Nottingham University Business School

MSc Programme

2015/16

Group Coursework Coversheet – Electronic

Submission

[Corporate Strategy N14105]

GROUP MEMBERS:

[Pierfrancesco Bresolini Eibenstein]; Student ID: [4257378]

[Sebastian Kummle]; Student ID: [4262679] [Rohan Midha]; Student ID: [4246092]

[Sebastian Noll]; Student ID: [4252049]

The humanistic approach of Brunello Cucinelli: story and analysis of

an Italian fashion company

Table of Contents

Introduction ............................................................................................................................................................ 1

1 Brunello Cucinelli: the person, the company and his philosophy ............................................. 2

2 Resource-Based View (RBV) ..................................................................................................................... 6

2.1 The model ................................................................................................................................................... 6

2.2 Application ................................................................................................................................................. 6

3 SWOT Analysis ................................................................................................................................................ 8

3.1 The model ................................................................................................................................................... 8

3.2 Application ................................................................................................................................................. 8

4 Porter’s Five Forces ................................................................................................................................... 11

4.1 The model ................................................................................................................................................ 11

4.2 Application .............................................................................................................................................. 12

5 Porter’s Generic Strategies ..................................................................................................................... 14

5.1 The model ................................................................................................................................................ 14

5.2 Application .............................................................................................................................................. 15

6 Our opinion about the future of the Company ................................................................................ 16

Conclusion............................................................................................................................................................. 18

References

Table of Figures

Figure 1: Own illustration based on Penrose (1959) and Wernerfelt (1984) .............................. 6 Figure 2: SWOT Analysis, own illustartion based on Humphrey (1960) ........................................ 8 Figure 3: Porter's Five Forces (Porter, 1979) ......................................................................................... 11 Figure 4: Porter's Generic Strategies (Porter, 2008: 39) .................................................................... 14

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Introduction

Recent years were influenced by the consequences of the financial crisis which showed

the failure of an entire business model. There were many ethical issues during the

financial crisis of 2008 and the focus was mainly on personal interests instead of the

stakeholders and society's well being. In the famous movie “Wall Street” from 1987 the

main personage, Gordon Gekko said that “greed is good”. But since the financial crisis

this point of view has been highly questioned. However, the case of the italian luxury

fashion company, Brunello Cucinelli, shows that it is possible to run a successful business

while taking into account ethical and moral principles. In fact, especially during these

years, it has been vital to have a leadership approach focused on shared values (Porter

and Kramer, 2011) and positive contribution to the whole society, in order to gain a win-

win strategy for the business and the stakeholders.

The philosophy and humanistic approach of Brunello Cucinelli enabled him to create a

big family instead of ‘just a place to work’. The positive financial results combined with the

high happiness of the employees show that his leadership approach is still currently

working really well. However, these kind of companies founded and run by just one person

could have great problems and concerns about the future sustainability and business

continuity. For instance, if the founder dies, the organisation would not only lose their

leader, they would lose their whole culture (Beckhard and Dyer, 1983). This could be

imagined as a wonderful car without the engine. This issue in the long term strategy is

characterized by the dependency of the company on the founder. Especially in Brunello

Cucinelli’s case this risk is higher due to the total overlapping between the entrepreneur

and his company.

The purpose of this essay is to analyse the various positive and negative aspects of the

way in which Brunello Cucinelli manages his organisation with a specific focus on the

strategies and business sustainability. The essay proceeds as follows: section 1

describes important background information about Cucinelli’s life story and company’s

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story and philosophy. In Section 2 a Resource-Based View analysis is undertaken, and

then the SWOT in section 3. Section 4 shows the results of Porter’s Five Forces while

section 5 is considering Porter’s Generic Strategies. Finally, in section 6 our opinion about

the future sustainability is presented, followed by the conclusion.

