Università della Svizzera italiana Faculty of Economics

Faculty of Management Sciences

Luxury Brand Management: Hugo Boss Corporate Strategy

Master Thesis

Roberto La Rocca

08-986-515

Master in Management

Thesis Supervisor: Erik Larsen

Academic Year: 2009-2010

Submission Date: June 2010

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Table of Content

ABSTRACT 5

INTRODUCTION 6

CHAPTER 1: An Overview of The Fashion and Luxury Industries

1.1 - The Fashion System 7

1.2 - The Luxury Fashion Industry 8

1.3 - Luxury Brand Management 10

CHAPTER 2: Hugo Boss Corporate Strategy

2.1 - Founding & Organizational Structure 18

2.2 - Products 19

2.3 - Business Model 23

2.3.1 - Value Proposition 23

2.3.2 - Targeted Segments of Customers 24

2.3.2 - Communication and Distribution Channels 26

2.3.4 - Value chain organization 27

2.3.4.1 - Innovation in The Hugo Boss Value Chain 29

2.4 - Hugo Boss Internationalization Process 31

2.4.1 - American Dream 37

2.4.2 - Chinese Expansion 41

2.4.2.1 - Success Factors of Luxury Brands in China 43

2.4.3 - Indian Horizons 45

CHAPTER 3: Applied Strategic Models

3.2 - Hugo Boss SWOT Analysis 48

3.1 - Porter’s Five Forces Model 54

3.3 - Financial Analysis 60

3.4 - Risk Assessment Analysis 68

CONCLUSIONS 72

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Tables and Figures Index

Tables Tab. 1 – Competitive Models in The Luxury Fashion Industry 8

Tab. 2 – Retailers Type in The Luxury Fashion Industry 11

Tab. 3 – Distribution Channel Types 13

Tab. 4 – Direct Distribution Channel Format 15

Tab. 5 – Indirect Distribution Channel Format 16

Tab. 6 – Customer Profiles in The Luxury Industry 24

Tab. 7 – International Growth Paths 32

Figures Fig. 1 – Hugo Boss Number of DOS Over Time 14

Fig. 2 – Hugo Boss Brands 19

Fig. 3 – Hugo Boss Brands’ Shares of Sales 20

Fig. 4 – Hugo Boss Current Brand Positioning 21

Fig. 5 – Hugo Boss Brand Positioning in The Long Term 22

Fig. 6 – Hugo Boss Value Chain 27

Fig. 7 – Hugo Boss Global Presence 31

Fig. 8 – Adaptation & Efficiency Trade offs for Multinational Firms 34

Fig. 9 – Hugo Boss Investments Over Time 35

Fig. 10 – Hugo Boss Mid-Term Sales Target 36

Fig. 11 – Per Capita Growing American Household Income 38

Fig. 12 – Flying Geese Model 41

Fig. 13 – Hugo Boss Distribution Channel 50

Fig. 14 – Hugo Boss Sales Evolution Over 2008 51

Fig. 15 – Euro Exchange Rates Over 2007/2008 52

Fig. 16 – Hugo Boss Investments 2008 65

Fig. 17 – Hugo Boss Investments Overview of The Last Five Years Of

Operations 65

Fig. 18 – Hugo Boss Share Price Performance 66

Fig. 19 – Hugo Boss Risk Management 68

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to my family

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Abstract 

Globalization effects spill over to all sectors of the economy blurring

boundaries between luxury and fashion. We are currently referring to a world where

eye stimulation is predominant. Behind the idea of luxury, we find three hidden

words: creativity, exclusivity and total quality. Accordingly, in the past decade it was

observed that customer interest focused on luxurious experiences rather than merely

on luxurious products. Clothing is the industry that gets closest to the idea of luxury

applied to daily life situations. Consumption preferences in the fashion industry have

always been influenced by social and consumers’ cultural backgrounds. This is even

more important when we consider luxury goods and their symbolic value.

Nowadays, some companies operating in the luxury fashion industry extend

their offers to broaden their customer bases by lowering prices to enhance

accessibility. Other firms manage to leverage the marketing mix, design and

communication of their product in order to be included in the masstige1. Competition

in the luxury fashion industry is therefore increasing.

Moreover, considering the current economic recession, an interesting question

to consider is why people buy the clothes that they do, especially if they are

expensive. What makes one suit different from another suit? Is there really any

particular difference that might alter the socio-economic aspect of the individual who

purchases a specific suit?

This study aims to indirectly investigate some possible answers presenting

Hugo Boss luxury brand strategy at a corporate level.

                                                        1 It is composed of all firms whose offer is designed to fit quality, visibility and appearance of luxury goods, yet marketed with the price of non-luxury goods. (Corbellini & Saviolo, 2009)

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Introduction

Fashion and culture have held a mutual-influencing relationship over the

course of time. The industrial revolution, from the 18th to the 19th century, showed us

the rise of middle classes over aristocracy and the consequent codification of grey

suits as businessmen suits. The women’s rights revolution prepared the ground work

for Coco Chanel pioneer dresses which evolved into Giorgio Armani tailleurs creating

the businesswoman stereotype by the end of the 1980’s. Then it was the time for jeans

and t-shirts with silver screen testimonials made by the likes of James Dean and

Marlon Brando. In other words, clothing represents a mean to express the self and

communicate a certain cultural status. It is now clear that the way you dress does

affect your life. Some companies anticipated all these trends and industry

characteristics through an ongoing market analysis, positioning as premium brands in

the luxury industry.

Therefore, the aim of this study is to analyse the organizational model of Hugo

Boss as representative of successful firms operating in the luxury fashion industry.

Starting from a description of the fashion and luxury systems, an understanding of the

general luxury brand management will be provided.

Secondly, by presenting Hugo Boss strategy at corporate level through an analysis of

its organization, products and business model, it will be possible to define the roots of

success for the German firm operating as a luxury fashion brand. Emphasis is also

given to the Hugo Boss’ internationalization process within the American, Chinese

and Indian realities, as they constitute central levers that need to be managed for a

prosperous future.

Finally, this case study includes a number of strategic and managerial models: a

description of Hugo Boss’ Porter’s Five Forces Analysis, SWOT Analysis, Financial

Analysis and Risk Assessment Analysis will also be presented.

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1 - AN OVERVIEW OF THE FASHION AND

LUXURY INDUSTRIES

1.1 - The Fashion System

Societies evolve along with fashion. Consumers now require more customized

products than in the past and it has become more difficult to meet their expectations.

The luxury fashion industry bloomed in the eighties and is now facing unfavourable

conditions. Positive results start coming from countries like India and China which

are part of the BRIC2. These countries are developing very quickly and consumer

needs are characterised by different motivations in comparison with other developed

countries. Focusing on Western luxury fashion companies, we observe the importance

to differentiate in order to preserve growth. More often, these companies are called to

decide on a trade off between differentiation and the need to boost their core values to

enhance customer loyalty. Indeed, it is becoming more a matter of line extension

versus brand name and luxury fashion companies must not forget how the latter is

their most critical success factor.

Companies operating in the fashion system face a product life cycle whose

length is shorter in comparison with other industries. In 2006, Kotler and Keller

underlined how fads’ life cycles are shorter than fashion’s and how fashion’s is

shorter than basic products’. The implementation of changes in fashion are usually

related to seasonal motives and more often product life cycle is modelled by “Planned

Obsolescence” which pushes firms to control their product turnover. Nowadays, it’s

not uncommon to notice how High Street stores propose a new collection on a

monthly basis. The total look3 collapsed and fast fashion4 is increasingly assuming

importance on a global scene.

                                                        2 Acronym for Brazil, Russia, India and China. As reported by Goldman Sachs in 2003, these four countries combined together are expected by 2050 to be wealthier than current major economies. 3 It should be intended as the look of a person who is entirely dressed by a single brand.

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1.2 – The Luxury Fashion Industry

In 2003, Silverstein and Fiske estimated the luxury market size at $350bn per year

with an annual growth rate of 10%. At the time, Tilley (2001) had defined the luxury

market as the one with the fastest growth rate all over the world. This is consistent

with people’s desire to show off which fosters the demand for goods with status-

conferring characteristics (Ziccardi, D. (2001); Echikson, W. (1995)). Therefore, in

comparison with other goods presenting comparable functions, luxury goods are able

to charge a price premium (Bagwell, I. & Bernheim, B. (1996); Mc Kinsey

Corporation (1990)). It is worth explaining what luxury means in order to better

define which industry this case study is targeting. Luxury specialists have attempted

to give a clear definition of what a luxury brand is, but this is not an easy task

(Kapferer, J. N. (1997a)). “Luxus” is the Latinism for “indulgence of senses,

regardless of cost”. Luxury goods consumption reflects the current cultural values

rooted in our society where ostentation is broadly accepted as a must (Phau, I. &

Prendergast, G. (1998)). The “Rarity Principle” (Dubois, B. & Paternault, C. (1995);

Mason, R. M. (1981)) suggests that when everybody is able to purchase a specific

brand, the luxury component is eroded. Considering this assumption, Hugo Boss can

be classified as a luxury brand since not everybody can afford its products.

Salvo Testa, expert in Fashion & Design lifestyle Management at the Bocconi

University, classifies four pure competitive models in the luxury fashion industry.

Tab. 1 – Competitive Models in The Luxury Fashion Industry

                                                                                                                                                               4 It’s a current trend characterized by fast changing stocks which often mean added sales as customers frequently come back to visit the store 

Model Segment Competitors Mission

Affordable Fashion

Woman, Apparel, Accessories

There is no competitors’ predominance

Codification of fashion tendencies

Premium Brand

Man, Casual & Jeans, Accessories

American & Northern Europe brands

Value for money

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Source: adapted from Salvo Testa, “Fashion, Luxury and Lifestyle”, SDA Bocconi

The abovementioned four classes are classified according to the degree of luxury

contained. Starting from “Affordable fashion” brands and moving on to “High fashion

brands”, we observe an increment in terms of quality, price premium and brand image

importance. Although it is possible to identify these four macro-categories, it is not

easy to set their own boundaries and clearly make a distinction between some

“Affordable fashion” brands and some “Premium brands” as well between some

“Exclusive luxury” brands and “High fashion” brands. Sometimes they are

characterised by features owned by another competitive model and they give birth to

hybrids whose mission is to preside crossing consumer expectations. Here’s an

attempt to classify some famous brands into the four competitive models mentioned

above. “Affordable fashion” includes names such as Diesel and Miss Sixty. “Premium

brands” are Geox and Replay. An example of “Exclusive luxury” is given by Armani

and Zegna. Prada and Gucci are part of the “High Fashion competitive model”.

