Competitive Advantage at Louis Vuitton and Gucci - Case Study Example

Question To what extend would Louis Vuitton and Gucci Key Success Factor (KFS) and sources of competitive advantage be sustainable in Asia and transferable to other parts of the world Louis Vuitton Mot Hennessy (LVMH) group came into existence in 1987 and is considered relatively new compared to other fashion houses. LVMH is the market leader for luxury brands and products having its portfolio of over 60 exalted luxurious brands in five different sectors including wines & spirits, fashion & leather goods, perfumes & cosmetics, watches & jewellery and selective retailing. These luxurious brands include high street names including Louis Vuitton, Christian Dior, TAG Heuer, Donna Karan, Givenchy and many others. Its sales reached up to 16.5bn in 2007 and it operates through a retail network of 2,000 stores worldwide employing 71,000 people throughout its value chain. While on the other hand Pinault-Printemps-Redoute (PPR) is a French retailing group which incepted in 1963 and having strong entrepreneurship background and performance driven culture, it became one of the leading fashion empires. PPR incorporates 6 different business groups including Fnac, Redcats Group, Conforama, CFAO, Puma and Gucci Group. Shared between these groups is a list of business segments including electronics, home furnishing, fashion & leather goods, perfumes & cosmetic, watches & jewellery serving both high margin luxurious and broader consumer markets. Some of the well known brands include Gucci, Puma, Yves Saint Laurent, Jessica London, Woman Within and many others. The much controversial acquisition involving LVMH of majority shares in Gucci group added great asset to the group (Democratic Dentist, 2007). With its distinctive brands Gucci group has allowed the group to become an active participant in the high-end luxurious products' market. LVMH and Gucci's Key Success Factors: Both LVMH and Gucci host a number of luxurious brands which have their own individuality in terms of designing, inbound and outbound logistics, marketing and value to these companies. The most important success factor for these companies has been the valuable brands they serve. These brands have a long established history for delivering products which have been appreciated and accepted as the source of luxury. By luxury we mean products or services which have high economic value and have a limited market of the richest and elites. Both companies have cultivated strong marketing tools to ensure that their brands remain active in the market and are not renounced at any times. Furthermore, their presence and major fashion shows in major cities including New York, Paris, Milan, London, Singapore and Berlin creates a real impact for these companies. The overall impact of rejuvenating brand is increasing demand for prestigious products even at higher prices than market average. The second most important success factor is that these companies have constantly engaged in the process of evolving. From just being single business line entities they have not been hesitant to explore opportunities available in the market. This is mainly due to the inspirations and charisma of the groups' creative directors who had long term vision for making their brands as household name. The companies have grown as conglomerate of brands with product lines in different market segments however keeping in view the value in terms of the extravagance and luxury for their users. The companies have been able to differentiate from their competitors in many ways. Most importantly is that these companies have kept a unique culture and control over the use of their brands. They have not allowed excessive franchising and licensing of their brand which would dilute their brands as experienced by some of the leading fashion brands such as Pierre Cardin which lost its presence in the luxury market because of the overuse of the brand in 1980s for over 800 products (Lynch, 2005). The consideration of the companies' value chains indicate that both companies aim to work with controlled suppliers and have direct interaction and involvement in the process of transforming the design idea into the final product. Few of the products are also licensed to use the brand name however still strict control over the quality and product design is maintained. The designers' affiliation with the designs and products is very important. Both companies have associated with renowned designers whose name, flamboyance, creativity and ability provide these fashion houses with results and high competitive advantage over their competitors. LVMH and Gucci have focused on their own retail outlets promoting the similar attire and shop culture providing customer focused services. This also had allowed the companies to retain maximum profit margin and developed discretion for their valuable clients. Asia and other markets perspective: LVMH and Gucci have long promoted and enjoyed strong ties with the production facilities they use. This is the reason for their which strong presence in major cities of Europe and U.S.A. Asian countries such as Japan, China, Hong Kong, Korea and even Singapore has been targeted by these companies because of the wealth these countries hold and the increasing demand for luxury items is soaring in this region. LVMH has established its production facilities in Philippines and India however the supply chain has been criticised for not meeting the accepted standards. China, which is emerging as a big market for luxury items after Japan, Hong Kong and to some extent Singapore, has been blamed for its weak trade regulations which allow its manufacturers to illegal use luxury brands (Barham, 2008). Improvement in production techniques has created a parallel market for fake luxury brands which affects the