Sustainability Is Fueling Innovation at Ferrari

(upbeat music) Welcome to HBR on Strategy. Case studies and conversations with the world's top business and management experts. Hand selected to help you unlock new ways of doing business. Ferrari is synonymous with tradition, luxury and speed, not necessarily sustainability. But under CEO Benadero Vignia, the company is aiming to go carbon neutral by 2030. To him, this is both a moral obligation and an opportunity to innovate. In this episode of Cold Call from 2023, Harvard Business School Professor Rafael Sadoon joins Vignia and host Brian Kenney. They discuss her case study on how Ferrari is using sustainability as a strategic advantage. - We're gonna start today, Rafael, with the question I always start the podcast with. Can you tell us what the central issue is in the case and what your cold call is to start the discussion? - So the central issue of the case, as you described, is a company, an iconic company that is now embarking on a new carbon neutrality strategy. It's a dramatic shift, if you want, in what the company plans to do over the next few years in terms of both its product range, the introduction of the first electric Ferrari, as well as, and probably the part that intrigued me the most, the internal changes that Benedetto and the rest of the Ferrari team is planning to become carbon neutral by 2030. - Yeah, yeah. I think I know a little bit of the answer to the next question, but I'm wondering how you heard about this and why you decided to write the case. - How did I hear about that? Well, because I was lucky, and one day I saw Benedetto's face on a Zoom call, and as an Italian, I just couldn't resist and ask him, you know, Benedetto, I think we should really write a case about Ferrari. And what surprised me is that Benedetto said, yes, but I really wanted to talk about sustainability, which is something that surprised me. - Yeah, and we're gonna get to Benedetto in a minute, but before we do that, I know you visited the plant, and in the process of writing the case, I'd love to hear a little bit about what that experience was like, and then you can maybe comment on where Ferrari sits in the landscape, who are their competitors? - So the visit to the plant, and I, you know, in the audience today, we also have Leyla Dummi, who is a PhD student that was with me when we visit the plant. I just can't tell you how exciting this was. I almost risked divorce, by the way, because my husband, who is a mechanical engineer, couldn't make it, and he was very, very jealous about me being there, but it's like, you know, you don't expect a company that makes car to have that amount of passion, excitement, through engagement, and it's one, you know, on the one hand you see, they tell you, this is where Ferrari was watching the cars, and you immediately realize, I'm in the middle of history here. Okay, so that's one. But then it's something very tangible and it's today, and you see how people work together. You walk into the production floor with the scars, coming from the conveyor belt from the top, coming down, and teams of workers that work seamlessly. I tell when I teach this case, I tell my students, I know it feels weird to say it, but I have readily seen a place as harmonious as the production plant of Ferrari. - That's amazing. Benedetto, let me turn to you for a moment. Again, welcome. We wish you could be here in person, but it's great to have you on the wall. Can you tell us a little bit about your background? I teased a little bit by talking about the fact that you're a physicist. I don't know how many people expected that, but tell us a little bit about your background. - Thank you, nice talking to you. - Despite that it is digital. I am a physicist, so I prefer the 3D analog world, not the digital world. Anyway, you said it, and I studied physics. At the beginning of my idea was to be in a university, but then I realized it was better for me to do some research in companies and create products that could reach the market. So I switched to a company making chips. In your mobile phone, there are a lot of sensors or any kind. Well, that is what I did with my team. It took me around 20 years to create a business and industry that was not existing. And then after traveling with here and there, I'm meeting several people. I get to know the chairman of Ferrari and the vice chairman. They offered me this opportunity and year I am. I am the CEO of Ferrari and I'm working with different people, but in any case people like Adi, Doroy, and Mike Adi. - That's wonderful. Rafael, I'm gonna ask you a question that might make Benedetto a little uncomfortable. But I'm gonna ask it anyway. Can you describe for us what his leadership style is? How would the people who work at Ferrari describe him? - I never asked for a formal description, but I can tell you what I saw. And what I saw is a couple of things that impressed me. The first one is respect, of course, as you would expect. But I also was very impressed by the fact that people felt empowered. And so it's really this combination of, on the one hand, knowing that you're dealing with a scientist who's very focused on understanding the concreteness of the production process, in this case, of the sustainability strategy. And going to the metrics in a way that, perhaps people that don't have that scientific background would not be able to. But then at the same time, a very strong sense of being also feeling respected by the CEO. And I think that, in the case we described, when editor spends time with both his management team, but it's also very visible, more visible than, I would say, the average CEO to the people who are on the shop floor. And he has engaged them in competitions to elicit their ideas, which I think really made a lasting impression on the team. - Benadot, let me turn back to you. - Thank you. - Yeah. Let me turn back to you for a second. Just curious, 'cause I looked up, in