case 1- louis vuitton-competitive advantage

Value chain analysis- FPT

Case study 1: Competitive advantage at Louis Vuitton and Gucci

With annual sales of over US$165 billion and gross profit margins of over 50 per cent, the major luxury goods companies rely on famous brands like Louis Vuitton and Gucci to deliver competitive advantage. But does the advantage come only from the brand name? Perhaps there are other advantages? This case explores competitive advantage in the world of high fashion luxury goods.

To explore competitive advantage in the industry, we begin by examining the value chain – where the profits are generated in the business. This is a useful starting point because it identifies those parts of the business that are particularly profitable and therefore likely to be linked with potential advantages. The second part of the case then uses the value chain to explore competitive advantage in luxury goods.

Value chain at a major fashion houseIn practice in the luxury goods sector, the value chain is complex, with many interlocking parts. However, the key activity for most companies is the preparation and display of a new collection for its bi-annual fashion show. To explore this, we can take the example of a Paris fashion house, perhaps at the leading French company LVMH, which owns such brands as Louis Vuitton, Hennessy, Loewe, Kenzo, Givenchy and Thomas Pink. The lead designer at the fashion house has decided to make an embroidered silk haute couture dress as part of its next women’s spring collection. This activity will generate profits through a value chain of business activities. The primary activities of the value chain are shown in Table 6.1.

The support activities are not shown for reasons of simplicity, but the fashion designer, who oversees the whole process, is part of the firm infrastructure. In order to make the dress, silk is supplied as thread mainly from China to a co-ordinating company, often in Northern Italy. The co-ordinating company has a network of associated companies in the geographical area to dye, spin and weave the silk. Importantly, the co-ordinating company will work very closely with the lead designer from LVMH on colours, patterns and textures relevant to the appropriate design collection. For both the Chinese and Italian companies, the real driving force in terms of design, pricing and sales to the customer is the fashion house, rather than its suppliers. For this reason, the main value is generated at the fashion house, not the earlier parts of the value chain.

@ Duong Thi Hoai Nhung (MBA)-FTU


Competitive advantage in the fashion industry includes brand reputation. But for the leading fashion houses, the lead fashion designer is probably more important.

Turning to the fashion house itself, there are considerable variations in where and how value is added. Clearly, the fashion designer – for example, famous designers like John Galliano, Stella McCartney and Giorgio Armani – takes the lead in developing the new silk dress design. The designer’s work is often better when supported by a business manager. The manager ensures that the business objectives of the fashion house are met and that the designer is not burdened with unnecessary administrative matters. The designer does not just focus on one silk dress but creates two complete fashion collections every year in each of the major fashion centres: Paris, Milan and New York. The designer may also develop men’s as well as women’s collections, arrange a pre-collection briefing for department stores and other subsidiary buyers and also contribute to the design of the fashion house accessories range – scarves, bags, shoes, etc. The embroidered silk dress of our example will probably appear only once in one of these collections. The designer begins each dress collection with fashion ideas that are simply draped as fabric on a static mannequin. Silk fabric might not even be used at this stage. The ideas are then refined over time, the silk fabric chosen and the brief given to the Italian suppliers to make this specific fabric – described above. When the material arrives from the Italian supplier, it is then cut to make up the finished garment. The final stages involve invisible stitching using highly skilled seamstresses who are an extremely important part of a top fashion house. The embroidery too demands great expertise. The silk dress then appears on the catwalk of the fashion show and subsequently in the showroom for sale after public presentation. Each of these activities will add value to the finished garment- see Table 6.1.



Even allowing for the expense of hand finishing, the resulting price of the silk dress may appear high – perhaps as much as US$30,000 – and the value added may therefore seem high. However, there are only a relatively few haute couture customers – perhaps only 2,000 around the world – who are able to afford such prices. Thus the ‘value’ generated from the embroidered silk dress in absolute terms is relatively small. The real value added at the fashion house comes in at least three other related areas:1. Off-the-peg dresses from the same design label: many people may not be able to afford the $30,000 silk dress, but they will pay $2,000 for a prêt-à-porter (ready-to-wear) dress from the same designer.2. Shoes, scarves and other accessories: many customers will also pay $500 for shoes and other items from the same fashion house. Some of these may be made inside the



fashion house, but many will be subcontracted to outside suppliers and then sold through the retail outlets owned by the fashion house.3. Other related and licensed items: customers will also pay $50–$100 for fragrances and other items related to the brand.

Such items may not be manufactured by the fashion house but by licensees of the brand name. The brand is therefore more than just a silk embroidered dress produced for a fashion show. Fashion houses license their brand names to outside companies but also understand the real danger of diluting the brand. An example of ‘brand dilution’ is the Pierre Cardin brand, which used to be a major high fashion brand in the 1970s. During the 1980s, the brand was licensed to over 800 products, including toilet seat covers. The Pierre Cardin brand is still important and well respected, but it is no longer a part of the high fashion luxury market in the sense explored in this case. High fashion houses guard their brands carefully and will even revoke licences if they judge that the brand is being diluted: examples of activities leading to brand dilution include selling the ends of lines below normal pricing or attaching the brand name to an unsuitable product. From a more positive perspective, brand licensing across a number of related products means that a fashion house has a range of activities to exploit its major brands. For example, the world’s leading fragrance company, L’Oréal, has bought licences from fashion houses for several of the L’Oréal luxury fragrance ranges – including Giorgio Armani, Ralph Lauren and Cacherel

There are two additional aspects to value generation at fashion houses that are not captured in the simple design and manufacture of a single silk dress: ● Most of the fashion houses have developed their own retail outlets to sell their products around the world. For example, the market leader in luxury goods is the French company LVMH: it has around 1,600 stores and derives around 80 per cent of its sales from these outlets.● Fashion houses also operate a range of brands, each with its own designer and fashion activity. For example, LVMH owns at least 50 brands, though not all are involved in fashion clothing. The purpose of such a strategy is to spread the risk: if one fashion house brand within the group suffers a temporary downturn, then another brand can take over. In total, LVMH employs 56,000 people with two-thirds of them being located outside its home country, France.

Competitive advantage in the luxury goods industryAlthough the value chain locates the high profit margin activities, it does not necessarily follow that all will deliver competitive advantage for a company. The high profit margin activities may be the same at all the fashion houses and therefore not deliver a competitive advantage to a particular fashion house. Nevertheless, the value chain is a useful starting point because competitive advantage is more likely to be associated with high profits. In the case of the luxury goods market, it will be immediately evident that the competitive advantage rests only partly with a brand name like Gucci or Louis Vuitton. Table 6.2 examines the three leading luxury goods companies and describes the main attributes that will then generate competitive advantage.



© Copyright Richard Lynch 2006. All rights reserved. This case was written by Richard Lynch from published information and the teaching and research activity listed in the references.23

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case 1- louis vuitton-competitive advantage

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