Appendix A Problem Statement

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					Appendix A: Problem Statement
Internal environment-

LVMH is looking to expand its brand domination in Asia; they face many challenges in doing
so. The internal environment of LVMH, especially the watches and jewelry business line has
many different strengths that can be improved on, but also there are weaknesses that they need to
consider before the expansion goes any further.



    Challenges
    The watches and jewelry division has the lowest sales in the company compared to the
    rest of the business lines, the division has also experienced a negative net income from
    operations in years 2002 and 2003. This division has not been profitable for the last few
    years and therefore is not recognized as a highly profitable input to the company
    There have been no investments in the watches and jewelry business line for the last
    number of years, suggesting that no further consideration has been taken to get the
    division back into a profitable situation. Also the watches and jewelry division does not
    have any of its own stores while in another division there is as many as 800 stores
    dedicated to just selling that business line.
    There is a lack of focus in the watches and jewelry division, it does not have as many
    companies in it as the rest of the divisions of the company have, especially the fashion &
    leather goods business line. There is not as much selection for consumers.


    Advantages
    LVMH has a very strong brand name, and people experience brand recognition and they
    know that they will have quality goods if they purchase from there.

    LVMH has many luxury goods companies in its alliance, more than its’ main competitors,
    Gucci, Richemont and Bulgari. While these competitors of LVMH have top quality luxury
    goods, LVMH has many more companies with which they can get their goods to consumers.
    LVMH can use this opportunity to continue to expand especially in different regions, using
    these companies as their starting point.

    TAG Heuer has built a very strong brand name and has established itself as the prestige
    chronographs and sports watches. They have established new benchmarks in the industry
    defines 6 characteristics of any genuine prestige sports watch. This reputation is an
    advantage that the LVMH can expand on in the future.

    Tag Heuer has acquired genuine legitimacy in the field of unique know how in terms of
    performance and reliability which allows them to be the official timekeepers for prestigious
    sports events, such as the Olympics and Formula 1 racing.

    While the watches division has shown a loss for the last few years, 2004 has shown a return
    to a profit for the division, they can work to continue with this profitable situation
    Inbound            Operations           Outbound          Marketing &             Service
                                            Logistics            Sales
♦Selection of        ♦Use of brands      ♦ The products of   ♦ LVMH caters to     ♦ The use of top-
quality goods to     such as Tag         LVMH are            high class           quality alliances.
make watches         Heuer for           distributed         consumers and        LVMH is the
♦Key locations of    efficient           through the         their sales          parent company
manufacturing        operations- they    unique              people are ready     of about 50 sub-
plants (“Western     already have the    distribution        to deal with         companies all
feel- France)        know how to         channel,            these people         with very well
♦High quality        produce the         including           ♦ They link their    established
materials            goods               boutiques and       watches to           names and
♦Quality             ♦The use of         shop-in-shops       prestigious          customer service
craftsmanship-       creative and        ♦LVMH               sporting events      ♦ Employees
“radical             unique product      associates itself   (Olympics)           ensure the
innovation”          generation- using   only with up-       ♦ The highly         LVMH brand is
♦The use of          scratch resistant   market stores       reputable brand      being protected
reputed jewelers,    sapphire crystal    ♦ Consumers         promotes itself      by quality and
a famous             ♦LVMH imposes       cannot buy          ♦Employees are       uniqueness
designer and         strict discipline   products on the     required to have     because they are
well known           on its              internet from any   knowledge about      so close to the
Swiss                manufacturing       site- there are     the local target     brand
watchmakers          processes to        selective           market and their     ♦ Arnault has
♦Encourages          achieve high        distribution        lifestyle choices-   considerable
artists, they        productivity        channels such as    the products,        interest (owns
much be              ♦ Not willing to    Sephora.com to      company history      47%) and strives
“completely          compromise on       keep the prestige   and what it          to ensure the
unfettered by        quality by moving   associated with     represents to the    company is
financial and        offshore for        LVMH products       world                doing the best by
commercial           cheaper labout                          ♦ Selling the        purchasing new
concerns”            costs                                   “idea of France”     companies, and
                                                             that products are    divesting those
                                                             made exclusively     that do not allow
                                                             there                for profits


                                          Support
                                          Activities

General        The head of LVMH, Arnault has the goal of acquiring top name companies
Administration in the luxury goods industry
               Dealing with tariffs in the luxury goods industry
Human          Choose top notch creative designers, the already well established Swiss
Resource       watchmakers of Tag Heuer
Management     Artists have no financial restraints when designing the high quality
               products
               Artists get to see the fruits of their labour with the acceptance of their
               design into the world- sense of satisfaction
Technology          Developing technical improvements to ensure the most precise measurement of
Development         time
                    Communication technology- the internet- has influenced the reach of LVMH.
                        Consumers can shop online in countries that do not have LVMH retail stores
                        Employees research in different cultures, LVMH Korea had major projects under
                        development for 2003 to 2006 to guarantee the overall excellence of customer
                        service




  Appendix C: External Value Chain


      Product                    Development                 Distribution                Star Brand
      Design


Radical Innovation            In the manufacturing          Products “made in          Reliable product,
- Messy, highly               process, LVMH                 France” for the            consumers can
unpredictable                 imposes strict                Western feel to            see the connection
activity that the             discipline                    deliver to consumers       with the Olympics
company endorses                                                                       and know that
so artists can do             Allows the company to         Sold only in up-scale      their watches are
their best work               achieve exceptionally         stores to present the      reliable to keep
                              high productivity             feel of luxury             time
Artists are
encouraged to use             Only uses top quality         Very few distribution      Not willing to
any means they                materials in the              channels on the            compromise on
know how to- no               process                       internet- monitored        costs by moving
concern for financial                                       very closely through       production to
matters                       Has developed                 their selective            other locations
                              characteristics of a          retailing group
LVMH harnesses the            genuine prestige                                         Unique shopping
creativity potential          sports watch and will         Strict controls about      experience, with
hidden in its people          not compromise on             distribution- and          employees having
and makes available           these standards               safeguards against         a great knowledge
what the designers                                          counterfeit so             of the company
need                          Alliances with top            consumers know
                              companies in the              they are getting the
                              watch making                  real product
                              business

            Top Competitors           Hermes
                                      Richemont
                                      Bulgari



  The Formula for creating a Star Brand
  Customer Satisfaction
  - Created a reliable product proven through cooperation with Olympics
  - Ensure product quality and uniqueness
- Customers expect western quality and get it because it is only produced there
- LVMH atmosphere created around creativity and qualtity
- customers get a unique shopping experience, allow interaction between store and customer.


