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LVMH

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LVMH

  1. 1. 1 STRATEGY, ORGANIZATION & MARKETING PROJECT Spring 2015 Professor: Paolo Neirotti Yashar Taifeh – S201988 Jennie Boérius – S215711 Elena Boffi – S211427 Christian Lazzanzi – S220702 Chaima Rhouma – S221403 Sahar Travassoli - S202124
  2. 2. Table of Contents 1. Introduction....................................................................................................................................... 3 1.1. Definition....................................................................................................................................................3 2. The luxury Goods Industry ........................................................................................................... 4 2.1. Market Overview.........................................................................................................................................4 2.1.1. Market Segmentation......................................................................................................................................... 4 2.2.2. Growth, Operating Margins and Concentration ........................................................................................ 5 2.2.3. Value Chain Analysis ....................................................................................................................................... 6 2.2.4. Analysis of Porter’s Five Forces .................................................................................................................... 7 2.3. Main Industry Trends ................................................................................................................................9 2.3.1. Diversification...................................................................................................................................................... 9 2.3.2. Vertical Integration...........................................................................................................................................10 3. The LVMH Business Analysis.....................................................................................................12 3.1. Resources and Capabilities..................................................................................................................... 12 3.2. SWOT Analysis......................................................................................................................................... 13 3.3. Business Strategy and Competitive Advantage................................................................................. 13 3.3.1. Strategic Planning of LVMH for Competitive Advantage as a Differentiator ..............................13 3.4. VRIO Analysis........................................................................................................................................... 15 3.5. Organizional Structure ........................................................................................................................... 16 4. Industry Evolution............................................................................................................................17 4.1. BCG Matrix and Innovation Inside LVMH....................................................................................... 18 4.1.1. Innovation in LVMH........................................................................................................................................18 5. Conclusion Strategic Recommendations for the LVHM .........................................................20 Attachments ............................................................................................................................................21
  3. 3. 3 1. Introduction LVMH is founded in 1987. Historically was a supplier of a luggage to the wealth and powerful, LVMH is known for combining quality fabrication with innovative designs to reflect the needs of customers and the ever-changing mode of the world travel. Although the history of LVMH began in 1987 with the merge of Moet Hennessy and Louis Vuitton, the roots go back much further to the 18th century champagne when Claude Moet decided to build on the work of Dom Perignon a contemporary of Louis XIV. And to the 19th century Paris, famous for its empirical celebrations, where Louis Vuitton, a craftsman truck-maker, invented modern luggage. Today LVMH is the world’s leading luxury goods company. Its products include leather goods like handbags, trunks, shoes, watches, jewelry and accessories. Most of these are adorned with the LV monogram. It is one of the most profitable brands in the world with profit margins approaching 40%. The result of successive alliances among companies that from generation to generation, have combined traditions of excellence and creative passion with a cosmopolitan flair and spirit of consequent.1 All acquisition and merges for LVMH can be found in Attachment 1. 1.1. Definition Luxury: a material object, service etc., conducive to sumptuous living, usually a delicacy, elegance, or refinement of living rather than a necessity2. Objects may be considered luxuries, while luxury may also be viewed as a lifestyle. Luxury fashion brand: this paper defines luxury fashion brand as an established apparel brand with recognized luxury status in the marketplace. Examples would be Gucci, Hermès, Burberry and Prada. 1 May 25, 2015. http://www.forbes.com/companies/louis-vuitton/ 2 March 29, 2015. http://dictionary.reference.com/browse/luxury?s=t
  4. 4. 4 2. The luxury Goods Industry In luxury goods industry part there is studies about market overview and main industry trends. 2.1. Market Overview The market overview studies all the aspects of the luxury good market. Through this analysis the segmentation, financial analysis, Porter’s five forces, value chain and main trends of the luxury good industry will be identified. 2.1.1. Market Segmentation The luxury goods market has been witnessing major growth due to the addition of new high net-worth customers. A major transformation has happened with regard to lifestyle of wealthy young and affluent customers, who are extremely brand-conscious these days. Companies are forming various strategies to cater to customers in the most effective manner. Development of mobile applications, websites, and campaigns on social networking sites are some initiatives companies are adopting in order to attract new customers and engage old ones. The global luxury goods market is characterized by large number of mergers and acquisitions, thus making it highly consolidated in the near future. Different segments adopt unique strategies to develop their product lines. Some companies are focusing on distribution, while others are producing unique high-priced products in the form of limited editions.3 Studies mainly mentioned below category of affluent customers for luxury industry  The Exclusivity Seeker: Is a key segment for many high-end brands as they have considerable disposable income and spend liberally across multiple luxury categories. These consumers spend on luxury cosmetics and fashion and are especially likely to spend on travel. For this segment exclusivity is a luxury a premium brand can deliver.  