the research for the podcast, I looked at Ferrari's to see, what kind of Ferrari I would buy. Needless to say, I can't buy any Ferrari's. Who buys a Ferrari? What's your customer's name? - Not yet. Not yet, not yet. - I mean, the Lego Ferrari is available to both of us. - That's true. - That's true. Who buys your cars? - There is one sentence. We like to say that different Ferrari for different moments and different Ferrari for different characteristics. This is what is driving our strategy. If you want what we are doing, we are starting always from the emotion that our client wants to have when they drive the car. People very often talk about technology. People talk about the trend today in automotive autonomous shared, connected electric cars. What is said we like to say is that we are a luxury company that makes cars and there are four clear trends that are for us very important. One, we want our car to be really highly personalized. We want our car to deliver unique emotional experience. We want our car to be sustainable and we want our car to be culturally relevant. This is Ferrari. Ferrari is a luxury company. It's not an automotive company. So if there is a message, I would like to leave here is that we are not making cars. We are making luxury products and the car are part of what we do. - That actually gets to another question that I had in mind for you, which is tell us how sustainability is on brand for Ferrari. So I believe that the luxury company that is doing, let me say emotional product, symbolic product, we don't make functional product because nobody's gonna take a Ferrari to the supermarket. Which important, the social license and the social license can come from us showing to the entire world, we can be scientific, we can have an holistic approach to the sustainability. And we want to be sustainable by end of this decade. So this is very important. It's a commitment, it's a way to tell the entire world, look, it's difficult, we know, but we want to show the world that we can do it. - Let's talk about sustainability, Rafael. We've done other cases on cold call about other automotive makers that have put a stake on the ground around sustainability. Can you talk a little bit about what's driving this in the automotive industry? - Yeah, I mean, especially in Europe, we have a very strong regulatory push. That as you know, we have very strict targets that are felt and are having a very big impact on how large and small and you can see also with Ferrari, niche automotive are thinking about their futures, their futures. And I think that these are very strict targets that however are not exactly uncertainty here is are they feasible and are they, do they match with the production capabilities that current companies have? So you can see there is a tremendous amount of anxiety now and push back that is coming from this push. - Ben, Eddo, can you talk a little bit about these targets? And I'm curious also about Ferraris carbon neutral commitment and how people react to that. How did your investors react? How did your customers react? How did your suppliers react when you made that statement? - I would say that we have a different reaction for different players. In our engine, I have to say that the investor please our commitment very much, they like it. People here in Maranello, they like this challenge. That's reason why Rafael, when she interviewed them, she saw that they were all on it. There are suppliers that are more, let's say they are already on the journey. One are the suppliers that believe that it's not a true problem, a real issue. And some others is that they are willing to get some support from us. Clearly, you can guess what is our point of view in front of suppliers that do not believe that this is something to work on. So different mix of the feeling, we are making a selection and we want to work with suppliers that are working in a scientific and holistic way like we are doing on this important topic of the system ability. - How much change does that require from your suppliers? Do they have to do things quite differently than they've done item of past? - But very often I can tell you that some suppliers are scared, they simply because they do not know the metric. It's fine, if you sometimes you meet some suppliers that are proud of the sustainability report, but then apart from the fact that they spend a lot of money to bring a lot of things on expensive paper that are not too many numbers in it. But very often I have to say, more than 80% of our. our supplier are willing to join us in this journey and to see how we can challenge each other. So as always, you have the people that are willing to embrace the new challenge and that are equal to not embrace it. I can tell you, based on my experience, that the people that are embracing this challenge are now are supplying chain at most than what I expected. As you can imagine, it's not easy, but they are on it. Rafael, the case points out that the primary goal, that Ferrari is not about market share, it's not about volume. They only make about what? 11, 12,000 cars a year. So if it's not about market share and it's not about volume, what's it about? Ferrari is about an experience, I think. That's what I came to understand. And Benigni articulated this point very much earlier, very well. It is about feeling part of a community. For the Ferreilles, I think there is very much about the car as much as the events and the racing. And we talk about these other events. And then there is also the symbolic meaning that Ferrari has for all the people. We don't have a Ferrari, but somehow, perhaps, in Italy, but I'm sure that this is true also for other nationalities. There is a sense of affinity with a brand that is so historic. Now this is what's visible to us. Where Benigni was going before, to me was the most intriguing part of the case, is what Ferrari means for the supply chain and for the employees as well. And there we