demand for genuine products. This is the reason that LVMH is reluctant to launch its Chinese production facility as the brand faces greater threat from fake products sold at fraction of company's retail prices. Even Gucci faces the same dilemma as both these companies have invested heavily to build their competitive edge and market conditions in Asia are to a great extent damaging their reputation as fake products are sold as originals which puts the brand on the back foot. Companies offering luxury items have a great potential in Asian market seeking greater revenues outside U.S. and Europe however these companies require more controlled operations in these regions. Therefore, to sustain and retain competitive edge in such markets LVMH and Gucci needs to adopt principles of good governance, better working environment and marketing to defend their brands. Question 2 Identify how Louis Vuitton and Gucci might use the concept of dynamic competitive advantage to develop its strategy. What are the benefits and risks of such an approach Asia market for luxurious brands and product has been fuelled up by the recent upsurge in the economic boom in the region. Countries like China (Mainland), Hong Kong, South Korea, Taiwan, Philippines, Singapore and India have attracted foreign and local investments which not only generated phenomenal growth in these countries but also gave birth to multimillionaires who are seeking luxurious brands and products. Most of fashion houses have contracted with Chinese suppliers for developing their luxury goods inspired by the increasing demand for their products by Chinese and nearby Asia-Pacific region. Sales of luxurious items soared to $2bn in 2004 and are expected to reach $11.5bn by 2015 in China alone (Chung, 2007). Similarly, Japan, Singapore and India also pose identical scenario where wealth is accumulating and people are becoming brand and quality conscious. We will consider Porter's dynamic competitive advantage model to understand how companies like LVMH and Gucci can outperform in the Asian markets and challenges they have to embrace in these markets. Porter's Determinants of Competitive Advantage: Michael Porter explained how competitive advantage can be achieved by altering and finding the right mix of value chain activities. He developed a way to explain achievability of competence as the Competitive Advantage Model which prescribed competitive strategy as either offensive or defensive course of action to create a sustainable position in the industry facing the challenges of the competitive forces and performing at above average than other participants. He identified two basic types of competitive advantage that are 'cost leadership' and 'differentiation' and more narrowly another type that is 'focus' (Porter, 1998). LVMH and Gucci's Case for Competitive Advantage Strategy: Both companies LVMH and Gucci have developed a sustainable and progressive position in the world's fashion industry and are recognized for their prestigious brands and unprecedented creativity and quality. Their experience in Asia markets (see Appendix I & II) has been encouraging as these companies sought to achieve greater revenue from emerging markets where people are becoming more aware and concerned with the image these luxurious brands could add up to their lifestyle. Both companies are serving in the same market segment that is marked by high profit margin therefore not all of their value chain activities do not necessarily add competitive advantage (Lynch, 2005). Also they both deal in luxury goods therefore their demand is highly elastic to the income level which has improved in countries like China, Hong Kong, Singapore and India but at the same time is facing pressure as global economic downturn sets in. In order to achieve competitive advantage in predominant Asia fashion markets these companies are not only faced with pricing issue but also the competition from both resident fashion houses and also from counterfeited products due to which the image of the brand may be subject to dilution. The competitive advantage's approach as becoming cost leader requires a company to become a low cost producer in its industry. This is often achieved through economies of scale. As we have understood that luxury products are for a particular market segment which is driven by the lust and income level and the demand is often targeted and limited. Therefore economies of scale are not viable proposition. Furthermore, for companies in review it is difficult to become low cost producers which could be understood by looking at their value chains. The companies work with high quality raw materials and well established associates for different products to ensure uncompromised finished result. Usually low cost is associated with poor methodology, machinery and unskilled labor however the companies maintain a level of working standards. However, this has been argued also as a survey related to LVMH production facilities in Asia are often blamed for neglected conditions and low pay to workers (). China which has emerged as 'workshop for luxury brands' since 2004 is also facing with a dilemma where it is a source of cheap products at the same time perception of poor quality often looms over Chinese products. Furthermore, China has weak trademark legislative which allows counterfeiters to illegally use brands with poor product. PPR's Gucci recently succeeded in litigation against a Chinese manufacturing for infringement of trademark (Reuters, 2008). LVMH has been reluctant to announce its production setup plan for China as it is believed that controlling operations and maintaining brand prestige would be difficult to manage. But the demand from Chinese consumers has been pushing upwards and has convinced many other luxury item producers to shift to China, India and other Asia-Pacific