Growth Strategy for Versace - Assignment Example

Growth Strategy for Versace Introduction Versace is a well-known high-end luxury fashion label brand launched by Gianni Versace in 1978. The brand represents glamour and elegance in its apparel and accessories design. This report discusses where Versace stands today in the global luxury goods industry. The report identifies the major risks, challenges and opportunities faced by the company as well as the internal strengths and weaknesses. Three strategic alternatives are evaluated against strategic objectives derived from the analysis of Versace’s strategic capability. The strategic alternatives are compared with the present growth strategy of the company. The report concludes with a comment on the effectiveness of the present strategy and its implications for the future competitiveness of the company. Industry and Company Analysis Versace operates in the high-end fashion industry which is a large but well-guarded industry as far as statistical data is concerned. The luxury goods industry comprises a range of diverse products including fashion, cosmetics, fragrances, jewelry and handbags. Industry Trends According to a report by Statista (2014), the size of the global luxury goods industry was €212 billion in 2013. The United States is the single largest market for luxury goods and accounts for almost half the volume of sales in the industry. Among the industry players, the most dominant player is the LVMH Group which had sales of around €29.15 billion in 2013 (Statista, 2014). A report by Deloitte (2014) states that the global luxury goods industry is experiencing a comeback after the financial crisis as demand in traditional markets is restored and emerging markets continue to grow. Consumer Needs The high-end fashion apparel and accessories sectors offer products that satisfy the aspirational needs of consumers. The main target consumers are the upper-middle and upper class consumers who possess a developed sense of luxury. These consumers are highly brand conscious and are willing to spend large amounts to communicate their high status through the consumption and display of luxury goods. The consumers are well-connected to information channels and are constantly searching for the latest luxury fashion trends to adopt. They are motivated by exclusivity and sensual marketing campaigns for their brands. Products The products in this industry include fashion apparel, jewelry, shoes, bags, watches, perfumes, and so on. Versace operates in all these product categories including fashion, eyewear, fragrances, watches, and home accessories but its primary focus has always been on apparel (Versace, 2014). Competitors Versace faces stiff competition from other global luxury fashion labels such as Christian Dior, Valentino, Gucci and Prada. These competitors operate in the same product segments as Versace and cater to the same consumer needs. Hence, competition is highly aggressive in this industry. Out of these competitors, Prada was the most profitable in 2012 (Deloitte, 2014). It is also believed to have a market capitalization of $25 billion (Webb, 2013). Competition is mainly carried out on the basis of product differentiation and marketing strategy. Each company tries to put forth a compelling and appealing marketing campaign that reflects the desired brand values. Versace has been unable to offer stiff competition because of the instability that had set in following the death of the founder Gianni Versace in 1997. The financial crisis ten years later also caught the company at a bad time while it was struggling to stabilize. Key Success Factors Success in the global luxury goods and fashion apparel industry depends on certain key success factors. Okonkwo (2007) describes some of these factors when describing the success of global giants such as Armani and others. Effective branding and marketing are vital for the growth in the luxury fashion industry. Creativity and innovation in product design and quality are also essential to differentiate a firm’s products from its competitors. Efficient purchasing systems and distribution systems are vital to reach consumers in high-value markets around the world. Corbellini and Saviolo (2009) explain that product quality, retail distribution, communication strategy and service quality are key success factors in today’s fashion and luxury industry. A segmented approach is also vital for firms competing in today’s high-end fashion industry. Evolved consumer tastes and affluence levels are also important to support demand in the industry. Okonkwo (2007) also argues that firms with the first-mover advantage are often able to compete better than laggards or followers in the industry. Strategic Capability Analysis of Versace This section analyses the strategic capability of Versace with respect to responding to the opportunities and threats in the competitive environment. In the first part, the strengths and weaknesses of the company are analyzed. Strengths Versace possesses a number of competitive strengths that can be instrumental in helping the company to weather the challenges and exploit the growth potential in the industry. Versace is currently experiencing a resurrection after a long period of struggle with Ms Versace at the helm of affairs. The company evaded bankruptcy in 2004 and has increased sales considerably under the leadership of CEO Gian Giacomo Ferraris (Mesco, 2013). The company has a vast distribution network in major fashion capitals of the world as well as some emerging destinations. The products of the company are sold through company owned stores as well as multi-label retail stores. The brand has a strong positive perception among consumers and is regularly endorsed by top celebrities of which Lady Gaga is the latest. The company has a wide product assortment which allows it to compete in multiple product categories including fragrances, eyewear, fine