get to something that is even more personal than what you and I can experience from the outside. And I don't know if this is at least what is palpable when you are there. But yeah, you are right. I mean, it was in Christmas 2021. And unfortunately, we could not have an event where all of us are together physically. So the communication department, the great idea, and the idea was that all the people of Ferrari, all the employees would built in a puzzle, a passing course. We have it. So next time you come here and show you, it's a big passing course that is standing in front of our canteen. And all the employees, while they were completing the passing course puzzle, they were saying something. Okay. What does it mean Ferrari for you? And Ferrari means many different things, but there are some common uncertainties. Ferrari is my life. Ferrari is my family. Ferrari is community. And this is something like Lafela was saying that you experience when you are part of the family. And we are the different family members. We have many stakeholders from the Ferrari's to the client to the Tiffosi, the fan, any kind of, you know, the shareholder, the media. So the university and the students, it's a unique company where we have many different kind of stakeholders. It's a community feeling. How do you find your employees and what's it like to work at Ferrari? I can tell you that there is a unique sense of belonging in the company that is not easy to describe. You can understand when you leave it, but I can see from the eyes of the colleagues, you know, these last years have not been easy because of the supply side. For example, we had the Ukraine wars, we had the shortage of chips, we had the problem of the COVID. But I can tell you that we did not stop our production line for a single second while the media during the assembly here were suffering of it. And consider that, you know, sometimes being is more player because we don't buy a lot of things. We could have been suffering more. But because of this sense of belonging, because of this unique attachment to the company, we've been able to go through without any disruption. This is something that I am always thankful to all of them. We publish it some initiatives that are pretty unique. For example, I want to give a chase to all the employees from first to last. Now we are at the chase program open to all the employees. We also give many other benefits to say thanks to all of them for what they are doing and for where they are helping to bring the company. Can I pause on this for one moment? Because I think, you know, now not to be the boring strategy professor, but I am a boring strategy professor. So I can do that. I think. Not boring at all. What is interesting here is the following. We are talking about a differentiated strategy. You cannot get more differentiated than Ferrari. But what this case tells you is that as much as it's important to create surplus for the customer, I think that the roots of a very successful differentiated strategy is standing how you behave with your employees and with your suppliers. And this is something that often it's not very clear when people look at brands. What's the engine that makes this brand valuable over time and continuously? When a company is doing well, all the stakeholders not do well. In vice versa. One thing that I change when I came in the company is that we can do innovation. If we have our suppliers that are in love with what we do because we need also their ideas, their brain cell, let me say, to help us to do something unique. And I think this dimension of working together in a team, I'm always paying particular attention to this dimension. I was paying attention already in my previous, in the company was working before, but here I am even paying much more attention because in a luxury company, the people are even more important than in other kind of company. So this is really unique. And in this way you have to read what we are doing like Ravela was saying. I'm wondering, obviously we've talked about the fact that you oversee a brand that's got tremendous legacy and heritage. How do you think about innovating with a brand like that? Because there's always the danger that you're going to leave something behind that people think is really important. Clear in a luxury company, the traditional innovation, our two dimensions of the equally important. If you want one of the most beautiful things of my job together with the team, that you have always to balance the past and the new, maybe start up companies today, they don't tell you any past. So you have to look with two eyes on it to the future. But in our case, the future and the past innovation and tradition coexist so that the DNA of the company can evolve through the history. Rafael, we know that millennials care a lot about the products they buy and the firms that they engage, they care a lot about where they work and what those firms are doing to make the world a better place. Do you see this as a brand enhancer for Ferrari, the move to carbon neutral? You know, that is really the piece that, again, I learned a lot writing this case and there is something about using sustainability to push yourself ahead of where the customer is going. So there is a customer evolution. Maybe it's not the traditional Ferrari base today that cares about sustainability, but it's clear that there are changes in the customer base, more women, younger population that will appreciate that. But again, I go back, the real powerful message here is how sustainability can be a catalyst for energy and innovation inside organizations, which is something that I am starting to see now. I think that this case gives you an example of course Ferrari is an outlier in so many dimensions, but what they're doing is using sustainability to move the supply chain in a certain direction, to innovate and sitting down with them, but also to engage their workers in a way that combines