countries to benefit from cheaper resources. Another approach to competitive advantage is differentiation by virtue of which the company seeks to be unique in its industry (Porter, 1998). Both LVMH and Gucci develop their products based on the work of famous high profile and experienced designers who are responsible for designing complete product range including clothing, shoes and accessories. This allows differentiation in their product lines and adds uniqueness to their brands. Furthermore, both companies have established their own marketing, distribution, sales and management culture which is unique to each company. Most importantly these companies tend to rely on their own retail outlets which allows greater control and also less reliability on the third party for their sales. Furthermore, both companies offer wide range luxurious products which vary from wines & spirits, clothing, watches & jewelry, beauty & perfumes and retails accessories. All products are differentiated according to the markets they are targeted which may include high price luxurious products for a selected market group or much more reasonably priced products from which the real value is added to the business. Differentiation can also be achieved through licensing and franchising allowing brand to be used for products from another source but this is a difficult to control. The differentiation is of lower value where companies in the same segment use similar options therefore adding little competitive advantage. This would require the brand to be strong and continuously renewed with advertisement and affiliating products with fashion house designers (Lynch, 2005). Therefore, both companies would need to continue their businesses with their focus both on cost and differentiation to be successful in Asian market and generate the desired results. Question 3 Evaluate Louis Vuitton and Gucci's positioning strategy in its current markets. Suggest different positioning strategy that they should adopt for different geographic markets. LVMH and Gucci offer products which are luxurious under different brand names. These luxurious products are often characterized as products with limited but high end market accessibility and high profit margins. For many years both US and European markets have been the centre of fashion and many great names have been able to develop positions for them. These markets were mainly driven by the industrial revolution and wealth was accumulated and at the same desire for highest standards and quality was generated to a great extent by elites and richest. The recent shift in the economic balance to Asian countries such as China, India, Philippines, Singapore and also the Middle East has created huge market for luxurious brands and products as that of LVMH and Gucci. We would estimate the positioning strategy for both LVMH and Gucci in their existing markets and evaluate why their strategy have proved to be successful drawing conclusions on the implications for different positioning strategies in different geographical markets. LVMH's Review: LVMH, a French based fashion house, is the world leader in offering luxury items across the globe. The group holds its strength and growth in the high end market segment. The group incorporates various high street brands with offerings in different market segments as discussed previously. Now we consider each market segment and highlight the business strategy and positioning of the group. The group wine & spirits segment holds a world leader position in champagne and cognac and offering collection of still wine with further expansion into luxury spirits. The fashion & leather group having 989 stores worldwide and collection from renown fashion designers builds its reputation upon famous brands e.g. Louis Vuitton, Donna Karan, Loewe, Givenchy etc. The perfumes & cosmetics group offers great names from French and Italian collection with new brands introduced in the U.S.A. market. The watches & jewellery segment has amongst others, De beers for prestigious diamond collection and TAG Heuer is known for its watch collection. Finally the retail segment offers versatility in its offerings as retailing to international travellers, cruise line services, departmental & grocery stores and dealings in real estate (LVMH, 2008). Gucci's Review: Gucci established in 1921 but its founder Guccio Gucci is a fashion label based in Italy however now controlled by French retail store chain PPR. The company has its presence in all continents with stores in major cities. The company promotes a distinctive corporate culture which has been the foundation for its global success. With inspiring creative directors and management the company has been able to continue its business offering stylish and luxurious products. The company incorporates various brands including Gucci, Yves Saint Laurent, Sergio Rossi, Bottega Venetta and others (Gucci, 2008). The various brands have their own individuality and creative teams which develop products ranging from clothing, jewellery, watches, shoes, cosmetics and other accessories. These products are sold through a network of retail stores and departmental outlets which are fully integrated at the top and careful marketing and logistic is intact to ensure the brands hold their image and position. Positioning Strategy: LVMH and Gucci have adopted positioning strategy in much similar manner where a number of brands have been bought and organised under an umbrella with an aim to deliver the best and specifically for the richest. Thus creating a limited but yet very profitable market for their products which has recently seen great expansion Asian markets too. Recent results showed growth of 12% (FindArticles.com) and 13% (Gow, 2008) for LVMH and Gucci respectively despite of the economic turmoil but Asian markets are indicating future slowdown