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How Socially Responsible Engagement Can Change Your Business Model: The Radical Experience of Armor Lux Despite a growing consensus on corporate social responsibility (CSR) issues relevant to companies, there is no one-size-fits-all way to structure and organize CSR. The lack of clarity and transparency in the structure leads stakeholders, rightly or wrongly, to accuse companies of “greenwashing strategies.” The author analyzes the case of a small French textile company that has radically turned its business model toward CSR in order to survive. It provides a good example of real social engagement and how it transforms the business model. It also raises the question of whether sustainable development issues, scarcity of resources, and deindustrialization of developed countries will move other manufacturers to consider services and intangible assets as part of their business model. © 2008 Wiley Periodicals, Inc. Today most large- and medium-scale businesses are aware of environmental and social issues, and an increasing number of companies are involved in what has been labeled corporate social responsibility (CSR). Companies engage in developing greener products, subsidize community initiatives, build alliances with nongovernmental organizations (NGOs), or help improve working conditions in developing countries via their relationships with local subcontractors. While there is a growing consensus about the issues CSR should tackle and what initiatives matter, companies have different ways of organizing their CSR efforts. Rather than following a prescriptive view of CSR structure, firms often experiment and discover various ways of implementing CSR policies in their organizations. Some devote a CSR department to identify and handle issues and stakeholders. Others

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VIRGINIE VIAL

assign the social aspects of CSR to the Human Resources department, and the environmental aspects to either the Quality Assurance department or the Environmental, Health, and Safety function. There is clearly no one-size-fits-all CSR structure and implementation strategy. In the absence of clear compulsory and enforceable international and national standards—and credible corporate self-commitment—enterprises have been accused of wanting to “green” business without really making a difference for the world around them. Greening the business usually entails talking about CSR with little or no action at all, or taking CSR actions without adequate communication. Both cases lead to misunderstanding and disappointment on both sides—the company’s and the stakeholders’. In the end, CSR must be about doing business differently: defining stakeholders in the broad sense, taking a larger number of stakeholders’ claims into consideration, and acknowledging that the company and its activities are part of a complex system, that the company has an interest in sustainability for its own survival, and that it should firstly serve human beings, because it is composed of human beings who are ends in themselves. Thus, the question we ask is, If you have not changed your business model, can you affirm that you are really engaged in CSR? We believe CSR entails different steps or levels, from awareness to leadership. The first few steps are about awareness, environment scanning and analysis, and implementation, via a process of trial and

c 2008 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com) Global Business and Organizational Excellence • DOI: 10.1002/joe.20239 • November/December 2008

error, of some CSR initiatives planned for the near to mid-term. We argue that the next step for companies committed to making a difference and surviving in a better world is to rethink their business models—that is, strategizing and planning for the long term. The long-term strategy that manifests itself via the business model also creates a lock-in whereby the company commits itself to a certain range of actions that renders the CSR initiatives more credible and trustworthy vis-a-vis all stake` holders. Consciously changing the business model could help companies find solutions for structuring CSR with less need for dedicated resources such as departments or teams because the notion is embedded in the business model. It could also restore and strengthen credibility and trust between the firm and a wide range of stakeholders.

Consciously changing the business model could help companies find solutions for structuring CSR with less need for dedicated resources such as departments or teams because the notion is embedded in the business model. The case study we present in this article is interesting in several respects. Firstly, it presents the experience of a small company, whereas the majorities of studies highlight CSR implementation in medium and large companies. In the literature as well as in business circles, small companies are depicted as being overwhelmed by both the financial and organizational costs of CSR implementation. Secondly, the company belongs to the textile and garments industry, which has been the first and constant target of acute scrutiny from national and international observers and external stakeholders. Thirdly, the CSR engagement of the company and the way it has been implemented departs from mainstream approaches, because of both its size and historical location in France, symbolizing part of the European specificities and experience regarding CSR issues.