innovation and purpose. And that is, I think, a very interesting way of thinking about sustainability. Benadero, can you talk a little bit about that? Maybe give an example of how you're working both with the suppliers and internally to innovate. There are three names now, Scope 1, Scope 2, Scope 3, that the expert are using. So if I see Scope 1, Scope 2, it means what we are doing in the company. Well, if I see inside the wall of Maranello, we are doing two main things. Number one, we see how to become more efficient. And numbers too, we see how to use electricity or energy that is cleaner. I can give you a few numbers, the 22 or 21, we've been able to reduce internally the carb auto-printed by 10%, despite the fact that we've been growing the number of carb by at most 15%, it was 22 or 21. So this is a big achievement for me. In terms of energy generation, we've been installing a lot of solar panel. We have been promoter of a community that can help to generate more clean energy for us, but also for the local municipality. We are starting to use solid oxide fuel cell, so we can use even hydrogen. You see, we are looking at different dimensions on the generation size. And there are a few ideas that I'm particularly proud of, on my team, because the people working in the factory, in the manufacturing line, the one that Pavela was referring to, with zero capital expenditures, only by using their brains, their observation, they've been able to reduce the aluminum consumption, 23 or 22 by around 4%. So this year we will buy 4% less aluminum than the year before. This is a big achievement. So this is what we are doing in the company. Outside the company, we are looking at the logistics, so we are giving priority to companies that are using biofuel to move our cars. We are looking also at the material that is very important for us, that is aluminum. Aluminum is more or less 40% of the weight of our Ferrari. And for aluminum, we are looking at the companies that are extracting and purifying aluminum. So we go through all of this. all the steps because we want to be, as I said, the scientific and the follow-and-oristic approach. You have to cut the problem, means, license, and you have to go one by one. -Rafael, we know that it's not easy in any industry, but definitely not in the automotive industry to scale electric vehicle production. Can you talk a little bit about some of the challenges that we see automotive companies making? -Yeah, I'll tell you the high level because then the scientists should come in and tell us everything about it. But, you know, I would just want to mention the first one, and I think the relevant one, which is the construction of the battery. And so that, besides the tensions that you are currently facing to get the raw material that is needed to produce this battery, there is also a whole set of challenges that have to do with the technology to produce the batteries themselves, which at this point are more art than science. That's how I've heard one of these big, broader producer companies refer to them, which makes what Ferrar is doing even more interesting. Because, but if I'm not mistaken, you guys are bringing part of that battery construction in-house, correct? -You're right. We buy the cell and we make the battery now, because the battery is an entire part of the car. This is fundamental because it's the same story. The iron line industry did 100 years ago. In 100 years ago, in iron line industry, you had the wings and yet the gasoline tank. And then the wings became the gasoline tank. So that's what we are doing here. The battery itself is becoming an integral part of the car. It's a structural part. This is very, very important. We have something that is nice to drive. We would drive the emotional clear. -We are getting close to the end of our time together. And I've got one more question for each of you. But before I ask those questions, I do want to give the folks that are watching this. I have an opportunity to ask some questions. So what I'll do is look up at the wall and I'm just going to pit view to ask the question that you had sent in a little bit earlier. Gina, I'm you and ask your question. -Yes. Hi. This has been really fascinating. My question is, is Ferrari in engaging with the new materials and things that needs to meet suppliers? Are you collaborating with other manufacturers, whether they're automobile manufacturers or manufacturing other products? Do you find bringing in other brains even more helpful when dealing with your decarbonization? -Not directly, indirectly, because we participated to some common meetings. Today, the most effective way to lower the carbon footprint is to mostly through working, through tier 2, 3, 3, 3, 4 of the supply chain. The cycle of aluminum, three of life, that we know the meeting room here in Ferrari, because it remembers that you have to go to the basic. These are members that you have to talk to, and with the companies that are digging the ground to get the materials for the room. If I have to say, who are the clients, the players that are helping us in this journey, I've wanted to put our competitors or other automotive players at the same level. I was thinking to your question, they are maybe the last. We have a question from Angie E. -Hi, I was wondering what is your favorite Ferrari? -Not only one, I would say the next one. Today, they're not a couple that they like a lot, these are 296 GTS and the Puro Signway. But the next one is going to be better. We have a question from Ankit. -Yes, hi. I'm wondering if there are other luxury browns that have made the switch to sustainability that you can learn from or you admire. And how do you think the rest of the luxury automotive friends will follow? Will they follow in the footsteps making Ferrari a leader? How do you see that will play out? -There are some other luxury brands that they are looking at it, and they want to say in the teenager age, these people I