The Indulgent Traveler: Buys luxury predominantly at airports or in cities they travel to. The travel indulger is also something of a socialite who is looking to elevate buyers social status by buying luxury products  The Virtual Shopper: Does not have an issue with luxury converging with the online world. They do researches and purchase luxury online. She values luxury goods for their higher quality and uniqueness  The Luxury Bargain Hunter: Sees luxury goods desirable, but only at the right price. LVMH segments to multiple target markets. Many people, both men and women with different values and all walks of life are fans of LVMH. LVMH has multiple avenues of communicating their brand to different target markets. Through high fashion print ads, and their Core Values campaign ads, these ads are segmented to both men and women in the Upper Class, to Upper-Middle, and Middle. LVMH segments its revenues by its five businesses, which include: Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewelry, Wines and Spirits, and Selective Retailing. Revenues are also segmented under six geographical segments: France, Europe (excluding France), the United States, Japan, Asia (excluding Japan) and Other Markets. By gaining the interest of both the wealthy and middle class, they have mastered the art of "less is more", maintaining a sense of mystery, yet they really are an attainable brand.4 Upon entering a LVMH boutique, one will notice different counters and sections with different "themes". These counters range from, men's travel bags, unisex travel bags, fashion jewelry, high end jewelry, small leather goods, scarves, belts, shoes, travel books etc. The store is organized and one can easily locate what 3 Roxanne Genier. April 8, 2015. www.agenceluxury.com/ Affluent Luxury Consumer Segmentation 4April 8, 2015. sliclvmh.blogspot.it
  5. 5. 5 section they are in, and helping to navigate through what could be very confusing. Rambourg created a brand pyramid to show how major brands range in accessibility from everyday luxuries like Starbucks to ultra-high-end luxury like Graff diamonds.5 This is the luxury power ranking, see Attachment 2. 2.2.2. Growth, Operating Margins and Concentration Lately, the luxury industry is under a growing and positive trend due to a recession that seems to be near the end. Thanks to this, the majority of the companies in this sector are experiencing an increase in revenues, with an expected optimistic future in the years ahead. Observing the market of luxurious apparel and accessories, its general structure and its main players can be deduced. In the analysis, data have been taken from the list of revenues of the biggest 47 companies in this market in 2012/2013. These values are still relevant though, since the luxury market is a mature one and so it does not have the tendency to change significantly in a short period. The demand elasticity in the Luxury market tends to be elastic; in fact, top shelf goods, representing a sort of “status quo” and a symbol of opulence, gain reputation by being less and less affordable. That is why the raise of their price will sweep off a big part of the potential customers, since they all suffer a lower willingness to pay. Therefore, empirically fixing an elasticity of demand bigger than one (1.3), the market power expressed by the Lerner’s index is significantly low, about 0.049, where a null value points out that the level of competition is at its maximum. Studying the profitability at a market segment level, LVMH gained the leading role in luxury goods, with sales that are around €31B, see Attachment 3, while the Compagnie Financiere Richemont SA, who is one of the biggest competitors, earned approximately €10.65B. Given the structure of the industry, reaching these high volumes is not an easy target to achieve; this firstly indicates a competitive advantage to the other players in the market. More general, the whole apparel, textile and accessories industry is slowing the positive trend it showed in the last years. This is due to a more expensive labour cost in the Countries where manufacturing has been outsourced, for example China and Bangladesh6, and because of a minor propensity to consume in common stores. Still, the industry trend shows good indicators, and LVMH surpasses them with even better results. From the graph in the Attachment 3, it is shown that on average the growth during 2014 has been around 5.3%; LVMH increased its revenues by 6.8%, exploiting the favourable tendency. Concerning the financial ratios, in order to understand how good the profitability of a company is, a conjoint analysis of Return on Assets (ROA) and Return on Equity (ROE) indicators is supposed to be extremely helpful. In general, the market of Luxury goods is a mature one, with a relatively low number of “blue ocean” undiscovered segments. Therefore, the indexes tend to be lower with respect to industries where the potentiality of the initial resources are higher, as for example in software and app development, or the technology field. Nevertheless, LVMH and the other competitors are in a positive period, the average ROE is stable on 15%, see Attachment 4, a positive result for stockholders. LVMH still behaved better; the trend (in the dotted line) and the last year’s index suggest a high quality management for all the subsidiaries and Brands related to it. 5 Megan Willett. April 8, 2015 www.uk.businessinsider.com/pyramid-of-luxury-brands-2015 6 April 10, 2015. http://www.bloomberg.com/visual-data/industries/detail/retail-discretionary/::abqsal7
  6. 6. 6 ROA bolsters the stability of ROE, meaning that the returns obtained will not lead to a risky financial exposure. With having that said, the average level of ROA in the luxury market shows stability over time due to its maturity, but the internal players recently modified their positions, see Attachment 5. The regression (dotted) line represents the raising trend of LVMH, which in 2014 increased by more than 4% this indicator. ROE increased by almost 12% in the same period; even though the net income grew substantially, from €3.436 to €6B billion, part of the positive result was muffled by a higher level of indebtedness. Finally, the overall structure of the luxury market is recovering thanks to the new investors and by exploiting the heterogeneity of the products to extract profits from them. Parameters are stable due to maturity; moreover, no strong innovations altered the internal equilibrium. From this overview, it is possible to observe that LVMH in particular, gained competitive advantage and by that greater results than the competitors. 2.2.3. Value Chain Analysis Luxury industry value chain can be portrayed as Figure 1 below. Figure 1: Value chain of the luxury industry The three most strategic parts that characterize the luxury goods industry are manufacturing, marketing and advertisement, distribution. Manufacturing Manufacturing is crucial in maintaining the quality and brand reputation. Stefania Saviolo who is a luxury goods industry expert at Milan’s Bocconi University and head of its masters in fashion programme explains “The only source of luxury is who makes the product. This is luxury today”. The brands where sales are growing are those perceived by clients to be based on artisanship and manufacturing excellence such as Hermès, Chanel and Céline.7 Marketing and Advertising 7 May 11, 2015. http://www.ft.com/intl/cms/s/0/f2498d08-be45-11e2-9b27-00144feab7de.html#axzz3c5owDL59
