In: Operations Management
Is LVMH a global company? Why? Consider different definitions, starting with LVMH’s global spread of revenues. A popular definition of a “global” company (suggested by Alan Rugman and Alain Verbeke) is that for a firm to be “global”, it has to derive at least 20% of revenues from each of the world’s major regions (Europe, North America, and Asia).
How would you characterize LVMH’s strategy, especially in a global context? For example, does it stress adaptation to local markets or global integration and economies of scale? How important is China to LVMH?
How important will it be to LVMH in the future?
Are LVMH’s strategies in China different from its strategies in developed markets, such as the USA, France, or Japan? If so, please point out how they are different.
5. Does LVMH need a different strategy in China? What should this strategy be? Propose two concrete alternative strategies for China and discuss their pros and cons.
1. Is LVMH a global company?
Yes LVHM is a global company
2. Why?
LVMH operates globally and in addition to this LVMH has many offices in countries worldwide. Besides , the firm operates in different segments and offers a wide range of different brands. However the international strategy differs per product group. The main strategy in the firm is a mix of multinational and global. In some product groups (like wine and spirits) LVMH has to be aware of local responsiveness, local regulations and norms. The firm has to adjust to the environment. In contrast, product groups like, fashion and leather goods, are more in need of integration instead of local responsiveness, because the global need for the kind of fashion and leather goods is rather equal.
The firm LVMH operates in five different sectors of the market. They offer products in: wine and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewellery and selective retailing. Each product group is individual. There is little influence of the headquarter in each product group. The headquarter basically gives authority to the business divisions. This has the benefit that every business unit is flexible to adjust their structure to what suits their business unit and environment the best. However the organizational values are shared through the whole company. Summarized, looking at chapter 3 of the textbook Laserre ,it is clear that LVMH uses a sort of multi business global product division model.
The employees have the freedom as long as they meet their
targets. In addition to this, Bernard Arnault described innovation
as a driver for growth and profitability in the luxury industry.
For LVMH quality in production and product development is essential
for their success strategy. The firm pursues a strategy of soft
human resources, meaning that no real hierarchies exists. This is
resulting in that innovation is used in an excellent way.
Additionally the firm offers training programmes, on the job
training to motivate and in order of the development of the
employees
3. How would you characterize LVMH’s strategy, especially
in a global context?
The LVMH article describes the management aspects of a multi brand firm. LVMH is globally known as the world leading luxury goods companies. LVMH was established by the merger of two fashion houses, called: Louis Vuitton and Moet -Hennessy. LVMH produces and sells wines and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewellery and selective retailing. However, the majority of sales comes from the fashion and leather goods division. The luxury group grew due to key acquisitions and the development and innovation of new products. The future focus of LVMH is likely the growth into new markets and regions, where China, Russia and Eastern Europe countries can be considered. But how is such a huge company organized? Every division functions has its own general manager and a management team, besides these divisions also controls and manage sales abroad. The five product groups of LMVH are decentralized into two subsidiaries: production and distribution subsidiaries. Additionally the organizational set-ups are organized regionally. The luxury market is constantly changing, nowadays there is a wide range for luxury products since the middle-class market purchase luxury products as well. Besides the luxury sector is related toward economic conditions. Additionally , the development of growing by acquisitions became an important strategy for many firms in the luxury sector. In many of LVMH ‘s acquisitions it had maintained the creative talent as independent pool and certainly without the generating of synergies between product lines or brands. For LVMH quality in production and product development is essential for their success strategy. Moreover, integration, training and top management seminars are designed in LVMH to support business strategies.
What are the main strategic issues of this case (e.g. go into questions like what is the meaning of globalization in the luxury industry; what is the meaning of a multi-brand strategy; why so many brands in one conglomerate company)?
