OBJECTIVES
As a person with knowledge of the luxury goods industry, the author has always brought up to his superiors the viability of strategy formation regarding the analysis of this industry and at times fail to understand the reasons or logic behind certain strategic implementations imposed on it.
By delving into this project paper, the author intends to have better insights into how the strategic analysis of the luxury goods industry is thought up, formulated and then imparted down. The author hopes to have an in-depth understanding as to how the strategic analysis of the luxury goods industry enables companies and organizations in this business to compete effectively and profitably in this era of internationalization where competition is extremely intense.
In order to reinforce the learning objectives, two key focal issues were focused upon i.e. innovation and diversity. Innovation was discussed with regard to the strategic analysis of the luxury goods industry where it was renowned for its developmental capabilities to constantly innovate. Diversity came under strategic thinking and formation as the author considered the diverse culture, political climate, economic surroundings, social environment, technological settings, government policies and legal systems in order to better understand the issues being discussed.
EXECUTIVE BRIEF
This paper utilized the luxury goods industry as the model industry to review its present impacts and opportunities and how it dealt with critical situations. From the analysis, key trends in the luxury goods industry were then identified, how it worked and its effectiveness in dealing with critical situations was ascertained. The paper then moved on to assess the luxury goods industry with regard to its suitability to critical situations, during which the internal capabilities of the industry in relation to the strategy being followed was determined also. An overall analysis of the performance and effectiveness of the luxury goods industry was also conducted to assess and compare the strengths and capabilities of the industry with those of others. Gaps in the luxury goods industry and environment were then identified.
Finally, several choices of strategies to improve the status of the luxury goods industry as effective means in critical situations were recommended and evaluated in terms of appropriateness to the issues reviewed, feasibility in carrying out the options and acceptability within the key stakeholders and decision makers. Several key implementation issues related to managing strategic change were also addressed as well.
INTRODUCTION
The luxury goods industry over the years has developed an efficient and effective process of implementing the policies and tasks necessary to satisfy its consumers and management of companies and organizations. There has been a recent focus on the careful management of the processes involved in the production and distribution of luxury products and services within the industry.
More often than not, small luxury goods companies don’t really have the capabilities to implement operations management. Instead, these companies engage in activities that various schools of management typically associate with operations management. These activities include the manufacturing of products, product development, production and distribution.
However, operations management deals with all operations done within companies and organizations. Activities such as the management of purchases, the control of inventories, logistics and evaluations are often related with operations management. A great deal of emphasis lies on the efficiency and effectiveness of processes. Therefore, operations management includes the analysis and management of internal processes.
Detailed Analysis of the Macro-Environment (PESTLE Analysis)
Political Trends
The luxury goods industry has experienced electoral and political transitions and crises in the last 12 months. There have been at least four political trends that have emanated from these political events. These are: (a) the cry for democracy and reforms; (b) increased popular and local-level assertiveness; (c) greater public accountability; (d) re-definition of the concepts of power and politics. Also, the forms of political economies have slowly shifted from a bipolar (big government-big business) to a tri-polar structure (authorities – private sector – civil society).
The implementation of the Free Trade Area, which laid out a comprehensive program of regional tariff reduction, will be continuously implemented in phases through the year 2008. Over the course of the next several years, the programs in tariff reductions were made broader. Efforts to eliminate non-tariff barriers and develop common product certification standards were initiated. In addition, ASEAN also was able to formulate framework agreements for the intra-regional liberalization of trade in services. Industrial complementation schemes meant to encourage intra-regional investment were also approved ( 2001).
Economic Trends
Despite the adverse economic trends in the first half of the year, the luxury goods industry as a whole experienced relatively robust economic growth. It is estimated that the ASEAN countries, taken together, posted a better-than-expected GDP growth of 4.5% last year, slightly higher than the 4.1% growth that they achieved in 2002. Last year, Vietnam was the fastest growing ASEAN country, with an estimated GDP growth of 7.3%, followed closely by Thailand with a GDP growth of 6.7%. In other countries, GDP growth ranged from about 1% to 5%.
Many countries have also seen the risk-weighted capital adequacy ratios of their banking systems improve due to government-sponsored bank recapitalization programs, continued progress in financial restructuring, and improvements in financial risk management. The capital adequacy ratio of commercial banks in these countries is now far higher than the 8% Basle norm. It ranges from about 14% in Malaysia and Thailand to about 20% in Indonesia, with the Philippine commercial banks reporting an average capital adequacy ratio of about 18% ( 2001).
