MM 5012 BUSINESS STRATEGY AND ENTERPRISE MODELLING

THE NATURE OF PARENTING ADVANTAGE IN LUXURY FASHION RETAILING

CASE STUDY: GUCCI GROUP NV

SYNDICATE 6

ANANDITA ADE PUTRI 29112476

RIZANUL IKHWAN SIRAIT 29112478

FERRY KRISNA ARIANTO P. 29112479

LIVANI PUTRI D. 29112502

WAIZAL QORNIE PRATAMA 29112618

HARRY PANANGIAN S. 29112561

ASWIN AGUSTINUS 29112567

MASTER OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT

INSTITUT TEKNOLOGI BANDUNG

2014

1. Case Synopsis

Gucci was founded in Florence in 1923 first as a manufacturer and retailer of

fine leather goods. The first store was outside of Italy, then opened in London (1967),

followed by many others in the important world centres. With its association with

royalty and film stars, the Gucci brand had become synonymous with luxury (Forden,

2000).

By the late 1980s, Gucci was in disarray. In 1995, Domenico De Sole was

hired as President and Chief Director and Tom Ford was promoted from Assistant to

Creative Director to affect turnaround. During the years, De Sole and Ford used their

skills in luxury brand management and established the internal resources for the

exploitation of Parenting Advantage whenever the company extended to become a

luxury brand group in 1999.

Moore and Birtwistle (2005) focused on Gucci to study the nature of

Parenting Advantage in luxury fashion. They reviewed Guccis annual reports and

other secondary information sources and identified the ten-year renaissance in Gucci.

They argued that there is an intrabusiness group synergy in Gucci and this synergy is

crucial for saving Gucci from the financial crisis that it faced at that time. They also

established a multidimentional luxury fashion branding model which identifies

various critical components and their interactions for luxury fashion brands. They

believed that their proposed model can help luxury fashion brands to better shape the

branding strategies and develop a competitive edge.

The relationship between parent company and its subsidiaries is more than

how subsidiaries give benefit to the parent. Therefore, experts have been research how

parent companies contribute to the achievements of subsidiary competitive

advantages. The fundamental role of the parent is to create value for the subsidiary,

due to influence the decisions and strategies of its business, while standing between

these business and those who provide capital for their use.

Parenting advantages necessary depends upon the strategic fit that matches the

core skill, expertise and resource of the parent company with the improvement

requirement of the subsidiary company. Realization of parenting advantage

necessitates a consideration of the skills available to the parent company that may be

of strategic use to the subsidiary as well as the mechanism which facilitated the

transfer of this from the parent to subsidiary.

The approaches of value creation from parent to subsidiary are:

- Stand alone influence

- Linkage influence

- Functional and service influences

- Corporate Development activities

2. Issues and Problems

In 1994, Gucci made losses in excess of US $40 million and faced bankruptcy,

while a decade later the company emerged as the Gucci Group, one of the most

important luxury brand groups. Gucci reached sales in excess of US $2 billion and

five-year average annual operating profits exceeding US $200 million (Gucci Group

Annual Report. 2004).

The transformation of Gucci in the period from 1995 to 2004 was achieved in

three distinct phases, Gucci Brand Stabilisation Phase, Multi-Brand Acquisition

Phase, Gucci Group Consolidation Phase. The first phase, from 1995 to 1999,

marked a period of brand stabilisation. Management re-established the integrity and

luxury equity of Gucci through their consistent control and investment strategy. They

developed formidable expertise in product development, supply chain control, brand

communications and luxury fashion retailing. These core luxury brand management

skills made Gucci attractive to other businesses and close rivals, LVMH and Prada.

Another interested party, the French brand conglomerate, Pinault-Printemps Redoute

(PPR), formed a strategic alliance with Gucci in March 1999. PPR acquired a 42%

stakes in Gucci for US $9 billion.

The multibrand acquisition phase (November 1999 to July 2001) is when

Gucci signalled their emergence as the Gucci Group. The company acquired equal or

majority shareholdings in 10 companies to form the Gucci Group NV, the worlds

second largest multi-luxury brand conglomerate. (measured by share of the luxury

goods market)

Finally, the third period from August 2001 to April 2004 is Gucci Groups

consolidation phase, when the company sought to exploit group resources

management; production and logistics; distribution to build these brands, which

over time can contribute meaningfully to Group returns. With their expertise in luxury

fashion brand management, the Gucci Groups strategy was to bring the skills and

advantages of the parent company to their subsidiaries.

