International Business Strategy: Lois Vuitton Moet Hennessy - Assignment Example

?International Business Strategy: Louis Vuitton Moet Hennessy Table of Contents Background 3 Theoretical framework 4 Analysis: LVMH 8 PESTEL analysis 8 (2)SWOT analysis 9 (3)4 Ps 10 (4)Boston Matrix 11 (5)Ansoff Matrix 12 Conclusions & Recommendations 14 Bibliography 16 Background Globalization is defined as “the intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring miles away and vice versa” (Giddens, 1987, cited in Inoguchi, 2000, p. 216). Economic globalization is marked by contradiction (Kelly & Prohovnik, 2004, p. 102). This is true in the case of a highly successful and internationally renowned brand such as Louis Vuitton, more formally called LVMH (Louis Vuitton Moet Hennessy), a name synonymous with luxury and highly prized even among the world’s most wealthy. This company which has established itself for over a century would have been in one sense adversely affected by globalization, in a manner not normally seen among other industries that cater to the masses. LVMH, like all high-end consumer products (called “luxury” products) has built its brand name among the wealthy not only by maintaining a high level of quality, but more so by tightly controlling the quantity of items produced and distributed. The rarity of its top quality products in the market and the high price them commands engages the wealthy segment of the market to purchase them not primarily for their use (which may be discharged by cheaper alternatives), but for the social status they bestow upon their owner. The value of the brand is more psychological than functional, born of a desire to be perceived as belonging to the elite. For this reason, luxury brands have been called “one of the purest examples of branding” (Keller, 2009, p. 290) With the advent of globalization, there is the natural expectation that established manufacturing firms will reap the advantages of entering new markets that also provide a source of lower-cost labour and raw materials. LVMH would be one of such firms; however, with the expansion of production facilities into emerging markets, LVMH became a target for brand piracy and intellectual property (IP) theft. It was not long before cheaper versions of products looking like and even constructed with the firm’s proprietary materials, logo and designs, began flooding the market, selling at a fraction of the prices of originals. The brand was thereafter seen in the possession of the masses, eroding its desirability as a luxury item and diminishing the status of its legitimate purchasers. This particular aspect of globalization and its effect on LVMH shall be discussed in this paper. Theoretical framework The situation of Louis Vuitton Moet Hennessy exemplifies one effect of globalization on an already successful business. It shall be analysed in this study through the use of the following theoretical frameworks: (1) The PESTEL framework is a macro-environmental analysis tool that examines the political, economic, social, technological, environmental, and legal issues that impact upon a particular industry. The framework can be used to gain an idea of future trends in these areas, and thereby arrive at possible scenarios that a firm in the industry may have to strategically address (Swoboda, Morschett & Rudolph, 2009, p. 165). This method of analysis enables business strategists to identify sources of general risk and opportunities (Witcher & Chau, 2010, p. 91). http://www.whatmakesagoodleader.com/macro-environment-analysis.html (2) The SWOT analysis is another popular analytical tool that is “one of the most important instruments for the internal analysis of a company’s situation” (Bohm, 2009, p. 24). The method involves the identification of the company’s internal strengths and weaknesses and how these could impact on the company’s ability to meet external opportunities and threats to the company’s best advantage. It is simple, flexible, and it promotes integration and synthesis of diverse information (Ferrell & Hartline, 2010, p. 122). (3) The 4 Ps of marketing (Product, Price, Place and Promotion) is a fundamental approach to market strategy formulation that is commonly referred to as the “marketing mix”. First established in 1960, its purpose is to identify the product, place, price and manner of promoting the product. The four Ps are the elements that influence consumers on their decision to purchase (Chrisholm-Burns, Vaillancourt, & Shepherd, 2010, p. 307) (4) The Boston matrix categorizes the products of a company pursuant to the degrees to which they use and generate cash, according to market growth and relative market share. The four product classifications are cash cows (high market share, low market growth), stars (high market share, high market growth), question marks (low market share, high market growth) and dogs (low market share, low market growth). (McDonald & Wilson, 2011, p. 172). http://www.theadvisoryfirm.com/taf%20sales%20and%20marketing%20development.htm (5) Ansoff’s matrix is a planning tool for arriving at specific strategic approaches for particular products. It identifies the product as new or existing, and situates it is a market that is also identified as to whether it is new or existing. Where the product and market are both existing, the ideal approach is market penetration. Where both are new, the strategy is diversification. Where the product is new but the market is existing, the best approach is by product development, and where the product is existing but the market is new the appropriate strategy is market development (Ansoff, 2007; Lester, 2009, p. 52). http://tutor2u.net/business/strategy/ansoff_matrix.htm Furthermore, two fundamental theories shall be employed. First is the semiglobalization theory developed by Pankaj Ghemawat, which states that the difference between countries are wider than what is implied by the prevalent globalization theory. As important as it is to take advantage of similarities among countries, it is equally important to take advantage of the differences among them (Sethna, 2008, pp. 25-31). The other theory is the Diamond Model on the Competitive Advantage