The Fashion Luxury Industry - Essay Example

Introduction

In the contemporary business environment, the competition is stiff, and thus the need for organisations to focus on making strategic choices that can ensure they remain relevant in the marketplace. In essence, a focus on strategic choices is necessary if a given organisation wants to position itself in terms of implementing strategic decisions that are sustainable (Shafer, Smith & Linder, 2005). Similarly, the constant changes in the business environment require organisations to maintain a focus on strategic choices. Such choices are necessary to ensure organisations are dynamic and can adapt to the constant changes in the marketplace. In order to implement such strategic choices, organisations can rely on various strategic models that include, for instance, the BCG matrix (Teece, 2010). In essence, this paper examines how the BCG matrix can be applied at Burberry to assist in making strategic choices.

Organisation Profile

Burberry Company is based in the UK, and mainly focuses on manufacturing, wholesale and retailing of luxury goods. In addition, the firm specifically engages in designing, producing and selling its products using the Burberry brand. The product categories associated with Burberry include, for example, men and women’s apparel, other accessories and beauty. The company boasts of its own distribution network that includes 497 stores. With the increased use of the new media, Burberry has also created its own online store to reach more customers across the globe. In order to expand sales, the Company has also licensed its partners in other parts of the globe to sell its products such as fragrances, children wear and timepieces (Burberry, 2016). On the other hand, the firm’s retail and wholesale sections mainly focuses on selling luxury goods in the mainline stores, outlets and online stores. On the other hand, the Company has also established its subsidiaries in Europe, Asia, United States, Asia Pacific region and Africa. In general, Burberry mainly operates in the luxury fashion industry (Burberry, 2016).

Strategic theory

Strategic models in the business environment play an important role in ensuring that businesses make informed choices that resonate with the changing trends in the marketplace. Among such strategic models is, for instance, the BCG matrix that is vital in assisting firms to analyse their business units. Such units include, for example, the product lines (Hax & Majluf, 1983). As a framework that was formulated by Boston Consulting Group for purposes of evaluating the strategic position of a given business’s brand portfolio and potential respectively, the BCG matrix operates in terms of classifying a given business portfolio into four different categories that are informed by the industry attractiveness and competitive position. In essence, the two dimensions (industry attractiveness and competitive position) play a role in assisting a given business to understand its potential in the marketplace, and the resources it might need to support its brand portfolio in the marketplace and subsequently, the revenue that can be generated from such an understanding. In addition, through the BCG matrix, businesses are better place to understand the brands that they should invest in and those to divest (Hambrick, MacMillan & Day, 1982).

Based on the relative market share and market growth rate that tend to inform the evaluation of business portfolio using the BCG matrix, a higher market share means translation into higher cash returns. As such, firms with a higher market share can produce more by taking advantage of economies of scales to generate more profits (Tassabehji & Isherwood, 2014). However, it is also important to note that situations may arise where some firms can experience similar advantages with lower production outputs and lower market share. On the other hand, high market growth tends to translate into significant profits, but also requires the use of more resources. Such resources can be in the form of cash that can be used as an investment to fast-track growth. On this note, business units that tend to operate, for instance, in rapid growth industries need to use more resources such as cash especially in situations where they anticipate growth or maintaining the market share (Goold, 1996).

Essentially, the BCG matrix, as a model used to assist firms to make strategic choices, consists of four quadrants that can be used to classify a given firm’s brands.

Table 1: The BCG matrix

Source: NetMBA, 2016

Dogs refer to brands that hold a low market share when compared to the competition, and tend to operate in a market that is growing at a slow pace (McCabe & Narayanan, 1991).In general, such brands may not be worth investing more resources in as they are likely to generate low returns. However, there are some brands categorised as dogs that can be profitable for a sustainable period of time. In addition, such brands may play a role in providing, for instance, synergies for other brands or used to counter competitors moves. On this note, it is important for firms to engage in a thorough analysis of all their brand portfolios prior to considering choices such as divestiture (Wirtz, Schikle & Ulrich, 2010).

Cash cows, on the other hand, are brands considered to be the most profitable, and as such, should be “milked’ to generate as much revenues as possible. On the same note, the cash derived from “cows” should be channelled for investment purposes in the stars to promote further growth. As noted by the proponents of the growth-share matrix, firms should not invest into cash cows to support growth, but can only provide support to ensure they maintain their current market share. However, it is also important to note that cash cows are common with large firms that are better placed to develop new products or processes thus creating new stars(McGrath, 2010).

In essence, such developments or innovations are enhanced by the support derived from the cash cows. The strategic choices that can be derived from the cash cows include, for instance, product development and diversification. Stars, on their part, are the brands that operate in high growth industries and also recognised for maintaining a high market share (Nath & Sudharshan, 1994). In addition, they are also viewed as cash generators and cash user respectively. To this end, stars are considered as the key units that firms need to invest a substantial amount of resources in because they can become cash cows and generate significant cash flows (Ghemawat & Levinthal, 2008).