  7. 7. 7 On average, luxury goods industry spends more than 7% of its sales in advertising as its one the most important factors in maintaining the brand reputation. Some mediums of advertisement are television, on- screen campaign, newspapers, celebrities, fashion shows etc.8 Distribution Distribution is one of the key elements in the value chain. As S. de Rosen, a luxury goods analyst at J.P. Morgan, argues: "If there is one critical word in the luxury business, it is "execution". People think about the luxury business in the wrong way - they think about brands. But luxury companies are primarily retailers. In retailing, the most important thing is execution, and execution is all about management. You may have the best designed product, but if you don't get it into the right kind of shop at the right time, you will fail".9 There are five main distribution channels in the luxury industry: directly operated stores (DOS), franchise, wholesale distribution, agents, and licenses. These channels differ in the degree of control, capital requirements and profitability can be seen below. Figure 2: Distribution channels The degree of integration of distribution and the associated question of the control of the distribution channel is a key question in the luxury goods industry. It depends mostly on the group’s ambition and management risk-taking attitude. Integrating the whole distribution can be rewarding in periods of high growth, but can be extremely dangerous in downturns, as the operating and the business risks are different. 2.2.4. Analysis of Porter’s Five Forces Table 1: Five forces analysis Porter five forces Intensity New entry threats low Bargaining power of buyers Low Bargaining Power of suppliers Moderate Threat of substitutes Moderate Rivalry between established competitors High The Threat of new entrants 8 May 11, 2015. www.lvmh.com 9May 11, 2015. http://www.economist.com/node/1045638
  8. 8. 8 The new entrants are mainly new designers who start their own brand on their own. Usually, these new entrants, if successful, are quickly acquired by the big names of the industry, by providing them the needed infrastructure for growth. Capital Requirements The costs of entering the industry from scratch would be monumental  Very high break-even point  High marketing and management costs: o Distribution fees:  High rent to develop mono-brand boutiques in prestigious shopping areas  High rent to develop global presence o High salaries for craftsmen o High investment for promotional activities, example runway shows during Paris Fashion Week Heritage Another important barrier to entry is heritage. Luxury brand reputations and brand loyalty are built through legitimacy of the product offering and a rich history of high quality production. Few brands succeed without at least borrowing or referencing legitimacy from some source. Geographic factors do play a role similar to heritage. Luxury goods are credible and valuable due to the country of origin effect, example Italian leather goods. Bargaining power of buyers There are two types of customers: the super-rich and the middle-market customers. The super-rich customers (or High Net Worth Individuals) seem not subject to the world economic cycles. In addition, they are a growing number. While the middle-market customers are those that are willing to buy luxury goods, but they want the trendiest designs which increasingly have to be marketed in creative and expensive ways. They are considered to be both a great opportunity as they show no price sensitivity and also a threat because they are more demanding and show less brand loyalty than the High Net Worth Individuals. This leads to a difficult trade-off between satisfying a smaller number of loyal customers and a larger number of more volatile customers.10 Bargaining power of suppliers The bargaining power of the suppliers depends on the segment. As some tended to have increased bargaining power, this leads to the concentration and vertical integration trend in the industry, one of the reasons for which is to lessen the bargaining power of the suppliers. However, there is a trend for larger houses to buy smaller suppliers and to deprive the market from access to those suppliers. LVMH has recently taken over Les Tanneries Roux a leather supplier. This will reduce the bargaining power of suppliers in terms of leather products. Threat of substitutes There are two kinds of substitutes to the luxury goods: counterfeit products from china or fast fashion brands copying trends within weeks after fashion shows. But this remains as a non important threat regarding the fact that consumers are very sensitive to the loss of prestige when switching to counterfeits or fast fashion brands. 10 May 15, 2015. Euromonitor. ”Luxury Industry Review”
  9. 9. 9 Rivalry between established competitors Although there are a number of brands in the luxury market, the market is Oligopoly, refer to the graph in Attachment 6, in nature due to the fact that three large conglomerates: LVMH, Richemont and Luxottica group have ownership of numerous brands between them. The competitiveness in the industry can be qualified as relatively high but given the high margins and the consumers’ perception about the price, the competition is not on price, but rather on quality and image perception, as well as on the ability to attract the right designers. This has created the “Wars of Talents”. LVMH has the star designer Marc Jacobs. Brands also tend to differentiate their products by focusing on heritage and craftsmanship, encouraging provocative fashion shows, use shocking ad campaigns, celebrity endorsement, sponsoring sporting and entertainment events, launching ecommerce sites, and by offering duty free retailing. 11 There are hardly any barriers to exit. If the business has built a network of DOS, it might be time and efforts consuming to sell them or to undo the leasing contracts, but as these DOS are usually on highly visible and coveted places, it is not considered as a barrier to exit. 2.3. Main Industry Trends The four dominant trends in the global luxury goods market are globalization, consolidation, diversification and vertical integration. Globalization is a result of the increased availability of these goods, additional luxury brands, and an increase in tourism. Consolidation involves the growth of big companies and ownership of brands across many segments of luxury products. 2.3.1. Diversification The major luxury goods companies’ portfolio has evolved from mono brand to multi-brand and from mono-segment to multi-segment, see Figure 3 below. Figure 3: Diversification in luxury goods This evolution has been dictated by hope of achieving economies of scale and scope and by the hope of reducing the impact of brand life cycles. 11 May 15, 2015. The Economist. “Every Cloud has a Satin Lining”
  10. 10. 10 International diversification protects LVMH from regional downturns. LVMH's revenue is derived from operations spanning the globe, with the U.S. as its largest single contributor of revenue. This has proven important as the U.S. economy went into a recession in 2008. These sales decreases were more than compensated for by revenue increases in LVMH's other regions, namely Europe, Asia (excluding Japan) and Australia. Higher sales in those regions have resulted in overall increased sales for the company.12 LVMH possesses an atypical structure: 60 brand with different professions, present all over the world with each a strong identity and an appropriate positioning for each, see Attachment 7. LVMH produces high quality goods. Their distinctive competence is that the range of product of LVMH is very large. It’s of course a competitive advantage because if customers are satisfied by one brand they will trust the group and certainly buy another of their products13. LVMH has its own economy and community, despite the economic climate is has to go through astonishing increase in revenue and continues to become an empire by acquiring not only small manufacturing companies but also some of the largest fashion houses (Dior, Marc Jacob) and jewelry and watch companies. With a strong strategy in growing its brands in each sector and diversify into new markets and counties, yacht industry in India, LVMH reduced its grow in 2012. In the long run by acquiring these companies LVMH will reduce its cost, increase its industry knowledge, improve its technology allowing greater quality and a more efficient company taking a huge competitive edge in the every market its enters14. 