Creating Shared Value: A framework for the luxury sector

Creating Shared

Value

A framework for the luxury sector

1.  Introduction

2.  Environmental analysis

3.  SWOT analysis of the luxury sector

4.  Taxonomy

5.  The evolving value of work

6.  The three dimensions of shared value

7.  Connecting the brand to the individual

8.  Meaning as a driver of value

9.  Balancing profit and profiteering

10.  Conclusions

1. Introduction With “luxury” used to label anything from cars to cookies, what can luxury brands do to demonstrate their value beyond fiddling at the margins of what already exists in terms of heritage, craftsmanship and customer service? When companies consider their place in the community and their social responsibility, is this about mitigating – but still enduring – negative externalities, or can they strengthen their position by actually driving the progress of society? Through their understanding of emotional appeal, quality and reputation, luxury brands have the potential to be agents of change. They can lead other businesses and individuals to ever more socially responsible and sustainable practices. This consolidates luxury brands’ position and stature by making them the target of a new kind of aspiration. This document presents a framework through which luxury brands can create shared value. We begin by outlining the factors that make shared value a condition for their continued success. We then explain how shared value takes existing practices to a higher level, by integrating it more deeply into corporate identity, communications and business processes.

© NAIR-SAFIR 2011

Creating Shared Value: A framework for the luxury sector

2. Environmental analysis The convergence of technological change and the current economic situation has brought us to a turning point. The damage caused by the economic crisis will remain for a long time to come. A slow and uneven recovery is causing prolonged insecurity and greater socioeconomic inequality. At the same time, people are questioning values and priorities that disproportionately favor material well-being. This atmosphere has negative consequences for popular solidarity and trust. A 2011 study by Burson-Marsteller found that trust in CEO’s and governments has fallen by 50% in the last year. Changing value systems and low trust mean a heightened level and new type of public scrutiny. Already, there is a sense that instead of addressing the roots of the crisis, public figures prefer to focus on easy, short-term solutions. The continuing evolution of technology facilitates this scrutiny by increasing access to information and the speed of its transmission. It exposes organizations to unprecedented visibility and transparency, putting pressure on them to bring their actions in line with changing expectations. To address these challenges we need frameworks and practices that derive from shared human values to engage stakeholders in developing solutions.

© NAIR-SAFIR 2011


Normative Objective Fo

rces

Political •  Scramble to manage the crisis “domino effect” •  Few consensus ideas about the way forward •  Increasing regulation of business conduct •  Vested interest groups blocking reform efforts •  Lack of pragmatic and trusted leading figures

A need for innovation and integrity

Economic •  Ongoing uncertainty and instability •  Fewer sure values and sources of growth •  Cost-cutting reorders spending priorities •  Unemployment and austerity taking social toll •  Indicators that the crisis will change shape A need for substance and reliability

Tren

ds

Societal •  Growing fear and mistrust about the future •  Perception of an unfairly privileged minority •  Crisis of confidence in “The Establishment” •  More emphasis on individual rights and voice •  Institutions and elites called to responsibility

A need for trust and solidarity

Technological •  Explosion of new sources of information •  More channels for exchanging ideas •  Greater transparency of institutions •  Speed increases competitive pressures •  More complexity in control of messages A need for sincerity and engagement

3. SWOT analysis of the luxury sector The luxury sector has prospered despite the economic climate. This performance came from the strength of market segments that have avoided the worst of the crisis. But record sales in 2011 have not prevented concern about future luxury revenues, mostly on fears of debt loads affecting banks and a slowdown in Asian markets. As economic uncertainty continues and developing markets reach maturity, the luxury sector will need to generate more substantive appeal. Taken together with the contextual pressures to which all brands are subject, a paradigm shift is emerging in business. Here, the luxury sector has a role to play. By adopting an industrial model, luxury firms have exposed themselves to market requirements that pander to short-termism. Yet, their understanding of emotion, quality and reputation is rooted in the long-term pursuit of fundamental values. Through their own cultural influence, and through their access to other influencers, they can lead businesses and individuals to ever more socially responsible and sustainable practices. Refusing this leadership role would be negligent, not only in terms of their social responsibility, but also in terms of their own self-interest.