1 Brunello Cucinelli: the person, the company and his philosophy

Brunello Cucinelli was born in 1953 in a small village with just a few hundred inhabitants,

in the province of Perugia (centre of Italy). He was a son of a farmer family, growing up

in really poor conditions and having neither electricity nor running water. However, he still

has a good memory of these genuines and happy times. They were poor but happy

(Nalley, 2013). After that, when he was just a teenager, the family moved from the

countryside to the city where his father got a job in a cement factory. After this point,

everything became worse for him. In fact, two aspects of this period of life really influenced

the young Cucinelli (Nalley, 2013). The first one was at school where the classmates

bullied and humiliated him for his rural accent and poor style in clothing. The second one

was the memory of his father’s sadness after work. Indeed, his dad was constantly

humiliated in the workplace by his boss. Based on these experiences Cucinelli started to

develop the most important dream of his life; “I don’t know what I will do with my life, but

whatever it is, I will do it for the dignity of humankind” he said (Nalley, 2013: 81). After

passing a diploma as a building surveyor, he started studying engineering at university

but then dropped out. The sentiment of doing something “for the dignity of humankind”

led him to the founding of his company in 1978.

Luciano Benetton in those years gained success with the production of multi-coloured

woollen sweaters that it was an innovative idea at the time. Cucinelli was inspired by this

idea and also decided to produce colored cashmere sweaters. He chose cashmere as

the material because he “wanted to manufactured something that never goes waste.

There is something precious about cashmere. Very rarely you throw it away. It has the

fascination of eternity. You either pass it along, or you find another use for it, but there is

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something eternal about it” (Koh, 2015: 86). He started his business alone, with neither

money nor employees. At this stage, the value of trust came into play. Cucinelli asked a

friend from his village for 20 kilograms of cashmere but did not have any money. This was

not a problem for his friend who gave him the cashmere and told Cucinelli that he could

make the payment when he has money (Nalley, 2013). In order to sell his first 53

cashmere sweaters, he went to the north of Italy where the people paid in advance. Since

that point, the business has grown into luxury fashion company with a current market

capitalisation of more than 1 billion euros. In 2015, Brunello Cucinelli made 415 million

euros in revenue (Cucinelli, 2016), employed 1,400 people and had 3,000 independent

contractors from the region (Proietti, 2015). The company went public at the Milan Stock

Exchange in 2012. Cucinelli’s humanistic approach was highly valued by the market,

leading to a 50% increase in the stock price at the first day of trading (Fagnani, 2012;

Roberts, 2012). From the 158 million euros he raised through the I.P.O., he used 5 million

euros of it to pay each of his employees a bonus of 6,385 euros (Bersani, 2012; Rose,

2012). This example provides an indication of the way he treats his employees which is

further emphasised by his following quote; “If I give you the right conditions to work, and

I put you in a beautiful place, where you feel a little bit better about yourself because you

know your work is being used for something greater than producing a profit, maybe you

will get more creative; maybe you will want to work more” (Mead, 2010). He pays his

workers 20% above the average of the industry (LaRocca, 2014). Moreover, he provides

his employees with outstanding working conditions and facilities, surrounded by friendly

environment and shared values. An emphasis is placed on the importance of family and

socialising. In fact, he does not allow his employees to work after 5.30 pm because they

should spend enough time with their families and need their rest. Furthermore, Brunello

Cucinelli usually eats with his employees, providing them an extensive, high quality,

handmade lunch for just a few euros (Davis, 2015). This underlines his sense of the

family. Cucinelli’s approach to leadership also played a key role in overcoming the

financial crisis of 2008. Whilst other companies where firing employees, cutting wages

and reducing investments, Brunello Cucinelli brought all his employees together and

declared: “tomorrow will be another day. Don’t be scared. We’ll all work harder and be

more creative” (Gwyther, 2014: 40). As a result, Brunello Cucinelli himself found that the

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2009 collection was the most beautiful collection ever, leading to the company’s record

revenues at the time. “This is because people felt esteemed” said Cucinelli (Gwyther,

2014: 40). Here, it is important to highlight that the trust between employer and employees

rocketed. They all joined together and triumphed against the huge financial crisis and

made the personal relationships between them flourish.