jewelry and home accessories. A strong leader in the form of Donatella Versace who has steered the company through the toughest crises and has helped the brand to resurge is another strength of the company. Weaknesses Along with a number of strengths, the Versace brand is also hampered by certain weaknesses which must be overcome or prevented from interfering with the growth strategy of the company. Like most designer brands, Versace products are priced high which reduces the size of the targeted market. As the company relies heavily on its brand image, there is risk of that brand appeal diluting because of the widespread prevalence of replicas and fake Versace products. The company also does not seem to have a strong differentiating quality with respect to its competitors. As the company has recently completed a transition towards stability under the leadership of Donatella Versace, it is still not in a strong position to make radical changes to its strategy. Strengths-Weaknesses The foregoing analysis shows that the unique strengths of Versace outweigh the weaknesses and the company is in a strong position to leverage its competitive strengths. As long as the leadership takes into account the human and financial resources of the company and invests in shaping the Versace brand, the company will be in a good position to leverage opportunities for international growth despite the setbacks experienced in the past. Opportunities The industry environment offers several attractive opportunities for growth in the luxury fashion sector. The most significant opportunity has come in the form of online retailing and e-commerce. Although low-end fashion labels have established a presence on the online retail platform, high-end fashion labels such as Versace have been hesitant. However, with Internet use becoming commonplace with the emergence of smartphones and mobile computing, the potential for growth through the online retail environment has become very attractive. A second opportunity is the growth potential in emerging markets such as Russia, China and Turkey. These countries have experienced economic growth while the established markets of the luxury industry have stagnated in the past few years. An affluent upper-middle class has emerged in these markets with aspirations of identifying with global luxury fashion brands such as Versace. A shift in consumer preference towards fashion tends that convey assertive style as opposed to subtlety as identified by Tungate (2008, p. 116) is another opportunity for Versace to succeed with its designs which have been often described as over-the-top (Webb, 2013). Threats Versace is likely to face threats in the emerging markets as well as the established ones. The United States still accounts for half the sales volume of the global luxury goods industry. However, purchasing power in this market has declined because of the financial crisis and economic recession. The company will have to wait for purchasing power levels in the established western markets to be completely restored to the levels prior to 2008. Even if the company decides to venture into emerging markets, it will have to deal with the competition from local designers who possess better knowledge of local climatic conditions, cultural norms with regard to fashion and local consumer tastes. The lack of sufficient intellectual property protection laws in emerging markets could make it easier for knock-off brands as well as local designers who copy international designs to evade punishment. Kapferer and Bastien (2009) explain that counterfeiters can steal the functional as well as the dream aspects of a luxury product. Therefore, guarding the brand against counterfeiting is an important challenge. Another challenge is posed by the company having lagged behind its rivals who have developed innovative products and set up vast distribution networks during the time Versace has been trying to stabilize itself. Opportunities-Threats When the threats facing Versace are weighed against the opportunities offered by the environment, the Versace appears to be in a strong position. The potential for e-retailing and growth in emerging markets should enable the company to prevent the threats from becoming a major obstacle to its growth. Analyzing the SWOT Matrix Key Strategic Issues The SWOT matrix along with the scoring for each factor is presented in the Appendix of this report. Analysis of the SWOT matrix shows that the highest scoring strength of the Versace Company is its strong and experienced leadership which scored 0.9 in the analysis. Donatella Versace has steered the company since the death of her brother in 1997 and has since then introduced several brads including Versus which caters to the young consumers. At the same time, the weakness with the highest score is the financial position which received a score of 0.6 among four other company weaknesses. The most attractive opportunities for Versace are situated in the areas of e-retailing and emerging markets because of the untapped growth potential for Versace beyond its traditional markets. At the same time, Versace should also be wary of competitive rivalry from well-heeled rivals such as Louis Vitton and Prada among others such as Ralph Lauren in the United States, and Armani and Gucci in its home market. The threat of competitive rivalry received a score of 0.9 in the SWOT matrix analysis. Identification of Strategic Objectives On the basis of the foregoing analysis, the following strategic objectives can be extracted and articulated to guide the strategy development process at Versace: The company should significantly diversify its product range and markets to minimize the threat from competitive rivalry in any particular market or product segment. The company should expand its distribution network by creating more channels and locating itself in places that are easily accessible to the consumer. The brand