2.3.2. Vertical Integration A company is said to be vertically integrated when it is present at several successive stages of the production process of a product. During the last 30 years luxury fashion firms are more and more involved in the fields of production (mostly for finished products, but also in raw materials) and distribution. In the case of luxury fashion the production process can be divided in four phases: 1. Creation and design 2. Raw materials production (fabric, leather, etc.) 3. Final product manufacturing (apparel, handbags, shoes) 4. Distribution, through wholesale and retail If creation is the main activity and goal of all luxury fashion companies, the majority have from now on an increasing involvement in the production sphere, in a direct or indirect way, and in distribution. Certain firms among the most well-known are in addition already involved in the raw material supply, primarily in leather tanning. The opposite is happening to the other firm that instead preserve in-house only the essential activities for creation of value and its perception by the customer and outsource the phases of manufacturing to subcontractors located in countries with low costs of labor. Companies explain their integration as the necessity to maintain a certain level of quality through the production process, to guarantee a certain consistence in the brand image around the world and an equal service to customers is no doubt a factor, this strategy has an economic foundation15. This general movement of vertical integration has led to diverse consequences. At a microeconomic level, it has clearly improved the companies’ performances. This strategy led to the settling of strong entry barriers at a sector level, and to a higher market power for firms16. Potential new competitors have to cope with many disadvantages: important initial investment, worse 12 April 15, 2015. www.LVMH.com/publications/Translation of LVMH financial documents, 13 April 15, 2015. http://www.academia.edu/9264688/length_1536_words_4.4_double-spaced_pages_rating_red_free 14 April 15, 2015. http://ocarrodo.blogspot.it/2011/12/lvmh-merging-and-acquiring-is-in-its.html, 15 Franck Delpal. April 25, 2015. http://process.arts.ac.uk/sites/default/files/franck-delpal.pdf 16 Franck Delpal. April 27, 2015. http://process.arts.ac.uk/content/vertical-integration-luxury-companies-objectives- and-effects
  11. 11. 11 selling conditions, more expensive or slower deliveries from manufacturers. The Vertical Integration Index was calculated in order to see how LVMH is vertically integrated compare to other companies in the same industry sector, luxury good; in particular Richemont and Luxottica industries. The formula used to calculate the Vertical Integration Index is the following: = The lower the index the higher the vertical integration of the company. The index is calculated, shown are inside Table 3, for three years to see how it changed over time and then it is represented on a graph in Attachment 8. Table 3: Vertical Integration Index Companies Index 2012 Index 2013 Index 2014 LVMH 264.255 253.116 252.603 Richemont 346.474 366.876 365.932 Luxottica 100.788 99.606 98.442 The result coming from the calculation shows that Luxottica is the company with the higher vertical integration and it remain constant during the tree years. Richemont is the company less vertical integrated and after there is LVMH. LVMH vertical integration is slowly increasing overt time.
  12. 12. 12 3. The LVMH Business Analysis In this part there is description about LVMH resources and capabilities, strategic planning of LVMH for competitive advantage as a differentiator, SWOT and VRIO analysis. 3.1. Resources and Capabilities Resources and capabilities are the primary determinants of firms’ profitability. Resources are productive assets owned by the firm; a single resource is not a “competitive advantage”, but an input factor. List the resources of a firm is not easy. Capabilities describe, “what a firm is good at?”, and are the essence of superior performance. In Table 4 below LVMH resources and capabilities are shown. Table 4: Resources and Capabilities of LVMH RESOURCES CAPABILITIES Tangible Resources Financial Large financial capabilities Physical17 The LVMH group owns numerous factories in France, Spain, Italy; sophisticated machinery and equipment. The company own 3600 stores in 69 countries. Intangible Resources Technology18 The group has artistic creativity and an innovative production process, distribution. LVMH owns patents (LVMH Recherche) and copyrights on various brand names and products . Reputation and customer relationship LVMH have tree fundaments values, on which is base their reputation: be creative and innovative, deliver excellence, and cultivate an entrepreneurial spirit. LVMH owns database of information on customers’ buying habits and preferences. Human Resources19 The priority for LVMH Human Resources is to build strong, creative and passionate teams and developing their skills through an ambitious program based on two strong levers: training and mobility. Whether geographic or functional, internal mobility is an important element in attracting and keeping talent. For employees, job mobility is a source of professional and personal fulfillment, an opportunity to develop new skills, broaden experience and cultivate professional networks. Training is an essential tool that every employee must make use of in order to develop. During the annual evaluation, managers and their teams discuss the development program to be undertaken. This must provide a solution to both employee’s professional aspirations and the organization’s business challenges. The Group, Houses and regions have therefore established a vast array of training programs, in order to provide a perfect solution to the needs of each employee and each organization. 17 May 10, 2015. https://powerpoint.office.live.com/p/PowerPointView.aspx?FBsrc=https%3A%2F%2Fwww.facebook.com%2Fattac hments%2Ffile_preview.php%3Fid%3D1406084053051536%26time%3D1432816560%26metadata&access_token =611056673%3AAVJjR41hLrRm7ohsmddwR_aSL_8-EXEON8BNsQrwEFbVuw&title=lvmhpresentation11- 141121164417-conversion-gate01.pptx 18 May 11, 2015. http://www.termpaperwarehouse.com/essay-on/Lvmh-Strategic-Analysis/93827 19 May 10, 2015. http://www.lvmh.com/talents/your-career-at-lvmh/development/