Another important aspect about this company is the ‘Brunello and Federica Cucinelli

Foundation’ where Brunello is donating 20% of his personal profits every year (Gelardini,

2014). The money flows into different kinds of social projects. For example, the foundation

is closely connected with Solomeo, the medieval hamlet where the company is based. In

fact, the hamlet was totally restored by the Foundation and they also built a theatre which

Cucinelli is really proud of. In this theatre, they organise many social and cultural events

for employees and their families in order to strengthen the relationships between the

people. In addition, to enhance the cultural awareness of each employee, the foundation

pays 500 to 1,000 euros per year to each of them. This money is to be spent on cultural

activities such as cinema, books and theatre (Veneziani, 2016). The Foundation also

sponsored with 2 million euros the restoration of an old monument in Perugia and the

construction of a hospital in Malawi (LaRocca, 2014). However, the most strategically

important project of the foundation is the School of Craftsmanship. It was founded in 2013

with the aim to transfer technical skills from the old experts to the new young workforce

(Berbenni, 2013). The School made a significant contribution to the company’s ability of

maintaining high quality products without risking lack in changing generations. It also

aimed to regive dignity to manual labour (Koh, 2015). All these project increased the

relations between Cucinelli and Solomeo, and between Cucinelli and the people.

It should be noted that in this company, the human being is at the center of the

organisations, and the richness generated by the company is split between the various

stakeholders. The leadership and the personality of Cucinelli is vital. In fact, he is a

traditional old man, humble, religious and fair. He is inspiring and motivating his people

by giving them a sense of family and a shared mission. Overall, there is a strong

relationship between employer, employees and the location in Brunello Cucinelli’s

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company, that has led to the feeling of togetherness and a really high level of motivation

and shared values. This approach is supported by the virtuous cycle of leadership which

supports the development of a sense of identity and the involvement of people (Starkey

and Hell, 2011).

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2 Resource-Based View (RBV)

2.1 The model

The model, Resource-Based View is often used in order to investigate how firms compete

(Peteraf, 1993). The Resource-Based View uses the VRIO characteristics which stand

for Valuable, Rare, Inimitable and Organised.

Figure 1: Own illustration based on Penrose (1959) and Wernerfelt (1984)

2.2 Application

Brunello Cucinelli is a highly valuable person because of his strong leadership. His brand

and style of leadership is rare and inimitable. He also puts his ability into practice whilst

exploiting his capabilities. Although there are companies that exist which are family

focused whilst letting employees get involved with the company, Brunello Cucinelli made

this happen in a way that is stronger than other companies. This adds value to the working

efficiency of the employees, especially their motivation. The location of the company also

possesses all of the characteristics of VRIO; The location is rare and unique in the village,

Solomeo. The buildings with the Italian hamlet are inimitable in the sense that another

company cannot gain this characteristic without locating to the area. The unique location

adds value to the company and above all his products.

There are more strengths in Brunello Cucinelli’s company, such as the selected and

well paid suppliers, the high salaries and the outstanding facilities. These are all

7

valuable to the company and partially rare in today’s competitive industry, however,

these characteristics are imitable.

Overall, there are many factors and characteristics that make Cucinelli’s company

highly competitive in the current environment.

8

3 SWOT Analysis

3.1 The model

In 1960, Humphrey develop the SWOT analysis. With the SWOT analysis, we can focus

on the internal factors of a company, putting particular emphasis on cases of strengths

and weaknesses, and on the external factors as in the cases of opportunities and threats

with the aim to better understand a business (Humphrey, 1960).

Figure 2: SWOT Analysis, own illustartion based on Humphrey (1960)

3.2 Application

In our specific case study, Brunello Cucinelli’s company has many strength factors.

Cucinelli, the founder, is the most important of those. In fact, he is the name and the face

of the company. However, this strong relation between the founder entrepreneur and his

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company, combined with a really weak corporate governance, is a relevant weakness of

the firm, especially in the inevitable event of his death or inability to continue working.

Another strength is brunello cucinelli’s approach to leadership that has created strong

shared values and a unique relationship with his employees and, more generally, the

stakeholders of the company. However, as is normal for an Italian business run by a

majority shareholder, there are many conflicts with trade unions. This could be a problem

for the future of the employees, because at the moment, Cucinelli is the ideal boss.