Competitors – Richemont, Hermes, Bulgari

Appendix D: Porters 5 Forces
 Competitive Force                                                                            Impact



 Few- but equally balanced competitors. LVMH’s competitors have highly recognized             HIGH
 names; Richemont, Hermes and Bulgari who boasted more prestigious and more
 recognizable brands and more upscale products

 High industry growth- Asia has a population of 360 million with and 8% growth rate.           LOW
 There is a low average age in Asian countries, much interest for international travel &
 increased awareness for luxury brands

 High transportation costs because of the lack of manufacturing plant in Asia, LVMH is
                                                                                               LOW
 not willing to cut these costs by producing elsewhere because that would compromise
 on the quality of the luxury goods

 Differentiation in the watches, each competitor has a different formula to make the
 perfect watch and consumers can choose which they prefer. Choices not based on               MEDIUM
 price- but on the quality that is offered
 Switching costs are low- consumers do not have to pay fees if they decide they like a
 competitors design better

 Each firm has the capacity to make watches as supply dictates- Richemont is the
 second largest luxury goods seller and a majority of their sales is watches and
 jewelry, being this big allows for minimal capacity expansion as demand grows                 HIGH
 without incurring the costs of building new plants or purchasing new technology

 Exit Barriers- To exit this line would be damaging for the name of the companies.
 LVMH has experienced losses on their watches and jewelry business line, but still             HIGH
 continues to keep this valuable sector for the overall wholeness of the company. All of
 the competitors have other business lines that make it possible for negative returns in
 a year in their watches and jewelry line, but still to keep it for the prestige associated
 with it.
 Economies of Scale- LVMH is very well established and is able to spread the unit
 cost of producing its watches and jewelry over a large number of units, they already
 have the facilities that are necessary and the know how, with their Swiss                   HIGH
 watchmakers, and also the brand recognition and quality that is associated with
 LVMH product lines. It would be hard for a new comer to create the prestigious
 watches without all of the technology and facilities, they would face much higher
 costs

                                                                                              HIGH
 Product Differentiation- The major players in the watch and jewelry product lines
 already have established, prestigious brands and strong brand identification. LVMH,
 Hermes, Richemont and Bulgari are known worldwide and this creates high consumer
 loyalty. The opening of the LV store in Japan produced sales of over $1 million the
 first day, showing extreme consumer loyalty
                                                                                              HIGH
 Capital Requirements- To enter the watches and jewelry market, a company
 would need to have the capital for vast research and development to be able to have
 the precision and reliability required by the industry standard

 Switching Costs- Buyers are free to switch from one company to the next when                 LOW
 choosing a watch or jewelry. There are no costs involved with this switch, it is all in
 the preference of the consumer

 Access to Distribution Channels- these watches and jewelry are sold through
                                                                                              HIGH
 upscale luxury outlets and retail stores. It would be very difficult for a new company
 in the market to get their product featured in some of these stores due to the lack of
 brand recognition which we know is so important in this industry. Many up-scale
 stores already hold the top names, or each name has made its own store

 Cost disadvantages Independent of Scale- TAG has developed characteristics of               MEDIUM
 a prestigious sports watch and may have secured access to these products which
 could be hard or expensive to get, such as the scratch resistant sapphire crystal. Also,
 there is a special consumption tax on luxury goods in Asia imposed by the
 government.

-OVERALL THREAT OF NEW ENTRANT IS LOW
Threat of Substitutes


 Alternatives:
 Cell phones are very popular now, and this is a substitute for watches- every cell
 phone has a clock on it, along with an alarm and other features such as reminders
 and calendars to keep track of engagements. While cell phones can be used for these
 features, the style of a watch and the prestige that is associated with wearing a
 quality luxury brand cannot be beat by a cell phone clock.                                   LOW
 Most consumers wear these watches not just for the time but also for style
 The Jewelry that is designed by the companies of LVMH is made with all the best
 materials and is sold through the right distribution channels with little substitutes for
 this product.
Supplier Domination- The supplier industry is not dominated by few firms. The Tag
watches line has established inputs for their watches which include; scratch-resistant
sapphire crystal, a screw in crown, water-resistance, a double safety clasp and            LOW
luminescent hands and hour-markers. These supplies can come from a number of
different companies and LVMH has the power to negotiate prices with its suppliers.
They can provide a lot of business for a supplier, with their 6 sub-companies that
produce watches

Industry Importance- The suppliers may have a number of different industries they
supply to, but some products would only be sold to those in the watch making               LOW-
business, such as straps and watch hands, which means that they need the business         MEDIUM
from these buyers

Important Inputs- the inputs that these suppliers sell are important to the end
product. The criteria that TAG has established are important inputs to each watch and     MEDIUM
they must be there for the consumers

Differentiated Supplier Products- The products that the supplier provides are not
differentiated, most of the items used in producing these watches could be obtained        LOW
from several suppliers- also there are no switching costs from one supplier to the next

Threat of forward integration- The watch making process requires a lot of skill and
inputs from different places, also the prestige that these watch and jewelry producers     LOW
have associated with their names would be very hard to replicate for a supplier
company




