Evaluate The Corporate Strategy Being Pursued At Lvmh Business Essay

Evaluate The Corporate Strategy Being Pursued At Lvmh Business Essay LVMH Moet Hennessey Louis Vuitton, a famous luxury corporation found by Bernard Arnault in 1984. At present, a host of famous brand name peoples are associated with LVMH such as Louis Vuitton, Christian Dior, Givenchy, Celine, Guerlain, Tag Heuer, Moet et Chandon, Pommery etc. In the following statement, it is aim at evaluate the corporate strategy being pursued at LVMH. In order to have an in-depth analysis, it will have a brief identification of corporate strategy in LVMH and an explanation of the rationale for the strategy in the beginning. Based on those parts, it will have an evaluation of corporate strategy at LVMH. Summary statements of strategy In the following, it is going to identify the nature of the corporate strategy being implemented at LVMH. The first part is going to explore the composition of LVMH. The composition of LVMH According to the case, LVMH group had covered a large spectrum of business by commencing an active external growth strategy towards luxury product companies with high development potential. It also used an acquisition strategy to narrowly focus on luxury brands for increasing the existing portfolio of the brands. LVMH group consists of a smattering of individual brands in five different products and services Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewelry, and Selective Retailing. In between, these brands are grouped into different clusters. It also comprised two Paris department stores La Samaritaine and Le Bon Marche; the DFS duty-free chain and Sephora perfumery chain. These had showed that LVMH is a really big company operated in the luxury business. Besides, LVMH had pursued a corporate sponsorship strategy, which supporting a wide array of public interest initiatives and aimed at the revitalization and promotion of Frances artistic heritage. It had also sponsored a host of exhibition and retrospectives in order to spreading its central mission Western Art de Vivre. The meaning of that is a sense of style, a vivid connection with the past and its tradition, transferred into the present. It is the cult of beauty and creativity at every level, combining ancestral know-how and craftsmanship with modern and a passion for quality, referred to case. This philosophy perpetuated the tradition of the most ancient and refined craftsmanship. LVMH provided a financial aid, LVMH Young Artist Award to art students for fostering the cultural instinct of young generations into talents, especially in fine arts and music. To strive promote young talent, LVMH supported young virtuosos by lending them Stradivariuses from its collection and organizing concerts. It sponsored a complete MBA program in luxury goods management at the top French business schools, ESSEC in order to create the future recruitment. The corporate centre manages the strategic business units Here comes to the second part to discuss about the corporate centre manages the strategic business units (SBUs). SBU is a division of the organization that has a unique business mission, product line, competitors, and markets relative to other SBUs in the same corporation (Johnson et al 2008). According to Mintzberg et al, the corporate strategy is the pattern of discussions in a company that determines and reveals its objectives, purposes or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers, and communities. (Mintzberg et al 2002) From the above summary of LVMH cover a large spectrum of business, the group seems to adopt the portfolio approaches. LVMH has to acquire new companies continuously with new profitable business and invested into a medium or long-term view, aim to strengthen the cash flow and develop its diversity and a balanced portfolio in terms of risks. A number showed that LVMHs profit had grown by 500% in eleven years and had multiplied 15-fold under the Arnaults way of running this approach. Now, it is going to review on LVMH major policy in central functions. referring the case, being as a group, commencing of synergies had created strengths within different branches, attract and retain the best talent worldwide. The Group allowed the branches to share the variety of departments provided by Headquarter. The synergies policy made every company benefited from Group resources and synergies in different categories, such as financial resources, administration (shared service centers), purchasing, RD, advertising negotiation, production, retail networks etc. Companies can be done at Group level to get specific support instead of go to the Headquarters. Explain the rationale for the strategy Approaches to corporate level strategy There are three different approaches when choosing corporate level strategy: Portfolio approach is based only on financial synergy; Linkages approach is based on operational approach and Core competencies approach is based on sharing organization-wide core competencies (Mintzberg et al 2002). According to the case, LVMH is adopted the portfolio approach which is based only on financial synergy. The Corporate centre acts as a financial investor in a set of autonomous businesses. It also adds value by keeping strict financial control and attempts to achieve a balance of businesses across the life cycle and with complementary financial needs (Mintzberg et al 2002). Boston Consulting Group (BCG) matrix There is one way to evaluate the corporate-level strategy to compare and evaluate each individual investment in the portfolio to determine whether or not the investment is currently performing to expectations and what the future prospects are for the investment. The Boston Consulting Group (BCG) matrix is a relatively simple technique for assessing the performance of various segments of the business (Johnson et al 2008 and Advameg Inc 2010). It classifies business-unit performance