Global Business and Organizational Excellence

A Foundation for CSR Armor Lux is a French-based and French-owned company founded in 1938 by Walter Hubacher in Quimper, Finist`ere, Brittany, in the remote northwestern part of France, a four-hour drive from Paris. Initially a producer of high-quality (but not luxury) underwear for the French market, the company soon moved into quality cotton and wool clothing for sailors and fishermen. The distinctive characteristics of the products were the sea colors and marine patterns (stripes), coupled with high-quality material and manufacturing. In 1993, with a turnover of 131 million francs ($23 million) and 450 employees, the company, hit by international competition and the waves of delocalization in the industry, was sold to two Breton industrialists, Jean-Guy Le Floch and Michel Gueguen, who were determined to keep jobs in the region and expand the business in spite of the hostile competitive environment, the declining value of the brand, and the obsolete and narrow production technologies. The textile industry flourished in Brittany during the Middle Ages and beyond, enjoying great advantages from the maritime trade. However, during the eighteenth century, the industry declined as tensions between England and France disrupted trade. The nineteenth century and the industrial revolution brought a sudden surge in the French textile industry with the introduction of the steam engine, and it continued to expand until experiencing a sharp decline in the 1970s. Of particular significance for our purposes is that the textile and garment industry is indeed a very old one, and an important factor in shaping a culture in textile companies that emphasizes quality, know-how, a predominantly female labor force, and a strong paternalist approach to management. Our interview with Jean-Guy Lefloch, current co-owner and manager of Armor Lux, reveals that this is still the case, and the entrenchment of the paternalist and traditional culture surely constitutes the basis for Armor Lux’s engagement in corporate social

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November/December 2008

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responsibility and ethics initiatives. We also had the opportunity to speak with the employee and trade union representatives, Dominique Lepage and Barbara Weber, who confirmed the paternalist nature of the company’s culture and employees’ full adherence to these values. Throughout their discourse, both Lepage and Weber described the attachment of the employees to the company, its textile activity, its culture, and its ethical standpoint. Most of today’s employees started at Armor Lux at the age of 16 some 30 or 40 years ago, and employment turnover is close to zero. Such loyalty and stability most likely provided strong support to the company throughout the changes that it had to undertake in order to remain competitive in the market. Armor Lux’s three stated core values of quality, tradition, and ethics are reflected in its mission and its strategy: building strong brands and developing know-how and expertise in garment manufacturing, while building upon CSR engagement, diversification of targeted customers, and control of French distribution channels. The company’s CSR engagement encompasses three areas of focus: (1) employment protection in the historical core geographical center, Brittany, France; (2) responsibility toward subcontractors in the third world; and (3) the use of organic and fair-trade raw materials (in this case, cotton).

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tion offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value and relationship capital with the goal of generating profitable and sustainable revenue streams.”1 Rather than a classical input-output approach to the enterprise, the authors’ definition of a business model includes and explicitly mentions internal as well as external stakeholders. It emphasizes the central role of “value proposition,” which, of course, relates to monetary value but can also be understood to include nonmonetary value stemming from the values of the company—quality, tradition, and ethics in our example of Armor Lux. We find that these specificities make this framework for depicting the business model particularly well suited to our purpose here. Using Osterwalder, Pigneur, and Tucci’s analytical framework, we construct Armor Lux’s business model before 1993, shown in Exhibit 1, as it stood before the arrival of the new management team. We will later repeat the exercise to describe the business model as it stands today, and then contrast and compare the two business models, with particular attention to the identification of the differences between the two business models and the factors that have driven changes.

The company’s CSR engagement encompasses three areas of focus: (1) employment protection in the historical core geographical center, Brittany, France; (2) responsibility toward subcontractors in the third world; and (3) the use of organic and fair-trade raw materials (in this case, cotton).

In Exhibit 1, we can see that pre-1993 Armor Lux was a classic textile company in the developed world. Textile manufacturing was in decline in the member countries of the Organisation for Economic Co-operation and Development (OECD) due to the maturity of the market, characterized by a saturation of supply and demand, but growing in developing countries in terms of both manufacturing and demand, coupled to relatively lower labor costs.

A Traditional Business Model in a Traditional Industry Osterwalder, Pigneur, and Tucci (2005) state that “a business model describes the value an organiza-

The company had to import its principal input, cotton, and because of relatively lower labor costs abroad for a given and satisfying quality, procured the cotton as yarn rather than the raw material. However, it maintained the weaving activity since part of the value proposition resided in the design


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Exhibit 1. Armor Lux’s Business Model Before 1993

(marine stripes) and know-how of the French labor force.

