Value chain analysis- FPT

Case study 1:
Competitive advantage at Louis Vuitton and Gucci
With annual sales of over US$165 billion and gross profit margins of over 50 per cent,
the major luxur goods companies rel on famous brands li!e "ouis #uitton and $ucci to
deliver competitive advantage% &ut does the advantage come onl from the brand name'
(erhaps there are other advantages' )his case explores competitive advantage in the
*orld of high fashion luxur goods%
To explore competitive advantage in the industry, we begin by examining the value chain
where the profits are generated in the business. This is a useful starting point because it
identifies those parts of the business that are particularly profitable and therefore likely to
be linked with potential advantages. The second part of the case then uses the value chain
to explore competitive advantage in luxury goods.
Value chain at a major fashion house
In practice in the luxury goods sector, the value chain is complex, with many interlocking
parts. However, the key activity for most companies is the preparation and display of a
new collection for its bi-annual fashion show. To explore this, we can take the example
of a aris fashion house, perhaps at the leading !rench company "#$H, which owns
such brands as "ouis #uitton, Hennessy, "oewe, %en&o, 'ivenchy and Thomas ink.
The lead designer at the fashion house has decided to make an embroidered silk haute
couture dress as part of its next women(s spring collection. This activity will generate
profits through a value chain of business activities. The primary activities of the value
chain are shown in Table ).*.
The support activities are not shown for reasons of simplicity, but the fashion designer,
who oversees the whole process, is part of the firm infrastructure. In order to make the
dress, silk is supplied as thread mainly from +hina to a co-ordinating company, often in
,orthern Italy. The co-ordinating company has a network of associated companies in the
geographical area to dye, spin and weave the silk. Importantly, the co-ordinating
company will work very closely with the lead designer from "#$H on colours, patterns
and textures relevant to the appropriate design collection. !or both the +hinese and
Italian companies, the real driving force in terms of design, pricing and sales to the
customer is the fashion house, rather than its suppliers. !or this reason, the main value is
generated at the fashion house, not the earlier parts of the value chain.
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Value chain analysis- FPT
+ompetitive advantage in the fashion industr includes brand reputation% &ut for the
leading fashion houses, the lead fashion designer is probabl more important%
Turning to the fashion house itself, there are considerable variations in where and how
value is added. +learly, the fashion designer for example, famous designers like -ohn
'alliano, .tella $c+artney and 'iorgio /rmani takes the lead in developing the new
silk dress design. The designer(s work is often better when supported by a business
manager. The manager ensures that the business ob0ectives of the fashion house are met
and that the designer is not burdened with unnecessary administrative matters. The
designer does not 0ust focus on one silk dress but creates two complete fashion
collections every year in each of the ma0or fashion centres1 aris, $ilan and ,ew 2ork.
The designer may also develop men(s as well as women(s collections, arrange a pre-
collection briefing for department stores and other subsidiary buyers and also contribute
to the design of the fashion house accessories range scarves, bags, shoes, etc. The
embroidered silk dress of our example will probably appear only once in one of these
collections. The designer begins each dress collection with fashion ideas that are simply
draped as fabric on a static manne3uin. .ilk fabric might not even be used at this stage.
The ideas are then refined over time, the silk fabric chosen and the brief given to the
Italian suppliers to make this specific fabric described above. 4hen the material arrives
from the Italian supplier, it is then cut to make up the finished garment. The final stages
involve invisible stitching using highly skilled seamstresses who are an extremely
important part of a top fashion house. The embroidery too demands great expertise. The
silk dress then appears on the catwalk of the fashion show and subse3uently in the
showroom for sale after public presentation. 5ach of these activities will add value to the
finished garment- see Table ).*.
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Value chain analysis- FPT
5ven allowing for the expense of hand finishing, the resulting price of the silk dress may
appear high perhaps as much as 7.89:,::: and the value added may therefore seem
high. However, there are only a relatively few haute couture customers perhaps only
6,::: around the world who are able to afford such prices. Thus the ;value( generated
from the embroidered silk dress in absolute terms is relatively small. The real value
added at the fashion house comes in at least three other related areas1
1. ,ff-the-peg dresses from the same design label1 many people may not be able to afford
the 89:,::: silk dress, but they will pay 86,::: for a pr.t-/-porter <ready-to-wear= dress
from the same designer.
2. Shoes, scarves and other accessories1 many customers will also pay 8>:: for shoes
and other items from the same fashion house. .ome of these may be made inside the
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Value chain analysis- FPT
fashion house, but many will be subcontracted to outside suppliers and then sold through
the retail outlets owned by the fashion house.
3. ,ther related and licensed items1 customers will also pay 8>:8*:: for fragrances and
other items related to the brand.
.uch items may not be manufactured by the fashion house but by licensees of the brand
name. The brand is therefore more than 0ust a silk embroidered dress produced for a
fashion show. !ashion houses license their brand names to outside companies but also
understand the real danger of diluting the brand. /n example of ;brand dilution( is the
ierre +ardin brand, which used to be a ma0or high fashion brand in the *?@:s. Auring
the *?B:s, the brand was licensed to over B:: products, including toilet seat covers. The
ierre +ardin brand is still important and well respected, but it is no longer a part of the
high fashion luxury market in the sense explored in this case. High fashion houses guard
their brands carefully and will even revoke licences if they 0udge that the brand is being
diluted1 examples of activities leading to brand dilution include selling the ends of lines
below normal pricing or attaching the brand name to an unsuitable product. !rom a more
positive perspective, brand licensing across a number of related products means that a
fashion house has a range of activities to exploit its ma0or brands. !or example, the
world(s leading fragrance company, "(CrDal, has bought licences from fashion houses for
several of the "(CrDal luxury fragrance ranges including 'iorgio /rmani, Ealph "auren
and +acherel
There are two additional aspects to value generation at fashion houses that are not
captured in the simple design and manufacture of a single silk dress1
F $ost of the fashion houses have developed their o*n retail outlets to sell their
products around the world. !or example, the market leader in luxury goods is the !rench
company "#$H1 it has around *,):: stores and derives around B: per cent of its sales
from these outlets.
F !ashion houses also operate a range of brands, each with its own designer and fashion
activity. !or example, "#$H owns at least >: brands, though not all are involved in
fashion clothing. The purpose of such a strategy is to spread the risk1 if one fashion house
brand within the group suffers a temporary downturn, then another brand can take over.
In total, "#$H employs >),::: people with two-thirds of them being located outside its
home country, !rance.
Competitive advantage in the luxury goods industry
/lthough the value chain locates the high profit margin activities, it does not necessarily
follow that all will deliver competitive advantage for a company. The high profit margin
activities may be the same at all the fashion houses and therefore not deliver a
competitive advantage to a particular fashion house. ,evertheless, the value chain is a
useful starting point because competitive advantage is more likely to be associated with
high profits. In the case of the luxury goods market, it will be immediately evident that
the competitive advantage rests only partly with a brand name like 'ucci or "ouis
#uitton. Table ).6 examines the three leading luxury goods companies and describes the
main attributes that will then generate competitive advantage.
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Value chain analysis- FPT
H +opyright Eichard "ynch 6::). /ll rights reserved. This case was written by Eichard
"ynch from published information and the teaching and research activity listed in the
references.69
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