(2) This case explores the competitive advantage in the world of high fashion luxury goods. Does the advantage come only from the brand name or there are other advantages? Louis Vuitton and Gucci are brand names which are always associated with high fashion and are among the most successful international fashion houses.
(3) THE FIRST PART OF THE PRESENTATION examines the value chain and the value system of the famous French fashion house LV. This will help to identify those parts of the business that are particularly profitable and therefore likely to be linked with potential advantage. THE SECOND PART OF THE PRESENTATION then uses the value chain to identify those resources that are exceptional and have sustainable competitive advantage.
(4) THE WORLD OF LUXURY
Luxury products have more than necessary and ordinary characteristics compared to other products of their category, which include their relatively high level of price, quality, aesthetics, rarity, extraordinariness, and symbolic meaning.
With annual sales of over US$165 billion and gross profit margins of over 50 percent the major luxury goods companies rely on famous brands like Louis Vuitton and Gucci to deliver a competitive advantage. Does the advantage come only from the brand name or there are other advantages?
(5) Louis Vuitton
(7) The VALUE CHAIN AND THE VALUE SYSTEM were developed by Professor Michael Porter. The concept of value added can be used to develop company’s sustainable competitive advantage. Like most of the organizations LV consists of activities that link together to develop the value of the business. The VALUE CHAIN is used for developing competitive advantage due to fact that they are unique to an organization.
In addition, the fashion house is part of a wider group of value generation – THE VALUE SYSTEM- which includes suppliers, distributers, buyers and competitors.
The VALUE CHAIN ANALYSIS emphasises on the linkage between two areas:
First, the value chain links the value of the organisation’s activities with its main functional parts. Then the analysis examines how each part might be considered to contribute towards the generation of value in the company and how this differs from the competitors. (Lynch, 2009)
(8) The value chain framework is a handy tool for analysing the activities in which the firm can pursue its distinctive core competencies, in the form of a low cost strategy or a differentiation strategy. In addition, Porter splits the company into two main parts:
PRIMARY ACTIVITIES OR THE PRODUCTION PROCESS ITSELF which includes: inbound logistics, operations, outbound logistics, marketing and sales and services.
SUPPORT ACTIVITIES such as the human resources management and the firm’s infrastructure.
The word ‘margin’ in the diagram is used by Porter to indicate what is defined as added value. The margin is the difference between the total value and the collective cost of performing the value activities. (Lynch, 2009)
(9)!! LET LOOK AT LV’S VALUE CHAIN!!
As part of designer’s next women’s spring collection, the creation of fashion haute couture silk dress will generate profits through the value chain of business activities. Usually the value chain in the luxury goods sector is complex with many parts where value is added. We have started with the management of the supply chain in order to see how the production lines are working within the factories of Louis Vuitton starting from the SUPPLIERS.
(10) In order to make the dress, silk is supplied as thread mainly from China to a co-ordinate company which uses its network of associated companies to die, spin and weave the silk. Essential part of the process is that the co-ordinating company will work very closely with the lead designer on colours, patterns and textures relevant to the appropriate design collection. In this case THE REAL DRIVING FORCE in terms of design, price and sales for both Chinese and Italian companies is the fashion house. This is the reason why THE MAIN VALUE IS GENERATED AT THE FASHION HOUSE, not at the earlier parts of the value chain.
(11)The second part is the INBOUND LOGISTICS and at that stage the amount of value added is LOW because of the variety of importers and methods which are not exclusive for the company.
(12) A crucial element in the process of developing the new silk dress is the designer. The designer is involved in the OPERATIONAL PART of the process where a SIGNIFICANT VALUE is added due to famous designers such as John Galliano and Stella McCartney.
The final stages involve invisible stitching using HIGHLY SKILLED SEAMSTRESSES who are an extremely important part of the top fashion house AND ADD ESSENTIAL VALUE to the final product.
(13) In order to create the illusion of exclusivity, LV’s DISTRIBUTION STRATEGY is focused only on specially selected locations which are limited. The shops are located on high streets and luxury shopping malls with other designer brands. These exclusive channels of distribution ensure greater control and flexibility on their product ranges. As a result, OUTBOUND LOGISTICS have also a high contribution to the value of the product and the competitive advantage of the brand.
(14) The MARKETING AND SALES DEPARTMENT also has a great impact on the value added to the final product due to the fashion shows and in the world’s fashion capitals New York, Milan and Paris. The media coverage of the show is extremely valuable and results in millions of dollars. The pre-collection briefings are useful for brand promotion, but the real value added at the fashion house comes at the ready-to-wear products and accessories such as shoes and bags as well as other related licensed items such as perfumes.
(15) THE SERVICE DEPARTMENT ADDS A SIGNIFICANT VALUE TO THE BRAND ALTHOUGH THE NUMBER OF HAUTE COUTURE CUSTOMERS IS LOW. THE FASHION HOUSE PROVIDES EXCLUSIVE AND DISCREET LEVELS OF SERVICE TO THEIR WEALTHY CLIENTS WHICH ADD VALUE TO THEIR PRODUCTS. LV ALSO OFFERS ADDITIONAL SERVICE TO THE GREAT NUMBER OF CLIENT FOR PRÊT-À-PORTER.
Apart from the design and manufacture of a single silk dress, value generation is captured in two additional aspects:
The market leader in luxury goods LVMH has developed its own 1,600 retail outlets around which derive around 80% of company’s sales.
LVMH also operates a range of at least 50 brands not only in fashion clothing. The purpose of this strategy is to spread risk and generate profits even if one brand suffers a temporary downturn.
Shin’ya Nagasawa. (2008). Marketing Principles of Louis Vuitton. _The strongest Brand Strategy_. 44 (5), 44-45
Richard Lynch (2009). _Strategic Management_. 5th ed. England: Prentice Hall. 122-140.
Porter, M. E. (1990), The competitive advantage of nations, New York: Free Press
Macmillan, H. & Tampoe, M. (2000), Strategic Management, Oxford University Press.