When the “Shock Doctrine”2 Leads to Responsible Outcomes However, when the company, facing fierce competition from Asia and Africa, was handed over to Jean-Guy Lefloch and Michel Guegen in 1993, it was already suffering from declining revenues and lack of innovation. The new owners’ stated objectives for the acquisition were to maintain jobs in Brittany and expand the business using the following means:

r Promote product diversification. r Adapt skills and competencies to the new strategy.

r Stimulate a culture of economic realism.


r Bet on Brittany’s social cohesion and cultural identity.

r Promote internal mobility of labor. In 1996, the French Robien Law was passed to promote employment via a reduction and reorganization of weekly working time. It allowed companies to decrease employees’ working time in order to either create new jobs or avoid layoffs, and to benefit in turn from lower state social security contributions (taxes). In 1996, after consultation and negotiation, Armor Lux’s employees accepted a shorter workweek, accompanied by a 9 percent wage cut. The effort avoided layoffs equivalent to a 10 percent reduction in the company’s labor force. Additionally the following year, Industry Minister Franck Borotra allocated cuts in social

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security contributions to companies in the textile and garment industry that wished to reduce working time in order to maintain jobs. The tax reductions, which were equivalent to 10–12 percent of total labor costs and could have helped Armor Lux at the time, were declared anticompetitive by the European Court soon after. Companies that benefited from the scheme, Armor Lux included, had to pay the rest of their social security contribution although they were still bound to the social contract of lower working time and no change in the number of employees.

The tax reductions, which were equivalent to 10–12 percent of total labor costs and could have helped Armor Lux at the time, were declared anticompetitive by the European Court soon after.

The additional tax payments coincided with extensive damage to the Armor Lux weaving manufacturing facilities when the Odet River overflowed its banks in 2000. The new management team, after consultation, negotiation, and agreement with employees and trade union representatives, decided not to reopen the weaving facility and instead invested heavily in new cutting, assembling, storing, and dispatching facilities. Although its implementation was surely accelerated by the shock of the flood, the decision was clearly strategic thinking in response to competitive pressures. This is the historical turning point that sealed the future of the small textile company. Indeed, in the face of increasing financial difficulties due to cheap foreign competition, combined with the bad luck of the flood and suddenly escalating labor costs with the demise of the Borotra scheme, JeanGuy Lefloch and his team, with the agreement of employees and trade union representatives, decided to take drastic action and follow an unorthodox path.

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While the sale of quality cotton clothing remained its value proposition, the company moved up the quality ladder to become the seller of quality cotton clothes traditionally designed, cut, and assembled with an ethical spirit. Quality and tradition were already deeply embedded in Armor Lux’s brand, image, and products; the ethical aspect stemmed primarily from the paternalistic nature of the company’s culture. It took an unexpected turn when the management team made the firm decision to not yield to foreign competitive pressure and, instead, to keep jobs in France while seeking lower-cost manufacturing partners abroad in order to remain viable in the market3 It was clearly one of the challenges that the two new owners wanted to take up in 1993, and they managed to do so thanks to the strong cohesion amongst employees, as well as the success of their expansion plan. The ethical aspects of the company’s value proposition encompass the protection of existing production jobs in France; outsourcing part of the production to vendors that follow the code of conduct of the company; and the use of fair-trade cotton for part of the production.4 As the environment changes and small northern textile manufacturing companies disappear, the values embodied in the Armor Lux product and business model become more prominent. The international division of labor has made the textile industry one of the extreme cases where the value of the brand—the intangible good sold as part of the garment—is created in countries with expensive and skilled labor, while the tangible good—the garment itself—is produced in developing countries with cheap labor and raw materials. Most textile companies located in the North have moved toward this model, but the peculiarity of Armor Lux is that it has done so while never attempting to outsource abruptly and threaten the current French jobs, and it has rapidly embraced the principles of corporate social responsibility through the careful choice and monitoring of foreign manufacturing partners— rather than subcontractors—and through procurement of fair-trade cotton.