Purchases large volumes- LVMH sells its goods through selective retailing; they only
distribute their products through boutiques and shop-in shops. Buyers do not have           LOW
the exclusive power to determine where the goods will be as LVMH has a lot of power
in this regard

Products from the industry are standard- The products in the watches and jewelry            LOW
line are not standard, each company offers their own advantages and consumers
want the choice of these luxury products. There are limited substitutes for consumers
to look for

Buyer faces few switching costs- While there may be no switching costs, consumers
depend on what they know in a store. Since watches and jewelry are so highly                LOW
differentiated, it would not be wise for a buyer to stop selling a certain brand unless
there was no demand for it

Low profits- Watches and Jewelry are luxury goods and are expensive to consumers,
while in the past few years the division has shown a loss, watches and jewelry have         LOW
returned to a profitable situation in the last year

Threat of backward integration- Since the watches and jewelry are mostly sold
through boutiques of the parent company LVMH, there is no threat that the buyer             LOW
could take over the production
Financial Analysis:

Profit Margin=       Net Income
                      Sales
Profit Margin for LVMH (all business lines)
                                                             2001           2002         2003
         Net Income (millions of Euros)                      1,932          2,198        2,343
         Sales (millions of Euros)                           12,089         12,698       12,257
         Profit Margin                                       15.98%         17.31%       19.12%

Profit Margin for LVMH Watches & Jewelry
                                        2001                                2002         2003
         Net Income (millions of Euros) 27                                  (13)         (48)
         Sales (millions of Euros)      548                                 552          502
         Profit Margin                  4.93%                               -2.36%       -9.56%




                                        Profit Margin by Company and by Watches & Jewellery

                              25.00%

                              20.00%

                              15.00%
            Profit Margin %




                              10.00%
                                                                                                  2001
                               5.00%                                                              2002
                                                                                                  2003
                               0.00%

                               -5.00%

                              -10.00%

                              -15.00%
                                                  Whole Company    Watches & Jewellery




Profit margin is calculated using the income and sales of a company. Looking at the profit
margin for the whole company, each year there has been increases and this is projecting future
growth for the company. When the watches and jewellery business line is examined apart from
the rest of the company it can be seen that in 2002 and 2003 there were negative profit margins.
The fact that the watches and jewellery line is not achieving a positive profit margin is bringing
down the profit margin of the company as a whole and this needs to be considered very carefully.
This negative profit margin could be a result of many factors, one of the reasons for the decrease
in sales could be that many consumers in Asia still cannot afford to buy luxury goods or the
counterfeit products. International watch companies are also facing a major barrier in the Indian
market because of an 85% duty which is imposed on the sector.




Alternatives:

Option Alternative                 Description
  1    Focused                     LVMH is present in many markets across the globe. They
       Differentiation-            currently are working on expansion in the Asian market.
                                   The watches and jewelry segment of the company sells
       Capacity Expansion          16% of their goods in Japan 12% in the rest of Asia. LVMH
                                   can take the brand loyalty that they have already
                                   established in Asia and expand on this. It is obvious that
                                   consumers want the luxury goods if this many of LVMH’s
                                   sales occur in Asia, so the watch and jewelry lines should
                                   focus on making their products more attractive than
                                   competitors products, an important aspect of entering the
                                   Asian market is making sure that the consumers there will
                                   accept the European lifestyle that is associated with LVMH
                                   product lines. LVMH could change the style of some of its
                                   jewelry to allow it to work with the fashions of Indian or
                                   Chinese dress. The same goes for the style of their
                                   watches, some of the consumers in Asian countries may
                                   prefer luxury products but that are in the style of their own
                                   culture. By making these new products, LVMH would be
                                   expanding their product lines, and that makes the need for
                                   more capacity in their manufacturing plants. The stores that
                                   make these watches and design the jewelry will have to be
                                   expanded to sustain the extra people who will make these
                                   designs and the extra space and raw materials that is
                                   needed to produce the products. Acquiring a new watch
                                   making company to increase the capacity
2        Differentiation-          LVMH can differentiate the products that they sell to their
         Vertical Integration      consumers in Asian countries, to allow for the different
                                   cultures in these countries to have the products they desire.
                                   LVMH faces medium supplier power, since they have such
                                   specific criteria for their TAG sports watches and the inputs
                                   that go into these watches, they need to be able to access
                                   the products they need almost immediately. They have to
                                   be able to satisfy consumers by providing the best quality
                                   customer service possible, in a timely manner. In order to
                                   differentiate their products, there will have to be new
                                   features added to their watches that competitors aren’t
                                   offering to their consumers. TAG sells sports watches that
                                   are highly reliable to consumers and which measure time in
                                   the most precise way possible, for TAG to expand on this
                                   feature and offer watches with certain battery times so that
                                   the watch-wearer will know before their battery is going to
                                   die so that the consumer can rely on their watch with the
                                   most certainty possible, they must have the inputs to be
                                   able to do this. If LVMH could purchase some of the
                                   suppliers of their inputs to the watches then LVMH could
                                     rely on the fact that all of the inputs are made to the best
                                     standard possible, and they could relay this fact to their
                                     consumers. There would be no worry that a suppliers
                                     mistake in production could compromise the good name of
                                     LVMH or slow down the production process
3          Focused Cost              In some of the Asian markets, especially India, consumers
           Leadership - Cost         cannot afford to purchase high quality goods because they
                                     do not have the money. The consumers in these markets
           Leadership                who are going to purchase luxury items preferred to buy
                                     them in Europe or Singapore, because they believed the
                                     products were cheaper there. LVMH is currently able to
                                     price their watches on par with competitors in India but if
                                     they were able to lower prices and still offer a luxury
                                     product Indian consumers would be more likely to buy
                                     there. Richemont, Bulgari and Hermes have more upscale
                                     products than LVMH so charging the same amount of
                                     money for a product that is not seen as of the same
                                     prestige is not going to be as successful for LVMH. If they
                                     can produce their goods at a lower cost, but still maintain
                                     the luxury status associated with the LVMH name then it
                                     will be possible to convince consumers to keep their
                                     business in India and still have the latest fashions
4          Focused                   The watches and jewelry line has lost money in the past
           Differentiation-          few years, and sales decreased from 2002 to 2003. The
                                     income from operations in that division is less than
           Divestment                impressive, with a loss of $48 million Euros in 2003. The
                                     watches and jewelry business line is also the one that has
                                     the least number of sub-companies compared to the other
                                     4 business lines that LVMH has. LVMH could focus their
                                     investments and time on their other more profitable
                                     business lines by eliminating the watches and jewelry
                                     segment in Asia. Asia accounts for about 49% of sales in
                                     the Fashion & Leather goods business line, by eliminating
                                     the watches and jewelry division and concentrating on
                                     other business lines, LVMH could make more profits
                                     because they will not have to make up for the negative
                                     profits in the watches and jewelry line