Hugo Boss fits best under the “Premium Brand”. Indeed, customers perceive the

German brand as a distributor of male-oriented products, whose quality is mirrored in

the premium price. However, as time passes, Hugo Boss tends to show some features

typically owned by “Exclusive luxury and High fashion” brands. Its mission is

spreading and growing toward these last two models in order to enlarge the customer

base and evolve into the next level of the luxury scale.

Luxury fashion industry is increasing in complexity and the real challenge for

companies operating in this environment is currently acquiring the capabilities to

manage these challenges.

Exclusive Luxury

Man, Elegant Woman, Accessories

French luxury brands

Affirmation of Brand Heritage

High Fashion Woman, PAP, Accessories

International Designer

Imposition of new tendencies

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1.3 - Luxury Brand Management

In the first place, it is worth mentioning how luxury fashion firms take advantage of

the so-called country branding5. Just like Versace reflects Mediterranean lifestyle,

Hugo Boss can brag that its Made in Germany label is a symbol of innovativeness,

precision and elegance.

The country of origin (“Made in”) serves two main functions:

• It allows brands to better develop their internationalization processes due to

the intrinsic quality owned by products coming from particular places.

• On the other side, this label also helps protect national product consumption.

Due to outsourcing practices, today’s meaning of “Made in” has spread so far from its

original significance that it is now hard for customers to clearly define what it is.

Multinationals’ operations, having subsidiaries all over the world, contribute to create

confusion regarding this issue which is usually solved by the paradigm “the product is

born in the factory but what the client buys is brand” (Klein, N. 2001).

Corbellini and Saviolo (2009) define a luxury brand as a “coherent system of

excellence”. Here we present the set of characteristics shared by luxury brands.

• High price • Exclusive communication

• Imaginary and storytelling • Superior service

• Tradition and heritage • Selective distribution

• Selective distribution • Innovation and creativity

Fashion designers want their brands to be clearly positioned in customers’ minds. In

order to achieve this result, brand equity has to be determined. In 1993 Keller

suggested that this value of brand is built upon brand knowledge which comes from

brand awareness and brand image. Thus, perceptions reflected in brand associations

and memory anchors constitute the two main drivers to create strong brand equity.

                                                        5 This type of branding strategy exploits national values, culture and history to confer unique characteristic to products. The major advantage of country branding is that it is impossible to be imitated.

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Even though there is a shared set of features among luxury brands, there are four main

components creating brand identity. This can be defined as the brand positioning

inner essence which is exteriorized by product aesthetics. It is modeled on the

following four drivers: heritage, style, retail & distribution channels and

communication. A description of each one of them is provided:

• Heritage: refers to the company’s long tradition and history of brand and its

importance relies on the fact that it cannot be imitated. People, place of origin,

products and legend are blended together to communicate a sense of

uniqueness.

• Style: refers to the importance of creating a code of stylistic rules through

which the brand can be easily identified and positioned in customers’ minds.

• Retail & Distribution Channels: there are two kinds of retailers in the luxury

and fashion industry6:

Tab. 2 – Retailers Type in The Luxury Fashion Industry

Non Specialized Retailers Specialized Retailers Department

Stores

(e.g. Lafayette)

• Wide range of

products

• No brand

predominance

Specialty chains

or vertical chains

as they market

their own brand

(production is

outsourced)

• Wide

geographical

presence

• Large players

(e.g. H&M)

Hypermarkets

(e.g. Carrefour)

• They combine

features of

supermarkets and

Independent

stores

• Self standing

POS

• Specialized in

                                                        6 Classification based on Aspinall, K. (1997)

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department stores

• Business model

focuses on high

volume – low

margins sales

one product line

Mail order

retailers

(e.g. Otto

Versand)

• Orders placed via

phone or internet

• Products

dispatched to a

specific address

Concept stores

(Destination

boutiques)

• Individual multi-

brand stores

• Unique retail

concept:

shopping

experience

pushed beyond

the mere

purchase

• They combine

store loyalty to

brand loyalty

Source: Adapted from “Managing Fashion and Luxury Companies”, Corbellini &

Saviolo (2009).

Since 2000, the general trend has been concentration. In the last decade, a drastic

reduction of “Independent stores” and “Departments” has been observed in favor of

the expansion of “Specialty chains”. Choosing the correct distribution channel and

store format is critical, especially in the luxury fashion industry where timeliness and

visibility are important to achieve a successful distribution strategy. This can be

implemented through two different methodologies: direct and indirect. Following, is

the distinction between these different methodologies:

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Tab. 3 – Distribution Channel Types

Direct Channel It is the luxury firm that

manages the distribution

channel through DOS7 or

franchise

Indirect Channel The luxury firm does not control the distribution channel

but it cooperates with retailers in the “Short Indirect

Channel” and with both distributors and retailers in the

“Long Indirect Channel” to deliver its offer

Short Long

Source: Adapted from “Managing Fashion and Luxury Companies”, Corbellini &

Saviolo (2009).

Whilst in the “Short Indirect Channel” the company has to deal primarily with

“Concept stores” and “Department stores”. In the “Long Indirect Channel” the firm

mostly engages in operations with distributors in order to frame the distribution, price

and payment structure for a given area. Often, this second option regarding the

indirect channel is the only feasible way in a developing market since the company

expanding into new markets does not know much about them. This theory works

greatly in the early stages of international expansion when firms need to gather as

much information as possible before committing a lot of resources in developing

direct channels of distribution. Of course, evidence shows that there is no one best

way and often distribution channels are the result of different practices blended

                                                        7 Directly Operated Stores 

Manufacturer 

Consumer 

Manufacturer 

Retailer 

Consumer 

Manufacturer 

Distributor 

Retailer 

Consumer 

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together. Hugo Boss’ distribution policies are based on two points. The first one

explains how Hugo Boss chooses directly operated stores in order to develop a

globally consistent image of its brand. Indeed, de Chernatony and others (1995) found

that consumers have expectations to find the same brand core concept8 wherever they

go. The following figure illustrates how the number of directly operated stores has

increased over time.

Fig. 1 – Hugo Boss Number of DOS Over Time

Source: “Hugo Boss Annual Report 2008”

The second point refers to the strong-tie relationships with its trading partners in order

to maintain control on the quality of the offer delivered.

Another approach called “Transnational” seems to be gaining importance. It refers to

the development of distribution via Internet and travel retail. The former is in an early

stage of growth for luxury fashion companies that usually propose limited editions of

products on their websites to avoid conflicts and confusion with the other existing

distribution channels. Nonetheless, it has become clear that positive customer

experience on e-purchases reflects increases in physical stores and therefore                                                         8 Keller, K. L. (2003) defines core concept as the added value positioning in customers’ mind of a certain brand.

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companies are investing in order to improve the usability, emotional and experiential

side of their interfaces. On the other hand, travel retail refers to retailing inside

airports to exploit customers’ willingness to purchase luxury goods before catching

their flights. Travel retail is based on space concessions given by the Airport

Authority to those who pay a sales percentage in exchange.

It is now fundamental to analyze which retail format better suits a company’s

intentions:

Tab. 4 – Direct Distribution Channel Formats

Type Description Location Personnel Management

Dimensions

Flagship Store (All brand products)

• The company’s biggest store

• Independent,

directly owned and operated

• Worldwide presence, big cities

• The brand hires and manages sales people

• Huge:

from 200

to 5,000

sqm

Self standing store (Large selection of brand products)

• Independent, directly owned and operated

• High streets, airports, malls

• The brand hires and manages sales people

• 70-200

sqm

Shop-in-shop (Main brand products)

• Directly operated

• Department stores, malls

• Sales people are dedicated

• 50 -120

sqm

Source: Adapted from “Managing Fashion and Luxury Companies”, Corbellini &

Saviolo (2009).

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Tab. 5 – Indirect Distribution Channel Formats

Type Description Location Personnel Management

Corner9 • Retail space personalized with the brand image

• Department stores

• No

independent entrance

• No walls

• Sales people can be dedicated

Wall unit • Retail space organized as a wall

• No brand

personalization

• Department stores

• No dedicated sales people

Open sale • Retail space with multi-brand offers

• Lower level of a “Department store”

• No dedicated sales people

Source: Adapted from “Managing Fashion and Luxury Companies”, Corbellini &

Saviolo (2009).

From the first abovementioned format to the last one, it is evident how firms lose their

control over the possibility to affect the brand image perception. Through the

harmonization of distribution policies, integrated multichannel management focuses

on avoiding misinterpretations of a firm’s brand image. Whatever format is chosen,

luxury fashion stores are also integrating “bazaar display” in order to improve

customer shopping experience through fun. Hugo Boss carries out programs to train

employees on product and sales techniques. Personnel is therefore taught about

wearability and provided with books explaining how to conduct business in the                                                         9 It’s also growing importance the concept of partnership corner where producer and retailer cooperate to maximize their sales.

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German firm. This is part of a proactive10 approach toward customers that can be

synthesized with CRM (Customer Relationship Management). It is continuously

growing in importance as a customer-oriented approach has proved to be effective

considering luxury fashion customers’ profiles. CRM itself is part of a broader

concept. This is “Market-Driven Management” and it aims to establish customer

loyalty in order to develop long-term relationships as it has been proved that is

cheaper to retain current customers than seek for new ones.