on the basis of the units relative market share and the rate of market growth as shown in Appendix Figure 1. The five different LVMH business spectrums are put into the four quadrants. The perfumes and cosmetics spectrum is as a question mark, which had the lowest market growth within other spectrums, compared with Figure 2. The strategy for these products have to continually gain market share through strong communication and innovation in this spectrum such as new product launching, new product line or strengthen existing products. A high market share becoming a BCG matrix star and it is belongs to Fashion and leather goods, which means this spectrum has a high-growth market. Stars can generate large cash flow for the business, as same as the largest account for the revenue from LVMH in Figure 2. Stars are the targets of large expenditures for advertising and research and development to improve the product and to enable it to establish a dominant position in the industry. For instance, Louis Vuitton entered into new markets, Lebanon and Dominican Republic; accelerate global expansion of Marc Jacobs; and to maintain policy of targeted investments and rigorous cost management for other brands. The spectrum of Watches and Jewelry is located at the middle of star and question mark, which has the high potential in market growth but account for a little market share. The strategy is to continue gain the market share, pursue up-market positioning through strong innovation and selective expansion of mono-brand store network. Cash cows are Wine Spirits and Selective Retailing spectrums that have high market share in a low-growth market. They are usually well-established products with wide consumer acceptance, so sales revenues are usually high. LVMH has to continually maintain rigorous management of costs and inventories and increase marketing programs like e-commerce in order to retain the market growth. Dogs are the businesses with low market share in low-growth markets. In LVMH, no one is belonging to this quadrant. Diversification Diversification is a strategy to increases the corporation scope radically from existing markets and products (Johnson et al 2008). It is the most radical strategic direction and more value creating than others. According to Porter, there are also three tests for diversification. Attractiveness test is the business which must be structurally attractive or capable of being made attractive. Cost of Entry test is the cost of entry must not capitalise all the future profits. Better-off test is either the new unit must gain competitive advantage from its link with the corporation or vice versa (Porter 1987). LVMH has the below reasons for diversification with potential value-creating. Efficiency gains: LVMH keep its companies at human size and group them in a separate Business Groups or Branches, allow the brands in each business to coordinate strategies and develop synergies with common interests such as research, purchasing, logistics and international distribution. Companies can take the benefits from synergies to share the existing Group resources once acquired new companies. It allows sharing variety departments and resources such as financial, administration, RD etc. Sharing resources can help LVMH to experience the economies of scale to reach efficiency and effective into a new activity (Johnson et al 2008). Stretching corporate parenting capabilities: LVMH had a wide range of business covering fashion, wine, perfumes to financial media that share very few operational resources or competences but creates value by adding parenting skills. The philosophy of creativity and the nurturing of creative talents are relevant to each business spectrum. Increasing market power: LVMH is obviously gaining market power with a diverse range of business by acquired new companies, invested with a medium or long-term view. The investments had permitted LVMH to finance in new development and strengthen cash flow that developed a balanced and diversified corporate portfolio. In order to increase the market power, the group expansion and the development of new subsidiaries had supported around the world. Value-adding to LVMH In this part, it is going to identify the activities by LVMH can add value. Envisioning: LVMH provide a clear vision that guide and motivate the business to maximize corporate-wide performance. The vision in LVMH is product quality, creativity, image, entrepreneurial spirit and the willingness of its people to always question their achievements and the striving to be the best, which is indissolubly linked to the entrepreneurial spirit. Each company was free to adopt the marketing and retailing strategies best suited to its needs, capitalize on distinctive positioning. Coaching and facilitating: can help to develop strategic capabilities by improving skills and confidence. It can also facilitate cooperation and sharing across the business. In order to provide high-caliber training to the employees, the group institutes a comprehensive training program in several regions such as Paris, Hong Kong, Tokyo to focus on development of personnel management and integration of LVMH. In addition, it launched a Global Leadership Program in order to step up the professional development of the most promising future executives through discussions on risk-taking and innovation moderated by business group leaders and the CEOs of Group companies. These kinds of programs are provided opportunities to learn management skills and build relationships for the group. Providing central service and resources: LVMH offer opportunities to management-level employees with internal mobility within the company, transferred to new position within the group by developed with special assignments to facilitate broadening of experience and perspective. It allows the employees to work for a defined period in a company and enable them to have