  13. 13. 13 3.2. SWOT Analysis Figure 4: SWOT analysis of Louis Vuitton.20 3.3. Business Strategy and Competitive Advantage Innovation, differentiation, and positioning are the fundamental pillars of the competitive strategy that LVMH follows. It has master the art of differentiating itself in every market segment in which it operates. The company values long-term performance and is willing to plough investments into new product brands and provide brand support for extended periods of time before expecting tangible profits. Unfortunately, although this long-term orientation and reinvestment of profits improved its market share over the long haul, it did not match the aspirations of the investing public, especially in major capital markets such as the United States. Success sometimes does take a long time to percolate to the bottom line.21 LVMH's corporate strategy is to hold a portfolio of the most cherished, coveted luxury brands and add value through its specialized resources - sourcing, its supply chain management, brand management and talent.22 But this is not enough to protect LVMH from being emulated by copycats. Therefore, the company has focused its appropriability regime23 on conveying the message of “uniqueness”. The consumer has to perceive the exclusiveness of the product he is purchasing, and no other fake will be able to stand the comparison. 3.3.1. Strategic Planning of LVMH for Competitive Advantage as a Differentiator LVMH's selective approach to their market is downright successful. The company, through its strategic planning, knows exactly where wants to be at all times is. Although economic times have dipped, the company had an extremely successful year in 2010, increasing its stock by 60%24. LVMH is a cash cow. The brands on LVMH maintain market dominance. They have a sustainable competitive advantage, holding dominance in the Luxury Goods market share. Through the company's success in Dom Pérignon, they launched several vintages, all which received critical acclaim. Louis Vuitton opened in London in 2010, which enhanced the appeal of the brand as well as the reputation for 20 April 30, 2015. http://www.lvmh.com 21 May 25, 2015. Louis Vuitton Moët Hennessy: In Search of Synergies in the Global Luxury Industry, Thunderbird Management school, A09-03-0011 22 May 25, 2015. http://www.quora.com/Louis-Vuitton/What-is-LVMHs-competitive-strategy 23 June 14, 2015. http://essay.utwente.nl/65371/1/Smit-BA-MB.pdf 24 May 25, 2015. http://sliclvmh.blogspot.it/2011/09/lvmh-strategic-planning-competitive.html
  14. 14. 14 London as a city. In the perfumes and beauty domain, Jude Law starred in five-minute movie for Dior that Bernard Arnault, chairman of LVMH, says, "brilliantly illustrated the unique magic created by Mr. Dior." This was after the crisis that overwhelmed Christian Dior and its Chief Designer John Galliano. – It can called "brilliant damage control." Also, in 2010 the beauty mecca, Sephora introduced themselves to a new market, Latin America. Home to a wide range of brands, they allocate their excess cash from their larger brands to work on expanding the others, while staying true to the originality of all of them. LVMH continues to develop and expand into cities and countries with pockets of wealth; among its 2468 (the data is from the year 2011) retail stores there are now outposts in Ho Chi Minh City in Vietnam, Phnom Penh in Cambodia, Yekaterinburg in Russia, Macao and Abu Dhabi. This growth is possible because LVMH stays true to each brands roots, highlighting the connection between the current work and the history of each brand.25 LVMH, world leader in the luxury goods industry, has adopted a global product structure wherein the business’s diverse product categories are managed separately. This is a suitable structure for a highly economically integrated multi-national. LVMH likes to boast that its global brands unite consumers into a worldwide elite through their highly-recognized motifs and standardized, though quickly replaced, designs. This brings advantageous economies of scale. As a retail brand, LVMH could expect to save 30% of its commercial costs – advertising, rent, and shop assistants – each time it doubles in size. Indeed, LVMH uses marketing to change consumer tastes to suit the firm’s existing offerings, not vice versa. Efforts to encourage Asian middle classes to embrace LVMH’s European sophistication have taken off in recent years. In 2011, they accounted for 27% of total sales. At the same time, the structure helps LVMH build and maintain the link between product development personnel and customers, placing brand experts at the helm. Because of this, the firm has been proactive in keeping up with global trends.26 The global product structure is not without disadvantages. When product categories are independently managed – charged with pricing, location and inventory decisions – there is an inevitable duplication of facilities and personnel which adds to LVMH’s operating costs. Furthermore, it takes longer to foster professional managers to meet the criterion for global product structure, which is to understand local and foreign markets well. LVMH’s focus on innovation in technology, environment, and management has also afforded the company much success. The brand has been able to maintain high quality while also exploring new, more efficient and effective means of manufacturing and doing business. This constant force for innovation pushes leaders to find ways to identify how they can be better and in turn, brings a very unique factor to the marketplace. Furthermore, the company’s strong culture and high brand value are elements that have aided in the brand’s success. Development of a core corporate brand as well as each individual brand is an important component that explains how the brand, although a conglomerate, is able to find synergy in its products and operations. The focused differentiation strategy is an action plan the firm develops to produces goods or services that a narrow group of customers perceive as being unique in ways that are important to them. Thomas Pink is a business unit of LVMH Moet Hennessey Louis Vuitton, which produces clothing and apparel. All of LVMH’s business units, including Thomas Pink, use the focused differentiation strategy. For example, Thomas Pink introduced men’s shirts made of 170-count cotton. This count of cotton is quite high and is the main way the product is differentiated in the marketplace (in comparison, a T-shirt from Old Navy is made of 18-count cotton). When introduced, these shirts were priced at $195 each. Thus, this shirt is 25 May 25, 2015. http://sliclvmh.blogspot.it/2011/09/lvmh-strategic-planning-competitive.html 26 May 25, 2015. https://henleybusinessreview.wordpress.com/2013/01/22/lvmh-strategic-style
  15. 15. 15 targeted to a narrow market: men who have achieved a great deal of success in corporate settings and who want to feel comfortable about the shirt they are wearing.27 To give some concrete examples, think of a $58’000 watch, dresses that look like newspaper, or an eye- shadow called “Gangrene.” These are items no one really needs, yet millions of consumers worldwide line up to buy them. That’s because LVMH—the world’s largest, most successful purveyor of these and other luxury goods that no one needs—is a master of a differentiation strategy. LVMH has differentiated itself in industries ranging from retailing and cosmetics to jewelry, leather goods, and wines—and in 2000 generated $10 billion. What is the company’s secret? LVMH uses a focused differentiation strategy.28 3.4. VRIO Analysis A VRIO table analysis can be found in Attachment 9. Value The brand of LVMH has a significant economic value because their target group is willing to pay for the products of LVMH and it provides value to the consumers and at the same time the brand contributes highly to the company’s profit. The quality of the products creates value for the consumers as well as for the company. LVMH’s innovativeness has created value to the company. If the company did not innovate and adapt to the fashion, the company would not be where it is today. The opportunities of LVMH from the SWOT analysis are: new image revamps, continuous innovation and support, and growing market for luxury good in Asia Pacific countries. While the threats are: proliferation of counterfeiting poses the biggest challenge, risking advocacy against the use of animal skins, and intense competition. LVMH has the recourses and capability to handle all of their opportunities. However, when it comes the threats it is harder for the company. It is harder for the company to handle the advocacy against the use of animal skins because the profile of LVMH is that the majority of their accessories are made of animal skins. LVMH has some of the right competences to create and handle new tasks