...................................................................................................................................... 54 5 1 Introduction The objective of this thesis is to understand the implications of changing environments on the luxury industry. More specifically, I will focus on the implications coming from the rising concern for environmentally sustainable practices, on how that will affect luxury brands and on how firms can cope with these changes, adapting to them and making them, in some cases, a source of differentiation and competitive advantage. For years, scholars have studied the reasons behind strategic change and the consequences of it. Van der Ven and Poole (1995) defined strategic change as a firm’s difference in quality, state and form over a period of time. Tsoukas and Chia (2002) added that strategic change arises from both exogenous and endogenous sources, highlighting the importance of managing the process. The role of management was also reinforced by Adner and Helfat (2003), stating that outcomes will vary according to each company’s resources and capabilities, as well as its top management decisions. Research conducted by Gioia and Chittipeddi (1991) concluded that change is not only needed at the time of a crisis, being an important part of a strategic reorientation process that guarantees firm’s survival in the long-run. Authors such as Teece (2007) and Zollo and Winter (2002) agreed that a firm’s dynamic capabilities have a direct connection to its success. Zollo and Winter (2002) further described the structured, stable and persistent aspect of dynamic capabilities. Barreto (2010) defined them as “the firm’s potential to systematically solve problems, formed by its propensity to sense opportunities and threats, to make timely and market-oriented decisions, and to change its resource base”. According to Kapferer (1997), the definition of luxury products can be described as “those that provide extra pleasure and flatter all senses at once and expand on this description to argue that psychological benefits, rather than functional benefits, provided by luxury products are the key distinguishing factors that set luxury products apart from non-luxury products”. Due to the specificity of the luxury consumer and the important hedonic side of the purchase, luxury brands