varied and changing work environment and tasks. Intervening: Once the new graduates come into the company on management level are immediately given real jobs but not send to have training program first. It helps to find out if someone is not suitable for the work quickly at LVMH or find the initial responsibility too overwhelming leave soon. The way is helping them to find the people are interested by being part of something, have a dream to be achievable so that it becomes challenge to work at LVMH in order to monitor the performance and encourage performing better. Evaluate the corporate strategy being pursued at LVMH According to Rumelt, there are four criteria for strategy evaluation: Consistency: The strategy must not present mutually inconsistent goals and policies. The atmosphere of LVMH vision is scattering in each company. Its autonomy disciplines and the philosophy of creativity also bring employees loyalty toward working at LVMH. People in the group tended to have a strong feeling of ownership of their brands and cherished that they contribute to the development of the company without a lot of bureaucratic procedures and constraints. (Rumelt, 1980) Consonance: The strategy must represent an adaptive response to the external environment and to the critical changes occurring within it. LVMH had a foresight that hired new designers to run conservative traditional business become as profitable. Marc Jacobs had created new lines of product which were much more modern and identifying the brand with the desirable fashion world. He took the 146 year old LV logo and put it everywhere, starting off the trend of logomania. Thus, LVMH had given a new generation of designers the chance of their lifetime on creative design freely. It also dedicated people who are passionate about doing something of outstanding quality. (Rumelt, 1980) Advantage: The strategy must provide for the creation and / or maintenance of a competitive advantage in the selected area of activity. This is usually the result of superiority in resources, skills, or position. Customers who came to buy the products are not acquiring for functionality, they bought an image and a lifestyle, an intangible value. The employees who worked at LVMH professed to love the products they worked with and wanted to make sure that others loved their products. They were proud they were be the part of the Christian Dior family of the Louis Vuitton family and felt prestige involved in LVMH companies. (Rumelt, 1980) Feasibility: The strategy must neither overtax available resources nor create unsolvable sub-problems. The strategy should be reasonable in the light of the organizations resources: money and capital; management, professional and technical resources and time span. Companies did not go to Headquarters for specific support, they can be done the tasks by group level, tax planning, and recruitment of senior management level positions. The shared and synergies group resources enable companies increase their problem-solving capabilities and empowerment. (Rumelt, 1980) Conclusion Porters concluded that Portfolio approach is not a valid corporate level strategy in advanced economies. The first key element is to associate with corporate level strategy, to ensure that a corporate entity can achieve more profitability than the collection of different businesses under their control. There are four concepts for corporate level strategy to achieve (Porter 1987). Portfolio Management: is based on diversification through acquisition with no direct involvement of the management and strategy of subsidiary businesses by headquarters. Value adding is from maintaining strict financial controls and financial economies of scale, which the external capital markets are very efficient in capturing information about companies; and external investors can take swift action when necessary. As the size of the company grows, portfolio managers need to find more and more deals to maintain growth. Porter also concludes that it is no longer appropriate in advanced economies as it is no way to conduct corporate strategy. Restructuring: It allows for the acquisition of failing organizations and short-term measures to turn round the organization and it can only be a short term strategy as it is difficult to maintain a long term corporate strategy based only on restructuring. Linkage: A sustainable corporate level strategy can only be achieved by creating operational synergies through transferring skills and sharing activities exploit the interrelationships between businesses. Core Competence: It is based on sharing organization-wide core competencies Core competencies allow a corporate to gain access to a range of new markets and to gain competitive advantage over its competitors (Prahalad and Hamel, 1990). To conclude based on the above findings, it evidence that LVMH had pursued those four corporate strategies. When LVMH choosing an effective corporate strategy, it identifies the interrelationships among the existing business spectrums and select the spectrum of fashion and leather goods as core business to become the foundation of the corporate strategy. The LVMH group structure also facilitates interrelationships among the core businesses and lays the groundwork for future related diversification. Its shared resources provide diversification opportunities and allow transferring superior skills. Restructuring is seldom used at LVMH since it had an excellence management level people with high-caliber. The remuneration for them was based on a fixed base salary, a bonus, and stock options which are merit based. Finally, the diversified and balanced portfolio enables LVMH to share organization-wide core competencies successfully. Appendix Figure 1: BCG Matrix of LVMH Source: http://www.slideshare.net/sumit_thawrani/the-deal-presentation Figure 2: LVMH H1 2010 revenue by business group Source: LVMH First Half 2010 results