However, in the future, if this strong relation changes between the employees and the

boss, employees would not have the power to defend themselves. On the contrary, in a

Germany, the relationships between businesses and trade unions are not a weakness

but a strength due to the collaboration between unions and employers. Furthermore, due

to the use of leather and furs, Cucinelli is commonly criticised by animal associations.

The location is a strategical point of strength. In fact, Solomeo is a unique ancient hamlet

in Italy. Cucinelli himself said that his products do not have the same attractiveness and

beauty if produced in China instead of this magic place, Solomeo. Basically, he is not just

selling clothes, he is selling an idea! He is selling a story behind these specially

manufactured clothes. Furthermore, the location impressed all the investors that came to

Solomeo to meet Cucinelli during his pre-listed period. This medieval village adds value

to the brand. However, the location could hide a weakness. More specifically, it is not

easy for the company to attract young new talent to work in a small village such as

Solomeo. Of course, talented young people are more attracted by big cities such as Milan,

London or New York instead of the small Solomeo. Also thanks to Cucinelli’s leadership,

the firm has demonstrated that his framework and his organisational culture could lead

them to a constant growth. Meanwhile, almost all the other businesses in the world are

losing value and revenue. This was the case during the financial crisis of 2008. However,

Brunello Cucinelli’s company is not a diversified business such as Armani, that is also

investing in HORECA (hotels, restaurants and cafès) and wellness spas, or LVMH, that

is the holding owner of many important luxury brands from clothes, to watches, to wine.

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From the perspective of the external environment, there are many opportunities for the

firm to follow. Of course, in this century characterized by the economic growth of emerging

markets and the Internet, Cucinelli could increase his focus on online retailing and open

new monobrand shops in emerging countries where people desire high quality and luxury

goods. This could compensate for the threat from the uncertain economic future of

established economies such the US and EU. Also, like Armani and LVMH, Cucinelli could

use his strong and well positioned brand for other kind of businesses in order to diversify

the risk. In fact, the fashion industry is characterized by fast changing trends. Moreover,

due to the absence of switching cost in this industry customers can change to other

brands very quickly. As we are going to analyse later, the industry faces fierce

competition.

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4 Porter’s Five Forces

4.1 The model

Figure 3: Porter's Five Forces (Porter, 1979)

Porter’s five forces is a framework developed by Michael Porter that analyses the level of

competition within industries (Porter, 2008). The model investigates the threat of new

entrants, bargaining power of buyers, bargaining power of suppliers and threat of

substitute products or services in order to measure the rivalry among existing competitors

(Porter, 1979).

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4.2 Application

Brunello Cucinelli is a company that is operating in a ‘Red Ocean’ sector. This is because

there are many existing competitors in the fashion industry. However, the threat of new

entrants in Cucinelli’s particular segment can be considered to be rather low. Brunello

Cucinelli is a very strong brand and established in the market, hence the company has

got a big network of suppliers and customers as well as a good reputation. Due to this

fact, new entrants in the luxury fashion industry can be considered as a very low risk.

The bargaining power of buyers is, in general, heavily influenced by the amount of

customers. As Brunello Cucinelli is a luxury fashion brand that is not affordable for

everyone, the target customers are a much smaller group compared to other fashion

brands. Furthermore, customers in the fashion industry have no switching costs and

customers can therefore easily change their purchasing behaviour, buying their products

from a different company. According to Hill and Jones (2011) the bargaining power of

buyers is high when the products are produced by several small companies for a small

amount of customers and when the switching costs are low for the customer. In addition

to that, the customers are powerful if they are able to purchase their products from many

different companies which is of course the case in the fashion industry (Hill and Jones,

2011). In addition to this, Brunello Cucinelli is continuously obliged to follow the trends

and follow the customer’s need. Due to these facts, its customers are powerful and the

bargaining power of buyers is classified as high level for Brunello Cucinelli according to

our analysis.