Decision Criteria and Matrix


Criteria   Metric             Weighting   Explanation                                 Measurement
                                                                                      Reason
1          Future Growth      25%         The luxury goods market is growing          Future growth is
                            quickly and there is an increased desire       weighted at 25%
                            for luxury goods by consumers in Asia.         because it is
                            China has a population of 360million           important for
                            people, which is a very large market for       LVMH to be able
                            LVMH to go into. It is important that the      to expand into the
                            alternative allows for expansion into          growing markets in
                            these markets and for adequate                 Asia
                            defense against the competition. LVMH
                            needs to look at which alternative
                            provides the greatest opportunity to
                            expand into these potential markets
2   Consistent with   20%   LVMH has a very strong brand name              Brand image is
    brand image             and associates all of its products with        weighted at 20%
                            “reliability, quality, style, innovation and   because it is
                            authenticity.” The alternative that is         important to LVMH
                            chosen must allow for the star brand           to have the best
                            that LVMH has established to stay this         products possible
                            way. Consumers must consider the
                            luxury goods- the watches and jewelry
                            that are produced- to be of the best
                            quality and keeping with the reputation
                            LVMH has
3   Competitive       20%   The alternative that is chosen must            Competitive
    advantage               allow for LVMH to have an advantage            advantage is
                            that the rest of its competitors do not        weighted at 20%
                            have. The Asian market is a relatively         because LVMH
                            new one, and the watches and jewelry           wants to
                            sector have to decide how to                   outperform
                            differentiate their products to please         competition and
                            consumers in different cultures. They          have something
                            need to have something that their              better to offer their
                            competitors do not have for an                 consumers
                            advantage
4   Long-term         15%   Long-term profitability is an important        Long term
    profitability           component in the alternative chosen.           profitability is
                            LVMH needs to consider the amount of           weighted at 15%
                            money that the alternative is going to         because it is
                            bring in. If the alternative will not allow    important for the
                            for future profits in the watches and          watches and
                            jewelry sector which has been                  jewelry line to
                            struggling for profits in the past few         make profits,
                            years, then it is not wise to implement.       where they have
                                                                           been lacking in the
                                                                           last few years
5   Capital           10%   The amount of money that it is going to        Capital investment
    Investment              cost to implement the alternative is           is weighted at 10%
                            another factor that LVMH has to                because it is
                            consider. LVMH is a very well                  important for
                            established company and they have              LVMH to consider
                            gotten profits in almost all of their          how much it will
                            business lines in the past few years,          cost, but if a large
                            which allows them to sustain the not           investment will
                            always profitable watches and jewelry          bring the division
                            line. To invest money in the watches           back to profits it is
                            and jewelry line, using an alternative         worth a large
                            that will bring the line back to a             investment
                                            profitable situation would be a good
                                            move for LVMH they have the money to
                                            dedicate to making their business line
                                            profitable
6              Risk               10%       Risk is the chance that the alternative   Risk has a weight
                                            will fail. Each alternative that can be   of 10% because
                                            chosen has some degree of risk            every alternative
                                            involved; there is always the chance      will have some
                                            that the watches and jewelry line still   degree of risk
                                            may not make money.




                               Alternative 1:      Alternative 2:    Alternative 3:    Alternative 4:
                                 Focused             Focused         Focused Cost        Focused
    Criteria          Weight Differentiation-     Differentiation-     Leadership-    Differentiation-
                                 Capacity             Vertical          Capacity        Divestment
                                Expansion           Integration        Expansion
Future                25%    3                   4                   2                1
Growth
Consistent            20%     4                  4                   1                1
with Brand
Image
Competitive           20%     2                  4                   2                1
Advantage
Long-term             15%     4                  5                   3                1
Profitability
Capital               10%     2                  2                   3                2
Investment
Risk                  10%     4                  3                   2                4
Total                         3.15               3.85                2.05             1.40
Weighted              100%
Score