of Nations developed by Michael E. Porter. The diamond model explains market structure outlines considerations for a firm’s choice of strategy when addressing cross-border markets. The model relates (1) firm strategy, structure and rivalry, (2) demand conditions, (3) factor conditions (referring to the inputs for production), and (4) related and supporting industries, which are collectively called the determinants of national advantage (Klug, 2006, pp. 13-14). The preceding frameworks and theories shall be used to analyse the dilemma of LVMH in the light of globalization. Analysis: LVMH http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8366776/Brands-owned-by-LVMH-in-pictures.html LVMH is a luxury brand that has been having trouble addressing globalization because of IPR infringements and brand piracy. Through the following analyses, a solution to the dilemma may be arrived at. (1) PESTEL analysis LVMH encounters the piracy and infringement problem particularly in the Asian emerging markets where it has subcontracted a portion of its production processes. Politically, many of these emerging economies are signatories to the TRIPs agreement which compels countries to protect investors against intellectual property theft, however not all the conditions thereto are properly observed. Economically, emerging countries are open to foreign direct investment and the cost of labor is relatively low, making it advantageous for foreign manufacturers to set up factories there. Socially, there has been a re-orientation of what used to be protective and isolationist cultures, and while differences exist, there is a greater openness to the West due to the internet and social networking. Technologically, there is a rich source of technical expertise particularly in China and India and areas of the ASEAN due to technology transfers and training. Legally, the national laws and judicial systems may present a problem because of legislative differences with Western laws, and the courts are highly encumbered. Both politically and legislatively, there are corruption concerns in these emerging countries. Finally, environmentally, these countries are included in the Kyoto protocol and similar environment treaties, but implementation has been sluggish. (2) SWOT analysis The SWOT analysis shall pertain to the company LVMH. The company’s strengths lie in its brand name, which has a long history of association with luxury and fine quality, conveying upon its owner a sense of high social status. The firm is also diversified into other products including scents, garments, jewelry and spirits, other than the bags and leatherware it is best known for. The weakness of LVMH is that its distribution is highly restricted, which originally formed part of its strategy. LVMH traditionally is sold in specialty stores, firstly to maintain its elitist image, and secondly to distance its access from the general masses and situate itself more strategically in the enclaves of the rich to which it understandably limits itself to preserve its luxury image. Opportunities to LVMH include the growing number of the wealthy in emerging markets, which provide it additional untapped demand, and to whom their brand name is already known. The lower costs of production in these countries also provide added incentive for entry. Threats exist also, however, principally that of piracy and intellectual property infringement, which is exacerbated by the weakness and corruption in the law enforcement arena in emerging countries. (3) 4 Ps As to Products, LVMH specializes in quality luxury items that convey high social status more than functionality. Products include bags and baggages, garments and accessories, scents, jewelry and spirits. As to Price, the brand name traditionally enjoys a high profit margin because of the strength of its brand name and its association to high social status and luxury. Presently, however, the price advantage is threatened because of the lower priced imitations or fake LVMH goods that have been coming out in the emerging markets. As to Place, LVMH prefers stand-alone specialty stores that bear its name, which attests to the exclusivity of the products and the brand. The specialty stores are strategically situated in the neighborhoods of the wealthy. Specialist stalls in malls and shopping centres also frequented by the higher income group is also resorted to when the situation is appropriate, but LVMH does not normally open its stores in places accessible to the masses. As to Promotion, LVMH largely thrives through word-of-mouth (WOM), particularly from one member of the elite class to another. Mass advertising is not in the interest of LVMH except for occasional broadcast and print advertising done in good taste and placed/published in magazines and shows patronized by the wealthy. (4) Boston Matrix The Boston matrix requires that a firm’s products be classified as to market share and market growth. It should be stressed here that LVMH’s market is defined as the demand for luxury goods, not the overall market for baggage and leather ware, garments and accessories, jewelry, spirits and scents that includes the lower priced mass markets. Within this context, the LVMH brand captures a large share of the market due to its brand recall and reputation. The table following shows LVMH’s revenues per group. Of its products, the firm’s cash cow is its fashion and leather goods, followed by selective retailing (i.e., specialized or custom products and services, including fashion shows). Considered stars are the wines and spirits, and the perfumes and cosmetics. The question mark among LVMH’s offerings is its watches and jewelry products with its relatively low margin, and comparatively being the newcomer in the LVMH offerings. The more traditional products of LVMH (leatherware and fashion goods) provide the highest margins and are generally unaffected by economic cycles and fluctuations. While watches and jewelry remains profitable, it is a good complement to the product offerings as it conveys the essence of luxury. Source: LVMH Annual Report 2010, p. 8 (5) Ansoff Matrix Pursuant to the Ansoff Matrix, LVMH’s brand (which is a product in