PESTLE Analysis of the Luxury Goods Industry

GENERAL 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. 

PART A: LUXURY GOODS INDUSTRY

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 (Amsden, 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% (Arora et al. 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 (Dunning, 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 (Cyhn, 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 (Baumol, 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 (Bartlett et al. 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 (Christensen, 1997).

What are strategic implications for the forces analysis?

The luxury goods industry requires raw materials to produce their goods which lead to buyer-supplier relationships within the industry. The luxury goods industry requires to the productive manufacturers which can supply them with the raw materials that they need. Because the supply is not that abundant, then suppliers in the luxury goods industry are powerful. Another factor which has contributed to this is that the limited sources of raw materials are already controlled by the major players in the market, which makes the power of suppliers high in the luxury goods industry.

There are two major reasons why the power of buyers in the luxury goods industry is low. The first reason is that luxury goods are one of the most expensive things in the world. On the other hand, the second reason is that there are only a few major players in the global market who controls the major supplies of luxury goods in the whole world. Thus, buyers are forced to follow the prices dictated by the companies along with other rules in the market such as availability of the luxury goods to be offered to them. 

The possibility of new companies entering the industry influences the pace of the competition. Thus, the key is to evaluate the methods of entry and exit for a new player to the industry. Although any company should be able to enter and exit the sector, each industry presents different levels of difficulty influenced by economics. These unique characteristics of the each industry are referred to as barriers to entry which may come from different aspects of the business ranging from supplies to technology. They seek to reduce the rate of entry of new entrants which leads to maintenance of a level of profits for the existing players.

These are the luxury products which are available from other industries which can meet an identical or similar need for the consumers. They are unique because they are perceived as the best possible gifts for very special occasions such as engagements, weddings and anniversaries.

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

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

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. 

PART B

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.

Gucci will be the model business entity that will be used in this research based on their history in the luxury goods industry

Measuring Gucci’s Performance

a. Financial Analysis

In the fiscal year of 2003, Gucci was able to experience a significant progress in several key metrics. The inventory was reduced from million to million and inventory turns rose from 12 to 26. The cost of revenues, excluding the benefit from previous special charges and the applicable portion of the amortization of intangible assets, decreased from 72.3% of revenues to 67.8% of revenues. The combination of sales and marketing, research and development, and general and administrative expenses was reduced from $ 435 million to 9 million, while at the same time improving on the pace of innovation. Gucci’s total revenue has approximately grown from million in fiscal year 1995 to $ 871. 9 million in fiscal year 2003.

b. Marketing

The retailers in Europe represent Gucci’s largest sales and marketing channel which encompass national and regional office supply stores and mass merchants. Distributors represent Gucci’s second largest European channel and generally sell to both traditional and Internet resellers and retailers. In Europe and the US, Gucci’s market share is still relatively high. Gucci has more than 100 international distributors located worldwide.

            The company also uses online stores as a venue to sell its products. This is accomplished through the use of e-marketing campaigns and product bundles. The company is able to build awareness of its products and brands through mass media advertising, public relations efforts and branded Internet properties. The company also makes it a point to receive feedback from its customers through market research. The company then uses these feedbacks to refine its product development efforts and marketing strategies (Kotler et al. 1999).

c. Operations

Gucci out-sources all of the fashion designs of its products to third party manufacturers. This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, quality control and delivery to distribution centres. The company is assured that there is an adequate supply of components to manufacture its products. The majority of the company’s products are assembled in Italy and the US. Distribution centres are operated on an outsourced basis in Europe and the US.

d. Human Resources

Gucci knows that its future depends on the company’s ability to attract new personnel and retain existing personnel in key areas including engineering and sales. None of the company’s employees is subject to a collective bargaining agreement. The company considers its relationship to its employees to be good.

Gucci Company SWOT Analysis

Strengths:

• Gucci has products that boast of a very powerful retail. This includes a reputation for value of money, convenience and a wide variety of products


• Gucci has grown significantly over the years, and has experienced global expansion.


• Gucci’s main competence lies on the use of information technology (IT) to fully support its international logistics system. Therefore, Gucci can see how their individual products perform within the United States, or even at stores at a glance. IT also supports Gucci’s efficient procurement.


• Gucci is able to deliver good customer care, as the limited amount of work would mean plenty of time to devote to customers.


• Gucci’s lead consultants have established a strong reputation within the market.


• Gucci can afford to change direction quickly if its management finds that the company’s marketing strategy is not effective.


• Gucci has little deficits and overheads. Therefore the company can offer good value to customers on a consistent basis.

Weaknesses:

• Gucci is one of the world’s largest companies in luxury goods but has a weak control of its empire, despite its IT advantages. This could lead to a decrease in productivity in some areas where they have the least control of.


• Since Gucci sell products across many sectors, the company may lack the flexibility that some of its more focused competitors possess.


• Gucci operates globally, but its presence is located in only relatively few countries worldwide.


• Some of the company’s weaker branches lack market presence or reputation


• Some of the company’s personnel still lack the essential skills base in many areas.


• The company is still vulnerable to the temporary losses of its vital staff (e.g. being sick, leaving).


• The company’s cash flow is unreliable especially in the early stages of a new product development.

Opportunities:

• Taking over, merging, or forming strategic alliances with other luxury goods companies while focusing on strong markets like Europe or the Greater China Region.


• The branches of Gucci 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 Gucci 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.