© NAIR-SAFIR 2011


Positive Negative In

tern

al

Strengths •  Luxury touches emotion, attracts and inspires •  Luxury embodies quality and longevity •  Luxury symbolizes improvement and optimism •  Luxury firms are in a strong financial position •  Luxury has visibility and access to power

Luxury is a source of influence and motivation

Weaknesses •  Growth relies too heavily on opportunism •  Vision not consistent among all stakeholders •  The notion of luxury is overused and diluted •  Luxury highlights privilege and draws envy •  Luxury is the first expense cut back in a crisis Luxury’s appeal and power are inconsistent

Ext

erna

l

Opportunities •  Luxury’s appeal can serve as a consensus point •  Heritage and design, together, can shape culture •  Aspirational values can influence behaviors •  Vision and know-how can be tools to educate •  Influence can cause positive change

Luxury brands can assert cultural leadership

Threats •  Temptation to pander rather than lead values •  Affiliation of luxury with privilege and excess •  Luxury consumption becomes embarrassing •  Evaporating sources of growth and demand •  Luxury brands can lose meaning Luxury brands become irrelevant to people

4. Taxonomy Companies take many paths in their efforts to conduct business conscientiously. But these paths can lack a common vision and unifying direction. Compliance with corporate governance and sustainability standards is often mistaken for social responsibility which, in turn, gets reduced to eco-friendliness or philanthropy. Furthermore, firms rarely exploit the synergies between these. In fact, there is a hierarchy and logic to these terms, which starts with the way an organization is run, and expands out to how it sees its mission. Some corporate governance and sustainability elements are now law, based on codes like the OECD Principles for Corporate Governance and the UN Global Compact. Social responsibility, which includes a belief in creating benefits for society, remains voluntary, with a range of definitions. The International Standards Organization has made a first effort to codify these with the ISO 26000 Guidance on Social Responsibility. Encompassing all of these is the notion of shared value. An approach recently emerged from Harvard Business School, shared value is the creation of economically viable societal benefits. It seeks to align societal and business interests, where solving society’s problems becomes the mission and the competitive advantage of an enterprise. Shared value expresses itself through conception, design, creation and operations, all of which are communication.

© NAIR-SAFIR 2011


Corporate governance Sustainability Social

responsibility Shared value

Shared value

“Creating societal benefit is a powerful way to generate economic value for the firm.”

Michael Porter, Harvard Business School

Social responsibility

The ideology that an organization is obliged to act to benefit society

Sustainability

Meeting present needs without compromising the ability of future

generations to meet their own needs

Corporate governance

The system by which companies are directed, as it applies to stakeholder interests,

responsibility, transparency and integrity

5. The evolving value of work Technology frees people’s productive capacity from existing limitations and thus transforms the nature of value creation. Where value was once product-based, it is increasingly derived from transforming knowledge into new ways of imagining the world. As we get further from a product model, we see the emergence of one where the community rewards individuals who contribute to a higher level of collective well-being. Brands have an important role in this dynamic. Externally, they encapsulate and communicate organizations’ contribution to the community. Internally, they serve as drivers for individuals’ affiliation with this contribution through the work they perform. Companies need to link the two by defining their mission in a way that highlights their contribution and merits affiliation. It engages the individual on many levels in creating something meaningful to both the provider and the recipient. The sense of purpose generated by this relationship becomes an ingredient of fulfillment for both. Firms must empower their people to assume the responsibility inherent in the unbound creativity that results in leadership. It is at this point that work looks (and feels) less like labor and more like art.

© NAIR-SAFIR 2011


Past Present Future

Value

Brand

Economic driver

Role of money

set by market

set by stakeholders

set by community

based on product

based on affiliation

based on contribution

Product purpose

Work

Extent of vision

labour & production

knowledge & synthesis

art & leadership

end means consequence

utility experience fulfillment

immediate strategic limitless

industry technology information

6. The three dimensions of shared value Shared value seeks to meet the needs of business and those of the community through the same actions. When these are aligned, the course of action is clear. But there are many cases where the interests diverge, if only on the surface. Resolving this tension means recognizing that both the enterprise and the community are collectives of individuals. Adam Smith’s “Invisible Hand of Economics” theory says that if each individual acts in their own self-interest the whole community will prosper. But it also acknowledges that the individual prospers when the community itself is strong. Elaborating on this, John Maynard Keynes noted that the sum of individually rational actions does not necessarily move society towards efficient equilibrium, and called for a role for public policy to correct the imbalance. Truly self-interested behavior then is a conscious act, including an awareness of and responsibility for the consequences of one’s actions on the community and over the long term. People intuitively act this way in their private lives. How strange that this awareness breaks down at the institutional level, and especially in a business context, in the face of systemic constraints and efficiency needs. Leveraging the personal dimension in both the business and societal spheres allows the formation of the solidarity and consensus necessary to pursuing shared value.