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The company has also managed to extend its CSR strategy to customers while improving stability in the revenue stream. Indeed, in a move to enlarge its customer base beyond the final consumer to include targeted corporations, the company returned to its original product, work clothing. One of its first great achievements under this growth strategy was a contract in 2004 with the French Group La Poste to supply all its agents with work clothing. Armor Lux responded to La Poste’s European tender and managed to win the contract partly on the basis of its ethical standpoint in general, and in particular its social responsibility both in France and abroad. This aspect of the company was not only attractive to this large customer, but also accounts today for a large part of Armor Lux’s sales. Under the old manufacturing model, the company had previously devoted its activity as follows:

r 50 percent to production, r 40 percent to clothes design and conception, and r 10 percent to logistics. The La Poste contract, which amounts to 17 million euros ($21 million) over five years, began as a business-to-business venture for Armor Lux but has since shifted toward business-to-consumer as the company is now taking clothing orders directly from La Poste employees, which has since helped the company move to a new operating model, with the following allocation of its activity:

r 50 percent is devoted to a new business activity,

which made it possible for Armor Lux to retain employees and promote internal mobility. The new contract also enabled the company to boost investment in new storage, dispatch, picking, packing, and mailing facilities. Other noteworthy changes to its operations include:

r operating a Web site that serves La Poste endusers,

r managing dedicated catalogues, r monitoring end-users’ annual clothing budget allocations. and

r designing special clothing. The company retrained former production employees to perform new jobs, such as mail order phone sales and manning the customer service hotline, which made it possible for Armor Lux to retain employees and promote internal mobility.

Armor Lux’s annual turnover has grown from the equivalent of 20 million euros ($23 million) in 1993 to 72 million euros in 2007 ($99 million), with its labor force increasing from 450 to 650 employees.

Deep and Pervasive CSR Engagement Changes the Business Model Drawing once again on Osterwalder, Pigneur, and Tucci’s analytical framework, we construct Armor Lux’s business model today, as shown in Exhibit 2.

mail order sales;

r production now accounts for only 20 percent; r clothes design and conception decreases to 10 percent; and

r logistics, now more important, accounts for 20 percent. The company retrained former production employees to perform new jobs, such as mail order phone sales and manning the customer service hotline,


It is fairly clear from a comparison of the two business models depicted in Exhibits 1 and 2 that Armor Lux’s engagement in CSR truly modified its initial business model. The trigger for change has been foreign competition, which the company transformed from threat to opportunity, turning the situation into a win-win solution via a movement up the value chain thanks to belief in and commitment to its core values—quality, tradition, and ethics.

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Exhibit 2. Armor Lux’s Business Model Today

This commitment has modified all aspects of the business model without exception, from core capabilities to revenue streams. Most companies that advertise their CSR engagement communicate a modification of their value proposition. The true commitment test for a company is to show that the change in the value proposition is accompanied by compatible changes in all other areas of the business model that support the new value proposition. In fact, CSR engagement can start in any area of the business model, but to be credible and efficient over the long term, it has to be echoed in all other areas.

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Take, for example, a company’s decision to engage with fair-trade raw material producers (i.e., change its network of partners):

r Because it will have to deal with new issues relating to fair-trade suppliers management, its core capabilities have to change. r Because suppliers have changed, the value configuration is affected. r Because the content of the product embeds new characteristics, the value proposition will differ, which will affect the customer relationship.

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Exhibit 3. The Sixteen Business Models

What type of asset is involved?

What rights are being sold?

Creator Distributor Landlord Broker

Financial

Physical

Intangible

Human

Entrepreneur Financial Trader Financial Landlord Financial Broker

Manufacturer Wholesaler/Retailer Physical Landlord Physical Broker

Inventor IP Trader Intellectual Landlord IP Broker

Human Creator* Human Distributor* Contractor HR Broker

∗ These models are illegal in the United States and most places today because they involve selling human beings. They are included here for logical completeness. Source: Malone, T. W., Weill, P., Lai, R. K., D’Urso, V. T., Herman, G., Apel, T. G., et al. (2006). Do some business models perform better than others? MIT Sloan Working Paper 4615-06; Figure 2, p. 30.

r The choice of fair-trade suppliers will affect the cost structure, and because customers’ profiles might have changed, the revenue streams will also be affected. A true commitment to CSR will impact nearly all aspects of the business model, producing pervasive, holistic change. Malone et al. define sixteen types of business models along two interesting dimensions, as shown in Exhibit 3. The first dimension relates to what rights are being sold—the right to own, the right to use, or the right to be matched to a buyer (or seller)—with the following four distinctions:

r The creator owns an asset and carries out a significant transformation of the asset before transferring ownership to the customer. r The distributor also owns the asset, but its transformation is limited before transfer of ownership. r The landlord owns the asset and sells the right to use the asset. r The broker neither buys nor owns the asset, but sells the service of matching buyers and sellers. Here, the broker does not sell any right as such, as Malone and colleagues imply, but uses his access to some assets in order to produce the service of bringing buyers and sellers together.5 The second dimension deals with what types of assets are being sold: financial, physical, intangible, or human.