values of elegance, glamour and style should be communicated and reinforced in the marketing campaigns. The company should expand its customer base to drive up revenue growth and profitability in the short term. Determination of Base, Direction and Method The market development strategy of the company should be developed after considering the growth options available to it. Strategy may be directed towards product or market development, diversification or consolidation of existing business operations. These strategic directions are presented in the form of the Ansoff matrix (Spender, 2014). In the present situation, Versace should choose the direction that is appropriate for its current resources and competencies as determined by the SWOT analysis. Up until the present, the company has been largely pursuing a consolidation strategy by serving existing markets with a traditional range of products. This has been necessary because the company was going through a phase of restructuring and instability. However, the company has now emerged from that stage and should now look to more dynamic growth directions. Versace has the opportunity to choose from several growth methods. The company may pursue organic growth or it may enter into strategic alliances with a partner (Johnson, Scholes and Whittington, 2006). There is also the possibility of undergoing a merger with an existing label or acquiring a smaller company. Out of these, the first and third options are not feasible because the company does not have adequate resources to finance organic growth on a global level. Secondly, mergers and acquisitions would involve reconciling differences in design philosophy and values which would be impossible to achieve for a luxury fashion label. Hence, the company should search for a strong partner who can provide access to resources needed by the company to implement its growth strategy. Strategic Alternative 1 The first strategic alternative available to the company is to pursue growth through product diversification. The SWOT analysis shows that there is a threat of low switching costs for the customer and a high threat of competitive rivalry. Versace has struggled over the years to strengthen its brand as a credible luxury fashion label. The company may now be in a position to consolidate its position and neutralize the risk of competitive rivalry in its product segments by developing new products. The company has a strong team of experienced designers and a strong brand image. It can use these resources to develop a new product segment where it can perform effectively without the risk of competitive retaliation from entrenched rivals. However, there are some risks associated with this strategic alternative. Versace does not possess adequate financial resources that are essential for starting a new product line altogether. In such a scenario, adding variants to existing product lines such as Versus or the fragrance line may be a more reasonable strategy. While this would entail the threat of competitive retaliation, Versace appears to be in a strong position to overcome this threat through its strong marketing campaigns and positive brand image. In this way, the company can pursue market growth by investing in new product development. Strategic Alternative 2 The second strategic alternative that Versace may pursue is catering to emerging markets. The company has a positive reputation in these markets because of its successful marketing campaigns in recent years. Moreover, the rising income levels in emerging economies have increased the demand of the local affluent classes for luxury products. Moreover, the rapid westernization of these societies as a result of globalization has also made western luxury brands more appealing than local designer labels. Hence, this offers another window of opportunity through which Versace can expand its global operations by entering new market territories. It should benefit from a large population and high preference for its products. There are a number of risks associated with this strategic alternative as well. Firstly, Versace has focused mainly on western markets for most of its history. Its design sensibilities and marketing campaigns also reflect a deep understanding of western markets and consumer needs. As most of the emerging markets are situated in Asian countries including Turkey, India, South Korea, etc. the company would have to weigh the risks of failure by not matching the needs and cultural sensibilities of the local consumers. Design language may not be translated in the same way in a different culture. Therefore, the company must exercise caution if it chooses to go with this alternative. Strategic Alternative 3 The third strategic alternative which the company may pursue is entering into a partnership or strategic arrangement with another luxury brand label. If the company opts for such a strategy, it will benefit from a more advanced partner who possesses financial resources and a vast distribution network that Versace can leverage for its own products. This would give Versace an opportunity to catch up on the market that it had not been able to capture while it was going through a period of reorganization after the death of Gianni Versace. This strategy would require extensive restructuring and reorganization which may put a lot of strain of the company as it has only recently emerged from a period of instability. As such, this alternative could be the most costly as well as risky one for the company. In addition to the restructuring at the corporate and organizational level, the company would also need to make decisions about selecting which product lines it would continue under the merger and how it would deal with dropped product lines. The company has spent years developing a brand image which could be diluted after the company enters into an alliance with a different label. Moreover, Versace may not necessarily