As opposed to the bargaining power of buyers which is influenced by the amount of

customers, the bargaining power of suppliers is influenced by the amount of suppliers. In

the early stage of Cucinelli’s company history, the company was focused on cashmere

products only. Hill and Jones (2011) mention that the bargaining power of suppliers would

be very high in this case. However, Brunello Cucinelli’s product portfolio currently offers

a huge variety of different products and the company therefore needs a large range of

suppliers to produce their products. Contrary to previous years, in times of globalisation,

companies are nowadays able to purchase their products worldwide without strong

13

commitments towards suppliers. Also machines to produce their products are available

in large quantities on the market. Hence, Cucinelli is, from our point of view, not reliant on

certain suppliers. This means that the bargaining power of suppliers is classified as low

for Brunello Cucinelli and in this particular industry.

For the threat of substitute products, we firstly need to define what can be considered as

a substitute product for luxury fashion clothes. Low quality products cannot be classified

as true substitutes in our opinion as they are located in a completely different segment.

Hence, exclusively tailored clothes and suits can be considered as a threat of substitutes

and the risk can be therefore seen as low for this industry.

To sum up, the competition within the luxury fashion segment is very high (‘Red Ocean’)

and the amount of customers in this segment is limited.

The importance of the sixth force also needs to be considered in this case study. The

sixth force represents ‘other stakeholders’ which is one important point when considering

the strengths of Brunello Cucinelli. In fact, the relationship between Brunello Cucinelli and

his employees is of great importance for the company. The good relationship between

the company and its employees creates shared value, motivation and loyalty. This can

be summarised as a sense of family inside the company. Another important stakeholder

is the local community of Solomeo who are benefitting from Cucinelli’s charity activities.

Furthermore, Cucinelli is taking care of his suppliers personally, by visiting his suppliers

in order to check the quality of work and to make the people feel appreciated. Brunello

Cucinelli owns 57% of the company while the remaining 43% is owned by investors. Thus,

it is important to highlight the relationship between him and the other shareholders. In

fact, Cucinelli strongly believes in a constant and naturally stable growth and he is

expecting that his investors remain with him over the long term. However, it is also

important to mention that his relationship with trade unions, as usual in Italy, has a bad

history. In fact, Cucinelli did not want trade union representation inside his company and

they occasionally try to inhibit him instead of cooperating

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5 Porter’s Generic Strategies

5.1 The model

In order to be successful, a business should avoid being “stuck in the middle” as Porter

(2008) showed. According to him, a company can apply different strategies in order to

send a clear message to the customers and to achieve a clear position in the market. One

strategy a company can follow is cost leadership which could be achieved by keeping

costs low in order to offer competitive prices to the customers. The counterpart of this

strategy is differentiation which means that the company offers a distinctive product to its

customers. Both strategies can be applied either industry-wide or focused on a particular

market segment (George, Jones and Sharbrough, 1996).

Figure 4: Porter's Generic Strategies (Porter, 2008: 39)

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5.2 Application

Brunello Cucinelli offers a unique kind of product to a specific customer segment. The

special story of the company, the extremely high quality of materials and the unique

location in which the goods are produced give them a specific character that allows

Cucinelli to charge a premium price. The niche that Cucinelli is focusing on is men and

women who have the desire to buy something special that is only known by an elite group

of people. It is important to notice that the major visible characteristic of the products is

the absence of the logo in the visible parts of the product. It gives the buyer the perception

of buying something special without flaunting it, which is particularly desired by elite

people. Overall, Cucinelli does not just sell clothes, he sells the idea behind them, he sells

a sense of identity. He is selling the ‘real thing’ made in Italy. During the financial crisis

he chose to narrow down his focus on the elite. In fact, he answered to the financial crisis

with increasing the quality, increasing the price and amplifying the local production in

Solomeo without relocating the production to somewhere cheaper, like many other firms

did.