see them more active than the automotive player for a simple reason, because usually luxury brands are not so big either in terms of revenues, either in terms of production material, or in terms of people like automotive players. I mean, consider that automotive players forget about Ferrari that we are 6000 people, but if you take other big names, you're talking about companies with 100-200,000 people, luxury brands are not so big. It's much better to still be small boat than a big boat, you know? Especially in a period in which there are rough waves around you. We have this unique advantage, like other luxury brands that we want to leverage, just because we feel the moral obligation in front of the world to show that this carbon sustainability journey is something that does not exist only on charts, on display, on internet, but it's something that can be made possible. So I think we've got time for one more question. I'm going to go to the Boston Celtics fan that we have on the wall, Francesco M. Go on ahead, everyone. I'm Bojo do Dr. Vignan. Question and curious, since we talk about differentiated strategists and how has been perceived philosophically the idea to move towards electrification and also the idea to go towards SUV that is like the prosaqa that is a gorgeous model definitely made your transition point for you, Louis Vuittron, like Sporcar to an SUV concept. So I'm curious a little bit about how has been perceived internally within the company this transition towards something that is a little bit different that you more are necessity, but I'm curious about your perspective. Thank you. And I have a couple of important messages that I would like to leave this meeting room before we all depart. Number one is that we are following a scientific approach to carbon neutrality. The certain one we don't make a SUV. We make a pure sangue. This is important that is a sportic car. It's a sportic car and if you try it, it's really a sportic car because an SUV is a sport utility vehicle and Ferrari is not a utility vehicle. We make a pure sangue, yes, but we don't make a pure sangue because for the same reason the mass market players look at it because the other people, why did it do SUV? It was a SUV because the market is going. When we are doing a pure sangue, simply because we want the people to have and to leave emotion together with other friends, other friends and members. This is the drive. The drive is always the emotional side of our Ferrari's, of Ferrari's, of our client. This is very important. And I have to say that looking at all the portfolios that we have, it goes well beyond 26 and looking at the market's reception, we couldn't do a better choice in this direction. When it comes to the second part, the electric car, as I said also another interview and as I say also to the investors, three possibilities. There are people that will buy only IC car. There will be people that will be part of our family only through electric Ferrari and then we will have a client that will take both. In line with your original question, what is the product strategy? Different client, different Ferrari, for different Ferrari's. Different Ferrari for different moments. So all in all, I would say that we took a risk one year ago before the capital market day when we said that we will keep doing the three kind of cars, the red IC car, the blue hybrid and the green electric because I don't believe that doing only one car is the right thing. It would be an act of arrogance in front of our client. We have to respect the client. So we keep doing it. It was a good choice and if you see now the world is also moving in the direction to welcome both the electrons, let me say the electric cars and the e-fuel also in thermal cars. So we have time for one more question for each of you and Benadetto, I'm going to start with you. One of the final lines in the case is you pondering because we always have our protagonist pondering a question. So the case actually closes with you pondering about whether or not it was worth it in relation to moving into this EV space in such a determined way. So I would ask you, is it worth it? Yes, it was and it is, it's really worth it. And there is one quote that I like a lot from ends of Ferrari and this is to those who come after me, I leave a simple inheritance, the responsibility to keep alive, the will to progress, portioned in the past. For me, if in the past Ferrari added to do car that were beautiful, I performance and delivering emotional driving trails, now we have to add to this ingredient also the fourth one, the sustainability. It was really worth it. Excellent. So Raphael, you do get the last words since you wrote the case. Okay. And my question is simply if there's one thing you'd like people to remember about the Ferrari case, what is it? That sustainability can be an engine for innovation internally and drive the transformation of the supply chain. But what I find interesting about what they're doing is that they're really leveraging sustainability in a scientific way that I think has a potential of driving change throughout the supply chain and internally. Raphael, I have a benedetto. Thank you so much for joining me on call. Thank you. Thank you all very good day. That was HBS professor Raphael Sardun and Ferrari CEO Benedetto Vignan in conversation with Brian Kenny on Cult Call. We'll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple podcasts, Spotify, or wherever you get your podcasts. While you're there, be shortly thus a review. And when you're ready for more podcasts, articles, case studies, books, and videos with the world's top business and management experts, find it all at hbr.org. This episode was produced by Robin Paches, Craig McDonald, and me, Hannah Bates. Kertnichesh is our editor. Special thanks to Ian Fox, Maureen Hoek, Erica Trucksler, Ramsey Cabaz, Nicole Smith, Ann Bartholomew, and you, our listener. See you next week. (upbeat music)