MM 5012 – BUSINESS BUSINESS STRATEGY AND ENTERPRISE MODELLING
THE NATURE O OF F PARENTING AD ADVAN VANTAG TAGE E I N LUXURY FASHIO FASHI ON RETAIL I NG CASE STUDY: STUDY: GUCCI GUCCI GROUP GROUP NV
SYNDICATE 6 ANANDITA ADE PUTRI
29112476
RIZANUL IKHWAN SIRAIT
29112478
FERRY KRISNA ARIANTO P.
29112479
LIVANI PUTRI D.
29112502
WAIZAL QORNIE PRATAMA
29112618
HARRY PANANGIAN S.
29112561
ASWIN AGUSTINUS
29112567
MASTER OF BUSINESS ADMINISTRATION ADMINISTRATION SCHOOL OF BUSINESS AND MANAGEMENT INSTITUT TEKNOLOGI BANDUNG 2014
1. Case Synopsis
Gucci was founded in Florence in 1923 first as a manufacturer and retailer of fine leather goods. The first store was outside of Italy, then opened in London (1967), followed by many others in the important world centres. With its association with royalty and film stars, the Gucci brand had become synonymous with luxury (Forden, 2000). By the late 1980s, Gucci was in disarray. In 1995, Domenico De Sole was hired as President and Chief Director and Tom Ford was promoted from Assistant to Creative Director to affect turnaround. During the years, De Sole and Ford used their skills in luxury brand management and established the internal resources for the exploitation of “Parenting Advantage” whenever the company extended to become a
luxury brand group in 1999. Moore and Birtwistle (2005) focused on Gucci to study the nature of “Parenting Advantage” in luxury fashion. They reviewed Gucci’s annual reports and
other secondary information sources and identified the ten-year renaissance in Gucci. They argued that there is an intrabusiness group synergy in Gucci and this synergy is crucial for saving Gucci from the financial crisis that it faced at that time. They also established a multidimentional luxury fashion branding model which identifies various critical components and their interactions for luxury fashion brands. They believed that their proposed model can help luxury fashion brands to better shape the branding strategies and develop a competitive edge. The relationship between parent company and its subsidiaries is more than how subsidiaries give benefit to the parent. Therefore, experts have been research how parent companies contribute to the achievements of subsidiary competitive advantages. The fundamental role of the parent is to create value for the subsidiary, due to influence the decisions and strategies of its business, while standing between these business and those who provide capital for their use. Parenting advantages necessary depends upon the strategic fit that matches the core skill, expertise and resource of the parent company with the improvement requirement of the subsidiary company. Realization of parenting advantage necessitates a consideration of the skills available to the parent company that may be of strategic use to the subsidiary as well as the mechanism which facilitated the transfer of this from the parent to subsidiary.
The approaches of value creation from parent to subsidiary are: -
Stand alone influence
-
Linkage influence
-
Functional and service influences
-
Corporate Development activities
2. Issues and Problems
In 1994, Gucci made losses in excess of US $40 million and faced bankruptcy, while a decade later the company emerged as the Gucci Group, one of the most important luxury brand groups. Gucci reached sales in excess of US $2 billion and five-year average annual operating profits exceeding US $200 million (Gucci Group Annual Report. 2004). The transformation of Gucci in the period from 1995 to 2004 was achieved in three distinct phases, Gucci Brand Stabilisation Phase, Multi-Brand Acquisition Phase, Gucci Group Consolidation Phase . The first phase, from 1995 to 1999,
marked a period of brand stabilisation. Management re-established the integrity and luxury equity of Gucci through their consistent control and investment strategy. They developed formidable expertise in product development, supply chain control, brand communications and luxury fashion retailing. These core luxury brand management skills made Gucci attractive to other businesses and close rivals, LVMH and Prada. Another interested party, the French brand conglomerate, Pinault-Printemps Redoute (PPR), formed a strategic alliance with Gucci in March 1999. PPR acquired a 42% stakes in Gucci for US $9 billion. The multibrand acquisition phase (November 1999 to July 2001) is when Gucci signalled their emergence as the Gucci Group. The company acquired equal or majority shareholdings in 10 companies to form the Gucci Group NV, the world’s
second largest multi-luxury brand conglomerate. (measured by share of the luxury goods market) Finally, the third period from August 2001 to April 2004 is Gucci Group’s consolidation phase, when the company sought to exploit “group resources” –
management; production and logistics; distribution – to build these brands, which over time can contribute meaningfully to Group returns. With their expertise in luxury fashion brand management, the Gucci Group’s strategy was to bring the skills and
advantages of the parent company to their subsidiaries.