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6 Our opinion about the future of the Company

As recent results show, the company is particularly successful. However, there are some

relevant issues that call the sustainability of the company into question. The most

significant risk is linked to the dependency of the company on Brunello Cucinelli who is

the founder, the current CEO, the Chairman and the whole face of the firm. Even though

he is already 62 years old, he has not determined a clear successor for himself so far. If

Brunello Cucinelli dies, there could be no one in charge of the company who is able to

run and maintain the business like he does, especially with maintaining the values that

he has created. Moreover, the company has a really weak corporate governance

structure, in which Cucinelli is making all of the key strategic decisions instead of

cooperating with the board of directors. The board members are also not highly skilled

people who could guarantee some positive contribution and commitment to the company.

Cucinelli does have two daughters, however, as he declared: “you cannot inherit a

company. You can acquire the ownership but not the ability to run it” (Gwyther, 2014: 40).

In this respect, it is possible that he thinks the stock market could be a possible custodian

of the company in the future. However, this will not guarantee that the business will be

run with the existing core values and philosophy which could lead the company to a

change in its identity. The firm is currently doing very well as can be seen in this report.

But by looking into the future and putting all of that into context; the fact that the fashion

industry is rapidly changing and therefore requires a strong leadership, the uncertainty is

in regard to the future concept of the company that could represent an existential threat.

This risk will be strengthened by the potential issue that Brunello Cucinelli could not be

able to attract highly qualified people, such as top managers and outstanding designers

since the company is based in the village of Solomeo and qualified people prefer to live

in metropolitan regions.

In order to be able to handle these future problems, there could be some possible

solutions. The improvement of the corporate governance structure would be the first step

to prevent potential risks to the company by enabling it to face negative events. Moreover,

Brunello Cucinelli needs to begin a process of detachment from his company.

17

For example, this could be done by nominating a new CEO and other new managers. It

has to be noted that the detachment process would take a long time and a lot of work,

especially if Cucinelli wants to transfer his philosophy as an inheritance to the new

executives. Finally, the issue regarding the talent attraction could be solved by opening

other operative offices in big cities such as Milan, London or New York, where his main

markets are. With regards to the extension of his operations, Cucinelli should also

consider increasing the presence of his company in emerging markets which offer

significant growth opportunities, while maintaining the factory production only in Italy.

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Conclusion

A leadership approach that generates shared values and involvement of employees is a

vital aspect in order to create a unique workplace, in which people are highly committed

to their company. It creates a sense of identity that drives the success of a business, even

in times of crisis. This is exactly what is happening in the Italian fashion company Brunello

Cucinelli. However, the dependency of the company on the founder represents a

significant risk for the future sustainability of this business.

Our work applied several theories from the area of Corporate Strategy in order to analyse

the main characteristics of the business, its environment and its long-term perspective. It

was concluded that although a humanistic leadership approach is extremely important to

every stakeholder, this kind of organisational culture includes the risk that it is not able to

survive after their founder has moved on. In order to survive in the long-term,

organisations need consistency in regard to their leadership approach. In order to

perpetuate the business continuity, the leader has to start a long process of detachment

between himself and the company. This can be achieved by appointing new external

managers with the final aim of sharing the philosophy with them. It is vital to improve this

special philosophy in order to ingrain this inside of the company and the people.

This analysis was conducted trying to make a forecast about the future. However, the

assumptions made using these strategic models could present some limitations. In fact,

the Resource-Based View is based on the idea that firms have to create resources that

meet certain criteria in order to gain a long-term competitive advantage. However, Priem

and Butler (2001) criticised this model as it does not explain the importance of the

managerial role in creating and managing these resources. Moreover, a definite

sustainable competitive advantage is not achievable. In fact, the dynamic business world

implies continue changes and, maybe, a valuable resource today will not be valuable

tomorrow. SWOT analysis has also got the same problem in terms of staticity. In fact, the

current picture represent the characteristics of the company now, however it is our

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assumption that everything will remain unchanged in order to assume a future

forecasting.

In conclusion, the business is doing well and has been constantly growing since 1978. It

could be a clear demonstration that this organisational culture behind the company is

successful. It would be interesting, in future research, to see how the company manages

their risks and if this special philosophy inside and behind the company survives.

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