be successful at finding a company that would be interested in such an arrangement and would be compatible with the company’s products and design sensibilities. Comparison with the Present Strategy The present strategy of Versace is to expand its financial resources by issuing a public offering in the medium term. This is a sound strategy because it will enable the company to access financial resources whenever required simply by issuing more stock. This was not possible as long as the business continued to operate as a family enterprise without the support of external investors. However, as reported by Mesco (2014) in the Wall Street Journal, the leadership of the company is interested in strengthening the resource base of the company so that the public offering can attract a positive response from investors. In order to expand its operations in both traditional as well as emerging markets, the company has executed a deal with a private investor group named the Blackstone Group under which 20% stake in the company has been exchanged for funding. The company aims to use this financial inflow to invest in the expansion of its product line into menswear and accessories as well as entering new markets such as Turkey and South Korea. The present strategy is a reasonable strategy compared to the strategic alternative identified above. The present strategy is suitable because it addresses the key strategic objectives of diversifying its product range and market development. By pursuing related diversification, the company can increase the revenues generated from existing consumers who are familiar with the product quality and design. Te present strategy is also feasible because it has been implemented in an incremental fashion, with the IPO expected to take place in three to four years. This would not put undue pressure on the existing resources and capabilities of the company. The present strategy is also feasible because it is based on the resources and competencies already at the disposal of the company. The existing design team can create new designs for the menswear and accessories lines. Distribution managers can collaborate with retailers in emerging markets to find appropriate store locations. Conclusion On the basis of the foregoing analysis, it can be concluded that the most appropriate strategy for Versace is to continue exploring ways through which it can grow its business without consuming its internal resources. This is an important requirement because Versace is currently ranked 49 among the top 75 luxury goods brands by Deloitte (2014). This is not an appreciable position for a company that showed immense potential a couple of decades back. As the global economy recovers from the economic crisis, demand in developed and developing markets is expected to increase. This is a good opportunity for Versace to place itself in a strong position so that it is ready to serve the needs of luxury goods consumers in diverse markets around the world. In order to do this, the company should leverage its strong brand value and leadership skills for rapid growth as opposed to organic growth. This strategy would enable it to narrow the gap between its performance and that of its competitors without exposing the company to excessive risks. Appendix SWOT Matrix Factor Importance Rating Score Strengths Strong leadership 0.3 3 0.9 Organizational stability 0.2 2 0.4 Diverse product range 0.05 2 0.1 Wide distribution network 0.02 2 0.04 Positive brand image 0.03 2 0.06 Weaknesses Weak financial position 0.2 3 0.6 High prices 0.05 1 0.05 Replicas 0.05 1 0.05 No strong differentiating feature 0.1 2 0.2 History of instability 0.1 1 0.1 Opportunities E-retailing 0.2 3 0.6 Emerging markets 0.2 3 0.6 Celebrity campaigns 0.01 1 0.01 Product diversification 0.01 2 0.02 Social media marketing 0.1 1 0.1 Threats Local designers 0.01 2 0.02 Competitive rivalry 0.3 3 0.9 Weakened demand in traditional markets 0.05 2 0.1 Insufficient IP laws 0.05 1 0.05 Lowered customer loyalty 0.07 1 0.07 References Corbellini, E., and Saviolo, S. (2009). Managing Fashion and Luxury Companies. Rizzoli Etas. Deloitte. (2014). Global Powers of Luxury Goods 2014 in the Hands of the Consumer. [Online]. Available at: http://www2.deloitte.com/global/en/pages/consumer-business/articles/global-powers-of-luxury-goods-2014.html [Accessed on 18 July 2014]. Johnson, G., Scholes, K., and Whittington, R. (2006). Exploring Corporate Strategy: Text and Cases, 7th ed. Pearson Education. Kapferer, J. N., and Bastien, V. (2009). The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands. Kogan Page. Mesco, M. (2013). Versace studying bids for 20% stake. The Wall Street Journal. [Online]. Available at: http://online.wsj.com/news/articles/SB10001424052702304747004579223950944631702 [Accessed on 18 July 2014]. Mesco, M. (2014). Versace sells minority stake to Blackstone. The Wall Street Journal. [Online]. Available at: http://online.wsj.com/news/articles/SB10001424052702304709904579408542652711148 [Accessed on 18 July 2014]. Okonkwo, U. (2007). Luxury Fashion Branding: Trends, Tactics, Techniques. New York, NY: Palgrave Macmillan. Spender, J. C. (2014). Business Strategy: Managing Uncertainty, Opportunity, and Enterprise. Oxford University Press. Statista. (2014). Statistics and facts on the global luxury goods industry. Statista. [Online]. Available at: http://www.statista.com/topics/1110/global-luxury-goods-industry/ [Accessed on 18 July 2014]. Tungate, M. (2008). Fashion Brands: Branding Style from Armani to Zara. Kogan Page. Versace. (2014). The Group. [Online]. Available at: http://www.versace.com/en/the-group [Accessed on 18 July 2014]. Webb, Q. (2013). Versace valuation may be as over the top as its clothes. The New York Times. [Online]. Available at: http://dealbook.nytimes.com/2013/12/03/versace-valuation-may-be-as-over-the-top-as-its-clothes/?_php=true&_type=blogs&_r=0 [Accessed on 18 July 2014]. Read More