Formerly, medium sized firms dominated the market. However currently there are just a few big players in the luxury market that grew due to acquisitions. In the luxury industry globalization means the development of conglomerates. The most important strategic issue in the LVMH case is the development and change in the luxury market in relating to the globalization. Additionally, those conglomerates do follow a multi-brand strategy, which can be described as producing and selling of two or more competing products by the same company under different unrelated brands. The goal of a multi-brand strategy is to allow organizations to grow without overexploiting a specific brand and killing exclusivity. Firms seek to stretch their brands to attract new customers. One of the benefits is that the firms become stronger and have to deal with less competitors. Besides , firms dominate the market through padding all quality and price spaces. Nowadays, the range of products in these firms had a massive increase due to globalization.
How important will it be to LVMH in the
future?
The world’s number one luxury group, LVMH, announced another record year for 2018. The French group posted sales revenue of 46.8 billion euros, up 9.8% and a result of 6.4 billion euros for the Group share of net profit, an increase of 18.4% compared to 2017. Beyond the financial performance, the group is shining internationally through the excellence of its brands and its products and is not halting there. On April 10, 2019 it published its first quarter 2019 revenue of 12.5 billion euros: an increase of 16% compared to the previous year. How can one analyze this continuous growth? What are the key elements of the group's strategy that allow LVMH to remain top of the class?
LVMH enjoyed exceptional financial performance in 2018. Present in five main sectors - Wines and Spirits, Fashion and Leather goods, Perfumes and Cosmetics, Watches and Jewelry, Selective distribution - it is the undisputed leader in luxury at a global level with a portfolio of over 70 brands. These brands include: Moët & Chandon, Dom Pérignon, Veuve Cliquot Ponsardin, Chateau d'Yquem, Louis Vuitton, Céline, Loro Piana, Loewe, Kenzo, Givenchy, Fendi, Christian Dior perfumes, Guerlain, Rimowa, Sephora, Le Bon Marché, Bvlgari, TAG Heuer, Chaumet and Dior watches. Although the diversification of activities and geographical markets make it possible to overcome a context of geopolitical and economic instability, we believe that the attractiveness of brands rests on a permanent search for excellence thanks to talented employees, a priority given to innovation, an entrepreneurial spirit within a large group and an increasingly important consideration of societal and environmental dimensions.
Craftsmanship and talent factory
The first key success factor is the Group's human capital: 156,088 people by the end of 2018! Women (73% of the workforce in the LVMH group) and men who are passionate about their jobs who operate both in France and abroad (80% of employees are outside France).
Craftsmen who have been trained over the years, sometimes, from generation to generation. Craftsmen with unmatched know-how and who use exceptional raw materials, each in their respective fields: master-perfumers, watchmakers, jewelers ... or artistic directors who know how to infuse a new impetus to iconic brands. A perpetual renewal in a universe where we must combine creativity and high pressure for each new collection.
In Haute Couture, for example, after the departure of the tumultuous John Galliano of the Maison Dior, the Belgian Raf Simons was able to modernize the Dior creations with more sober collections, characterized by a refined and architectural style. When he left the group in October 2015, three years after he raised the Parisian couture house to high new heights, a new era began. The Italian, Maria Grazia Chiuri, was chosen as artistic director of the Maison Dior in July 2016 : the first woman at the head of the house Dior in 69 years! Not only is she magnifying the Christian Dior Couture legacy as witnessed during her Dior Cruise 2020 in Morocco or in her latest Haute Couture creations presented during the Paris Fashion Week end of June 2019 but she is also becoming a symbol for empowering women.
At Berluti, a new artistic director was also appointed at the beginning of September 2016. Frenchman Haider Ackermann presented his first collection at the Fashion Week Homme in January 2017. In April 2018, he was replaced by Kris Van Assche who presented his first collection during the Paris Fashion Week Men’s in January 2019. At the same time, Louis Vuitton appointed the iconic Virgil Abloh (American designer who launched Off-White) as artistic director of LV menswear. He presented his first Spring Summer 2019 collection in June 2018 reimagining the Louis Vuitton classics. Since his debut, Virgil Abloh is successfully marrying luxe with streetwear.