and information and therefore are most of their resources and capability valuable. Rarity LVMH is a rare brand which produces rare products. Worldwide, there are not many companies that produce products that are made by heritage and great quality. LVMH is very selective of the use of raw material and they choose their suppliers carefully.29 Furthermore, there are other companies which produce products of brand perception of quality by experienced craftsmen, but LVMH still has a competitive advantage in the market due to that they have a valuable resource and capability that is somewhat unique among a out of the current and potential competitors. LVMH’s recourses and capabilities are both short in supply and persist over time and this is why they are considered to have a sustained competitive advantage. Because LVMH is rare brand, which have rare products the advertising is only find in exclusive magazines. Additionally, the only place where the customers can find their products is in their own stores because LVMH does not franchise. This contributes to make their products rare. Imitability Firms without a recourse or capability face a cost advantage in obtaining or developing it compared to LVMH. This is due to the fact that some of the materials that LVMH uses are not expensive. This 27 Thomas Pink. May 25, 2015. www.lvmh.com 28 May 25, 2015. https://elearn.uta.edu/bbcswebdav/users/jmcgee/Syllabus 29 Marino Donati. May 8, 2015. http://www.supplymanagement.com/news/2014/luxury-brands-build-stronger- supplier-relationships
  16. 16. 16 indicates that other firms which wants to counterfeit LV’s products does not have too high expenses. It is the production made by experienced craftsmen who make LV to a luxury brand and therefore is it difficult for firms to imitate LVMH in precise detail and its quality. This is due to the fact that LVMH is based on tradition and culture. Furthermore, there is also a code somewhere inside or at the garment or the accessory to identify a product made of LVMH.30 The innovation and ability to adapt to environmental conditions is hard for other firms to imitate. In order to protect its customers’ loyalty, LVMH has managed to innovate in a way that adapts the new elegant and high classy fashion. By doing this LVMH will maintain its trustworthiness of the brand and not change focus of the company.31 To ensure the robustness, standard and quality of the products of LVMH they are exposing manufacturing tests. There is also a lifetime guarantee of the products of LVMH and all products are handmade by experienced craftsmen and no automated machines for mass-production are used.32 Due to this it is very hard for another firms to imitate the quality and the culture of LVMH, but not the design of the products. Organization Because LVMH is one of the world’s most valuable luxury brands, it is a resource and in the companys’ desire to create and design new fashion to keep its loyalty to their customers.33 LVMH’s standard is to create and release at least four collections each year: one for the spring, one for the summer, one for the fall and one for the winter. Occasionally, LVMH has corporations with celebrities, which design a collection or an accessory. 3.5. Organizional Structure LVMH, world leader in the luxury goods industry, has adopted a global product structure which is wherein the business’s diverse product categories are managed separately. So it is mostly divisional structured than matrix. This is a suitable structure for a highly economically integrated multi-national. LVMH likes to boast that its global brands unite consumers into a worldwide elite through their highly- recognized motifs and standardized (though quickly replaced) designs. This brings advantageous economies of scale. At the same time, the structure helps LVMH build and maintain the link between product development personnel and customers, placing brand experts at the helm. Because of this, the firm has been proactive in keeping up with global trends. The global product structure is not without disadvantages. When product categories are independently managed – charged with pricing, location and inventory decisions – there is an inevitable duplication of facilities and personnel which adds to LVMH’s operating costs. Furthermore, it takes longer to foster professional managers to meet the criterion for global product structure, which is to understand local and foreign markets well. See LVMH organizational structure in Attachment 10. Matrix structure might be suitable for LVMH as an alternative. Currently, there are many multinational enterprises using matrix structure since matrix structure consists of two lines of responsibilities, which are functional and product structure or regional and product structure. Matrix structure can make up for deficiencies brought by a single division of the enterprise. According to the annual report of LVMH in 2010, the three major markets based on the profit contribution are the United States (23%), Europe (34%) and Asia (34%). The features of each individual regional market are different from the others. Hence, matrix structure allows LVMH to balance product and global location strategy in order to develop the business in-depth according to characteristic of each region. As a luxury industry leader, LVMH might need to enhance the differentiation and services in order to make further development. LVMH utilizes 30 May 10, 2015. http://us.louisvuitton.com/eng-us/authentic-louis-vuitton 31 Quark Enterprise Solutions. May 10, 2015. http://www.quark.com/pdfs/03621CS_LouisVuitton_IE_Web.pdf 32 May 8, 2015. http://us.louisvuitton.com/eng-us/product-care 33 May 15, 2015. http://www.forbes.com/companies/louis-vuitton/
  17. 17. 17 both product division and geographical division, which helps to integrate the needs of local customers and product innovation and service, to achieve part of national responsiveness. 34 4. Industry Evolution In this part the points will be the life cycle of the industry and some of the main changes that occurred to this industry will be reviewed. Also the strategic management change that coped with this environment will be analyzed. Life cycle of the industry The luxury goods industry is re-branding itself. Generally, customers’ primary motivation for purchasing has been shifted to appreciation for the product quality rather than a sense of pleasure from merely showing off. The new environment is becoming harder for some short-sighted companies to make long- term profit by just offering easy-to-sell products with historically fancy brand names35 . Based on the characteristics of increasing rivalry, slower growth and some players existing36 , the luxury goods industry can be defined as in the shake-out stage. However, customers’ preference shift will not have a negative influence on the LVMH, as quality, innovation and creativity have always been the long-term focus of the Group. The spread of luxury can be illustrated in five processes. People in the US, wealthy European countries and different Asian countries are in the different stages of viewing luxury: For Indians, affluent elites are the customers of luxury while the majority are buying mass products; With China’s booming economy, an increasing number of people are able to afford luxury, which is used as symbols of their social status; For Taiwan and South Korea, since their earlier exposure to western brands after the economies took off in early 1990s, people buy luxury goods more for fitting into their lives; Hong Kong and Singapore are even further on their way to integrate luxury as a way of life, like the US, wealthy European countries and Japan.37 As shown in the S-curve, see Attachment 11, the luxury industry is an established mature industry with a steady growth of sales contrary to an emerging one. Although people have large demand for regular retailing industry, the luxury industry increased fast. In spite of the economic downturn, LVMH’s sales have increased very stably, see Figure 5 below. In the early 2010, LVMH’s sales have already reached €4.47B. The company also performed well in Asian countries. In order to stimulate consumption LVMH has changes their attitudes in luxury industry. For example, LVMH hired many famous designers to develop their products and avoid overexposure; these help LVMH reach a high velocity. 38 34 May 10, 2015. www.henleybusinessreview.wordpress.com/Lvmh-strategic-style/ 35 April 24, 2015. http://ftalphaville.ft.com/2013/04/11/1457062/the-evolution-of-luxury-markets/ 36 April 24, 2015. Scholes & Whittington report in 2010 37 May 26, 2015. Euromonitor. ‘’Luxury Industry Review’’ 38 April 24, 2015. http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=MC:PAR