• Communication:

In the luxury fashion industry, communication relies on aesthetics. Messages are

delivered with the aim of positively influencing brand awareness, brand image and the

company’s reputation. Strategic objectives and brand strategy have to be integrated

with the communication plan to benefit from the effort put in developing it. Indeed,

fashion companies are in control of numerous activities regarding the communication

system. Luxury fashion companies invest a great amount of money to monitor the

activities of media, their public relations and advertising campaigns after the launch

of a new product. Firms are striving to keep up with the general trends in

communication. While advertising is more expensive and not always as effective as in

the past because customers suffer of information overload, points of sales are called to

evoke brands’ values to enhance customers’ shopping experiences.

                                                        10 Being proactive means producing the desired outcome with consistent actions rather than react to something after it is happened 

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2 - HUGO BOSS CORPORATE STRATEGY

2.1 - Founding & Organizational Structure

According to Hamel and Prahalad (1994) there are two main kinds of

strategies to compete in a market. The alternative is between strategies that are

environment-led and strategies that are resource-led. The former reflects the

alternative “Fit” where firms take advantage of market opportunities adapting

resources to them. Instead, Resource-led strategies refer to stretch organizational

resources and competences in order to create value for money. Since firms are

generally limited in their resources in the early stages of their activity, they often start

to run their business according to the first approach. This was the case of Hugo Boss,

which was founded in 1923 in Metzingen, Germany and since the sixties it has built

its brand image around men’s suits. However, over time, the need for differentiation

pushes companies toward a resource-led approach. Today, indeed, the Germany based

premium-clothing manufacturer is known worldwide for its wide range of high-

quality products, which combine European design and fibers coming mainly from

Italy. In 2008 Hugo Boss’ annual sales amounted to €1,686 million.

A flat hierarchy constitutes the basis on which Hugo Boss corporate culture is

built. In this structure, the Supervisory Board and the Managing Board tightly

cooperate to strengthen the enterprise value. The latter reports to the former on

corporate strategy, business operations, and monitors changes in financial figures

through monthly reports. These regular reports together with regular meetings with

analysts, telephone conferences, ad-hoc announcements displayed on the company

website and annual shareholders’ meetings keep up with the need for transparency.

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2.2 - Products

The product range implies different kinds of clothing: business, leisure, sport

and evening. The company’s offer also includes accessories, perfumes, eyewear and

shoes for both men and women. Following is a visual structure of Hugo Boss’

umbrella strategy for its two main brands and Baldessarini:

Fig. 2 – Hugo Boss Brands

Source: Adapted from “Hugo Boss Annual Report 2008”

“HUGO Hugo Boss” differs from “BOSS Hugo Boss” for its avant-garde and

projection toward trendsetters. Buyers of “HUGO Hugo Boss” are characterized by

self-confidence and the collection is open to both men and women. Instead, “BOSS

Hugo Boss” represents the core of the “Hugo Boss Group”. This label includes

“BOSS Selection”, “BOSS Black”, “BOSS Orange” and “BOSS Green”.

The Hugo Boss Group 

BOSS Hugo Boss 

BOSS Selection 

BOSS Black 

BOSS Orange 

BOSS Green 

HUGO Hugo Boss 

Baldessarini 

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• BOSS Selection: menswear and accessories, “BOSS Selection”

combines the best workmanship practices and materials on the market

• BOSS Black: the focus is on menswear, womenswear and accessories

characterized by elegance. Business suits are predominant within

“BOSS Black”

• BOSS Orange: offers casual menswear, womenswear and accessories

through unusual colors, materials and details

• BOSS Green: also called “Golf collection”. This provides menswear

and accessories focalized on sports

Since its establishment in 2004, the brand Baldessarini does not include Hugo

Boss in its name. However, it represents the top luxury fashion brand under the Hugo

Boss group. Its offer includes shoes, fragrances and various accessories. Figure three

shows how “Boss Black” leads the shares of sales within the Hugo Boss group:

Fig. 3 – Hugo Boss Brands’ Shares of Sales

Source: “Hugo Boss Annual Report 2008”

The current strategy sees Hugo Boss’ brands positioned in this way:

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Fig. 4 – Hugo Boss Current Brand Positioning

Source: “Hugo Boss Annual Press Conference Presentation 2009”

The Hugo Boss Group aims to redefine the positioning of its brands in order to

better fit in customers’ minds and exploit a clearer brand image. Indeed, the current

brand positioning shows how Hugo Boss brands overlap and this might have negative

consequences by confusing costumers. In fact, these overlaps are not only related to

the fashion characteristics of each brand, but also to their prices. This situation has to

be changed as soon as possible since it might degenerate in the cannibalization of

Hugo Boss brands.

In order to succeed, Hugo Boss is striving to leverage its marketing mix in

both established and emerging markets. Figure five shows the future positioning of

the German brands:

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Fig. 5 – Hugo Boss Brand Positioning in The Long Term

Source: “Hugo Boss Annual Press Conference Presentation 2009”

This is an important step towards worldwide brand consistency. Having this brand

architecture is essential to reduce risks related to brand positioning and allows Hugo

Boss to create a starting point on which to develop effective and efficient future

strategic plans.

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2.3 - Business Model

Fashion business models are characterized by four different building blocks:

• Value Proposition

• Targeted segments of customers

• Communication and Distribution channels

• Value chain organization

2.3.1 - Value Proposition

Today’s fashion industry requires customized ways of approaching customers,

products, markets and communication. Single product strategies result to be obsolete

and firms are striving to offer a specific value proposition that suits a specific segment

of a specific market.

Premium brand firms operating in the luxury industry are usually specialized in only

one product at the beginning of their business. Over time, product specialization is

substituted by product range extensions. Hugo Boss’ value proposition relies on a

differentiation strategy where high prices, high quality and strong brand image are the

main characteristics. Industries like the fashion one are characterized by cycles that

have to be anticipated through forecasts in order to provide the needed degree of

innovativeness.

Facing innovation in terms of strategic proposition means being able to assess the

value for the customer (Christensen C. (1997)). Through innovation, fashion firms are

fighting to survive the competition and it seems that almost everybody has understood

the importance of creating new avenues towards success, but only some are able to do

so. Those companies are the ones capable of offering new ways to satisfy existing or

emerging needs through a competitive customer value proposition.

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2.3.2 - Targeted Segments of Customers

According to Porter, positioning entails all those activities through which it is possible

to achieve sustainable competitive advantage and at the same time preserving what is

distinctive about a company (Porter, M. E. (2008)). By carrying out different

activities from those of competitors or delivering them in a different way, companies

are able to succeed by adding value to customers through a unique positioning. Hugo

Boss as “Premium Brand” results in being more accessible than “Exclusive luxury”

brands and “High fashion” brands, especially to younger customers.

It is the hedonistic consumption theory proposed by Groeppel and Bloch (1990) that

justifies luxury goods’ consumption. These kinds of goods exercise stimuli on

customers who show emotions that are forbidden to other categories of goods. The

following is an illustration of customer profiles in the luxury industry:

Tab. 6 – Customer Profiles in The Luxury Industry

Type Description Conspicuous

consumption11

Consumers buy luxury goods to show-off.

Consumption patterns are explained by the

traditional components (Leibenstein, H.

(1950)):

• Snob effect: “The cheaper it is, the

less I buy and viceversa.”

• Bandwagon effect: “I buy what

people I respect do”

Selective extravagance Here price-sensitive/luxury cultured middle

class members experience “Rocketing”:

large amounts of money are spent on few

                                                        11 It was Rae (1834) to argue that this kind of consumption is driven by self-expression and vanity motives.

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expensive luxury goods

Fractional ownership Consumer’s status symbol is put apart in

favor of sharing the cost of luxury goods

Self-treating Consumers buy to satisfy their personal

pleasure and they are admired by other

people for their refined taste

Early adopter Innovation is what drives consumer behavior

Conspicuous austerity Large sums are spent on luxury goods that

communicate strong ethical values and

simplicity

Omnivore/univore

(Peterson, R. A. & Kern,

R. M. (1996))

Higher classes (Omnivores) have more

cultural tolerance and various tastes whilst

lower classes (univore) show limited tastes

Source: Adapted from “Managing Fashion and Luxury Companies”, Corbellini &

Saviolo (2009).

Hugo Boss positions itself on different customer profiles according to the market

development status it is in. With a look at established markets, Hugo Boss customers

can be grouped in three main customer profile categories: “selective extravagance”,

“self-treating” and “conspicuous austerity”. This is because customers’ tastes change

and get more sophisticated over time. However, considering the German brand

internationalization process, it has been observed that “Conspicuous Consumption”

customers constitute the majority in developing countries. Indeed, in emerging

markets where Hugo Boss is heavily investing for their growth potential, customers

show different needs. Traditional consumption drivers push emerging market’s

customers to buy in order to show off.

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2.3.3 - Communication and Distribution Channel

Following a strategy with a narrow competitive scope and differentiation of

offers, Hugo Boss’ competitive advantage is built on the combination between its

unique value proposition and the brand image rooted in customers’ minds. Hugo

Boss’ customers are led to believe that the higher the price, the higher the quality.

Although fashion industries are characterized by high volatility and variability, Hugo

Boss’s competitive advantage is sustainable to the extent which the company mixes

innovation in processes, products and strategies in order to deliver what customers

want. They expect high prices and high quality and Hugo Boss knows it. For this

reason, one of the secrets of success is to under-promise and over-deliver through

specifically designed advertising campaigns, especially in emerging market such as

China.

Being supported by public relation offices throughout the world, the

headquarters in Metzingen coordinate Hugo Boss’ corporate communication.

Transparency policies are enforced through publications, reports and press

conferences. Media planning activities are tightly monitored by the parent firm which

gives directions about what message has to be transmitted to customers. Collaboration

with lifestyle magazines, partnerships with celebrities and sponsorships to enhance

brand visibility allow to build a strong corporate identity for the entire Hugo Boss

group. On a more practical side, premium brands do not usually carry out production

and retailing while Hugo Boss does it. The German company’s know-how covers

both commercial and industrial aspects. This is another characteristic that makes

Hugo Boss a hybrid closer to “Exclusive luxury” and “High fashion” brands in terms

of unique offers delivered to customers. Hugo Boss’ distribution and communication

strategy is based on more than 1,300 monobrand shops spread all over the world,

which allow the company to develop an intimate interaction with its customers. Retail

identity is so built on four different elements: space planning, merchandising, store

design and visual communication. Each of them contributes to create a consistent

brand image. Notwithstanding, regional and market differences have to be considered.

