Internal and External Growth Strategy - Case Study Example

STRATEGIC PLANNING al Affiliation) Q1. Distinguish between internal and external growth strategy. What advantages and disadvantages might each generate for businesses within the Italian fashion industry? Internal growth strategy involves the development of an organization using internally available resources. This strategy has its focus on the development of new products, better marketing strategies and the hiring of qualified personnel to run the organization’s operations. Internal growth strategy, therefore, takes the form of modernization, diversification and expansion. Business expansion in the Italian Fashion Industry can lead to better utilization of the industrial resources and foster stiff competition amongst the companies. This strategy involves the raising of sales revenues, market shares and profitability of the current products in the Italian fashion industry. The expansion in this industry, may involve the increase in the products available in the market. For instance, Gucci can decide to produce more bags into the industry hence increasing their market share of the total bags in the industry. This strategy, however, can lead to overproduction in a company, which relates to oversupply in the markets (Bandinelli et al., 2013). Such situations often lead to a decline in the market prices of related commodities in the market. Apart from expansion, diversification is an internal growth approach that enables the companies to enter new business lines that not similar with the current business operations. Diversification has four major divisions namely the vertical, concentric, horizontal and conglomerate diversification. Diversification improves the marketing and economic ability of a company and enables the companies to tap into market sectors that are underperforming towards the fulfilment of customer needs (Capello & Ravasi, 2009). This strategy, nevertheless, in the Italian fashion industry, may require extreme knowledge of the industry and the prevailing trends in that particular industry. In the event that a clothing company decides to diversify into the manufacture of shoes, the company may have to invest extra funds in hiring quality professionals to produce shoes that will attract customers from the other retailers. On the other hand, external growth strategies are development plans that involve cooperation between one company and another from the same region, country or from foreign regions and countries. Collaboration is a major trend in the Italian fashion industry that involves the companies working jointly to pursue a common goal. The Valentino Fashion Group that involves the Versace, Dolce & Gabbana and the Armani Collections is an example of external growth strategy that aims at gaining market share of the Italian clothing industry. This strategy is disadvantageous in the sharing of profits as the umbrella body of Valentino Fashion Group claims the largest chunk of the market revenue (Paulicelli, 2014). More often, the companies in the collaboration find it difficult to exit the agreement, as they are unsure of the market uncertainties without the key marketer. Mergers, on the other hand represent two companies that come together in production and supply of their products using one brand name. In the Italian fashion industry, the mergers of luxury brands are a strategy that aims at locking out new entrants into the lucrative business field. However, the mergers present difficulties in splitting of assets and revenue in the event of dissolution or termination of the merger contract. Q.2 If you were seeking to launch a fashion company, and capture the success of companies in the Italian fashion industry, what key features would you seek to copy and incorporate into your own business model? The Italian fashion industry is amongst the world’s leading fashion destinations. The ownership of a company plays a critical role in the development of that company, especially in the Italian Fashion industry. Previously, the trademark giant Italian fashion companies were entities owned and managed as family businesses. However, with the current trends in globalization, private equity funding ownership will enable my new company to have an impact on the market. Such companies receive massive funding form credit facilities that enable them to expand and diversify their production. Besides, multi branding will enable the company to have a rapid growth in market shares (Tavoletti, 2009). Having secured the necessary start-up capital, I would look for a reputable licensee to develop and produce my collections. This trend has assisted many prominent fashion designers in Italy like Valentino, Armani Gaultier, and Ferre. These designers enable me to acquire a wide range of services and competencies with the little investments I have managed to raise. These designers will provide me with materials, manage my sales, equip me with the manufacturing techniques and inform me on the trade and markets analysis. After, the expiration of the license, I draw a growth strategy that will steer my company through the industry. The growth policy that I would choose for the company would be critical in determining the success of my company in the Italian Fashion Industry. During the first few periods after entry into the industry, I would implement a merger with a giant and established clothing line such as Armani, Gucci or Prada. This is necessary for my company to get the experience on how to initiate strong market strategies that are attractive to the customers (Bandinelli et al., 2013). After acquiring the experience, I will diversify into other products within the clothing industry. Besides, I will not focus on the production of luxury fashion designs; instead, I will specialize in producing standard products that are affordable across the entire social class. With these advancements, I will then shift into international markets. These markets are challenging in terms of the diverse requirements considering the different tastes and preferences of people across different cultures. With the entry into international markets, the focus will be on the low-income countries that require quality products at a cheaper price. This way, I will build a brand that is not only prominent in Italy, but also in other countries around the world (Cerruti and Delbufalo, 2009). Q.3 Using the Value Creation Frontier, consider how you might map the main companies within the Italian fashion industry Value creation Frontier of the the Italian Fashion Industry A value creation frontier represents the maximum value amount of products that can be provided to customers by different companies in a given industry using varying business models at one time. The companies at this frontier often have competitive advantage over the other companies, which are not in this frontier. Similarly, these companies enjoy profits that are above the average profitability of the companies in this industry. The overall cost leadership role in the value creation frontier requires the companies to develop benchmarks that aim at making them the lowest cost producers and distributors in the industry. This strategy, as in the Italian fashion industry suits such companies like Armani and Dolce & Gabbana. These companies