3. Analysis

3.1 Parenting Advantage

How subsidiary companies benefit from the interventions and directions of

the parent company, also how their value may be enhanced as a result of that

relationship. Within the context of value creating relationship, it also explain

how parent companies contribute to the achievements of subsidiary

competitive advantage.

Another simple mechanism for identifying the value created by the parent,

they purpose the better-off test to understand how the subsidiary is better-

off as a result of its connection with the parent company. In their view, the

business unit should gain competitive advantage from its link with the

corporation or vice versa. The combination should result in value creation.

The achievement of parenting advantage necessarily depends upon the

strategic fit that matches the core skills, expertise and resources of the parent

company with the improvement requirements of the subsidiary company. This

strategic fit is a dynamic connection that evolves and adapts in response to

changes in the competitive environment.

3.2 Business-Level Strategy

A firm must have an integrated and coordinated set of commitments, also

actions, uses to gain a competitive advantages by exploiting core

competencies in specific product markets, or calles as a business-level

strategy. Strategic competitiveness results only when the firm is able to satisfy

a group of customers by using its competitive advantages to compete in

markets. Therefore, Guccis management must have effective relationship

with customers by answering questions related to the issues of who, what and

how.

Deciding who the target customer is Gucci intends to serve by

considering demographic factors (age and income), social economy (high-

income), psychological (lifestyle, personality), and consumption pattern

(heavy, moderate).

After decided who it will serve, Gucci must also identify the targeted

customers needs (what), that is luxury goods. Gucci must determine which

customers needs to have luxury goods which will have benefit on prestige

esteem with the very best product features from the raw materials. Thats why,

people who is Guccis loyal customers, willing to pay premium prices to get

the value of Guccis products.

Gucci also use its core competencies (how) to implement value-creating

strategies and thereby satisfy customers needs. Gucci created sophisticated

store consumption experience, that was dramatic and highly recognizeable.

And, ensure that all products are presented to customers in a way that

capitalizes on the exclusitivity and ultimate allure of the brand.

Focused diferentiation streategy chosen by Gucci group where they can

differentiate their products in many ways. Gucci also must be able to complete

various primary and support activities of each brands consolidated in a

competitively superior manner to develop and sustain a competitive advantage

also to earn premium returns. The activities required used by Gucci are the six

key dimensions that defined their brand stabilization strategy, which are:

a. Re-established control of Gucci product design and manufacture

b. Re-established control over Gucci product distribution

c. Create a balanced product portfolio for a luxury brand

d. Establish a luxury marketing communications platform

e. Create a luxury brand consumption experience

f. Hiring Tom Ford as a creatuve director to design direction and

control

Furthermore, this strategy also has purpose to create difference

between the firms position and those of its competitors, by perform

activity differently or perform different activities.

3.3 Corporate-Level Strategy

Gucci uses a related diversification strategy that may gain market power

using their related linked strategy which is a moderate to high levels of

diversification. Not only the diversification level that can be shown, it also

related to connection between brands among their core business. Related

linked strategy means less than 70% of revenue comes from the dominant

business (Gucci) and there are only limited links between businesses.

Gucci Group has subsidiaries offices in Milan, Paris, London, Hong Kong,

Japan and New york. All of those area is a main district for global fashion

industry, and for reach market power as well as increase market size, Gucci

implement international corporate strategy; global strategy. Gucci markets its

products using the same material and production processes, even for the

prices. Gucci treats the world as largely one market with little loval variation.

With careful management on production process and distribution, Gucci

becomes one of the worldwide premium brands in the luxury goods industry.

3.4 Acquisition

Gucci engaged in an luxury brand acquisition strategy that had been done

before, in terms of speed or its scope. The acquisitions which transformed

Gucci from their single brand status to become a multi-brand luxury goods

group. With this strategy completed, the company proposed a tripartite-brand

categorisation of acquire brands which identified declining brands such as

Yves Saint Laurent (which have over extended and required the rejuvenating

inputs of Gucci management); emerging brands such as Alexander McQueen

and Stella McCartney (which would provide for future growth and healthy

returns); and complementary brands such as Boucheron and YSL Beaute

(which would afford synergistic opportunities in manufacturing and

distribution).