An explanation of the different Hugo Boss distribution policies in its competitive

environment will be provided further on in the report.

27

2.3.4 - Value Chain

It was Porter in the Eighties who developed the value chain approach in order to

maximize activities that create values and minimize costs of unproductive operations.

Fig. 6 – Hugo Boss’ Value Chain

Source: Adapted from relevant information within “Hugo Boss Annual Report 2008”

New collection Development

This step of the value chain takes place in Metzingen (Germany), where the

headquarters are situated. Innovation is a key component for developing new

collections and Hugo Boss also utilizes machines under patent protection.

Seasonal change influences all the steps in a fashion company’s value chain and

therefore it is important to forecast international fashion trends for a multinational

operating in luxury goods such as Hugo Boss. During this step, goods are

improved within an existing brand and new ones are developed to widen the

offer’s range. Last but not least, prototypes and showroom expositions are an

integrant part of this process which is coordinated by utilizing modern software.

Material Procurement

This step involves procuring the fibres necessary for the production of Hugo

Boss’ products. The fibres come from over 1,000 suppliers with which Hugo

New Collection Development 

Material Procurement  Manufacturing  Sales & 

Distribution Customer Service 

28

Boss also holds partnerships in order to deliver machines and develop new

manufacturing techniques. As timeliness is extremely important to Hugo Boss’

value chain, services are characterized by fast replenishments and ongoing

deliveries.

Manufacturing

After trading partners have placed their orders, Hugo Boss starts to manufacture

sample collections developed in the first step of the value chain. As the Germany-

based firm grew internationally, new production plants were opened over time

therefore delocalizing.

Sales & Distribution:

Sales and Distribution of Hugo Boss luxury goods are carried out through their

established distribution networks. As previously described in the “Communication

and Distribution Channels” of this study, it has to be reminded how independent

multi-brand stores have been substituted by the growth of vertically integrated

chains characterized by international networks of directly operated stores in

luxury.

Customer Service:

The value chain circle is completed by Hugo Boss’ attention to its customer

service. In the luxury fashion world, customer service historically meant

delivering something special to customers. From the moment of purchase, Hugo

Boss store operators are trained to gather feedback from their customers in order

to improve their service. In 2001, de Chernatony argued that employees play a

crucial role as brand builders. Indeed, Nueno and Quelch (1998) highlight the

importance of developing a strong customer relationship management cycle. In

other words, high levels of customer service impact positively on the point-of-

sales system as they bring more contact opportunities with the customers and

improve cross-product sales.

29

2.3.4.1 - Innovation in Hugo Boss Value Chain

Taking a look at the fashion pipeline from yarn to distribution, we notice the

complexity of these mutual-influencing processes. Indeed, whilst the fibre industry is

characterised by capital/research intensive approaches, apparel making features labour

intensive propositions that go along with innovative perspectives brought from

upstream actors of the pipeline industry. Firms’ successes are tightly related to

excellence throughout the fashion industry pipeline. Innovation, cooperation and

flexibility are the three pillars on which multinationals like Hugo Boss build their

success:

• Innovation: Innovation processes results are gained through interactive

approaches where “success is multi factored” (Cooper R. G. & Kleinschmidt

E. J. (1988)). In 1994, Utterback stated that there is not a linear process,

science nor technological dominance guiding innovation, but it qualifies itself

as the mutual interaction between internal and external company’s factors.

Unlike the past, Hugo Boss’ development drives have moved focus on the

combined effect of technological efforts and customer-oriented practices.

Thus, the major advantage is the ability to avoid product shortsightedness,

focusing the customer value proposition on each of the elements composing

the business model. Research and development expenses within the Hugo

Boss Group amounted to €49 millions in 2008. These costs are split among the

“Operational Technical Development” center and the “Technology & Service”

center.

• Cooperation is a must. Cooperating firms can avoid duplication of effort

allowing some savings in terms of money12. Thus, physical proximity qualifies

itself as an important factor boosting innovation. For instance, Hugo Boss

recently opened new offices in Ticino, Switzerland. This choice was driven by

the necessity of being located near an important fashion district, in this case                                                         12 “Assuming that research costs are the same for both firms, a formula is given by the research cost function: r(xi) = x2

i/2, i = 1,2. If the R&D intensity is xi = 10, then the research budget r(xi) = 102/2 = $50. If the R&D intensity doubles to xi = 20, the budgetary expense climbs to 202/2 = $200. A doubling of R&D effort therefore leads to a quadrupling of the R&D cost”. – Pepall et. al., (2008)

30

the Milan metropolitan area, yet exploiting Swiss legislation in order to get

some cost advantages. At Hugo Boss, cooperation means also strong-tie

relationships with its technology partners and its large network of key

suppliers in order to develop technological knowledge and competences able

to foster innovation in material quality.

• Managing complexity is a problem that can be better addressed by small-

medium size companies as they can exploit their flexibility to be more reactive

to environmental changes. It has already been mentioned that success has

different facets and the ability to combine them together is the key to manage

large organizations in high-velocity changing markets. Having adopted a

global strategy that takes into consideration geographical differences and

adopts accordingly to them, Hugo Boss is able to integrate all its value chain

activities into a smooth flow. Toward this extent, the company implemented

the “Columbus Project”. It consists of the development of software like SAP

to monitor and optimize all the value chain activities and processes.

31

2.4 - Hugo Boss Internationalization Process

Established in Germany, Hugo Boss has grown as a “Premium” luxury brand

firstly in Western Europe and throughout the world at a later stage. The dynamics of

fashion and globalization pushed Hugo Boss towards the exploration of new

unexploited markets. The following figure shows Hugo Boss’ global presence

according to the data reported in its 2008 report:

Fig. 7 – Hugo Boss Global Presence

Source: “Hugo Boss Annual Report 2008”

There are different reasons why firms enter foreign markets: resource seeking,

market seeking, labor seeking, knowledge seeking and competition matching. Starting

its internationalization process, Hugo Boss mainly sought market opportunities and

low labor costs. In order to control its growth path, Hugo Boss adopted a global

strategy. Bartlett and Ghoshal (1998) advanced four different strategies a firm can

adopt while growing internationally: multidomestic, global, international and

32

transnational. In order to understand why Hugo Boss opted for a global approach, a

brief description of the main features of each one of these strategies is provided:

Tab. 7 – International Growth Paths

Type Time

Period

Decision

Making

Main

Advantage

Subsidiaries

Management

Multidomestic Pre-war

period

Decentralized Local

responsiveness

Subsidiaries

independency

Global Seventies –

Eighties

Centralized Cost efficiency

through

economy of scale

Subsidiaries

dependency

from parent

firm

International Fifties –

Sixties

Only core

competences

centralized

Transfer of

knowledge

Subsidiaries

dependency

from parent

firm

Transnational Current

trend

Integrated and

Interdependent

Efficiency &

Responsiveness

Interdependen

cy among

subsidiaries

which can act

as CoE13

Source: Bartlett, C. A. & Ghoshal, S. (1998) “Managing Across Borders: The

Transnational Solution”, Harvard Business School Press.

                                                        13 It stands for “Center of Excellence”. It is a subsidiary which may allow the beginning of a second phase on internationalization for a multinational company as it carries out the same activities of the parent firm. 

33

The multidomestic approach qualifies itself as the right opposite of the global

approach. While a global approach allows firms to exploit experience curve effects, a

multidomestic approach is better suited to meet customized demands as it can count

on a higher degree of local responsiveness. Thus, while a global approach lacks local

responsiveness, a multidomestic approach fails to exploit experience curve effects. In

the end, these two approaches both exhibit advantages and disadvantages.

Therefore, in order to address these two model’s drawbacks, the transnational

approach was created. It is an integrated network of firms where knowledge is

transferred from headquarters to subsidiaries and vice versa. Nonetheless it allows

combining together both the advantages of the two older models discussed above.

Then, the question would be “Why did Hugo Boss opt for a global approach and not

one of the others?” The answer is linked to the need for brand consistency.

It is true that the main advantage of implementing a global strategy is

efficiency due to centralized activities. It is also true that the decision to implement a

global strategy for a luxury fashion multinational is forced by the importance of

implementing a consistent brand image throughout its customer portfolio. In order to

do this, Hugo Boss observed that the main dimension to focus on was efficiency.

In the following figure, the “X” axis represents the degree of adaptation which

is higher in “multidomestic and transnational” approaches than in “international and

global” ones. The “Y” axis refers to the degree of efficiency which is higher in

“global” and “transnational” strategies than in “international” and “multidomestic

ones”:

34

Fig. 8 – Adaptation & Efficiency Trade offs for Multinational Firms

Source: International Management, Professor Ciabuschi, class material

This is consistent with the tightly monitored subsidiaries of the global

approach proposed by Bartlett and Ghoshal and it also reflects the centralized way in

which things are done in Germany. In fact, German tradition and cultural values have

played an important role in defining Hugo Boss style.

It is worth mentioning though, that a slightly different variant of this model

has been applied within Hugo Boss. Indeed, the German firm has always kept an eye

on the differences in its markets with the aim to provide a sales strategy able to suit

them. After all, in order to treat everybody equally, you have to treat them differently.

Along with this, global sales are organized in three main regions: Europe, USA and

Asia/Pacific. Consequentially, a regional director has been assigned to each of them.

In the last two decades, the German brand focused its attention on spreading

its customer base. As reported in figure nine, more investments have been approved in

Global Strategy 

Transnational Strategy 

International Strategy 

Multidomestic Strategy 

35

North America, Asia and Eastern Europe as the growth rate of these markets is higher

than Western Europe’s14:

Fig. 9 – Hugo Boss Investments Over Time

Source: “Hugo Boss Annual Report 2008”

While sales in the US reached an increment of 12% in 2008, China is the main

focus for the future and the long-term aim is to increase to 50% the total shares of

sales outside the European continent according to what is described in the next figure.