have strategies that aim at controlling the costs with inclusion of tight overhead and costs control, the construction of facilities of efficient scales, avoiding customer marginal accounts and the minimization of the companies’ expenses incurred in operation. Besides, the cost leadership role in the Italian markets characterizes the companies to have tight control of their labour and wages costs, reduced input costs and lower costs incurred in distribution. Armani sells branded products, just as Dolce & Gabbana, but they have managed to gain direct contact with many customers. This is not to mention, however, that these companies do not have merchandise ranked as luxury goods. These fashion companies retain their profit margin by lowering their production costs. Therefore, in the cost leadership of the Italian fashion industry, Armani and Dolce & Gabbana enjoy competitive advantage by under pricing the competition while maintain the equal profit margin (Gull, 2014). However, these two companies often engage in price wars that often push the profits and revenues to terribly low levels. In the second value creation frontier mapping of the companies in the Italian industry, the differentiation strategy appears. Differentiation involves the production of products that are unique in the industry. This trend is rampant mostly amongst the luxury brands (Chevalier and Mazzalovo, 2008). Besides, these companies mostly have private ownership and are listed in the stock exchange as parts of multi brand groups. This trend, nevertheless, is uncommon in the Italian fashion industry. The companies that suits mapping as differentiators include Gucci, Diesel, IT Holding, Miroglio, Max Mara, and Tod’s. Differentiating companies use this advantage to produce goods that are perceived as luxurious in the mindsets of customers (Capello & Ravasi, 2009). Whether or not the features that these customers admire are real, the perception of the customer remains to be that the features are not commonly found in other competing products. Gucci handbags for example have a specific pattern that differentiates them from other handbags. The shapes of the handbags may be similar, but the luxury in the perception of the customer is in the pattern of the Gucci handbag. Differentiation enables the companies to sell their products at higher prices in the market than their competitors. For successful companies like Diesel and Gucci, the customers are willing to pay more for the marginal cost of adding the feature that distinguishes the differentiated brand. However, differentiation is a strategy that requires patience and customer loyalty in order to succeed. In a competitive market like the Italian fashion industry, only the big and established companies can implement differentiation. Q4. What form of product line extension do you think that Gucci should pursue next? Give the reasoning for your answer Gucci offers a line of luxury products that are exclusive and unique in their design. The company is the biggest selling brand of Italian origin. Currently, Gucci has a number of accessories ranging from footwear to handbags to children cloth line and belts. However, Gucci does not have a collection of official suits that define success for some companies like Armani and Versace. The choice to venture into product extension of official suits produces an opportunity for Gucci’s large customer base to diversify into consumption of the company’s related products. The brand already enjoys global consumer knowledge in the strongest economies in the world. This creates the opportunity for the company to save on such costs as the promotion of a new brand and the awareness of the customers (Freire-Suarez, 2014). The new product will only require Gucci to communicate its specific benefits to the prospective customers. In addition to the consumer knowledge, Gucci has worldwide reputation for consumer trust, being a brand that is strong and qualitative. Many customers expect the new product to have luxurious and unique features that historically define the Gucci brand. In the clothing industry, many consumers have a tendency of trying out products from brands with which they are familiar. This trust enables Gucci to introduce their products into the market easily. Gucci will need to design an outfit that suits the standards of their prospective customers. The lower costs that the company incurs in the introduction of the official suit enable them to channel the excess costs towards the production of a prominent promotional strategy. Significantly, the company will rely on the brand name to market and advertise the new product to the customers. The introduction of the Gucci brand of official suits will enhance the visibility of the brand beyond the previous target group. Initially, Gucci sold only jeans that are a preserve for casual wear and the young generation. In the extension of the brand to include official suits, the target group will broaden to include the elite and working classes of the consumer bracket. Therefore, this new product will enhance the brand’s visibility (Capello & Ravasi, 2009). Due to the competition that Gucci faces in the design of trademark products like bags, cosmetics, footwear and belts, the introduction of this new product brand will rejuvenate the brands image. The product will be a source of energy for the tired brand, as more customers will be looking forward to accessing more products in that line from Gucci’s brand. Besides, it gives room for more innovation and re-evaluation of the quality of products that are already available in the company’s cloth line (Paulicelli, 2014). In conclusion, the competitive strategy that a company employs is critical in the determining the impact of that organization in a particular industry. References Bandinelli, R., Rinaldi, R., Rossi, M. and Terzi, S. 2013. New Product Development in the Fashion Industry: An Empirical Investigation of Italian Firms. International Journal of Engineering Business Management, p.1. Capello, P. V., and D. Ravasi. (2009). The variety and the evolution of business models and organizational forms in the Italian fashion industry. Business and Economic History On-Line, 7. Retrieved January 24, 2010 from: http://www.thebhc.org/publications/BEHonline/2009/capelloandravasi.pdf Cerruti, C. and Delbufalo, E. (2009). International sourcing effectiveness in the fashion industry: the experience of Italian industrial districts. International Journal of Globalisation and Small Business, 3(4), p.427. Chevalier, M. and Mazzalovo, G. (2008). Luxury brand management. Singapore: John Wiley & Sons (Asia). Freire-Suarez, P. (2014). Penetration of sustainability in corporate agendas and its potential for expansion. Building Sustainable Legacies: The New Frontier Of Societal Value Co-Creation, 2014(2), pp.37-66. Gull, S. (2014). Corporate Sustainability: An Emerging Paradigm to Gain Competitive Advantage.Building Sustainable Legacies: The New Frontier Of Societal Value Co-Creation, 2014(3), pp.8-34. Lecture Notes Paulicelli, E. (2014). Italian fashion: yesterday, today and tomorrow. Journal of Modern Italian Studies, 20(1), pp.1-9. Tavoletti, E. (2009). Strategy and Structure in the Italian Fashion Industry: A Case of Internationalisation. Transit Stud Rev, 16(3), pp.655-670. Read More