                             Score              Scale
                             1                  Least Desirable Alternative
                             2
                             3
                             4
                             5                  Most Desirable Alternative
Recommendation   Objective                                                 Phase
1: FD+CE         This alternative would allow LVMH to focus on the         To expand its capacity,
                 markets in Asia, while expanding their capacity to        LVMH must hire more
                 make more products and this would allow for more          labourers to manufacture
                 stores to be opened up in the Asian market for            the watches and jewelry.
                 consumers to purchase luxury goods. After                 They need to make sure
                 evaluating this alternative with the criteria explained   they have the designers
                 above, it scored 3.15 out of 5. This alternative is the   available to handle the
                 second highest rating, it is not the best alternative     increased capacity that will
                 for LVMH to expand their watches and jewelry              come with this alternative.
                 division, even though this will allow them to expand      There are also capital
                 further into the Asian market, it does not provide a      requirements for the extra
                 competitive advantage for the product line. There is      raw materials that are
                 also the risk that this alternative could lead LVMH to    needed for the extra
                 produce too many products for the market, and they        goods, without the promise
                 would be left with too many products and not              of being able to sell these
                 enough buyers. This is a large risk to consider, with     goods in the Asian market.
                 the lack of profits that the watches and jewelry line
                 has made in the past few years a huge factor to
                 consider.
2: FD+VI         This alternative is the one that LVMH should              Phase 1- Geographic
                 implement for its watches and jewelry division. With      Research
                 the highest score of 3.85, it will provide the greatest   Phase 2- Examine the raw
                 opportunity for the division. By focusing on its luxury   materials suppliers and
                 goods line in Asia, LVMH is providing a valuable          decide which ones will be
                 service that its consumers want. Consumers also           the most advantageous to
                 want to know that they can rely on the goods that         own
                 they have been sold by the stores in the watches          Phase 3- Secure the
                 and jewelry division. With vertical integration, LVMH     capital requirements
                 will be able to purchase the suppliers who provide        needed to purchase these
                 them with the raw materials that go into their            suppliers and make sure
                 products, and this will allow LVMH to assure their        that the relations with them
                 consumers that they are getting the highest quality       will still be good, so their
                 goods possible, because LVMH will now have                employees who already
                 control over how these goods are produced- and            have the know how to
                 where these goods are produced- which is very             make the goods will want
                 important to the consumers. They may even be able         to continue working there
                 to save money by having their own workers                 Phase 4 Market the fact
                 producing these materials. Another way that LVMH          that LVMH has the best
                 can vertically integrate to achieve its goal of           quality products to the
                 expansion is Asia is to purchase more sub-                consumers there, ensure
                 companies, ones that are already well respected           them they are getting the
                 and have established themselves in Asia. While this       most luxury goods for their
                 alternative requires a large capital investment, the      money
                 future growth and future profitability will be very       Phase 5- Examine what
                 high. This alternative is also consistent with the        stores and brands in the
                 brand image that LVMH has made. They can now              Asian market the
                 assure their consumers with the utmost certainty          consumers there associate
                 that their products are the best possible. The            with being up-scale and
                 competitive advantage that will be gained by having       look into purchasing these
                 the service that consumers want and being able to         outlets
                 focus all of their efforts on satisfying consumers will   Phase 6- take the stores/
                 be very valuable to the watches and jewelry line,         brands that have been
                 and bring them back to a profitable situation             purchased and make them
                                                                           consistent with the brand
image that LVMH has
worked to hard to secure.
3: FCL+CE   This alternative is ranked third out of four options. It   To implement this plan,
            involves LVMH becoming a cost leader in the luxury         LVMH will have to
            goods market and expanding their capacity to               examine the Asian
            produce more goods. This is not the best alternative       manufacturing areas, and
            for the watches and jewelry line to implement              decide where they are able
            because when they take on the task of becoming             to build a facility to make
            cost leaders, it may lead consumers to believe they        their products in. The
            are no longer getting the luxury goods that the            capital that needs to be
            competitors are providing to them. Although this           secured in order to
            alternative may provide profits because more               implement this alternative
            consumers will be able to afford the products, it is       would be very high. LVMH
            not consistent with the brand image of the company.        would also have to
            In order to reduce the costs of the products in Asia,      examine the market in
            LVMH will need to expand its operations and                Asia to see if the demand
            actually produce the goods in Asia which will reduce       for a lower quality good
            transportation costs, but in doing so this will lower      was there and if
            the quality of goods because direct labour costs           consumers would accept
            would be too high to keep the same quality that is         these products.
            achieved in the manufacturing facilities in the west.
            Consumers will recognize this decrease in quality
            and see competitors’ goods as being better than
            those of LVMH. The capital investment that this
            project would require is also high because it
            includes the cost of expanding their facilities and
            making new places in which to manufacture their
            goods. This strategy is also very risky as it includes
            the chance that the rest of the product lines in the
            LVMH empire may be seen as inferior to
            competitors products if the watches and jewelry
            segment has lowered the quality of its goods.
4: FD+D     This alternative is the least advantageous for LVMH        To divest its watches and
            and would provide the least benefits if it was             jewelry business line,
            implemented. This alternative would involve                LVMH is taking the chance
            divesting its watch and jewelry operations in Asia,        that they will make any
            getting rid of all of its stores there and focusing on     profits from this in the
            the markets that they have already expanded in, in         Asian market out even
            other parts of the world. The future growth for the        though it may reduce the
            Asian market would be none, and this would take            chance of more losses in
            away the chance to make profits in this new area.          this line. LVMH will have to
            As for the brand image, consumers in Asia would            examine all of the stores
            see this as LVMH not being able to provide the             that it currently has in Asia
            luxury products that they are looking for, and this        and decide how they want
            alternative could also hurt the other product lines in     to divest them, most likely
            the LVMH empire because if consumers see that              by selling them off. To
            the watches and jewelry cannot be sold there they          move all of the products
            may believe that the other lines have products that        that are in Asia back to the
            are not as luxurious as the competition. Divesting         home base will cost money
            would hurt the brand image of LVMH as it is a              and extensive planning.
            failure in the new market. The capital that is
            required will be used to take down the stores that
            they have spent so much money to put up, and the
            planning that has been put into making new stores
            (expansion of Dior over the next 10 years in Japan).
            The risk associated with the divestment watches
            and jewelry in Asia is high, as it would hurt the rest
            of the company.
Implementation Plan:


Task Name       Activity                                    Time      Cost Drivers         Budget
Phase 1:        LVMH must conduct market research                     The surveys that
Geographic      to determine which areas their              4 weeks   are distributed to   $10,000
Research        suppliers should be located in to get                 consumers in the
                products to producers in the quickest                 Asian market and
                way possible                                          the employees who
                                                                      analyze this data
Phase 2:        The first phase involves LVMH doing
Examine Raw     research into the suppliers that                      Researchers who
Materials       currently provide the raw materials for     9 weeks   will study the    $25,000
Suppliers       their watches. They need to decide
                which supplies cost them the most
                                                                      suppliers and the
                money to obtain and decide if they will               value they add to
                be able to produce the product more                   the manufacturing
                cost-efficiently if they do it                        process
                themselves. Since the watches and
                jewellery line relies so much on the
                quality of the materials that goes into
                their final products it is important that
                the supplier they purchase will allow
                them to achieve the most profitable
                situation.
                Establish criteria needed for the
                supplier to quality for takeover
                Researchers will submit data to the
                executives at the highest level who
                will examine the data
                Top executives will examine the data
                that has been submitted and using                     The salaries of      $75000 for
                the criteria established to determine       1 week    the executive        the top 3
                which suppliers will be acquired.
                Ensure that relations with this supplier
                                                                      employees who        executive
                are good so that they will agree to the               will be examining    employee
                take over, also ensure that the                       the data and         salaries for
                employees there will be able to keep                  determining the      a week
                their jobs but the final supervision will             takeover process
                be by LVMH employees so that goods
                are being produced in the most
                efficient way possible to keep with the
                strict manufacturing process that
                LVMH has implemented in its own
                facilities
Phase 3:        After it has been decided which
Determine       suppliers to purchase, work to              7 weeks   The amount of
Capital         determine how much it will cost to                    money it will cost   $1,750,000
Requirements    purchase the supplier.
                Offer a price that is fair for the sales
                                                                      to purchase the
                that the company that is being                        supplier plus
                acquired will be foregoing by                         salaries of any
                accepting this offer.                                 negotiators
                LVMH will have to secure the funds
Phase 4:          LVMH has a very special culture and
Integrate         they make sure that employees have
LVMH culture      a deep understanding of LVMH’s                      The salaries and
in the newly      products, the company history, and
acquired          what it represents to the world.
                                                            Ongoing   relocation costs of $550,000
company           Take employees who currently                        employees who
                  work in the manufacturing                           have to go to
                  facilities of the watches and                       these new areas
                  jewellery and place them in the                     and work with the
                  newly acquired facilities to                        newly acquired
                  promote the culture                                 facilities (2
                  Must ensure that new employees                      employees for 1
                  understand this and feel the same                   acquired supplier)
                  way about the products that they
                  are producing even though they
                  are only raw materials used in
                  producing final goods.
Phase 5:          With the new facilities that LVMH has
Market the        acquired they can ensure that                       The costs of
renewed           consumers will have the best              10        advertising all     $500,000
reliability and   products available and they can not
quality of        only rely on the final product as a
                                                            weeks     across Asia, in
LVMH              whole, but on each individual input.                magazines for the
products          LVMH is now responsible for each                    up-scale
                  part of the production in their watches             consumer, on
                  and goods and consumers should                      billboards and
                  know the luxury products they are
                  receiving are the absolute best.
                                                                      through mail to
                  Advertising campaign all across                     existing
                  Asia to promote these luxurious                     consumers
                  goods and knowledgeable
                  employees in every part of the
                  manufacturing process
Phase 6-          LVMH will do market research in Asia
Examine           to determine what consumers really        4 weeks   The salary of the  $12,000
Luxury stores     want and which stores they see as                   employees who
in the Asian      the most luxurious to purchase their
market for        goods in.
                                                                      will do the market
possible          Determine criteria for stores to be                 research and their
purchase          purchased                                           materials needed
                  Using the criteria that were
                  determined, top executives can            1 week    Salary of the top   $75000
                  examine the data that is presented to               employees who
                  them and use this to decide which
                  store or brand to purchase
                                                                      will make the
                  Must be seen as prestigious in Asia,                decision
                  as this will increase their chances for
                  future growth in them market, which is
                  one of their main goals to reach with
                  this alternative
                  Make an offer to purchase a company                                     $2,000,000
Phase 7-          With the purchase of all of these new
Ensure the       stores and suppliers, LVMH must       Ongoing      Relocation of       $550,000
consistency of   ensure that they keep the brand                    employees to
Brand Image      image that they have worked to hard
that LVMH has    to establish
                                                                    Asia where the
                 Train employees in the new stores                  new stores are to
                 to have the expertise of the                       train employees
                 product, company and history and                   about the “Made
                 the made in France feel                            in France” feel




Contingency Plan:
 Event            Trigger Event                    Priority                     Response
Number
   1       Resistance from suppliers        High- this could           Ensure that suppliers
           in the efforts of LVMH to        damage the products         know their employees
           purchase them                    that the watches and        will not lose jobs, LVMH
                                            jewellery line              just wants control of the
                                            produces if relations       manufacturing process to
                                            with suppliers              ensure efficiency
                                            become strained            Allow for friendly
                                                                        discussions and a friendly
                                                                        merger not a hostile
                                                                        takeover
                                                                       Offer fair purchase price
                                                                        so suppliers do not feel as
                                                                        though they are being
                                                                        offered nothing for their
                                                                        product
    2       Sales in Asia decline even      High- If the watches       Advertising in Asia to
            further in the watches and      and jewellery               make sure consumers
            jewellery division and          division fails to           know they are buying the
            LVMH cannot put the             provide profits in          top luxury goods
            money into purchasing any       2004, the line is in       Establish a competitive
            suppliers for a division that   danger of being             advantage that will far
            is not providing profits        divested                    surpass that of
                                                                        competitors to gain some
                                                                        of the market share back
                                                                       Introduce a new luxury
                                                                        product to sell to
                                                                        consumers
                                                                       Make sure the buying
                                                                        experience and the after
                                                                        purchase service is of the
                                                                        utmost quality for
                                                                        consumers
    3        Resistance from employees    Medium- If                 Hold fourms for
             when trying to purchase      employees do not            employees to voice their
             suppliers                    want to integrate with      opinions on the takeovers
                                          other companies this       Educate employees on
                                          could damage                how the process will
                                          relations with              work and explain to them
                                          suppliers also              that there will be no loss
                                                                      of integrity in their luxury
                                                                      products
                                                                     Make sure the employees
                                                                      know the benefits that it
                                                                      will provide to consumers
                                                                      if the processes of
                                                                      supplier and producer are
                                                                      integrated