This mid-term target is shown in the figure below:

                                                        14 In 2008 the organization for Economic Cooperation and Development (OECD) reported the following growth rate: China 9%, India 7.3% and Europe 3.2%.

36

Fig. 10 – Hugo Boss Mid-Term Sales Target

Source: “Hugo Boss Annual Report 2008”

Considering the importance of non-European markets in Hugo Boss’ future

strategy, the next section of this study will respectively provide an analysis of the

American, Chinese and Indian luxury fashion markets.

37

2.4.1 - American Dream

Geographically isolated from Europe and without any particular tradition

recalling aristocratic values, the “Made in USA” was associated with concepts such as

assembly lines and mass-production in its early clothing-industry development stage.

Only during the “roaring twenties”15 new retail approaches developed opening the

market to luxury goods and their consumption.

Nowadays, the majority of US consumers tend to buy products which embed

an American style. Neither Italian excellence, nor French creativity is the main driver

of America’s consumption patterns. Brands whose origins incorporate American

values are the ones most likely to build a positive image in customers’ minds.

Considering this brief description of the American luxury fashion market, it is

straightforward to question how Hugo Boss, a German brand, is able to deliver what

customers want in the US. Although the United States suffered the blast of the

international economic crisis which exploded in 2007 more than other developed

countries, Hugo Boss America registered a positive variation in its sales percentage.

This result is given by the combination of different socio-economic trends which

affect the American society. Following is an analysis of these variables:

‐ Higher incomes than in the past: As shown in figure 12, households now

dispose of more money to satisfy their desires with luxury goods. The rich

are getting richer and according to Leonhardt (1997), these people have

experienced a 21% growth in their income since 1980.

                                                        15 Era of economic prosperity driven by the US and later spread in Europe with the name of “Golden Twenties”. It brought new consumer goods in a new dynamic society. It ended with the “Black Tuesday” in 1929.

38

Fig. 11 – Per Capita Growing American Household Income

Source: “US Census Bureau”

Since some of these households are characterized by totally different

tastes in comparison with the other people belonging to the same

consumption category, it is likely to observe the development of market

niches that can be better satisfied by luxury fashion firms.

‐ Increased home equity: Low mortgage rates combined with home

ownership fostered the spread of wealth among American householders.

Indeed, the compounded effect of the abovementioned variables confers

consumers more money to spend on luxury and non-luxury goods.

‐ Low-cost retailers: Consumers have more money to spend as retailers of

mass proportions like Costco or Wal-Mart offer the lowest prices on the

market. They therefore have their margins reduced and this translates into

more financial resources to purchase other goods such as luxury ones.

‐ Businesswomen: The US Census Bureau reported that the number of

married working women increased from 30% to 62% in a period of time

estimated between 1960 and the new millennium. In 2010 this percentage

in even higher and women are also covering companies’ prestigious

executive positions. Indeed these jobs traditionally tend to be a man’s

39

prerogative and it is even more impressive that, nowadays, a quarter of

married women earn more than their masculine counterpart.

‐ Changes in the family structure: Another important trend to observe is

how people tend to get married later in their life in comparison with past

traditions. US Census Bureau data show that the average age of marriage

was around 21 years in 1970. In the new millennium the same source

reports that this age has risen to 25 years. Young people are more willing

to experience the world and more young people want to do it alone. This

choice allows them to save more money to dedicate to one’s own

satisfaction.

‐ Increase in the number of divorces: In almost twenty years from 1973 to

1995 the likelihood for a marriage to end in divorce rose from 20% to

33%. When a divorce occurs, people’s consumption changes totally. More

money is invested on personal care to change one’s own self-image. For

example, after a divorce, it has been proved that women tend to spend

more on shoes, often satisfying their need of newness with an expensive

luxury good.

‐ Higher education: The current American society shows higher educated,

open-minded and adventurous individuals than in the past. This new era is

reflected in the eleven million Americans who took a trip to Europe in

2000 against only three million in 1970. Exposing themselves to new sets

of stimuli, Americans are developing more complex tastes that, more

often, are met by sophisticated goods such as luxury ones.

‐ Emotional awareness: Today’s consumers are pushed by media and more

generally by the world they live in to think that luxury goods can help

them in managing their emotional status and get them through their

everyday lives. Indeed, the need to establish and deepen relationships as

well as the need to individuate one’s own style can be satisfied by using

luxury goods to improve the expression of the self.

40

After having considered the salient aspects characterizing American society, it

is possible to define some strategic points to focus on in order to develop the luxury

fashion industry in the United States.

‐ Customers as experts: Consumers tend to consider themselves

knowledgeable about the product they are going to buy. They more often

show interest in product’s technicalities and are careful about brand

heritage that has to be therefore enhanced through ad-hoc policies by

luxury firms.

‐ Positive elasticity of demand through ongoing innovations: It can be

pursued as long as the luxury product provides technical, functional and

emotional benefits to the buyer. Thus, a luxury product cannot be obsolete

and it must always show innovative features. Accordingly, these products

will be able to differentiate themselves from their competitors.

‐ Customer Relationship Management: Ongoing feedback from early

adopters is necessary to improve future action plans. Core customers have

to be maintained loyal to the brand as they provide the first source of post-

purchase feedback and contribute to enhance one’s own brand image

through positive word-of-mouth.

In the end, it can be said that even though it is true that the majority of people

in the US buy brands incorporating mainly American values, new levels of openness

are influencing the traditional consumption patterns. The economic recession is just a

short-term trend overwhelmed by other socio-economic long-term trends such as the

ones described above. Multinational companies like Hugo Boss have to be proactive

in meeting these favorable trends towards the spread of luxury goods. Frequent

feedback and tight customer relationships are the means on which it is possible to

build one’s company brand heritage strength and earn higher margins through the sale

of high-quality and exclusive products.

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2.4.2 - Chinese Expansion

Hugo Boss decided to spread its production and some operations to the Asian

continent. In order to understand where the luxury fashion multinational is moving, a

brief description of the Chinese economy is presented.

The pioneers who firstly expanded their activities in East Asia were looking

for low-cost production advantages. None of them had thought that this ongoing

process would have led to an uncontrolled increase in local consumption up to the

point of fostering incredible growth levels for emerging countries such as China.

The Flying Geese model explains this. Firstly developed by Akamatsu

Kaname (1935), it has been afterwards revisited by numerous researchers. Kojima

Kiyoshi, 2000, in his article “The flying geese model of Asian economic

development” points out how technology spreads directly from developed countries to

follower ones through the delocalization of production. In figure 12 a visual

explanation of the model and its potential implications in the long run is proposed:

Fig. 12 – Flying Geese Model

Source: Adapted from “Managing Fashion and Luxury Companies”, Corbellini &

Saviolo (2009).

42

This model has been applied to describe the two-phase process which led to

tremendous changes in the clothing industry as we currently know it. The first phase

takes place during the fifties and sixties and has Japan, US and Germany as its main

actors starting their internationalization growth paths in Hong Kong, Taiwan and

South Korea16. In order to give a sense of the FDI17 of the three industrialized

countries listed above, it is worth looking at the following data: Hong Kong’s exports

increased by 365% in ten years from 1980 to 199018. Losing their low labor-costs

attractiveness, Hong Kong, Taiwan and South Korea became important hubs from

which the second phase described by the Flying Geese model started. Among the new

actors, Malaysia, Vietnam, the Philippines and Thailand, China took the lead of the

Asian economic growth. Today China has the monopoly of world silk production and

it has become the pole which luxury fashion multinationals look at.

                                                        16 S.R. Khanna, “Structural Changes in Asian Textile and Clothing Industries: The Second Migration of Production”, Textile Outlook International, Economist Intelligence Unit, September, 1993. 17 Foreign direct investment 18 GATT, International Trade, 1992 

43

2.4.2.1 - Success Factors of Luxury Brands in China

The Chinese market is characterized by a high degree of complexity where

consumers show different consumption attitudes and power accordingly to their

values and lifestyle. Saviolo (2007) argues how there are two main factors worth

considering in order to understand Chinese luxury consumption19:

• Display

• Brand consciousness vs. Brand awareness

Whilst in Western countries luxury is becoming more intimate, Chinese

consumers are more eager to display their wealth. Indeed, Chinese culture promotes

expressions of personal achievement and success. Tse (1996) argued that the more

individuals show-off in China, the more peers of the same social class tend to

experience the need to behave accordingly. Thus, showing-off seems to be the main

current driver of Chinese luxury good consumption. However, it is important to

consider how customer behavior changes over time since China is developing and it is

not a static economy but a dynamic one.

In China, “luxury consumers” possess brand consciousness but low brand

awareness. In other words, they are not able to distinguish between American or

European luxury brands. This negatively affects multinationals whose brand image is

strong and it could be exploited by expanding into new markets to start new

internationalization patterns. In order to make up for this brand confusion, firms

operating in the luxury fashion industry have to highly invest in advertising.

Currently, the general rule to invest to spread brand awareness in China is “the more

you spend, the more successful you are”. Brands like Zegna and Louis Vuitton

entered the Chinese market in the early nineties of the past century gaining a sort of

first mover advantage.

Considering these two assumptions, there are five general aspects to look at in

order to be successful in the current Chinese luxury-clothing industry:

                                                         

44

• Location is critical to build awareness: While advertising on lifestyle

magazines is essential in well-developed countries, this is not widely diffused

in the Chinese luxury market. Of course it will be an important step in the next

phases of the luxury market development, but up to now, visibility through

Hugo Boss directly operated stores is the crucial mean to build brand

awareness where missing.

• Brand image has to be built on cultural values and lifestyle: In order to build a

positive brand image which lasts over time, luxury companies such as Hugo

Boss are called to associate their products to one country’s cultural values and

lifestyle. Indeed, an effective way to impact on the Chinese society is planning

exhibitions and events able to show the historical heritage of the luxury firm.

• Retailing is the mean to create brand experience: As competition increases,

the importance of retailing in the emerging Chinese luxury market is

highlighted. Well-planned retail experiences able to confer a sense of

uniqueness to the customer are the key to communicate successful value

propositions and build intimate long-term relationships. For this reason, retail

academies are a reality in emerging countries in order to train employees

towards CRM approaches in the luxury fashion industry.