  18. 18. 18 Figure 5: LVMH Sales Technology Technology has expanded operations of the apparel industry to a more global scale. It has also provided closer working relationships between retailers and manufacturers. Technology has improved efficiency and has reduced the amount of manual labor as confirmed by Wagle in this statement “Rapid improvements in computer technology have helped to shorten the new product development phase from years to practically months, especially in the fashion/style/high performance areas. Apparel marketers who are linked with retailers through quick-response programs and other technology go a long way toward making themselves indispensable to their customers”. LVMH has special luxury lab to work on innovation parts. In general speaking, rising for demanding luxury products helps LVMH to have more income because they concern about this point and try the best to be well known as an innovation company.Technology has also its effect on attracting more customers whether by technology driven advertisement or state of the art stores. Burberry launched its flagship store in Regent Street last year, which has been dubbed Burberry World Live. The store includes the world's tallest retail screen, 550 hidden speakers, screens which turn into mirrors when needed and a hydraulic stage for performances.39 The rise of China The first wave of consumption of branded luxury goods began in China 30 years ago, see Attachment 12. China is expected to become the biggest luxury market worldwide within the next four years with $27B. The country is expected to consume 44% of the luxury market by 2020. There are now about 960K millionaires in China and a growing middle class that has discretionary income, both of which are ready to spend money on luxury items. Luxury producers are reaching to the Chinese customers via Chinese blogs, social networking sites, while still building a physical presence in the country. The spread of the luxury goods stores is not just in the big cities but throughout lesser known provincial areas as well. Luxury companies are also educating the public through multi-million-dollar fashion events such Prada restaging of its spring/summer 2011 men’s and women’s line and Chanel’s exhibition at the Museum of contemporary Art in Shanghai.40 4.1. BCG Matrix and Innovation Inside LVMH The definition of BCG matrix for the LVMH can be found in Attachment 13. Below there is a description of the matrix.  Fashion and Leather Goods: foundation of LVMH success, timeless brands, very integrated in the company’s strategy of production process quality and excellence, creativity and innovation  Perfumes and Cosmetics: good outlook for the future, LVMH should enhance of competitiveness  Wine and Spirits Selective Retailing- main source of revenue  Media and Other Businesses: media focused only on French market, strategic move from LVMH to be present in this field 4.1.1. Innovation in LVMH There are two types of innovation in LVMH: product innovation and process innovation. Product innovation in LVMH 39 May 26, 2015. http://www.theguardian.com/world/2011/apr/26/china-super-rich-demand-luxury-brands 40 May 26, 2015. http://www.wsj.com/articles/SB10001424052748703864204576319520105756258
  19. 19. 19 • LVMH Recherche, founded in 1981 as a G.I.E. (Groupement d’Intérêt Economique). • Members: Parfums Christian Dior, Guerlain and Parfums Givenchy. • Approximately 250 researchers (in Saint Jean de Braye). • Areas of research: biologists, chemists, pharmacists, medical doctors, ethno botanists, physicists • Mission: develop innovative cosmetic approaches based on the latest scientific discoveries. • Collaborative studies with researchers in the major universities and research centers (Ex. Cooperation with University of Orleon). • The expertise and the know-how of its researchers in the fields of skin biology, of formulation, as well as its discoveries of active ingredients and evaluation methods of cosmetic products (skin care, make-up, perfumes) Process Innovation in LVMH • The main core of the innovation creativity of the designers. • Giving complete freedom to designers by decentralization of the department. Each brand very much runs itself, headed by its own artistic director • Inventing product to see the creations on the “street” on their customers. • Picking up right designers and ateliers , training them for and maintaining them for a long time • Specific testing of products comparing with competitor’s products41 41 Victoria Rosca. May 24, 2015. www.slideshare.net
  20. 20. 20 5. Conclusion Strategic Recommendations for the LVHM  The industry at a glance shows the high competition level wherein LVMH has to move; despite these conditions, ROA and ROE indicate that the company is more profitable.  The main reasons of LVMH success derived from its strengths. LVMH acts as a differentiator with a superior quality of its products, it constantly searches for new “Blue Ocean” to build a one- of-a-kind brand. Moreover, a multitude of customers was reached through acquisitions, which broadened the competences. The range of services and exclusive rarities has expanded over time, strengthening the image of LVMH through a 360° degrees experience that a customer can live.  Its vertical integration focused on the stores and the designers involved. Now LVMH is switching to a more customer-oriented way of making business. The current divisional structure is efficient, but it is better for LVMH to go through the more matrix structure and centralize R&D, in the way it can focus more on geographical tastes (e.g. Russia and China). The loss of its signature mark to please them may turn against the brand protection work done so far.  LVMH should always look towards future, to shape market evolution at its own will. LVMH improved its value chain maintaining the quality over time. Its strategy may be to use embedded systems to make logistics even more efficient.  LVMH should keep on exploring the world of wearable technologies and apply discoveries to other products, trying to anticipate competitors instead of following them (as it is doing for the smartwatch with respect to Apple). For instance, smart garments are supposed to be the next trend. Through partnerships with technology firms, LVMH could share a common knowledge in the production of smart apparel and accessories; then, each fashion house could just style and design its own products.  Through the studies, LVMH is in a good situation and by acquiring and merging, they sustained their position. Nowadays their market in China is growing and they become more ordinary so they should invest more on differentiating their product to save their image like they did in the past.
