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.