• DOS portfolio: Managing the number of directly operated stores recently

opened in China is a focal point for brand image improvement. Luxury fashion

firms need to have a clear understanding of the development status of their

strategies, their markets and their customers’ needs. It is only when this

analysis has been carried out that firms can efficiently decide on the number of

directly operated stores which should be opened. Substantially, everything

depends on a deep cost-benefit analysis whose variables are moving in a high-

change context.

• Costumer profile: China is one of the few countries were men consume more

luxury goods than women. Consumers also tend to be young with the majority

of them in their thirties20. Hugo Boss can exploit this demographic trend as its

image is mainly associated to power and masculinity.

                                                        20 Source: http://www.time.com/time/magazine/article/0,9171,1647228,00.html  

45

2.4.3 - Indian Horizons

In 2006, Fareed highlighting how India, member of BRIC, is challenging

China’s growth with its disorganized yet high-velocity changing market. In 2003,

Wilson and Pusushothaman categorized India as the twelfth economic power in the

world. This position is bound to change and India will be the third largest economy in

the world by 2050 as Goldman Sachs’ researches predict. Indian society is built

around young people: 65% of the total population still has to turn 26 (Populier, A

(2006)). According to Ravindranathan (2007), two hundred million Indians speak

English and, as stated by the “Internet and Mobile Association of India” in 2006,

almost twelve million are Internet users. Skilled and low-cost workers make India the

“New Silicon Valley”. As a result, India gives opportunity to over a hundred

Fortune500 companies to establish their research and development activities there. An

attractive country for multinational firms eager to expand internationally, it is now

also tempting when it comes to luxury. If luxury fashion consumers in China embrace

a “show-off” attitude toward luxury goods typical of the early stage of their

consumption, the “Hindustan Times Luxury Conference” in 2007 describes the

concept of luxury in India as even younger than the Chinese one, something that just

entered Indians’ lives and is definitely there to stay. In 2004, McKinsey and Company

reports the size of the Indian luxury market at $454 million. However, there were

some constraints that, until few years ago, multinational brands like Hugo Boss faced

as they entered the Indian market:

• Compatibility with the Western lifestyle: As said, the luxury fashion

market is relatively young and not everybody who can afford to spend a

great deal of money on one luxury good was willing to adopt a Western

brand.

• Custom duty fees: Up to 2005, tariffs for multinationals eager to export

their product in India were up to an average of 33%. This led to the

dilemma of reflecting these additional costs on customers or not.

• Missing infrastructures: Various Indian realities coexisted in an

inadequate environment often missing established and working

communication avenues.

46

• Lack of direct control on distribution: Up to 2006, Indian law prevented

multinational companies investing in India to gain a majority stake which

would have allowed them to directly control their own distribution

network.

Even though some of these problems still linger today, a great deal of work

has been done to address them. In 2006, Indian law established that the majority

of stake can be gained through collaboration with local businesses. This decision

positively influenced the amount of money invested by multinational firms in

India. Indeed, they could finally directly monitor their own distribution chain. It

has been argued how important this is in order to develop a solid and respectful

brand image in countries that just went to know what luxury is.

Contemporaneously, taxes to export luxury goods in India were decreased to a

12.5% value added tax. The combined effect of these two Indian laws paved the

way to increase foreign direct investments in Indian retail. A direct consequence

has been the indirect growth of Indian infrastructures. As communication

channels improve, the shopping malls’ networks get wider. Sharma (2007)

highlighted how more than 600 malls are going to open in the upcoming years in

India. However, the shop-in-shop formula could not always reveal itself as the

best option to promote one’s company offer. Independent brand stores can better

answer the need for visibility and retail space than the shop-in-shop alternative.

However, even though India is part of the so-called BRIC and multinationals

might be tempted to venture in this young luxury market, there are some crucial

factors that influenced Hugo Boss’ choice to slow down its expansion in India.

Currently, the abilities to deal with Indian bureaucracy, to take advantage of

partnerships with local businesses, to choose the right location and form to

distribute and make visible one’s own product offer to the Indian audience might

require extremely high investments to match an extremely complex market.

Therefore, timeliness to enter the Indian market appears as the main variable for

Hugo Boss. Indeed, even if foreign direct investments have been allowed since

2006, the German brand mainly holds distribution offices in India. Through this

strategy, Hugo Boss provides its offers to local retailers and accurately select

where its next directly operated store is going to be run. More information that is

47

crucial to succeed in such a young market can be collected in this way and second

mover advantages can be gained on the Indian infrastructures.

48

3 - APPLIED STRATEGIC MODELS

3.2 - Hugo Boss SWOT Analysis

The following graphical representation of Hugo Boss’s SWOT analysis anticipates

the detailed description of each of its components and the relation between Strengths-

Weaknesses and Opportunities-Threats.

Strengths - Worldwide presence - Wide range of products - Effective distribution channels - Sustainable practices

Weaknesses - Low brand awareness in emerging markets - 2008 debt due to increases in investments

Opportunities - Expansion in emerging markets - E-retailing

- Strong brand image recognition in established markets - 330 directly operated stores and over 1000 franchise stores - Social networks & On-line sales - Internationalization process in developing countries - R&D activities

- Spread brand awareness through advertising campaigns in emerging markets - Increase logistic capacity - Increase the number of shops

Threats - Negative spillover effects - Brand image inconsistencies

- Differentiation focus strategy - Established markets - Outsourced activities

- Future goals do not match current brand image21 - Consumers buying power might be lowered by economic recession

- Euro’s appreciation - Overload of information combined to less time at customers’ disposal

Threats

Adam Smith said: “The world is flat”22. Sectors are more interconnected than in the

                                                        21 Matthiesen, I. & Pau, I. (2005) 

49

past and this translates into negative and positive externalities. Thus, when one sector

suffers a crisis, it is likely that it will be spread to other sectors too ending up in an

overall economic recession. Negative effects spill from one sector to another:

increases in the energy sector price affect agricultural products and therefore the

necessary raw materials for the textile industries. A vicious cycle is easily formed and

this finally results in significant private consumption drops. Moreover, the

differentiation focus strategy implemented by Hugo Boss pushes the company to

differentiate even more over time to broaden its customer base. This strategy reflects

Hugo Boss’ future goals but there is no alignment between them and the current brand

image in some countries. For instance, research has shown that Hugo Boss is still seen

mainly as a manly brand in Australia even though the corporate goal is to broaden

their brand image perception (Matthiesen, I. & Pau, I. (2005)). Lastly, there might be

the temptation for Hugo Boss to partly outsource its activities. This might imply some

cost advantages but at the same time it means a loss of control over activities that are

an integral part of the value chain and are the base for developing a competitive

advantage within a differentiation focus strategy.

Opportunities

While Western Europe is facing a difficult economic situation, other markets such as

Eastern Europe, India and China have been proved to be very dynamic during the past

years. In the interaction pattern between market growth and market share developed

by the Boston Consulting Group, these markets mostly occupy the position of

question marks. Indeed, their penetration is relatively recent and only who entered

those markets in the early nineties is starting to make profit and sees his or her

business as a little “Star” characterized by both high market growth and share. In

order to make this transition occur, multinational companies operating in the luxury

fashion industry are called to spend heavily in advertising in order to spread their

brand awareness. Once they will get to the “Star” stage, they will benefit of

experience curves which reduce costs over time. Not only the physical world is

changing but also the IT sector has merged with other globalization trends. Social

Networks qualify themselves as a potential mean to spread brand awareness and

                                                                                                                                                               22 Smith, A. (1776) 

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enhance brand image. Nonetheless, e-retailing is spreading as a differentiation

alternative to integrate the physical retail experience for customers. Even though it is

more difficult to sell a luxury good on the web because they usually require major

emotional involvement, the great growth potential of e-retailing is pushing companies

towards planning and investing more on e-boutique environments and experiences.

Strengths

Hugo Boss has a wide product range: menswear, womenswear, accessories,

fragrances, eyewear and shoes. If you have a good product, this does not

automatically imply success. Hugo Boss knows this and it built a strong and effective

distribution channel in its established markets and it is also aiming to develop its

distribution policies in emerging markets. The Germany-based company can count on

a worldwide presence with its 330 directly operated stores and over 1000 franchise

stores.

Fig. 13 – Hugo Boss Distribution Channel

Source: “Hugo Boss Annual Press Conference Presentation 2009”

The implementation and development of Hugo Boss distribution policies contributed

to positive sales trends in 2008. Here is a figure describing sales’ evolution of the

German brands during the same year:

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Fig. 14 – Hugo Boss Sales Evolution Over 2008

Source: “Hugo Boss Annual Press Conference Presentation 2009”

Moreover, Hugo Boss has established a strong brand image in its already developed

markets. Another strength Hugo Boss possesses is related to its R&D activities that

confer the company an ongoing stream of new technology to lower cost of production

and new man-made fibres to fulfil their mission of delivering high innovative

products. This is possible only through tight cooperation with suppliers and scouting

in other sectors to foster the innovation potential. Last but not least, Hugo Boss shows

high care for sustainable practices consequentially meeting current and future market

trends towards social responsibility.

Weaknesses

The Euro’s appreciation negatively influenced European tourism in 2008 and more

generally in the last years. Looking at the following data, it is possible to observe

Euro exchange rates with countries where Hugo Boss operates from 2007 to 2008:

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Fig. 15 – Euro Exchange Rates Over 2007/2008

Source: “Hugo Boss Annual Report 2008”

Another weakness is related to the need for high investments in emerging countries

since there is spread brand consciousness but low brand awareness. In emerging

markets whoever investing more in visibility and advertising to create a strong brand

image in customers’ minds is going to take the lead in the long run. Indeed, brand

awareness influences purchase decisions by impacting on consumers’ perceptions

(Alba, J. et al. (1991)). Therefore, consumers behave according to the knowledge they

possess (Engel, J. F., Blackwell, R. D & Miniard, P. W. (1993)). As regards

established markets, it has been observed how customers are victims of information

overload and lower time at their disposal. This has to be a stimulus to deliver more

effective and efficient messages to customers.