  21. 21. 21 Attachments Attachment 1. LVMH Acquisition and Merges42 Celine 1988 Newton 2000 Givenchy 1988 De Beers 2001 Berluti 1993 Aqua di Parma 2001 Kenzo 1993 Belvedere 2002 Guerlain 1994 Fendi 2003 Fred 1995 Les Echos 2007 Loewe 1996 Wen Jun 2007 DFS 1996 Royal Van Lent 2008 Sephora 1997 Hublot 2008 Marc Jacobs 1997 Numanthia Termes 2008 Le Bon Marche 1998 Montres Dior 2008 Krug 1999 Chateau Cheval Blanc 2009 TAG Heuer 1999 La Samaritaine 2010 Zenith 1999 Bulgari 2011 Parfums Loewe 1999 Investir-Le Journal de Finance 2011 Radio Classique 1999 Cova 2013 Make-up for ever 2000 Loro Piana 2013 Fresh 2000 Nicholas Kirkwood 2013 Attachment 2. Luxury Brand Range in Accessibility Attachment 3. Revenues 42 May 23, 2015. www.ashleymg330.wikidot.com/history-of-lvmh
  22. 22. 22 Attachment 3. Revenues Attachment 4. Return of Equity 12/31/2011 12/31/2012 12/31/2013 12/31/2014 LVMH 23.659 27.97 29.016 31 Richemont 6.892 8.868 10.15 10.649 Luxottica 6.223 7.086 7.313 7.652 Average 12.258 14.64133333 15.493 16.313 0 5 10 15 20 25 30 35 Revenues LVMH Richemont Luxottica Average 12/31/2011 12/31/2012 12/31/2013 12/31/2014 LVMH 13.084 13.427 12.312 24.553 Richemont 18.029 19.706 17.327 9.251 Luxottica 12.477 13.383 13.126 13.038 Average 14.530 15.505 14.255 15.614 0.000 5.000 10.000 15.000 20.000 25.000 30.000 ROE LVMH Richemont Luxottica Average Linear (LVMH)
  23. 23. 23 Attachment 5. Return of Assets Attachment 6. Competitors of the Luxury Good 43 43 June 05, 2015. www.bloomberg.com 12/31/2011 12/31/2012 12/31/2013 12/31/2014 LVMH 6.506 6.871 6.116 10.584 Richemont 13.118 13.886 13.017 6.523 Luxottica 5.401 6.330 6.739 6.698 Average 8.342 9.029 8.624 7.935 0.000 2.000 4.000 6.000 8.000 10.000 12.000 14.000 16.000 ROA LVMH Richemont Luxottica Average Linear (LVMH)
  24. 24. 24 Attachment 7. Business Diversification LVMH
  25. 25. 25 Attachment 8. Calculations of Vertical Integration Index and the Graph of it Companies LVMH Richemont Luxottica Revenue 2012 28.103.000.000 € 8.868.000.000 € 7.086.100.000 € Revenue 2013 29.016.000.000 € 10.150.000.000 € 7.312.600.000 € Revenue 2014 30.638.000.000 € 10.649.000.000 € 7.652.300.000 € Number of Employee 2012 106.348 25.595 70.307 Number of Employee 2013 114.635 27.666 73.415 Number of Employee 2014 121.289 29.101 77.734 Index 2012 264.255 346.474 100.788 Index 2013 253.116 366.876 99.606 Index 2014 252.603 365.932 98.442 Attachment 9. VRIO table Competitive disadvantage Competitive parity Temporary competitive advantage Unexploited competitive advantage Sustained competitive advantage Valuable? No Yes Yes Yes Yes Rare? No Yes Yes Yes Cost to imitate? No Yes Yes Exploited by the organization? No Yes 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 Index 2012 Index 2013 Index 2014 LVMH Richemont Luxottica
  26. 26. 26 Attachment 10. Organizational Structure LVMH44 44 May 10, 2015.www.theofficialboard.com Board Chairman & CEO Bernard Arnault Vice Chairman of the Board Pierre Gode Director Antoine Arnault Director Delphine Arnault Director Bernadette Chirac Director Nicholas Clive Worms Director Charles de Croisset Director Yves-Thibault de Silguy Director Diego Della Valle Director Albert Frere Director Gilles Hennessy Director Marie-Josee Kravis Director Charles Powell Director Marie-Laure Sauty de Chalon Director Francesco Trapani Director Hubert Vedrine N1 CFO Jean-Jacques Guiony CEO Advisor Laurent Marcadier DFS Group Philippe Schaus Moet Hennessy Christophe Navarre Hr & Synergies Chantal Gaemperle Managing Director Antonio Belloni Arnault Group Nicolas Bazire L Capital Asia Ravi Thakran Luis Vuitton Michael Burke Fashion Pierre-Yves Roussel Investment funds Daniel Piette Sephora Christopher Lapuente Strategy Jean-Baptiste Voision N2 Congas Hennessy Bernard Peillon Donna Karan Caroline Brown APAC Moet Hennessy Mark Bedingham HR USA Gena Smith CIO Phillippe Giry Operation & Technology Mohamed Marfouk Dior Timepieces & Jewelry Laurence Nicolas Watch Division Jean-Claude Biver
  27. 27. 27 Attachment 11. S-curve of Luxury Goods Attachment 12. Wealth Evolution Curves
  28. 28. 28 Attachment 13. BCG Matrix for the LVMH

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