3. Analysis 3.1 Parenting Advantage
How subsidiary companies benefit from the interventions and directions of the parent company, also how their value may be enhanced as a result of that relationship. Within the context of “value creating relat ionship”, it also explain
how parent companies contribute to the achievements of subsidiary competitive advantage. Another simple mechanism for identifying the value created by the parent, they purpose the “better -off test” to understand how the subsidiary is “bet teroff” as a result of its connection with the parent company. In their view, the business unit should gain competitive advantage “from its link with the corporation or vice versa. The combination should result in value creation”. The achievement of “parenting advantage” necessarily depends upon the
strategic fit that matches the core skills, expertise and resources of the parent company with the improvement requirements of the subsidiary company. This strategic fit is a dynamic connection that evolves and adapts in response to changes in the competitive environment.
3.2 Business-Level Strategy
A firm must have an integrated and coordinated set of commitments, also actions, uses to gain a competitive advantages by exploiting core competencies in specific product markets, or calles as a business-level strategy. Strategic competitiveness results only when the firm is able to satisfy
a group of customers by using its competitive advantages to compete in markets. Therefore, Gucci’s management must have effective relationship
with customers by answering questions related to the issues of who, what and how. Deciding “who” the target customer is Gucci intends to serve by
considering demographic factors (age and income), social economy (highincome), psychological (lifestyle, personality), and consumption pattern (heavy, moderate). After decided who it will serve, Gucci must also identify the targeted customer’s needs (“what ”), that is luxury goods. Gucci must determine which
customer ’s needs to have luxury goods which will have benefit on prestige esteem with the very best product features from the raw materials. That’s why, people who is Gucci’s loyal customers, willing to pay premium prices to get the value of Gucci’s products.
Gucci also use its core competencies (“how”) to implement value-creating strategies and thereby satisfy customers’ needs. Gucci created sophisticated
store consumption experience, that was dramatic and highly recognizeable. And, ensure that all products are presented to customers in a way that capitalizes on the exclusitivity and ultimate allure of the brand. Focused diferentiation streategy chosen by Gucci group where they can
differentiate their products in many ways. Gucci also must be able to complete various primary and support activities of each brands consolidated in a competitively superior manner to develop and sustain a competitive advantage also to earn premium returns. The activities required used by Gucci are the six key dimensions that defined their brand stabilization strategy, which are: a. Re-established control of Gucci product design and manufacture b. Re-established control over Gucci product distribution c. Create a balanced product portfolio for a luxury brand d. Establish a luxury marketing communications platform e. Create a luxury brand consumption experience f. Hiring Tom Ford as a creatuve director – to design direction and control Furthermore, this strategy also has purpose to create difference between the firm’s position and those of its competitors, by perform
activity differently or perform different activities.
3.3 Corporate-Level Strategy
Gucci uses a related diversification strategy that may gain market power using their related linked strategy which is a moderate to high levels of diversification. Not only the diversification level that can be shown, it also related to connection between brands among their core business. Related linked strategy means less than 70% of revenue comes from the dominant
business (Gucci) and there are only limited links between businesses.
Gucci Group has subsidiaries offices in Milan, Paris, London, Hong Kong, Japan and New york. All of those area is a main district for global fashion industry, and for reach market power as well as increase market size, Gucci implement international corporate strategy; global strategy. Gucci markets its products using the same material and production processes, even for the prices. Gucci treats the world as largely one market with little loval variation. With careful management on production process and distribution, Gucci becomes one of the worldwide premium brands in the luxury goods industry.
3.4 Acquisition
Gucci engaged in an luxury brand acquisition strategy that had been done before, in terms of speed or its scope. The acquisitions which transformed Gucci from their single brand status to become a multi-brand luxury goods group. With this strategy completed, the company proposed a tripartite-brand categorisation of acquire brands which identified declining brands – such as Yves Saint Laurent (which have over extended and required the rejuvenating inputs of Gucci management); emerging brands – such as Alexander McQueen and Stella McCartney (which would provide for future growth and healthy returns); and complementary brands – such as Boucheron and YSL Beaute (which would afford synergistic opportunities in manufacturing and distribution). Gucci believed that the acquisition will bring skills to advantage each category of the brand and the group-synergies would provide positive benefits for the group as whole. Each brand was acquired for its potential to “generate outstanding value for our shareholders through sustainable profit growth, return in excess of our cost of capital and minimal short-terms earnings dilution”. Equity
strategic
alliance chosen
to be implemented in Gucci
consolidation phase, where each brands own different percentages of Gucci holding shares by combining some of their resources and capabilities to create a competitive advantage.
