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Gucci Group N.V.

Case Brief Group: Synergy

BI4242 Global Strategic Management Section 404 Submitted to A. Pattana Boonchoo November 25, 2005

Mission: The mission of the company is to be a successfully managed multi-brand group in the fashion industry, producing luxury products that will be enjoyed by affluent, style-conscious consumers. Internal analysis: Performances: After the new CEO get on the stage, the company starts increase its revenue. Now the company use acquisition strategy to growth. And now they already acquire 2 companies YSL and Sergio Rossi. Current strategies: At the corporate level, the company operates in two directions, which is vertical and horizontal. Horizontally, the company purchased companies in the same industry such as YSL Beaute, Sergio Rossi and YSL couture. This acquisition not only broadens the product lines the company carries; it also provides the company with more specific targets with each of its brands. Vertically, the company has integrated both forward and backwards. It established partnering relationships with some of its suppliers and also tried to gain more control over its DOS (directly operated stores). In integrating vertically, the company is able to more control the entire value adding process, thus able to provide the most value to its customers. Also, they will be able to control costs and the overall image of the brand. Although there are a lot of positive reasons for integration, the company still has to consider factors like management resources and the ability to sustain the profit in the integrated businesses. External analysis: (See appendix 1 for detailed five force analysis) The business environment now is derived by change. Thus the fashion industry also has to adapt to changing consumer needs, change in materials used, and change in the competitive environment. In the case of Gucci, it has a strong standing brand, and the consumers view it as a status signature of their taste in fashion,

thus it will not be easily replace by other brands. However, it has to also realize that just because it has a significant brand; it is not enough to retain customers. Customers now like to switch between brands just for the sake of it. Thus the company has to focus on areas where the risk is high, such as threat of substitute products, threat of competitive rivalry, and the threat of the barrier to exit. Integration of major strategic issues: (See appendix 2 for detailed analysis of SWOT) The main strength that Gucci possesses is their creativity in establishing their business, no matter in the case of the design of clothing or their brand image and their management. Their main weakness is their lack of multi-brand experience. They have to adjust their management styles to fit the changes in the corporation. The opportunity they should seize is how to better use the internet as a tool. Maybe they dont have to sell their products on line, but it is definitely suggested to create a stronger presence of the brand Gucci on the internet. The main threat now can come from two aspects: consumers are much less loyal to one brand than before, and that many counterfeit products can be bought in many places, causing not only a loss of sales but also corrupting the brand name. Critical issues: CI1: exclusive competition of market for example, LVMH and PRADA. 35 companies shared 60% of the luxury goods market. From the revenue excess 1 billion, LVHM topped the first. LVMH aggressively acquired the domineering company in the luxury market. In 1999 LVHM joined with Prada to successful beat GUCCI to purchase Fendi so that their can absorb the production capability. Besides, in January 1999, LVMH has 34.4% share and even had the desire to further take over.

CI2: shortage of supplier for further expansion. GUCCI needed new supplier on board for entering the new market. However, the supplied had already taken by the competitors. Therefore, if GUCCI wanted expansion, they must find ways to solve the problem of shortage of supplier. Recommendations: Strategic package 1: GUCCI can continue the acquisition. With the acquisition more brands, the company can use the other brands suppliers, distribution channel, and customer. The company can increase the market share and became bigger which allow them to compete with big company like LVHM. Strategic package 2: the company can make alliance with some other companies. Strategy alliance will integrate the effort of all companies to compete with big company. Furthermore, GUCCI can use the resource of other companies, like let their suppliers work for GUCCI and help expansion of GUCCI. Strategic package 3: the company can start E-commerce. Using E-commerce the company does not need to find new suppliers and company can use its excess capability in Italy. With the help of internet, the company can increase the market size and shares under low cost. Strategic package 1 is more preferable than 2 and 3. (Pro and Cons see appendix 3) Acquisition has more control than alliance. All the brands serve towards the same goal. Moreover, the financial analysis proves that GUCCI has the ability for further acquisition (see appendix 4). Strategic package 2 and 3 only can solve the problem in short-term. E- Commerce can not increase market a lot. Strategic 2 may cause the future competitors and it is danger to lose company secret.

APPENDIX ONE

Five Forces Analysis: The Luxury Goods Industry


I. Threat of New Entrants High Medium Low 1. Economies of scale are medium; therefore, threat of new X entrants is 2. Experience effects are medium to high; therefore, threat of X X new entrants is 3. Product differentiation is high; therefore, threat of new X entrants is 4. Brand identification is high; therefore, threat of new entrants X is 5. Capital requirements are medium; therefore, threat of new X entrants is 6. Switching costs are high; therefore, threat of new entrants is X 7. Incumbents control of distribution channels is medium to X X high; therefore, threat of new entrants is 8. Incumbents proprietary knowledge is high; therefore, threat X of new entrants is 9. Incumbents control of access to raw materials is medium; X therefore, threat of new entrants is Overall Threat of New Entrants MEDIUM TO LOW II. Bargaining Power of Buyers High Medium Low 1. Buyer concentration is high; therefore, bargaining power of X buyers is 2. Buyer purchase in small volume, and frequently; therefore, X bargaining power of buyers is 3. Buyer switching costs are low; therefore, bargaining power of X buyers is 4. Buyers have good information; therefore, bargaining power X of buyers is 5. Buyers ability to integrate backward is low; therefore, X bargaining power of buyers is 6. Close-substitute products are available; therefore, bargaining X power of buyers is 7. Product differentiation of suppliers is high; therefore, X bargaining power of buyers is 8. Price of input, relative to the total product cost is low; X therefore, bargaining power of buyers is 9. Buyers profitability is high; therefore, bargaining power of X buyers is Overall Bargaining Power of Buyers Low