Social / Cultural Trends
There have also been social and cultural trends that have been evident over the last 12 months in the luxury goods industry. These include: (a) the irreversible rise of civil society among ASEAN countries; (b) the rise of civil society blends perfectly with a tri-polar structure of political economy; (c) the increase in the roles of intellectuals; and (d) the beginning of a period of introspection.
Technological Trends
It is a common knowledge that the luxury goods industry is still a relatively new industry and is still in its early stages of development. However, it has shown signs of rapid growth and it is being estimated that there will be more than a million mobile devices that will be shipped within the year. And it is further being expected that within the next years the tremendous growth and technological advancements will continue in the mobile world. Mobile commerce and multimedia terminals are just some of the technological advancements already being expected. Therefore, the continued growth and development will also make it imperative for localization to occur in the luxury goods industry in the years to come ( 1993).
Legal Trends
Intellectual property (IP) and IP Rights (IPR) creation, commercialization, and protection have been a significant source of comparative advantage of enterprises and economies and a major driver of their competitive strategies. Indeed, countries all over the world are fully aware of the pressing need for a long-term policy commitment to collectively transform the luxury goods industry into one which is largely based on knowledge, driven by innovation and sustained by life-long learning (2002).
Countries all over the world have pledged to work together to help accelerate the pace and scope of IP asset creation, commercialization and protection; to improve the regional framework of policies and institutions relating to IP and IPRs, including the development and harmonization of enabling IPR registration systems; to promote IP cooperation and dialogues within the region as well with the region’s Dialogue Partners and organizations; to strengthen IP-related human and institutional capabilities, including fostering greater public awareness of issues and implications, relating to IP and IPRs.
Detailed Analysis of the Industry Environment
The assessment of the industry attractiveness is performed using the Porter’s Five Forces Model.
A. Threat of New Entrants
New entrants in the luxury goods industry will have to deal with high costs of entry for their latest technologies. Most major competitors in this industry have yet to establish strong distribution channels. This will severely hamper their plans to retaliate with their technological developments as without distribution channels, their products would never be seriously considered in the market by customers. These companies must worry though about certain government laws in some countries that might weaken their competitive position ( 2002).
B. Bargaining Power of Suppliers
Suppliers of luxury goods have relatively lower bargaining power because their products have yet to establish consistency in the market. This is in contrary to ordinary brands where these products have been able to secure the confidence of its customers worldwide.
C. Bargaining Power of Buyers
A majority of consumers in the luxury goods industry are professionals who rely on mobile and expensive gadgets and expect seamless services every time they use them. For instance, a customer phones in a service request from the New York airport while boarding a plane bound to Paris the same day. The technical people in New York will immediately work on the service ticket of the client. And when that client arrives in Paris, he / she would be able to call the New York service center and pick up exactly where he / she left off (1999).The bargaining power of buyers in the luxury goods industry is relatively high because there are only few, large players in the industry.
D. Threat of Substitutes
There are very little threats that could emerge from possible substitutes. This is because product-for-product substitution could not possibly happen especially with luxury goods. Other products cannot simply replace the ingenuity of the established luxury products in the market. Also, the millions of users of these luxury products surely would find it too uncomfortable using other products other than their luxury products (1997).
Luxury Goods Industry SWOT Analysis
Strengths:
- has products that boast of a very powerful retail. This includes a reputation for value of money, convenience and a wide variety of products
- has grown significantly over the years, and has experienced global expansion.
- main competence lies on the use of information technology (IT) to fully support its international logistics system. Therefore, companies in this industry can see how their individual products perform within the United States for instance, or even at stores at a glance.
- is able to deliver good customer care, as the limited amount of work would mean plenty of time to devote to customers.
- Products have established a strong reputation within the market.
- Offers little deficits and overheads. Therefore the companies in this industry can offer good value to customers on a consistent basis.
Weaknesses:
- is one of the world’s largest industries but has a weak control of its empire, despite its IT advantages. This could lead to a decrease in productivity in some areas where it has the least control of (2001).
- Since companies in this industry sell products across many sectors, they may lack the flexibility that some of its more focused competitors possess.
- operates globally, but its presence is located in only relatively few countries worldwide.
- Some luxury goods lack market presence or reputation
- The company’s cash flow is unreliable especially in the early stages of a new luxury product development.
Opportunities:
- Taking over, merging, or forming strategic alliances with other luxury good companies while focusing on strong markets like Europe or the Greater China Region.
- Luxury good companies operate only on trade in a relatively small number of countries all over the world. Thus, this would open the opportunities for future businesses in expanding various consumer markets, such as those in China and India.