Armor Lux, in its first pre-1993 business model, is a creator of physical assets, a manufacturer: the company owns imported yarns, transforms them into fabric, and then clothes, before handing over ownership of the clothes to the consumers. When the company starts to face fiercer competition from countries with cheap labor, it has the choice either to keep the current business model and set up production facilities abroad to remain economically viable, or to change its business model. Most northern textile companies abandoned their manufacturing activity completely and changed their business model to physical and intellectual landlord or broker. Armor Lux also chose to change its business model while maintaining part of the production in France and moved up the value-added ladder while taking advantage of the international division of labor. It also managed to keep former employees via internal mobility from production to mail order activity. Armor Lux has become a hybrid manufacturer/intellectual landlord/physical broker. The company sells clothes (tangible asset) with a brand (intangible asset) that encompasses the values of the company—quality, tradition, and ethics— accompanied by the provision of a service (mail order management and delivery). This is shown in Exhibit 4. The company still controls most of the physical production (manufacturer business model) and controls brand building and management. However, when a shirt is sold with the Armor Lux brand, two rights are sold:

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Exhibit 4. The New Hybrid Armor Lux Business Model

Creator Distributor Landlord Broker

Financial

Physical

Intangible

Human

Entrepreneur Financial Trader Financial Landlord Financial Broker

Manufacturer Wholesaler/Retailer Physical Landlord Physical Broker

Inventor IP Trader Intellectual Landlord IP Broker

Human Creator Human Distributor Contractor HR Broker

Source: Malone, T. W., Weill, P., Lai, R. K., D’Urso, V. T., Herman, G., Apel, T. G., et al. (2006). Do some business models perform better than others? MIT Sloan Working Paper 4615-06; Figure 2, p. 30.

r The full property of the shirt—manufacturer business model r The right to “use” the brand of the shirt, without being able to use the brand separately from the shirt (complementary assets)—intellectual landlord business model Aaker defines brand equity as follows: A set of assets (or liabilities) linked to a brand’s name and symbol that adds to (or subtracts from) the value provided by a product or service to a firm and/or that firm’s customers. The major asset categories are: (1) brand name awareness, (2) brand loyalty, and (3) perceived quality.6

Klein broadens the definition and states that brand is a set of “cultural accessories and personal philosophies” because the companies producing them “integrated the idea of branding into [their] very fabric,” often taking Nike as a reference point.7 It would probably be wrong to say that Armor Lux did not own a brand before the 1993 turning point; however, the valuation of brand equity would have been a lot less than what it is today, first because the scope of the brand has broadened, and secondly because the company started to outsource part of its physical production. Because of both factors, one can estimate that the composition of the product it sells shifted from 10 percent brand/90 percent tangible to 40 percent brand/60 percent tangible. Pushed by the effects of globalization, and in particular by the international division of labor and the rise of developing countries in textile produc-

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tion, the company, which positions itself as socially responsible, has changed its business model in accordance with its very positioning. This is clearly a sign of deep engagement, as opposed to most greenwashing activities. Most world-famous textile brands emphasize quality, design, and innovation, but not responsibility and ethics, even if they communicate around these issues (the most famous example is again Nike, but most companies follow this line). One noticeable and well-known exception is the company Patagonia, which sells outdoor clothing and has a strong commitment to sustainable development. Patagonia does not own the factories that produce its clothing, but instead chooses socially and environmentally responsible subcontractors and conducts third-party audits of their practices. In that sense, Patagonia’s business model can be described as a hybrid of the intellectual landlord and wholesaler/retailer business models. Indeed, the company does not itself manufacture, and in fact, the first task of the company is to build the brand—that is, to produce intangible assets such as brand, reputation, subcontractor audit (to assure compliance with ethical standards), and selling the right to use the brand to consumers (intellectual landlord). The second task of the company is to sell the full ownership rights to the physical clothing (wholesaler/retailer business model). The peculiarity of Armor Lux is that the brand— the intangibles of quality, tradition, and ethics—is not limited to design and finished product but also extends to quality, tradition, and ethics in the production process. The company bet on the knowhow of French production employees while starting

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to outsource production, but without compromising responsibility and ethics—and thereby protecting the brand and maintaining quality—by carefully choosing foreign partners and exercising some control over their production facilities and treatment of employees. This is made possible by a change in the business model through the new mail order activity for the end-users of a large corporate customer.