III. Bargaining Power of Suppliers High Medium Low 1. Concentration of suppliers is low; therefore, bargaining X power of suppliers is 2. Availability of substitute products is high; therefore, X bargaining power of suppliers is 3. Importance of customer to the supplier is high; therefore, X bargaining power of suppliers is 4. Differentiation of suppliers product & service is medium; X therefore, bargaining power of suppliers is 5. Switching costs of the buyer are medium; therefore, X bargaining power of suppliers is 6. Threat of forward integration by the supplier is low to X X medium; therefore, bargaining power of suppliers is 7. Importance of the input to the quality of the buyers product is X high; therefore, bargaining power of suppliers is 8. Cost of the input, relative to the total product cost is high; X therefore, bargaining power of suppliers is Overall Bargaining Power of Suppliers LOW IV. Threat of Substitute Products High Medium Low 1. Profitability of industry producing substitute is high; therefore, X threat of substitute products is 2. Rate of improvement in price-performance relationship of X substitute product is medium; therefore, threat of substitute products is 3. Buyers switching costs are low; therefore, threat of substitute X products is Overall Threat of Substitute Products HIGH V. Competitive Rivalry & Barriers to Exit High Medium Low A. Intensity of competitive rivalry 1. Concentration of competitors is high; therefore, intensity of X competitive rivalry is 2. Industry growth rate is low; therefore, intensity of competitive X rivalry is 3. Fixed Costs are low; therefore, intensity of competitive rivalry X is 4. Storage costs are low; therefore, intensity of competitive X rivalry is 5. Product differentiation is high; therefore, intensity of X competitive rivalry is 6. Switching costs are low; therefore, intensity of competitive X rivalry is 7. Exit barriers are high; therefore, intensity of competitive X

rivalry is 8. Strategic stakes are high; therefore, intensity of competitive rivalry is Overall Intensity of Competitive Rivalry

X HIGH

B. Barriers to exit High Medium Low 1. Asset specialization is high; therefore, barrier to exit is X 2. Emotional barriers to exiting business exist; therefore barrier X to exit is Overall Barriers to Exit HIGH

Summary: According to the Five Forces Analysis which we conducted above, we evaluated the overall threat of new entrants for luxury industry as medium to low basically because the high brand identification and high product differentiation. The bargaining power of buyers is low because of the high product differentiation of suppliers. The overall bargaining power of suppliers is also low since the lower concentration of suppliers and higher importance of customer to supplier. The overall threat of substitute products is high because the profitability of industry producing substitute is high and low buyers switching costs. And at last the barriers to exist is high and high intensity of competitive.

APPENDIX TWO

SWOT Analysis
Strengths Gucci create the merchandise function Entrepreneur Strong brand image Distribution channel (they have DOS ) Quality control (they try to maintain throughout its network (p11 paragraph 3)) Global presence (MNC) Creative, talent (the excellent designer, Mr. Ford ) Partner-supplier and integrated supplier ( they try to build the supplier community and make them loyal to the company) (p3 paragraph 2) High return on investment (ROI) , ( As they mostly relied on outsourcing) Opportunities The stable increase market ( growth 6% per year) High margin E-commerce New technology Threats High trendy rate( low customer loyalty ) Global competition Gray market Fake product Weaknesses Company is too much rely on 2 person Lack of multi-brand experience They didnt take the advantage of the internet Lack of current supplier on board ( as the other competitor already acquired the existing supplier)

APPENDIX THREE Strategy Package Pros and Cons Analysis

Strategy Package
Strategy Package One Strategy Package Two Strategy Package Three -

Pros
Have more control Developed in Long-Term Easy than Package one Quick to use Relative Low cost Easy to do it Safe -

Cons
Higher Cost Dangerous for Investment Dangerous for future competition Just exist for 2 or 3 years Not long-term plan, just solve problem temporary Didnt increase Sales a lot

APPENDIX FOUR FINANCIAL STATEMENT ANALYSIS


Long-Term Debt Ratio & Equity Ratio Analysis 130.00% 90.00% 50.00% 10.00%

Long Term Debt Ratio (%) Equity Ratio (%)

1992 -30.00%
-70.00% -110.00%

1994

1996

1998

2000

Time (year)

Net Income 350 300 250 200 150 100 50 0 -501991 -100

Net Income

Millions

1993

1995 Year

1997

1999

Based on the Financial Analysis Table, and graph shows above, the Long-Term Debt ratio (Long-Term Debt / Total Asset) remains same, and the Total Equity ratio (Total Equity / Total

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Asset) keep increase even after 1998. It shows that the share holder still trust GUCCI company. And its possible that the company issue new stocks and get more money from investment for their acquisition. Look at the performance of Net Income increase. After the acquisition, the net income increase much more quick before acquisition. It shows that the companys performance is getting better. Besides refer to the Exhibit 8 of the case, it shows that after the acquisitions (1998) the stock price of GUCCI continue increase, it shows the confidence of the stockholders. And it also reflect that the company will generate enough money and investment to implement the strategy package one.

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