3.5 International Strategy
The importance of international strategy is as a source of strategic competitiveness and focuses on the incentives to internationalize. The four basic benefits from this strategy are increase market size, greater return on major capital investment, competitive advantage through. Global strategy is a method implemented by Gucci designed as a belief that the world as one market which doesn’t have any
tangible difference between region or places. Gucci have center strategy on market globalization by focusing on standardization of the market of luxury goods and generalization relating to the global luxury goods industry. Gucci have adopted an international marketing strategy of communicating a consistence image to it’s
customers around the world. To sustain the consistency Gucci has concentrate marketing operation to Florence, Italy which provide all creating materials Gucci make its product available to the public through 4 main distribution channels Direct operated store, Franchise stores, Duty-Free boutiques and Department stores.
4. Conclusion and Recommendations
Relationship between parent company and its subsidiaries is more than how subsidiaries give benefit to the parent. The fundamental role of the parent is to create value for the subsidiary, due to influence the decisions and strategies of its business, while standing between these business and those who provide capital for their use. The main problem explode 1994, Gucci made losses in excess of US $40 million and faced bankruptcy. To solve it, it divided to 3 phase; first phase, from 1995 to 1999, marked a period of brand stabilisation. Second, the multibrand acquisition phase (November 1999 to July 2001) is when Gucci signalled their emergence as the Gucci Group. The third period from August 2001 to April 2004 is Gucci Group’s consolidation phase. With the context of “ value creating relationship ”, it explain how parent
companies contribute to the achievements of subsidiary competitive advantage. Gucci’s management must have effective relationship with customers by answering
questions related to the issues of who, what and how . Gucci also uses a related diversification strategy that may gain market power using their related linked strategy which is a moderate to high levels of diversification. Not only the diversification level
that can be shown, it also related to connection between brands among their core business Equity strategic alliance is chosen to be implemented in Gucci consolidation phase, where each brands own different percentages of Gucci holding shares (combining some of their resources and capabilities to create a competitive advantage). Gucci make its product available to the public through 4 main distribution channels; Direct operated store, Franchise stores, Duty-Free boutiques and Department stores. Recommendation •
Gucci can not depends on one figure (Tom Ford)
•
Secure full creative control
•
Keeping customer ’s loyalty by effective marketing communication
•
Directly operated store
•
Keeping onto cutting edge designer
5. Lessons Learned
Luxury brands have a heightened status that allows the opportunity to charge premium prices. A luxury branding needs to have the following: iconic/product design,
history/culture,
marketing,
premium
pricing,
control
and
product
manufacturing, control on sales area, and it should have product design, status, client relationship management. Premium pricing is a defining and non-negotiable dimension of luxury fashion brand positioning. Creating luxury brands is a difficult marketing exercise, it requires heavy investment in marketing communications, excellent product/service quality, but above all these brands have to try to remain fashionable, which is notoriously difficult, These brands have to adopt innovative marketing strategies in order to succeed in this dynamic environment. Because of limitation of growth as single brand company, so making the strategic alliance to create a multi brand luxury and the requisite skills is a perfect
way to increasing the competitve advantage. Contribution of evocative and often controversial advertisements can be the reason of luxury brand status. The prestigious pricing of their products creates a high quality image and positions the goods in the mind of the consumer as a status symbol. The success of Gucci can be attributed to quality of service, brand image, retail environment, management structure, yet above all their ability to combine these factors to create an exclusive experience. The transfer of branding skills and the fostering of intra group synergies are the principal dimensions of parenting advantage in the gucci group. Different sets of businesses needs unique parenting approaches to run operation effectively, gain competitive advantage, and maximize corporate value, parenting advantage concept has also been aplied to more specialized corporate tasks. The concept of parenting advantage offers a clear framework and guiding principle for corporate-level decision making, including corporate portofolio management and corporate organization.