© NAIR-SAFIR 2011


Consensus & commitment

Sustainability & engagement

Humanity & solidarity

Shared value Personal

values Self-actualization Accomplishment Validation

Value to society

Ethical leadership

Community

enhancement

Responsibility

Business value proposition

Product offering

Return on investment

Employment

7. Connecting the brand to the individual Individuals share an essential structure of needs based on our natural origins and the evolution of the human psyche. Abraham Maslow’s “Theory of Human Motivation” presents these in a concise and useful form, which is a familiar tool in business. Viewed from above, Maslow’s Hierarchy can be seen as a set of concentric circles, providing an opportunity to establish parallels between the layers of human needs and the common elements of a brand platform. Translating the brand to the individual experience shows how it can be the basis for need fulfillment on many levels. Businesses are often conceived in terms of their utilitarian actions; the manifestation of their value proposition to customers. More sophisticated models seek to frame these first in terms of an overarching mission, with vision and values making the transition to the execution of actual work. Shared value is partly an emotional intelligence appeal, and luxury brands operate at the emotional and business nexus. A brand platform centered on the individual puts values at the core. Defining the Self first gives meaning and direction to all the other elements as a source of motivation.

© NAIR-SAFIR 2011


Values

Vision

Mission

Means

Actions

Self- actualization

Esteem

Belonging

Security

Physiological

Hierarchy of needs Brand platform

8. Meaning as a driver of value A recent study by the Boston Research Group found that 27% of corporate bosses and only 4% of employees believe their firms are inspiring places to work. The lower figure is perhaps less surprising: if those responsible for a firm’s governance don’t find it meaningful, can those that work for them care about it at all? In a transactional view of work, the parties meet to take from one another. Money and utility, both of which can be found elsewhere, are the basis of this model. As a result, a company’s resources are heavily taxed just to feed a narrow stream of returns. A shared value model doesn’t seek to replace these transactions, but to augment them by giving meaning to the whole process. This contributes to individuals’ sense of fulfillment. Stakeholders are no longer beholden to one another in the moment. The brand no longer has to buy their loyalty. Instead, they voluntarily and continually give back to it in the form of the strength of its position in the community, the trust it enjoys and its consequent influence. Self-interest still drives this approach, but seeks to increase the total amount of value in the system.

© NAIR-SAFIR 2011


Brand Employees Customers Owners Community

Profits

Investment Labor

Salary

Product

Marketing

Purpose

“Give” model

“Take” model

Money

Leadership

Prestige

Motivation

Solutions

Loyalty

Contribution

Expectations

Support

9. Balancing profit and profiteering Companies need to maximize profits. Investment in increasing the whole amount of value available to society provides the greatest returns. Squeezing performance at the cost of others while using company resources to benefit only a few stakeholders is detrimental to organizational health. McKinsey & Company found that firms with strong organizational health profiles outperform those with weak profiles by 1.5 to 2.2 times in areas such as profitability and market valuation. Furthermore, Allianz Global Investors found that the shares of companies recognized for responsible business practices outperformed market indicators from 2005 to 2010 by up to 2%. It also found that companies not benefiting from this recognition underperformed the markets by as much as 2.5%. Providing benefits to parties all along and around the value chain achieves a larger and more sustainable increase in performance and shareholder value. Excessive emphasis on “getting the numbers up” on one hand, and rewards that are too narrowly distributed on the other, erode the organization with immediate and destructive consequences. There is no one formula for creating shared value. It requires each organization to develop its own calculation of financial, cultural and psychological factors to define maximum value creation.

© NAIR-SAFIR 2011


Created value

Demand premium

Creativity & synergies

Motivation & risk mitigation

Squeeze performance

Business as usual

Shared value creation

Fixed costs

Variable costs

Innovation

Relationships

Opportunistic expenses

Return Investment

Profiteering

Shared value nourishes the firm by nourishing its environment. Shared value makes brands complete, unique and inimitable. Shared value takes luxury brands from desirable to indispensable.