What Next for Armor Lux? CSR is no longer about mopping up negative externalities; it is now about avoiding generating those externalities in the first place. It affects the composition of the product on offer (fair-trade cotton labeled by Max Havelaar8 ), as well as the process of production or infrastructure (value configuration, partners network, and core competencies). These changes for Armor Lux are quite evident in Exhibits 1 and 2. In the future, Armor Lux wishes to expand its mail order activities for other large corporate customers. It also envisions itself as moving toward a hybrid of the inventor and broker business models. For example, as the old guard of production employees retires and new young ones are difficult to hire because of the shift in skills across the world, the role of the company could be to design clothes and find a match between foreign producers and French distributors. Another possibility is for the company to become a specialist in the control and enforcement of quality and ethical standards for subcontracting activities in the textile industry.

ership rights to a tangible asset, but rather access to an intangible asset. This points, of course, to the key issue regarding CSR thinking: What do we do about property rights? Although the story of the “tragedy of the commons”—wherein free access to a commonly held asset, such as the air, wildlife, the oceans, and the like, ultimately leads to overuse and degradation—has been used to promote such concepts as private ownership, individualism, and liberalism, the mounting evidence of just such outcomes—global warming, earth pollution, increasing economic inequalities—begins to call into question the very foundations of our economic systems.

Acknowledgments We thank the company Armor Lux for having hosted the Responsible Managers Network meeting on Business Models, in Quimper, France, on May 15, 2008. We thank all the participants for their input: Adecco, Banque Populaire, EDF, La Poste Group, ONET Group, Kinnarps, Sodexho, Max Havelaar, and ACIDD, and in particular Gr´egoire Guyon, Jean-Guy Lefloch, Dominique Lepage, and Barbara Weber from Armor Lux.

Notes 1. Osterwalder, A., Pigneur, Y., & Tucci, C. (2005). Clarifying business models: Origins, present, and future of the concept. Communications of the Association for Information Systems, 15, 2–40.

Closing Thoughts We increasingly witness that in response to fiercer market competition, globalization, scarcity of natural resources, and the need for an economics of circulation (recycling),9 manufacturers have to gradually move from their traditional business model of selling full ownership of the physical assets they produce to a model in which they produce services and intangible assets. The company no longer sells own-


2. See Klein, N. (2007). The shock doctrine: The rise of disaster capitalism. New York: Metropolitan Books. 3. The introduction of the 35-hour week in 2000 helped the company maintain jobs. 4. While this proved difficult to expand the business and hire new production employees in France, the policy of the company has been to protect existing jobs until retirement. 5. Bel, R. (2008). Access, veto and ownership in the theory of the firm. Euromed Marseille Working Paper

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No. 02-08. Retrieved May 28, 2008, from http://papers.

that have been produced according to principles of fair

ssrn.com/sol3/JELJOUR Results.cfm?form name=journal

trade.

browse&journal id=946414. We use Bel’s approach to defining

9. Circulation economics refers to a system whereby production

property rights (ownership) as the right of access (use) and the

and consumption wastes are turned into new resources.

right of veto (prevent use by others). 6. Aaker, D. (1995). Building strong brands. New York: Free Press; pp. 7–8. 7. Klein, N. (2000). No logo: Taking aim at the brand bullies. New York: Knopf; p. 16. 8.

The

Max

Havelaar

Foundation,

a

Swiss

not-for-

profit organization, awards a quality label to products

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Virginie Vial is an assistant professor at EUROMED Marseille School of Management, in Marseille, France, where she teaches corporate social responsibility, sustainable development, and organizational behavior. Her current research focuses on social capital definitions, measurement, and effects on companies’ performance and nations’ development.

DOI: 10.1002/joe