in profits (The NewYork Times, 2008). This suggests that both companies are doing something right to keep customers urging for their brands and products and maximizing their shareholders value. Both companies have for many decades designed their products and catered a niche market both across the pacific. The companies have grown from just single business line to a conglomerate of businesses which have highly distinctive and differentiated from each other in many ways. Their products are timeless, modern, fast growing and high profitable. Their strong regional network and multinational retailing has added competitive advantage. With their value chains deriving their profit from designers' affiliations, runaway fashions shows and business managers who ensure that the brand is renewed and not diluting by its overuse. Furthermore, these companies has allowed b2c web purchasing to its customers in certain markets. Developing a suitable positioning strategy allows a company to avail the opportunities available in the market by offering products that differentiate it from other. Positioning success lies within four disciplines which company needs to evaluate when defining its strategy. These include assessment of risk, competitor, differentiation and vision of the market. It requires a discipline within a company through its resource allocation and also foregoing opportunities that are not on-strategy (Helton and Alloo, 2008). Both LVMH and Gucci have so far targeted the high end market and have developed their own retail outlets to sell their products around the world. The profitability has been higher than average and brands have been concentrated from either Europe or U.S.A. Both companies had been able to successful position themselves in countries adopting positioning strategy based on same principles. However, different positioning strategies for different geographical may require selling of an idea which relates to that market and by introducing different products, price, promotion and marketing. This would require assessing the attributes of the product, the brand and its competitors. The market segment needs to be determined and various activities should be carried out to gather market perception and firsthand experience whether products are viable for launching. Companies could engage local designers and production facilities to promote the close ties with the market it wishes to cater. Luxury brands can take the form of promotion through celebrities and elites which typically become role models for others in different countries. Once position strategy is developed testing should be carried out with people who are unaware of the brand and its products and record their response for further improvement and ensuring that the company is targeting the market correctly. Thus, positioning strategy should be developed in relation to the analysis of that particular market and different marketing and promotional activities should be in line to support the objectives which in case of companies under review are high profitability and unmatched quality. Question 4 Write a short report of no more than 200 words on the transferable skills than can be applied in a variety of different activities that you have learn from undertaking this assignment, and the readings you have undertaken to support your relevant outcomes. The objective of the above paper has been to learn from companies' experience in different market segments and geographical locations. This allows determination of the key success factors which companies have developed throughout their value chains and have been the source of profits for them. Also it assists to comprehend strategies which companies have devised and implemented to be successful and attain competitive advantage in markets which are concentrated and subject to continuation of change and creativity. This required understanding of the companies' business and the market segments which they are offering. The process of developing product from a mere initial idea to procurement of raw materials to finished product needs to be understood as all these components add value to the product and businesses. The products' distinctiveness in terms of their quality, designing, development, pricing, marketing, distribution and adaptability to the taste and trends of a market has to be recognised. The same analytical skills can be transferred when developing an approach for launching a new company, brand or product and assessing its viability. Further supported by various competence analyses including SWOT, Porter's 5 Forces, PEST and others, an understanding could also be achieved as to why different markets react differently to similar products. References Barham, J. (Jun 2008). China's Pirates Move Up Value Chain. Security Management. (online). http://www.securitymanagement.com/article/chinas-pirates-move-value-chain [accessed 8 Nov 2008] Chung, O. (14 Apr 2007). China's Global Luxury Brand Workshop. Asia Time Online. (online) [accessed 6 Nov 2008] Democratic Dentist. (2007). High Class Imports and Exports. (Online). http://www.democraticdentist.com/management/MGucciRepublicans.html [accessed 7 Nov 2008] FindArticles.com. (29 Jul 2008). LVMH Delivers Excellent Results in the First Half of 2008. Business Wire. (online) [accessed 7 Nov 2008] Gucci. (2008). (online). [accessed 6 Nov 2008] Gow, D. Luxury brands: Gucci and Hermes ride out the consumer slowdown. Guardian UK. 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(online). < http://query.nytimes.com/gst/fullpage.htmlres=940CE5D81638F933A15750C0A96E958260> [accessed 9 Nov 2008] Appendix I: LVMH Geographical Distribution of Revenue Source: LVMH Official Website LVMH Key Performance Indicators Source: LVMH Official Website Appendix II: Gucci Geographical Distribution of Revenue Source: PPR - Gucci Group Read More