10. Conclusions •  The demand for shared value comes from the growing awareness of firms’ role in the community

and the needs generated by the current crisis environment.

•  A focus on strengthening the community brings benefits to a company by enhancing reputation, trust, engagement and motivation. These contribute to performance through productivity, competitiveness and risk mitigation, and ultimately to the share price.

•  Luxury firms have a vested interest in adopting a shared value model. Their character accounts

for a larger part of their reputation than their products. Yet the spread of luxury makes it difficult to offer value propositions that are substantively different from those of competitors.

•  Aspiration gives luxury brands the power to lead. Is it enough for them to be leaders of the status quo? Luxury brands have the mission and raw material to incite innovation and progress towards well-being. Refocusing aspiration from affiliation with a product to affiliation with a purpose turns luxury consumption from a conspicuous act into an intelligent act.

•  Realizing shared value emanates from an honest assessment of the brand’s relationships with its stakeholders all along the value chain. Shared value methods leverage the power of branding and communications to reach the individual and earn their buy-in on a personal level.

•  The key to creating shared value is to build confidence in society by empowering individuals and helping them be responsible for their actions.

© NAIR-SAFIR 2011


Acknowledgements and copyright We thank the following individuals, whose perspectives have enriched our work: Yaffa Assouline, Assouline Media; Bob Berkowitz, The Dilenschneider Group; Bruno-Roland Bernard, LVMH; Anne Bugugnani, accessibility and design specialist; John Hope Bryant, Bryant Group of Companies; Christopher Chouinard, investment advisor; Micael Dahlén, Stockholm School of Economics; Frank Furedi, University of Kent; Jeremy Galbraith, Burson-Marsteller; Melissa Gonzalez, Cove Strategy Non-Profit Consulting; Seth Godin, author; Laurent Gounelle, author; Cari Guittard, Global Strategic Partners; Julie Harris, communications and social media specialist; André Kolasinski, LuxuryCulture; Philippe Khyr, Lagardère Active; Mark Kramer, FSG Social Impact Consultants; Alain Lardet, Designer’s Days; Henrik Månsson, Hotel d’Angleterre Copenhagen; Pascal Marquenet, Wacoal; Thomas Miller, Bloomberg; Frédéric Morales, Van Cleef & Arpels; Joydeep Mukherji, Standard & Poor’s; Elizabeth Muller, Muller & Associates; Richard Muller, University of California at Berkeley; Ramesh Nair, designer; John Paluszek, Ketchum; Michael Porter, Harvard Business School; Florence Rambaud, LVMH; Joseph Salah, Parfums Christian Dior; Roland Schatz, MediaTenor; Lord Skidelsky, UK Parliament; Irene Smolarski, psychotherapist; Diego de Sola, Inversiones Bolívar and Glasswing International; Catherine Tanelli, management and diversity specialist; Rochelle Weitzner, Gurwitch Products; Adriano Perotti (d. 2011), MPA Communications; Joel L. Saphir (d. 2010), investor. All materials contained in this document are the intellectual property of the authors except where noted otherwise. We encourage its distribution and use with proper crediting. Please contact us for any further information via www.nair-safir.com.


Authors Nair-Safir advises firms on the concept, communication and realization of their brands in terms of shared value. We help companies leverage the value they bring to people, over and above their value as a business. This forms the basis of a work culture and community with the brand at its core. The results are enhanced employee motivation, greater customer engagement and better performance for shareholders, all rooted in positive impact on the community. Rachna Joshi Nair specializes in implementing business strategies through forecasting, product development, sourcing, merchandising, market entry, training, retail, and customer relationship management. She has worked in the apparel, watch and jewelry, and hospitality industries, in both eastern and western cultures, with brands as diverse as Louis Vuitton and May Department Stores. Rachna earned an MBA in International Luxury Brand Management from ESSEC Business School, Paris in 2000 and a BSc in Textiles from SNDT University, Pune, India in 1990. Misha Pinkhasov specializes in communication strategy, stakeholder engagement, community relations and consensus building. His fields are economics, international relations, public policy, financial services, and the media, having worked at the OECD and Standard & Poor's, and edited and written for luxury consumer and industry publications. Misha earned an MBA in International Luxury Brand Management from ESSEC Business School, Paris in 2000 and a BS in Consumer Economics from Cornell University, New York in 1996.

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Creating Shared Value: A framework for the luxury sector