SWOT Analysis Assessment

SW – Internal Analysis

Hugo Boss’s strong brand in established markets, low brand recognition is opposed in

emerging markets. Thus it is worth highlighting that Hugo Boss has to deal with

brand inconsistency problems as it is not easy to maintain the same worldwide image

for a multinational company. This is especially the case of luxury fashion firms whose

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success is in good part based on their image. In order to overcome these issues,

communication plans have to be drawn so that customers are reached with effective

and efficient information. These plans are constantly supported by the latest

innovations in terms of processes and products. Indeed, research and development

activities play a proactive role in contributing to the company’s success in both

established and emerging markets.

OT – External Analysis

Economic crises are just temporary and cyclic events however their negative effect

can be mediated by the company’s strategies. In this sense, Hugo Boss aims to exploit

positive environmental trends. Most recently, one of these trends can be summarized

in the internalization processes which are based on the individuation of new customer

segments whose luxury needs are unfulfilled in emerging markets. Here, regulation

policies are sometimes hard to deal with because of the presence of information

asymmetry.

The SWOT analysis represents a valid tool to highlight important aspects on Hugo

Boss’s strategy. However, its results must be read together with the findings of

Porter’s Five Forces Model presented in the following section in order to lower the

degree of subjectivity.

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3.1 - Porter’s Five Forces Model The following analysis has been elaborated considering both established and

emerging luxury fashion markets in which Hugo Boss operates. That is because there

are important differences between the two in terms of customer needs. An analysis

focusing on the Chinese market’s growth considered as a symbol of emerging markets

is presented.

Bargaining power of suppliers

Established markets:

• High switching costs of suppliers

• Medium/low availability of substitute inputs

• No threat of forward integration

Traditional relationships between luxury firms and suppliers are ruled by

mutual trust and reliability. For this reason it is evident how supplier’s switching costs

in the luxury fashion industry might be higher than in other industries. However, since

Hugo Boss is an innovation boosting firm throughout its value chain, it can count on a

wide network of suppliers and it is always looking for new partnerships through

scouting in other sectors. There are two kinds of fibres in the fashion industry: natural

and man-made. The main advantage characterising man-made fibres is related to their

possibility of exploiting economies of scale. Man-made fibres are not scarce resources

as they are not subject to any availability constraint. It is therefore straightforward to

understand the importance of having different and innovative suppliers to scoop

competition.

Emerging markets:

• High switching costs of suppliers

• Medium/low availability of substitute inputs

• No threat of forward integration

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There are no big changes for Hugo Boss considering its relationships with

suppliers within developing countries. After all, the Germany-based brand shows the

same commitment to deliver its quality all over the world.

Barriers to Entry

Established markets:

• High capital requirements

• High learning curve advantages

• High product differentiation

Barriers to entry in the luxury fashion industry are very high. High

investments throughout the value chain are needed in order to deliver the quality

customers expect. For example, designers’ contribution, raw materials and

distribution channel-related expenses can be prohibitive for the majority. Moreover, it

is hard to build a new strong brand image because of the already existing established

brands that can exploit their heritage and history to make the cut. For the

abovementioned reasons Hugo Boss does not have to fear new entrants in the

premium segment of the luxury fashion industry.

Emerging markets:

• High costs to build brand awareness

Barriers to entry are lower in established markets than in emerging markets.

According to the theory proposed by Maslow (1943), luxury-related needs enter

developing countries later than commodity-related needs. Barriers to entry are often

and mainly linked to an industry’s life stage. Being among the first luxury fashion

companies to enter China in 1995, Hugo Boss is now gaining profits from its

investments. At the time though, Hugo Boss could not count on the same high barriers

to entry characterizing the already established markets where it runs its activities. The

main reason is that Chinese consumers had good brand consciousness and low brand

awareness as previously discussed in this study. In other words, whoever would have

taken the first move in terms of retail openings and aggressive advertising, would

have gained a first mover advantage in a long-term perspective and would also have

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avoided the barriers to entry increasing over time.

Bargaining Power of Buyers

Established markets

• Medium/low price sensitivity as brand identity is established

• Medium switching costs

According to luxury industry general trends, Hugo Boss’ customers are mainly

characterized by low price sensitivity. This is lowered by the customer’s perception of

brand quality and image following the rule “the higher the quality and brand image

are, the lower price sensitivity is”. Knowing this, luxury firms anticipate their

customers’ behavior and set high prices reflecting their product quality. Of course, the

emotional side of customer shopping experiences is amplified and brand image is

transferred to buyers who incorporate the shared values just purchased with the

product.

Emerging markets

• High price sensitivity as brand identity is not established

• Low switching costs

In developing countries, price sensitivity is decreasing but it is still higher than

in established markets. Moreover, buyer’s switching costs are lower as brand image’s

awareness is still spreading. However, Hugo Boss’s prices remain as high as the ones

in established markets as it contributes to form a strong association between product

quality and price. This creates a victorious circle that solves brand’s image awareness

issues within a long-term strategy

Threats of substitutes

Established markets

• Medium/low buyer propensity to substitute

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Substitution is a remote option for the majority of buyers of the Hugo Boss

brand. This is where the importance of brand image stems from: it enhances loyalty

and avoids threats of substitutes. These threats may present different prices

accordingly to the luxury competitive model they are in. An example of a substitute

with a higher price than Hugo Boss would be Gucci and one with a lower price would

be Diesel. In both cases customer’s stylish preferences and loyalty have to be taken

into account.

Emerging markets

• Medium/high buyer propensity to substitute

In the early phases of the luxury fashion industry development, substitution

might be theoretically higher than in established markets. However, in the early

phases it is hard to find substitutes, as there are not many competitors daring to start

investments in an emerging market such as China during the mid nineties. These

potential substitutes will become latecomers who will lose the so-called first-mover

benefits.

Rivalry and Industry Competitiveness

Established markets

• Low industry growth

• High brand identity

• High product differentiation

• Diverse and numerous competitors

The luxury fashion industry is in its maturity life stage. New entrants do not

have space to successfully run their activities as fierce competition is already

established in the market. Incumbents’ brand image and identity are hardly imitable

for newcomers. Hugo Boss qualifies itself as one of the major players in the

“Premium” sector of the luxury fashion industry and it is striving to broaden its

customer base while building customers’ loyalty through customer relationship

management practices.

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Emerging markets

• High industry growth

• Low brand identity

• Medium/low product differentiation

• Small number of competitors

“Baby” luxury markets present a lower degree of rivalry than established ones.

However, firms able to foresee high levels of growth are usually willing to commit a

higher percentage of resources in comparison to established markets in order to

prevent competition to enter later stages of development.

Industry Attractiveness

The bargaining power of suppliers is broadly the same in both established and

emerging markets and it specifically depends on one’s firm to be able to create a

differentiated network of partners to collaborate with. This allows companies

operating in the luxury fashion industry to get the necessary inputs to deliver

customers’ expected quality. At the same time, this is not easy to develop.

Barriers to entry are generally higher in established markets than in emerging

ones. However, in both realities it seems the market is bound to be split among those

companies who have financial resources and, most important, brand heritage to keep

up with competitors.

At the same time, switching costs and their related influence on the power of

buyers and buyers’ propensity towards substitutes are positively correlated to Hugo

Boss’s customers’ loyalty. This shows higher values in established markets than in

emerging ones.

Rivalry and industry competitiveness is higher in established markets as they

have a low industry growth. Indeed, where the luxury fashion industry is still in its

first stages of its development, low brand awareness implies a small number of

competitors which are striving to spread their brand image.

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Implications from the overall assumptions bring this study to assess the overall

degree of industry attractiveness as low. With regard to established markets and their

incumbents, Internet qualifies itself as the future to boost an industry with too many

players and a low growth rate. Instead, with respect to both types of markets, financial

resources are not the main variable which denies the entrance to new potential

companies. Unique values and emotions communicated by established brands seem to

be the hardest assets to be imitated and the crucial point on which success is built.

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3.3 - Financial Analysis

In 2008, Hugo Boss reported financial results that confirmed its best year in its

history. However, restructuring activities (mostly concerning the Managing Board)

pushed “Net Income” toward a recession in comparison with fiscal year 2007. The

Hugo Boss financial analysis starts observing trends in the “Income Statement”, then

it focuses on the data reported within the “Balance Sheet” and it concludes with

comments regarding the “Cash Flow Statement”. Financial ratios are also considered

and justified as integration of the analysis.

Income Statement

Source: “Hugo Boss Annual Report 2008”

“Group sales” were affected by a positive variation of 3% from 2007

incrementing to €1,686.1. Since “Gross Profit” is determined by “Sales” minus “Cost

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of materials including changes in inventories”, the elimination of some inventories

lowered the value of “Gross Profit”. However, “Gross Profit” 2008 is higher than in

2007. This is so due to three main factors: incremented sales, the optimization of

production processes and last but not least the weakness of the U.S. dollar in respect

to the Asian market.

“Other net operating income and expenses” were characterized by two main

changes. The first one refers to the positive impact of the lease agreement termination

of the DOS on 5th Avenue in New York City. This change also implied a decrement in

“Depreciation/Amortization” from the previous year of operations.

The second important change refers to the negative impact of costs related to

the opening of 54 new DOS throughout the world. This also influenced “Personnel

expenses” which increased by 18% from 2007. The greater part of these expenses can

be attributed to “Extraordinary expenses” in the organizational structure and more

specifically related to changes in the Managing Board.

Just like “Extraordinary expenses”, “Earnings before interests and taxes”

dropped by 14% from 2007. The “Net Financial result” mainly relies on the

augmented interests coming from higher financial debts. Accordingly, a lower

“Earning before taxes” can be observed in comparison with 2007.

Due to changes in German law, 2008 taxes were calculated at 25% and not

27% as in 2007. This change impacted positively on the “Net income” that decreased

by a good 27% in comparison with the previous year. Consequently, both common

and preferred earnings per share declined in 2008.