Moreover, in a New York Times article of June 8, 2016 entitled "Can America Build Its Own LVMH? ", one of the elements raised to explain the absence of groups able to compete with our French champion (beyond Kering or Compagnie Financière Richemont) is the absence of other players with a portfolio of brands with a sufficient inheritance on which to capitalize and this especially in the United States.
The group is as anxious to attract talented employees and managers as it is to retain them. This has motivated the development of its “Talent factory”, a program designed to help candidates with high potential evolve within the group. All these initiatives and daily actions are aimed at seeking talent around the world to raise each House to the highest, ensure profitability and sustainable growth. This is a constant challenge because artistic directors, in particular, must be able to carry out their creative choices and to flourish while respecting the constraints associated with belonging to a large group. It is not uncommon for these personalities to quit to develop their own brands.
Innovation efforts in all sectors
Maison Guerlain - 68 Champs Elysées- Isabelle Chaboud CC BY 2.0
The second key factor in our view is the ongoing innovation effort. It is the quest for excellence that drives the group to combine tradition, savoir-faire, craftsmanship and innovation. Each year, the various Houses launch new products to increase customer loyalty and expansion. Innovation in products, technologies used, distribution channels, acceleration of digital ... is part of LVMH’s DNA.
To mention just a few outstanding examples in 2018 and 2019, in Fashion and Leather goods, Virgil Abloh launched its fiber optic changing color Louis Vuitton bag and sneakers. In Perfumes & Cosmetics, Guerlain imagined the personalized lipstick case and the first ever digital radio for perfume lovers : the Olfaplay
Not only is innovation being developed internally, but the Group is also investing an important role in its external growth strategy. By taking over the German company Rimowa in 2017, LVMH has chosen a company that is already a world leader in the alliance of craftsmanship and precision technology. The German company which produces its new polycarbonate models has also launched the electronic label Rimowa, a pioneer in the registration of luggage thanks to an electronic label equipped with Bluetooth.
In selective distribution, Sephora continues its e-commerce strategy by offering ever more innovative and personalized tools such as mobile applications that make it possible to choose the ideal foundation based on its color profile or color- Get in-store or e-store personalized advice (My Sephora). Other initiatives include the participation of the LVMH Group since 2016, at Viva Technology Show (Vivatech), bringing together the main players in digital transformation. They took the opportunity to open the doors of its Luxury Lab and to present some innovations including those of the Maison Guerlain with its digital consultation service to discover its perfume or the connected watch of the TAG Heuer House.
Vivatech May 16-18 2019- IsabelleChaboud CC BY 2.0
Certainly this turn to digital is indispensable. Hiring Ian Rogers (digital music expert at Apple) as the new chief digital officer of the group in September 2015 was key to this change. Since then the group has made tremendous investments for its various houses nevertheless this shift remains challenging because it is very difficult to harmonize the digital policy to the 70 brands. According to the Boston Consulting Group (BCG):
"For many luxury companies, digital is a difficult new reality. They must face new tensions between their traditional world of exclusivity and access to the Internet for all ".
Social and environmental responsibility
The third aspect of the group's winning strategy relates to social responsibility. Since 2011, the LVMH Group reports its initiatives and achievements through a specific social responsibility report. In 2012, it launched its LIFE (LVMH Initiatives For the Environment) Program and never stopped extending its initiatives both in stores and within all Maisons.
As stated in 2015 in its Corporate Social Responsibility Report (CSR), social responsibility is a fundamental value of the Group and is articulated around four pillars: "Prevention of Discrimination and Respect for Uniqueness", "Development of Talent and Know-How”, "Constant Attention to Working Conditions", "Social and Territorial Involvement". In 2015, the LVMH Group sent a qualitative questionnaire to all of its Houses, which included the question "What are your priority CSR issues? ".