Problem Statement:
        The main challenge that the watches and jewelry line of LVMH is facing is their
expansion into Asia. LVMH has a very strong brand name and people know that they are getting
luxury goods when they purchase from a LVMH sub-company. The problem is that the watches
and jewelry line has not been able to achieve a positive net income in the past few years, and the
expansion into Asia may increase the negative income that the line is already experiencing. The
problem of counterfeiting in China and the rest of the Asian countries poses a huge threat to the
expansion because consumers may not want to pay the high prices for these luxury goods when
they can have look-alikes for a fraction of the price, and consumers who are willing to pay the
high prices may feel as though the goods are not worth paying high prices for if others in society
see them as being a “fake.” The competitors of the LVMH watch lines are strong players in the
world market and they produce more upscale products and have more prestigious and
recognizable brands. LVMH has to look at this and decide how they will position themselves for
a competitive advantage to get customers to buy their goods. Using the benchmarks that TAG
Heuer has developed in developing a prestige watch, LVMH can concentrate on expanding this
reputation for a reliable product into the Asian market.

LVMH needs to concentrate on their consumers who are looking for luxury goods,



Internal Value Chain-
        The internal value chain starts with the inbound logistics and the selection of quality
materials is by far the most valuable input that LVMH has for its watches and jewelry. They
make the best quality products possible and only put in quality materials they know they can
trust. Using these materials leads to the operations of actually producing the “star brand” that
LVMH is working to achieve. They use the best manufacturing processes possible to achieve
high productivity so that they can produce the goods in the most efficient way, but LVMH is not
willing to compromise on quality. Even though it would help overcome some of the challenges
of expanding into Asia by building a manufacturing facility there to reduce costs, this would
inevitably lead to a reduced quality of goods and the lack of a “western feel” for consumers. By
keeping all of their manufacturing in the western areas, LVMH has to have good outbound
logistics to get their products to consumers in the best way possible. The watches and jewelry
segment uses a unique distribution channel of boutiques and shop and by doing this consumers
know that they are getting the real products and not counterfeit ones. With their own boutiqes,
LVMH can ensure that they have the best employees to show their products to consumers and
have the knowledge to answer any questions that their customers may have. The service that
consumers get when they can go straight to the company who has produced the product if they
have a problem or question rather than have to go through a middle man.

External Value Chain-
        The external value chain consists of activities that lead to creating a “Star Brand” for the
watches and jewelry line of LVMH. It begins with the product design where the artists are free to
any means they have to design the luxury goods with no concern for financial matters. They also
allow for an unpredictable environment to encourage the most creativity possible. In the actual
development of the product LVMH has made alliances with some of the top Swiss watchmakers
which gives them an advantage because these watchmakers have the know how to produce the
watches that consumers want. The TAG Heuer brand has set benchmarks for the qualities that a
prestigious sports watch should have and they have also gained brand recognition by providing
timekeeping services for the Olympics and other prestigious sporting events, which is part of the
“star brand.” The distribution channels that LVMH has chosen for its watches and jewelry are
unique and work to protect against the possibility of counterfeit goods and yet keep the quality
name that LVMH has associated itself with. The products are still made in France which is what
consumers want. The “Star Brand” that results from all of these activities provides value for
LVMH and gives them a competitive advantage they can use to overcome competition

Porter’s Five Forces

Competitive force is very high for LVMH. The three main competitors in the watches and
jewelry division are Richemont, Hermes and Bulgari and these competitors boast more
prestigious and more recognizable brands and more upscale products. LVMH needs to determine
how they are going to develop a competitive advantage in the Asian market to overcome the
challenges that these competitors are throwing at them. The threat of new entrants coming into
Asia is relatively low, because it would be hard for a competitor to come into the market unless
they already have established their watch and jewelry making activities in the rest of the world
and have a highly recognizable brand name. The three main competitors of LVMH already have
established worldwide operations and the chances of another company coming in to try and take
away market share when many of the up-scale stores in Asia are already carrying the luxury
goods that the consumers demand is low. The threat of substitutes is low because there are not
many alternatives for the luxury watches and jewelry that LVMH is producing. An alternative
for the watches sold is cell phones, there is a rising popularity of these to tell time but a cell
phone does not boast the quality and prestige that a luxury watch has. The power of suppliers is
medium because LVMH needs to ensure that they have the highest quality inputs for their
watches and jewelry and they may not be able to get this from just any supplier. Buyer power is
low. LVMH wants to distribute its watches and jewelry through the most up-scale channels that
is possible, and this is mostly done through their own boutiques and store-in-stores. The chain
stores do not really have a chance to purchase LVMH products because they are not prestigious
enough to have these products. If LVMH sold its watches and jewelry in department stores it
would hurt the brand image and consumers would not see it as being a luxury brand.

Financial Analysis
        The financial performance of the watches and jewellery business line in the past few
years has been dismal, although in the first half of 2004 LVMH is reporting a return to a
profitable situation. There have been some economic factors in the Asian market that could have
contributed to the financial loss in the past few years such as opposition by some activist groups
against the luxury market, a consumption tax on luxury goods, and the non-availability of a
variety of models that people in the Asian culture desire.

