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. 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
• 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
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
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
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
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