Gucci believed that the acquisition will bring skills to advantage each

category of the brand and the group-synergies would provide positive benefits

for the group as whole. Each brand was acquired for its potential to generate

outstanding value for our shareholders through sustainable profit growth,

return in excess of our cost of capital and minimal short-terms earnings

dilution.

Equity strategic alliance chosen to be implemented in Gucci

consolidation phase, where each brands own different percentages of Gucci

holding shares by combining some of their resources and capabilities to create

a competitive advantage.

3.5 International Strategy

The importance of international strategy is as a source of strategic

competitiveness and focuses on the incentives to internationalize. The four basic

benefits from this strategy are increase market size, greater return on major capital

investment, competitive advantage through. Global strategy is a method implemented

by Gucci designed as a belief that the world as one market which doesnt have any

tangible difference between region or places. Gucci have center strategy on market

globalization by focusing on standardization of the market of luxury goods and

generalization relating to the global luxury goods industry. Gucci have adopted an

international marketing strategy of communicating a consistence image to its

customers around the world. To sustain the consistency Gucci has concentrate

marketing operation to Florence, Italy which provide all creating materials

Gucci make its product available to the public through 4 main distribution channels

Direct operated store, Franchise stores, Duty-Free boutiques and Department stores.

4. Conclusion and Recommendations

Relationship between parent company and its subsidiaries is more than how

subsidiaries give benefit to the parent. The fundamental role of the parent is to create

value for the subsidiary, due to influence the decisions and strategies of its business,

while standing between these business and those who provide capital for their use.

The main problem explode 1994, Gucci made losses in excess of US $40

million and faced bankruptcy. To solve it, it divided to 3 phase; first phase, from 1995

to 1999, marked a period of brand stabilisation. Second, the multibrand acquisition

phase (November 1999 to July 2001) is when Gucci signalled their emergence as the

Gucci Group. The third period from August 2001 to April 2004 is Gucci Groups

consolidation phase.

With the context of value creating relationship, it explain how parent

companies contribute to the achievements of subsidiary competitive advantage.

Guccis management must have effective relationship with customers by answering

questions related to the issues of who, what and how. Gucci also uses a related

diversification strategy that may gain market power using their related linked strategy

which is a moderate to high levels of diversification. Not only the diversification level

that can be shown, it also related to connection between brands among their core

business

Equity strategic alliance is chosen to be implemented in Gucci consolidation

phase, where each brands own different percentages of Gucci holding shares

(combining some of their resources and capabilities to create a competitive

advantage). Gucci make its product available to the public through 4 main distribution

channels; Direct operated store, Franchise stores, Duty-Free boutiques and

Department stores.

Recommendation

Gucci can not depends on one figure (Tom Ford)

Secure full creative control

Keeping customers loyalty by effective marketing communication

Directly operated store

Keeping onto cutting edge designer

5. Lessons Learned

Luxury brands have a heightened status that allows the opportunity to charge

premium prices. A luxury branding needs to have the following: iconic/product

design, history/culture, marketing, premium pricing, control and product

manufacturing, control on sales area, and it should have product design, status, client

relationship management. Premium pricing is a defining and non-negotiable

dimension of luxury fashion brand positioning. Creating luxury brands is a difficult

marketing exercise, it requires heavy investment in marketing communications,

excellent product/service quality, but above all these brands have to try to remain

fashionable, which is notoriously difficult, These brands have to adopt innovative

marketing strategies in order to succeed in this dynamic environment.

Because of limitation of growth as single brand company, so making the

strategic alliance to create a multi brand luxury and the requisite skills is a perfect

way to increasing the competitve advantage. Contribution of evocative and often

controversial advertisements can be the reason of luxury brand status. The prestigious

pricing of their products creates a high quality image and positions the goods in the

mind of the consumer as a status symbol.

The success of Gucci can be attributed to quality of service, brand image,

retail environment, management structure, yet above all their ability to combine these

factors to create an exclusive experience. The transfer of branding skills and the

fostering of intra group synergies are the principal dimensions of parenting advantage

in the gucci group. Different sets of businesses needs unique parenting approaches to

run operation effectively, gain competitive advantage, and maximize corporate value,

parenting advantage concept has also been aplied to more specialized corporate tasks.

The concept of parenting advantage offers a clear framework and guiding principle

for corporate-level decision making, including corporate portofolio management and

corporate organization.