Strategic Group Map


Alternatives
         There are four different alternatives that LVMH could choose to work on their expansion
in Asia. The focused differentiation- Capacity expansion alternative will allow for LVMH to
focus on their operations in Asia and presenting a differentiated product to their consumers there.
They want to provide luxury watches and jewelry they are not trying to compete with department
store watches or jewelry, they have a shallow presence in the Asian market but they are trying to
expand in other Asian countries such as China and India. By increasing their capacity, the
watches and jewelry line will have more products to offer to consumers and this will allow the
opening of more stores for consumers to shop in. The second alternative is one of focused
differentiation- vertical integration. In this alternative, LVMH will focus on their watches and
jewelry line in Asia to provide the same luxury goods for consumers and they will also enhance
the reliability of the products they provide to consumers with vertical integration. If LVMH can
purchase its main suppliers they will be able to rely without question on the materials that are
used in producing the final goods, which means there will be no need to question the reliability
or quality of the goods. The third alternative that LVMH can consider implementing is one of
focused cost leadership- capacity expansion. Some of the consumers in Asia are
If they expand their capacity to make more watches and jewelry by adding a manufacturing
facility in Asia to reduce transportation costs, it may be possible to make higher profits for the
division because they will be selling more goods and producing them at a lower cost. The
problem with this is that there will be a decrease in the quality of the goods because they will no
longer be produced with the supervision that is available in the west. The fourth and final
alternative is focused differentiation- divestment. This alternative would entail taking operations
out of Asia and focusing on the luxury goods markets that have already been established in
Europe and North and South America. This would allow for more money to be put into these
other markets in investments, but it could hurt the brand image of LVMH because if the watches
and jewelry were taken out of Asia because they were not making enough money, consumers
may see this as a failure of LVMH and that the other products of LVMH may not be as luxurious
as once thought.

Decision Criteria
         The most important decision criterion, with a weight of 25%, is future growth. It is
imperative that the alternative chosen allows for future growth in the Asian market. This market
is very large and has the opportunity for a lot of growth. Many of the consumers who now
purchase the products of LVMH are young, which means that they will continue to buy products
in the future. Consumers in Asia are also becoming more aware of luxury brands, and this is not
only because of the perceived quality but because of the social status that is now associated with
these luxury brands. The second criterion, with a weight of 20%, requires that the alternative
must be consistent with the brand image that LVMH has created. Brand image is very important
to LVMH and they want to make sure that consumers associate the products with “reliability,
quality, style, innovation and authenticity.” The alternative must support all of these things that
LVMH has worked so hard to promote within each of its divisions. They do not want consumers
to feel as though they are getting anything less than the luxury goods they have been promised.
The third criterion, with a weighting of 20%, is competitive advantage. Competitive advantage is
important to the watches and jewelry line because they need to make sure that they have
something to offer to consumers that their competitors do not have. They have to differentiate
themselves from other products and, in doing so make sure that they keep the luxury status they
have worked so hard to attain. Long term profitability has a weight of 15%, this is important for
the watches and jewelry line especially because in the past few years the division has failed to
make a profit and this needs to be changed with the alternative that is implemented. It is
imperative for the watches and jewelry line to be able to make money if LVMH is going to
continue with the expansion into Asia. The fifth criterion, given a weight of 10%, is capital
investment. While the amount of money it is going to cost to implement any given alternative is
an important factor to consider, it is not the most important because sometimes you need to
spend money to make money. An investment would be worth it for LVMH if it will return the
watches and jewelry line to a profitable situation. The final criterion to consider is risk, with a
weight of 10%. Any alternative that is chosen will have some degree of risk, although some may
be higher than others. It is important to consider what amount of risk is worth it because there is
always the chance that after all of the investments and planning, the watches and jewelry division
still may not return to a profitable situation.

       Recommendations

The alternative that is the most advantageous for LVMH to implement in its watches and
jewellery line is one of focused differentiation- vertical integration. This involves examining the
suppliers of the inputs to the luxury goods that LVMH produces and deciding which ones
provide the most value to the end product. These inputs are very important and must be reliable
for the producers of watches and jewellery to have the best products possible. If LVMH can gain
control of these suppliers they will be able to have complete control over the manufacturing
process, which will lower risk and will also enable them to ensure consumers that they are being
provided with the most luxurious and quality goods possible. Another opportunity for future
growth exists in forward integration, where LVMH could purchase some of the upscale stores in
Asia to gain the respect of consumers there and this will further increase their brand image to be
consistent with luxury.

Implementation Plan:
         The implementation plan for the chosen alternative consists of 7 phases. (See Exhibit --)
Extensive market research is required to determine which suppliers LVMH will acquire to
enhance the reliability, quality and overall luxury appeal of their products. Decision criteria will
be established to determine which suppliers and stores meet the criteria and the decision will be
left up to top executives. The capital needs must then be examined to determine how much it will
cost to acquire the companies. LVMH must relocate some of its employees to new areas because
these people will be responsible for ensuring the overall success of the acquisition. The brand
that LVMH has worked so hard to establish cannot be compromised by taking over these
operations, so LVMH must work to integrate their systems with those of the existing companies.
If the timing goes to the implementation plan it will take about 36 weeks to research, secure
funding and purchase these companies, with a budget of about $5,550,000.

Contingency Plan:
        The contingency plan consists of three trigger events that could cause a delay in
implementing the chosen alternative. The first event is that there could be resistance from the
suppliers that LVMH is trying to acquire. If this happens, LVMH will need to reassure the
suppliers that their employees will not be laid-off, just that an integration process will take place
so that LVMH has complete control of the inputs to their goods. The second trigger event is the
event that the watches and jewellery division will still fail to make profits in Asia. This could
cause management to reconsider their decision to spend money implementing this alternative. In
order to increase sales, management should advertise in Asia to let consumers know that they are
getting high quality luxurious goods. The third trigger event is resistance from employees. If this
happens, LVMH will need to ensure the employees that there will be no loss of their jobs either,
they should have meetings to educate their employees on exactly how the alternative will work if
it is implemented.