- The opening of new locations and branches offer luxury good companies the opportunities to exploit market development. This could lead to the diversification of the company’s branches from large super centers to local-based sites (2001).
- Opportunities exist for luxury good companies to continue with their current strategy of establishing large branches worldwide.
- The industry is continuously expanding, with plenty of future opportunities to exploit for success.
Threats:
- Being number one means that the luxury good industry is the target of competition, the industry to beat, both locally and globally.
- Being a global retailer means that luxury good companies might be exposed to political problems in the countries where the company has operations.
- The production costs of most luxury products have the tendency to fall because of lower manufacturing costs. Manufacturing costs fall because of outsourcing to low-cost regions around the globe. This phenomenon could lead to competition in prices, which in turn would result in the deflation of prices in various ranges. Intense price competition must definitely be considered a threat (1997).
OPTIMISTIC AND PESSIMISTIC SCENARIOS
Deriving from the analysis between the luxury goods industry, operations management and capabilities of the industry involved, many positive and negative scenarios would become imperative. It is therefore essential to evaluate these scenarios as to whether they are appropriate to the issues addressed, whether they are feasible enough to be implemented and their acceptability to key stakeholders.
A. Optimistic Scenarios (10 years from now)
Since there are potentials of merging and acquisitions that could happen among the companies within this industry, there is definitely a need to reconcile both the inside-out and outside-in capabilities. While most luxury goods companies’ operations management involves focusing on their core competencies with market position following their resource base, they will be put into a disadvantageous position should they choose to neglect both the macro as well as the luxury goods industry environment. Therefore, in ten years, it is expected that operations management changes, as well as changes in political, economic, legal and even demographic trends within the industry will occur in order to develop the outside-in capabilities of the luxury goods companies, such as market sensing, customer linking, channel bonding and technology monitoring.
The advantages enjoyed by the luxury goods companies may come in the form of increased revenues. Knowing what the market demands and the latest trends could help these companies fully exploit their research and development capabilities to come out with luxury products which are not only cost-effective but also high in quality within the next ten years. The strategic option can even be used as marketing tool where the focus is on staying close to their customers and listening to their feedbacks. On the flip side of the coin, there will be huge mobilization of resources involved, and the associated risks bestowed on the companies.
Nevertheless, the mentioned optimistic scenario seems the most evident to happen in the wake of globalization, since there is a sudden shift towards a more integrated and independent world economy. The key stakeholders too should not have any objections so long as the industry’s core business is not threatened. By virtue of the industry’s centralized control of its business, it is being expected that major barriers should not exist in carrying out such an option except additional time may be required given the scope and span of operations.
Understanding the strategic importance of operations management is something the luxury goods companies has to be familiar with. These companies normally practice a centralized and globally scaled configuration of operations and capabilities. This allows information dissemination to be retained.
B. Pessimistic Scenarios (10 years from now)
A tie-up or merger with various luxury goods companies offers tremendous benefits in terms of access to their operations management policies, infrastructure and even its resources. However, this scenario might become difficult to achieve within the next ten years, since every company might be in danger of losing sight of its core competencies while pursuing these tie-ups. This will result in jeopardizing the image of these companies.
Meanwhile, the collaboration of luxury goods companies with its major competitors can be seen as a brilliant move at first. However, upon close examination, this move could pave the way for luxury goods companies to experience a decline in its operations management. The bottom line is both sides wouldn’t be able significantly gain in such an alliance because of copying of ideas and information leakage. For instance, a company’s strengths in luxury product development combined with the operations management capabilities of their competitors can transform them suddenly into an unbeatable force to reckon with. One possible setback, however, is the differences in the cultures of the companies involved. Another possible setback could be whether any of the company’s competitors has the need to form alliances.
CONCLUSION
The results of the analysis carried out on the luxury goods industry indicated very significant effects, even amidst the threats of unrest. Therefore, we could conclude that the luxury goods industry could still be expected to improve faster than an average of ten years.
The review of the industry’s capabilities and resources revealed very little inconsistencies regarding its strategies. This is coherent with its traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now for the luxury goods industry.
The analysis among the environment as well as the operations management and capabilities of the luxury goods companies revealed certain gaps, most of which are biased towards the environment. However, these gaps paved the way towards determining a number of recommended strategic options to secure the competitiveness of the industry.
Also, luxury goods companies have to find a balance between adherence to internal forces within the management and to the changing forces of the environment in order to implement such strategic options.
Credit:ivythesis.typepad.com
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