• Opportunities exist for Gucci to continue with its current strategy of establishing large branches worldwide.


• Gucci is continuously expanding, with plenty of future opportunities to exploit for success.


• The local councils of Gucci are in the process of encouraging local businesses with work whenever possible.


• The competitors of Gucci may be slow to adapt to new luxury goods especially the ones that Gucci releases.

Threats:

• Being number one means that Gucci is the target of competition, the company to beat, both locally and globally.


• Being a global retailer means that Gucci might be exposed to political problems in the countries where the company has operations.


• The production costs of most consumer 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.


• The latest developments in information technology which could possibly change the markets might challenge the company’s ability to adapt to these changes


• A slight shift in focus of a large competitor might wipe out any market position that Gucci has achieved over the years. This could force the company to specialize in rapid response but good value services to local businesses. This would put so much pressure on the company’s consultancy staff to keep informed with the latest changes in technology where possible.

MARKETING MIX ANALYSIS

A. Product

Gucci’s dedication to quality for almost three generations now has led to the satisfaction of millions and millions of its customers worldwide. Gucci was created by a group of people who pursued the best quality and craftsmanship in terms of luxury goods designing and production. The various Gucci products that its customers patronize today are still being manufactured using nothing but the original and unparalleled raw materials discovered three generations ago by the Gucci family. Gucci’s durability and bright colors are obtained by using only the purest raw materials.

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The raw materials used in the production of Gucci luxury products are able to meet the high quality standards and specifications. The packaging materials where Gucci products are sold are also being subjected to strict quality standards.

In line to Gucci’s policies in product safety, appropriate measures are taken in the production process of Gucci and all of its brands to prevent the possible contamination of the products. Gucci manufacturing plants implement the principles of the HACCP (Hazard Analysis and Critical Control Points) system as a testament to their dedication to quality.

B. Promotion

Gucci has been able to maintain its reputation as one of the world’s leading luxury goods companies for more than 130 years now. It is able to face the challenges in many of its markets directly. This is made possible by the effective promotional and positional strategies aimed to deliver not only profit growth, but also on building down the foundation of Gucci’s brands and business.

The promotional campaigns and strategies of Gucci are focused mainly on driving the growth of its brands and improving the company’s financial performance. These campaigns have also helped secure significant acquisitions and partnerships. And more importantly, these campaigns have led to the release of the potentials of the company’s employees, thus building a quality performance- based culture.

The promotional strategies of Gucci’s local products are practically reinforced by the local employees themselves. These moves certainly allow the company to improve even more without the costs of introducing new technologies. These efforts have resulted in increased financial gains for the company and have allowed the establishment of distribution networks for both the local and international Gucci products.

C. Place

Gucci has grown and expanded virtually around the entire globe. This was made possible by their strong efforts to acquire smaller luxury goods companies and firms from other countries. Over the years and decades, Gucci has slowly but surely established an empire, with strong segment markets established in Asia and the Middle East, the Western Hemisphere, the Europe and most recently the Asia Pacific.

In Europe for instance, Heineken was able to achieve a broad market leadership through various acquisition deals over the years. The company also exerts efforts to communicate with their customers in every local culture about Gucci products and their impressions. And this is no easy thing because Europeans have different tastes in fashion and technologies. Therefore, Gucci products might not really have an appeal to them. This critical information gathered by Gucci paves the way for them to make the right decision regarding the appropriate strategies to pursue.

What are value chain implications for the corporation?

Gucci’s functions are based on a simple concept: that they could best understand consumer needs and efficiently provide the most effective luxury goods and products to meet those needs by selling directly to customers. This direct business model eliminates retailers, who adds unnecessary time and cost, and also allows the companies to build every system to order, offering customers powerful, richly designed luxury products at competitive prices. Gucci introduced the latest relevant technology much more quickly than companies with slow-moving, indirect distribution channels, turning over inventory an average of every four days.

The traditional value chain in the luxury goods industry is characterized as “build-to-stock.” Gucci design and build their products with preconfigured options based on market forecasts. Products are first stored in company warehouses and later dispatched to resellers, retailers, and other intermediaries who typically added a 20–30 percent markup before selling to their customers.

Gucci commands the upstream part of the value chain, while giving the downstream part to middlemen (resellers, retailers and other intermediaries). Retailers justify their profit margins by reasons that they also give free several benefits to customers: easily accessed locations selection across multiple brands, opportunity to see and test products before purchasing, and knowledgeable salespeople who could educate customers about their choices.

CONCLUSIONS AND RECOMMENDATIONS

Gucci has been able to remain one of the world’s leading luxury goods companies for more than a century now primarily because of the execution of the company’s branding and positioning strategies to perfection. Add to the mix the company’s dedication to high quality of service and the formula for success is at hand.

However, I am not totally convinced that the branding and positioning strategies Gucci implements currently would be as effective as before. For one, consolidation and globalization are taking place across most industries, and the luxury goods industry is not excluded. Gucci, as a leader in their industry, has implemented various strategies to fully adapt to the need to go global.

 I suggest that Gucci should implement a more sober approach to maintain consumer loyalty with their local brands. There is nothing wrong with building new loyalties with the other global consumers. But there are instances where the local market is often neglected. As a result, local consumers will tend to develop a bad impression about the company and its products. While it is good to acquire new firms, it is even better to keep and maintain the older and more established markets. This way, the empire of Gucci will remain unscathed amidst the advent of consolidation and globalization.

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