itself) is an existing product in an existing market. It is best represented by its fashion garments and leather goods, for which the brand is best known. The appropriate strategy for this is therefore market penetration, which the firm intends to continue pursuing in the newly wealthy emerging markets, despite problems encountered there. Selective retailing, which is best characterized by its fashion shows and similar custom engagements, is a new product in a relatively new market, but while diversification is Ansoff’s indicated strategy for this segment, LVMH will take care as to which markets and products or services it would diversify to, in order to maintain the exclusivity of its brand name. LVMH’s other products (wines and spirits, and scents and cosmetics) are existing products that may still find new markets because of the expanding target consumer segment particularly in offshore markets; for this, the appropriate strategy would be market development. Finally, watches and jewelry are relatively new products (among LVMH’s product lines) in an existing market, and may best be addressed by further product development. Concerning the application of the semiglobalization theory by Pankaj Ghemawat, there is partial application of this theory to the luxury market where LVMH is situated, and in the product offerings of the firm. This is partly to the universality of the product lines, particularly in leather goods. Fashion goods and the holding of fashion shows, however, should be attuned to the culture and custom of the locality they are marketed in; conservative states, particularly those of Islamic persuasion, will be culturally offended by fashions that would be too revealing by their standards although they be generally accepted in Europe. In general, however, LVMH as a luxury brand is prized by its target market (the social elite and economically wealthy) as a symbol of cosmopolitanism, and would generally be impervious to moderate differences among cultures. Furthermore, the target market is generally schooled in international standards and would value and LVMH for its possession and ownership rather than its display, except in appropriate circles and occasions, and would tend to patronize its products, other considerations of geography and culture notwithstanding. Finally, Porter’s Diamond framework may be also be selectively applied to LVMH marketing. As to firm strategy, structure and rivalry, LVMH is internationally patronized for its branding strategy, and there are few rivals to its established status except also those firms with established brand reputations such as Gucci, Prada and so forth. Even then, LVMH enjoys the advantaged of being product diversified in comparison with its rivals. As for demand conditions, being luxury products the firm enjoys relative strength even in times of economic downturns because it targets the generally better off; furthermore, demand is expected to increase because of the growing wealth demographics in other progressive nations. Concerning factor conditions, the opening up of emerging markets and their lower-priced factors of production, particularly labor, provides opportunities for LVMH to relocate some of its production abroad; however, the firm must take care, in light of the piracy situation, to maintain its proprietary designs and processes within its principal operations, and subcontract only those processes that do not require transfer of proprietary knowledge or procedures. Finally, the existence of related and supporting industries in the new markets are adequate as far as production is concerned; however, there is a need for the new markets to develop their supporting regulatory structures, such as IPR enforcement and litigation procedures, to eradicate graft and corruption, and to strengthen the institutional frameworks in favour of foreign direct investments. Conclusions & Recommendations In light of the foregoing analyses, it may be concluded that LVMH has strong prospects for pursuing new markets and developing its traditional as well as new products, given the globalization process. However, the risks of proprietary rights infringements and piracy is particularly damaging to a firm the foremost competitive advantage of which is its luxury brand name. Without the Louis Vuitton Moet Hennessy brand name and image, despite the high quality of design and construction, its products would only be one of several, much lower priced substitutes currently available in the mass market, and it is doubtful that the firm will be able to recover its costs given those dire prospects. This study therefore recommends that LVMH be highly selective in the emerging markets it chooses to enter. LVMH does not rely on volume sales for its profits, but on its high profit margins which can only be attained by preserving the integrity of its luxury brand. It may choose to be selective as to which products it would field in a particular market, choosing the lower-margin products which do not enjoy wide patronage in its established markets, or create new products for exclusive sale in these countries that are differentiated from its high valued products in established markets. LVMH should also actively investigate and litigate in those cases where evidence of piracy is high and prevalent. The firm has the backing of the World Trade Organization (WTO) instrumentalities in this so as to bring countries where regulatory infractions and weaknesses are common, to be held responsible for strengthening their institutions in promoting strict enforcement of intellectual property rights. Finally, LVMH can strengthen its own supply and distribution chains – its “value chains” – so as to ensure the protection of its intellectual property, its trade and service marks, and its design and manufacturing processes. There is no better solution than prevention, because the firm could not spend more than it is likely to earn, in legal processes and court cases. Where IPR rights cannot be protected and infringements actively and effectively pursued, then LVMH should prefer not to enter such markets, in order to preserve its brand name. 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