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Balance Sheet Structure

Source: “Hugo Boss Annual Press Conference Presentation 2009”

From the “2008 Balance Sheet” structure here presented it is possible to

observe that total assets increased in comparison to 2007. Although the “Assets”

structure remained almost unchanged, the same cannot be said for “Liabilities”. The

visually noticeable changes are due to the economic downturn (which impacted

negatively on the equity market as explained later on the “Return-on-equity” section

of this study) combined with the new investments carried out by Hugo Boss during

2008 through a five-year loan agreement with financial institutions.

Cash Flow Statement

Source: “Hugo Boss Annual Report 2008”

The Cash Flow Statement is reported according to International Accounting

Standards 7. In the above table, a situation where the total amount of Cash Flow

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coming from Operating Activities in 2008 was significantly higher than 2007 is

illustrated. The “Operating Cash Flow” measures cash flows coming directly from a

company’s core operations. That is in line with the results provided in the section

“Strengths” of the SWOT Analysis regarding Hugo Boss sales’ positive trends. The

“Investing Cash Flow” increased in 2008 in comparison with the previous year and

this is in line with the increase in investments as explained later on during the analysis

of the “Debt-to-equity” ratio. As regards the “Financing Cash Flow” one must note

that although Hugo Boss opened a line of credit with partner banks and paid special

dividends to its investors, this cash flow did not show big changes from the previous

year. In 2008, the overall change in cash and cash equivalents reports a positive value

in comparison with 2007.

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Ratio analysis

Source: “Hugo Boss Annual Report 2008”

Equity-to-assets

The first ratio exhibited above, gives a measure of the shareholders’ residual claim on

the total amount of the company assets in the case of its liquidation. The higher the

shareholder equity ratio, the more they might receive from the company’s liquidation.

Within the Hugo Boss group, a significant percentage decrease has been observed

from 2007 to 2008 in terms of Equity-to-assets ratio. This negative variation is due to

both increases in the total assets’ value and decreases in the shareholders’ equity in

2008. The payment of a special dividend strongly impacted the equity ratio downturn

by lowering the share price and therefore the shareholders’ equity.

Debt to equity

The debt-to-equity ratio gives an understanding of the percentage of debt and equity

that has been used to finance the company’s assets. The huge difference registered in

2008 compared to 2007 is due to high investments in research and development,

logistic capacity and the effort to increase the number of own retail shops.

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Fig. 16 – Hugo Boss Investments 2008

Source: “Hugo Boss Annual Press Conference Presentation 2009”

These investments required the company to open a line of credit to finance its

activities. The following figure shows how Hugo Boss capital expenditures have been

increasing over time:

Fig. 17 – Hugo Boss Investments Overview of The Last Five Years Of Operations

Source: “Hugo Boss Annual Report 2008”

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Asking for financial help in order to invest is risky as the cost of debt financing might

result higher than the potential return of investing money in profitable activities. In

the worst scenario, wrong planning leads to bankruptcy and leaves shareholders

empty handed. Even though financial markets are not experiencing an easy period,

partner banks seem to trust Hugo Boss and its strategic development therefore

conceding their valuable cooperation.

Return on equity

This ratio reveals Hugo Boss’ profitability. In other words, it describes the profits

gained on each dollar invested by the German firm. The positive increase of ROE is

linked to the lower values in terms of “Net Income” and “Shareholders equity”

registered in 2008 in comparison with 2007. Actually, a positive increase of ROE due

to a decrease in the abovementioned values is only possible when the “Shareholders

equity” is lower than “Net Income”. That is what happened to Hugo Boss and the

following figure shows the drop in common and preferred share price performance

within the luxury fashion multinational in 2008:

Fig. 18 – Hugo Boss Share Price Performance

Source: “Hugo Boss Annual Report 2008”

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Since shareholders equity is linked to the share price performance, it is easy to

understand why the former’s value suffered a sharp decrease in 2008. The share price

performance emerging from the figure above can be generalized to all sectors. This is

related to the economic recession which sparked in 2007 in the United States.

Therefore, uncertainty and volatility on the equity market negatively influenced DAX

and MDAX23.

                                                        23 DAX is the leading index in Germany and it lost about 40% during 2008. The MDAX is the index where preferred shares are listed and it reported a loss of over 43% in 2008. 

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3.4 - Risk Assessment Analysis

Hugo Boss risk management is focused on analyzing and evaluating both

potential external and internal risks. This process is partially transferred to insurance

companies through ad-hoc agreement contracts. Risk management follows the frame

shown below.

Fig. 19 – Hugo Boss Risk Management

Source: “Hugo Boss Annual Report 2008”

External Risks

• Macroeconomic Risks: Macroeconomic variables negatively influence Hugo

Boss’ sales forecasts. In order to address this issue, Hugo Boss has optimized

its processes through the “Columbus Project”. Nonetheless,

internationalization processes reveal themselves as an important strategy to

spread the risk on geographical areas which are far away from each other and

therefore should be less affected by negative spillover effects of an economic

recession. This choice of expansion might imply some country-related risks.

However, it is necessary to point out that most of the countries in which Hugo

Boss operates are characterized by either stable or growing economic realities.

This leads us to the conclusion that this risk should be considered irrelevant.

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• Sector risks: These kinds of risks are an integral part of the luxury fashion

business, especially in today’s fast changing world. There is a need to be

extremely accurate in examining future trends and develop new collections

accordingly. In order to cope with this type of risk, Hugo Boss exploits the

synergies of multiple design teams and in-depth qualitative analysis of its

target customers.

• Environmental risks: It is also important not to underestimate the likelihood of

environmental catastrophes. For instance, the Turkish Hugo Boss production

site is positioned on an active seismic area. Relocation possibilities were

considered but in order to keep gaining advantages from their positioning in

Turkey, the Hugo Boss Group transferred as much risk as possible to

insurance companies.

Internal Risks

• Strategic risks: Since Hugo Boss’ positive financial performance is tied to its

brand image, consistency all over the world is needed. In order to ensure high

levels of consistency, a centralized management approach coordinates all the

relevant decisions concerning the core of Hugo Boss. This type of system,

which is coherent with a global strategy in the Germany-based firm

internationalization process, reduces the related “Investment & Cost Risks”.

Indeed, when the parent firm tightly controls core activities, it is easier to keep

up with a homogeneous worldwide brand image. Therefore, market and

customer’s responses to Hugo Boss’ activities have to be collected and

analysed. Moreover, product quality has to be constantly monitored while

quality standards have to be strictly met throughout the value chain.

• Financial Risks: Variations in degree of liquidity, interest and currency

exchange rates are part of the game. In order to address the solvency issue, a

three-year financial plan is integrated through monthly liquidity plans.

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Furthermore, this risk is reduced by the opening of a line of credit which

ensures financial flexibility to the company. However, this implies interest

rates which might change over time. A team of analysts continuously monitor

these changes using derivative financial instruments. The risks related to

exchange rates have already been discussed in the “Weaknesses” section of

the SWOT analysis.

Operational Risks

• Procurement-related Risks: Hugo Boss utilizes high quality materials for

which suppliers play an extremely important role. In order to reduce

procurement-related risks, Hugo Boss depends on different suppliers who

have to be respectful of the company’s social standards and sustainability

plan. Adopting this policy, Hugo Boss is able to cope with custom fees,

bargain with suppliers and trade limitations. All the materials are then stored

in a few locations to control costs and centralize their management and

consequentially avoid inventory risks.

• Sales Risks: Hugo Boss always strives to keep high levels of loyalty among its

customer base. Considering its global presence and the ongoing research for

entering new markets, this kind of risk seems to be low and mostly influenced

by the economic downturn.

• Bad Debt Risks: The Hugo Boss internal audit department controls the extent

to which bad debts are characterized by a significant degree of danger. Risk

levels are positively influenced by macroeconomic variables and therefore a

higher risk in terms of bad debts is expected in the imminent future.

Organizational Risks

• IT Risks: Hugo Boss adopted multi-level security systems in order to avoid

information technology-related risks. As every day new IT risks may arise, it

is hard to assess their constant relevance within Hugo Boss.

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• Legal Risks: Since these risks are too dangerous and too delicate to be treated

by the different subsidiaries, it is up to the central firm in Metzingen to

regulate the legal aspects of operations. This centralization has been proved to

be effective and therefore legal risks are low. For the same reason, liability

risks are also low.

• Personnel Risks: Risks related to personnel may arise from employee

management processes. Hugo Boss has training programs to educate

employees according to its corporate culture and to reduce the risk of failures

in its hiring processes.

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CONCLUSIONS

In today’s developed countries, consumption is moving from material to

immaterial goods. Major symptoms of these trends are the greater parts of income

channelled into education, travel, body care and entertainment. Consumers are

currently asking for material goods whose core is represented by the unique

relationship they can offer through status-conferring characteristics which is hard to

find in the product surface. Brand has clearly become the real adding-value aspect for

customers and is increasingly becoming a symbol of quality. Moreover, the fashion

industry is one of those sectors where the immaterial side of product has been exalted

the most: brand and innovation content have always prevailed on the mere qualitative

aspect of products. Therefore, the greatest challenge is to keep worldwide brand

consistency to exploit brand heritage and history.

Considering all the differences between emerging and established markets, the

analysis shows the difficulties multinationals such as Hugo Boss face in planning

strategies aiming to achieve both local responsiveness and global efficiency. Indeed,

this result is even more complicated to achieve within the luxury fashion industry

because of the tight correlation between fashion and societal culture. As

multinationals are striving to increment their businesses through investments in

emerging countries, it is of crucial importance to understand environmental trends.

Through a global strategy approach open to adapt to geographical differences,

Hugo Boss has been successfully implementing internationalization processes in

emerging countries. This allows them to make up for the low growth rate of already

established markets. Above all strategic risks undermine the Germany-based firm in

its quest for the gold. Countermeasures have been adopted and mostly rely on Hugo

Boss’s innovation practices which are also part of Hugo Boss’s customer relationship

management.

The formula “High price for high quality” combined with the Hugo Boss

brand heritage allows the company to be among the world leaders in its industry

where fierce competition characterizes the premium segment of the luxury fashion.

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