Conversely, it is also important for firms to note that not all stars can turn into sources of cash flows. For instance, in a rapidly changing business environment, a continued focus on new innovations that has been enhanced by technological advancement can easily turn a star into a dog (Ford, Sharfman & Dean, 2008). On the same note, the strategic choices that can be derived from the stars in a given firm include vertical integration, product development and market development (Zott & Amit, 2008). The other component of the BCG matrix is Question marks, which denotes those brands that require more attention. While they are considered to hold a low market share especially in the rapidly growing marketplace where more cash is used and significant losses incurred, they have the potential to penetrate the market, and transform into a star, which can later become a cash cow (Morgan & Strong, 2003).

An important factor for firms to consider is that question marks in most cases do not become a success even with substantial investment because it is not certain whether they can gain market share. As such, they require more attention in order to determine whether they are worth investing or discarded. Similarly, the strategic choices that can be derived from the question marks include, for instance, market penetration, product development and divestiture (Wang & Zhou, 2008).

Applying the BCG matrix to make strategic choices at Burberry

As a luxury brand, Burberry deals in a number of luxury goods that target different customer segments. The luxury goods that the Company produces and sell to the target customers include both men and women apparel, accessories and beauty. With the advent of fast fashion industry, the competition has become stiffer as new fashions are introduced into the market almost on a weekly basis (Anders, Henrik & Rainer, 2015). Further, with the advancement in technology, the innovativeness of companies in the sector is more enhanced as evident on the new products that are introduced into the marketplace on a frequent basis. As such, adaptability in the contemporary luxury fashion industry requires a focus on strategic choices to remain relevant in the marketplace (Zahra & Nambisan, 2012).

Making strategic choices would require the Company to analyse its brand portfolio in the marketplace. An ideal model to use includes, for example, the BCG matrix. In general, the position of a given company as observed by the BCG matrix can provide a clue of how it generates cash and uses it respectively. At Burberry, its apparel unit can be considered as a rapidly growing unit. As such, the cash needed to sustain the growth of the firm’s apparel unit can be sourced from other units such as accessories and beauty (Hamel & Prahalad, 2005). The high demand globally for fashion accessories and beauty plays a role in ensuring that Burberry generates more cash that it can use to support the growth of its apparel unit. In the globalised business environment, the apparel market is competitive with prominent companies such as Zara jostling for the same market share with Burberry (Anders et al., 2015).

Gaining a competitive edge over a company such as Zara that has increasingly shifted to fast fashion would require Burberry to invest more cash in its apparel business unit to support a fast growth and remain relevant in a constantly changing marketplace. In relation to the experience curve as noted by the BCG matrix, an increased investment in the firm’s apparel unit would ensure it becomes a leader in the marketplace and subsequently develop a cost advantage (Heracleous, 1998).

Fig 2: The experience curve

Source: NetMBA, 2016

When making strategic choices using the BCG matrix, the identification of dogs would allow Burberry to know its brands that hold a low market share and, subsequently, a low growth rate. In addition, since such brands may not generate or use more cash, it is important for the Company to consider what to do with such brands because they can be a cash trap (Sharma & Fisher, 1999). As such, the strategic choice that would ensure Burberry does not run at a loss includes contemplating, for instance, divestiture. The question marks at Burberry include, for instance, the apparel business unit that is growing rapidly, and thus requires a substantial amount of cash. However, the low market share that the Company is currently experiencing in the apparel market compared to a well-established firm such as Zara means that Burberry is still not in a position to generate significant cash from its apparel business unit (Herbane, Elliot & Swartz, 2004).

In this respect, a significant investment in the apparel business unit can turn it into a star. Consequently, when the firm’s apparel business unit is transformed into a star, the potential for the firm to generate more cash is a possibility due to the exploits of a strong relative market share. If the Company can ensure its apparel business unit remain a star, then, the chances of this unit becoming a cash cow is high. In the event that Burberry turns its apparel business unit into a cash cow, then, this unit should be “milked” to turn other question marks in the Company into market leaders (Hackling & Wallnofer, 2012).

Conclusion

The contemporary business environment is competitive, and constant changes enhanced by technological advancement mean that firms have to make strategic choices in order to remain relevant in the marketplace. Such choices can be derived from strategic models that include, for instance, the BCG matrix. Burberry operates in the fashion luxury industry and faces stiff competition from well-established fashion firms such as Zara. As such, a focus on strategic choices would ensure key decisions are taken that can help the company to generate significant profits and subsequently improve its brand portfolio in the marketplace. Such improvement can be achieved through the reliance on the BCG matrix that can help the firm to map its business unit positions within the two key determinants (market growth and relative market share) of profitability.