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Gucci Group NV A Case Solution
Gucci was facing financial difficulties as it was not able to earn sufficient profit. The company did not engage much in advertising and marketing activities which had a bad impact on its overall brand image and fake products started circulating in the market. As a result, Gucci changed its strategy and reorganized its business model that was focused on cutting the costs and increasing the sales revenue for the business. Gucci fired many people to save staff costs as well as increased the spending on advertising to increase brand awareness and brand credibility. Apart from this, the company started focusing on fashion-conscious customers and differentiated its offerings. It slashed its pricing to make its products of high worth for its target customers. Apart from this, the focus was on redefining the brand image of the company which it did by constant advertising in order to convey the brand message to the customers in a dignified manner. Although the expenses initially were higher but they got offset by higher revenue generated by the company in the long run.
Following questions are answered in this case study solution
Map the competitive positions of the different players in the luxury goods business. Who are the best-positioned players? Why?
Where was the Gucci Group positioned on the map above in 1990? 1994? 2000? From a strategy point of view, what was Gucci’s problem up to 1994? In other words, where do you see issues in how Gucci was creating/capturing value?
What were the critical moves made by De Sole to reposition the company? Illustrate Gucci’s primary and support activities and explain how De Sole’s repositioning strategy affected these activities. (Hint: Value chain framework on p.13 of reading, “Strategy Reading: Competitive Advantage” (HBP: 8105)).
In 2000, Gucci acquires YSL. What would be the key to make this acquisition successful for Gucci in the long term from a strategy point of view?
Please do a write up of the case study and conduct a strategic analysis.
Case Analysis for Gucci Group NV A
1. Map the competitive positions of the different players in the luxury goods business. Who are the best-positioned players? Why?
The competitive position of the different players in the industry can be mapped as follows:
Based on Exhibit 4 in the case study, it can be seen that LV has been able to secure the highest operating margins standing at 30% followed by Hermes, Prada, and finally Chanel which has the lowest operating margins. Gucci has been able to improve its position on the competitive map over the years when in 1990 it stood at low for both cost leadership and product differentiation as its image was damaged due to fake products being circulated in the market. This is justified by the fall in the sales of luxury goods by 3% during the period 1990 to 1993. The overall position of the company improved, however. Finally, when Tom Fords replaced the creative director and engaged in a number of measures aimed to improve the competitive position of the company as they undertook aggressive advertising, rebranding, and repricing of products that enabled it to position itself at the midpoint of cost leadership and product differentiation.
Holistically, the best-positioned players in the industry include Louis Vuitton followed by Gucci as who ranks the highest when it comes to cost leadership. Also, as it operates in the luxury goods market, it is engaged in product differentiation that would continue to make it attractive in the eyes of its target customers. LV can be seen to be very successful as it has positioned itself as a high-end brand and still manages to earn the highest profit margins even when compared to brands like Tommy Hilfiger and Ralph Lauren that target the mid to high-end segment and still earn lower profit margins. Other niche brands like Valentino, Jill Sander, and Kenzo can be considered to be niche brands as they have very low margins given the fact that they target niche markets only with a personalized offering. Prada, Hermes, and Armani in Exhibit 4 can be seen to have similar profit margins, but Prada has been successful in engaging in product differentiation and catering to the needs of a broad range of customers. In the case of Gucci, it has consistently rebranded itself and innovated its offering to differentiate itself as well as reduce its costs and increase pricing that has played an important role in improving the profitability of the business and establishing its strong position in the market.
2. Where was the Gucci Group positioned on the map above in 1990? 1994? 2000? From a strategy point of view, what was Gucci’s problem up to 1994? In other words, where do you see issues in how Gucci was creating/capturing value?
The following map indicates the position of Gucci Group during 1990, 1994, and 2000.
During the 1990s, Gucci had very low-profit margins as its fake products were circulating in the market that had deeply tarnished the reputation of the company. Apart from this, in the years until 1993, the demand for luxury goods fell dramatically due to the Gulf War, a deep recession in the US, and a decline in the consumption of luxury goods. Not only this, but the company at that time had a weak leadership during the time as its CEO then, Maurizio Gucci did not have an adequate number of skills to manage the business efficiently and would spend money lavishly that had a negative impact on the financial returns generated by the business as Gucci had insufficient funding available and had developed a brand image which had lost its credibility in the eyes of its customers.
Moving forward in 1994, the senior leadership changed as Domenico De Sole took over the position of Chief Operating Officer and Tom Ford took the role of Creative Director. They implemented a number of changes in the company that were focused on cutting the initial costs and rebranding to reposition the brand in the eyes of its target customers through increased advertising, product repricing, and store renovations. Not only this, but the company engaged in technological innovation and set high-quality standards for its products to gain back the confidence of its customers. Hence, this way the management was able to increase the revenue of Gucci to $264 million and was able to achieve a 12% operating margin in 1994. Further, the company was able to generate profitability of around $18 million in 1994 against the losses made by the company of around $22 million in 1993.
Then moving forward in 2000, the Gucci Group had its four divisions including Gucci, Yves Saint Laurent Couture, YSL Beaute, and Sergio Rossi. Further, the company increased the retail pricing of its watches as well from $500 to $700. Further, it engaged in the consolidation of its back-office operations including the warehousing as a result of which Gucci was able to benefit from cost savings. However, the company was still faced with the challenge of maintaining the individual brand image of its YSL and Sergio Rossi brands.
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