According to the CSR 2015 report, all the Houses have a significant weight in the reporting of the group, i.e. more than 40 entities responded indicating the four priority axes that were taken into account. Social responsibility applies to all activities and applies throughout the world. It is also interesting to note the priority axes are defined at headquarter’s level but the Houses can deploy their own initiatives according to their specificities or their own priorities.
In 2017, it celebrated the 25th anniversary of its Environment Department.
Vivatech May 16-18 2019- Accelerate Program- Sephora Stands- Isabelle Chaboud CC BY 2.0
In the United States, for example, Sephora, the selective distribution chain in the beauty industry, launched three years ago the Sephora Stands program and announced an extension in its efforts to encourage women's entrepreneurship. Recognizing that women entrepreneurs are underrepresented even in the world of beauty, the brand launched a new platform to encourage women's initiatives as part of its Sephora Accelerate initiative. The group proposes to select and accompany more than 50 female entrepreneurs in the world of beauty by 2020.
At a time when many of our French brands and industries have been or are being absorbed by foreign groups (Club Med by Chinese Fosun, Lafarge by Swiss group Holcim, acquisition of Filorga by Colgate in July 2019 ...), the LVMH group is, to the contrary, a group that buys companies abroad: Bvlgari in 2011, Loro Piana in 2013 or the German group Rimowa in 2017 as mentioned above.
Not only does the group show robust and promising financial performance, it carries the image of France around the world. The reputation and desirability of its brands make it an undisputed leader. The group is led by a visionary CEO whose strategy is based on the quest for excellence through the talent of his employees, the ubiquitous place of innovation and inscribing its development through a CSR and sustainability approach. The group is also integrating digitalization and making targeted acquisitions, the latter being the acquisition of Belmond in the luxury hospitality segment to be completed in the second half of 2019. Another step toward diversification and the development of the luxury experience segment.
Two medium-term challenges
With nearly € 4.5 billion in cash available at the end of 2018, the group is still planning to grow and retain its entrepreneurial spirit. On February 3, 2017, it announced creation of an investment structure, Luxury Ventures, to support luxury brands in the making. Where will the LVMH group stop? Will it cross the threshold of 50 billion euros in turnover by 2020?
In order to continue its rise, the group will have to face two major challenges in the medium term in an uncertain economic and geopolitical context: that of maximizing profits from Houses and effectively retaining talents or considering potential divestitures. The group does not report its results by House but by activity (six activities in total), so it is difficult to know if individually all brands and Houses contribute to the sustainable growth of the group.
Even if this lack of transparency is probably justified by confidentiality reasons, we are entitled to wonder if certain Houses like Louis Vuitton for example do not cover the low profitability or losses of other brands? Is Berluti actually profitable? All recent changes may suggest that the brand is still looking to revive itself.
What is on the horizon for the group to make its brands profitable? In the fashion and leather goods business, it seems that Donna Karan did not bring the expected results, which would have eventually helped sell the brand in 2016. Bloomberg mentioned in an article published on July 27, 2016 entitled "LVMH to sell Donna Karan to G-III Apparel for $ 650 million, "that LVMH's sale (by Donna Karan) reflected LVMH's inability to generate profitable growth in business”. The reporters also quoted Luca Solca, an analyst at Exane BNP Paribas:
"Selling DKNY is a way to get rid of a problem at a time when the market is difficult (...) Getting rid of the deficit business is the second best solution but better than keeping them in the group as a permanent brake on growth ".
The second crucial challenge in the medium or long term will be
the succession of Bernard Arnault. Will his successor or his
successors be able to pursue this sustainable growth model? They
will undoubtedly have important choices to make in terms of digital
policies and extreme diversification. As of July 16, 2019 LVMH
remains the first market capitalization in the French stock
exchange (CAC 40) with 194 billion euros, ahead of L’Oréal and
Total SA with respective market capitalization of 141 billion euros
and 133 billion euros. And LVMH share price is at its highest level
ever, culminating at 384,65€.
So LVHM will keep being one of the best brands in the industry