1. Bernard Arnault has built LVMH into a luxury goods empire by making numerous acquisitions. Describe the strategy is being used here? Discuss why you agree or disagree with this type of strategy. If you disagree, what alternative tactics would you use?
Actually Mr. Bernard Arnault, one of the richest men in the world who took control of LVMH in 1990, has been snapping up luxury brands during past two decades one after another. He has build LVMH into a luxury good empire by conducting a selective acquisition strategy with which I agree. Now LVMH has more than 60 brands under control and is still pursuing some others including the old famous family business; Hermes.
LVMH structure is made up of Wines and Spirits, Fashion and Leather goods, Watches and Jewelry, Perfumes and Cosmetics and Selective Retailing. Although some may argue that there are issues such as lack of concentration on core business thereby exclusivity and rarity which are main characteristics of luxury brands can be faded, I firmly believe that not only has Mr. Arnault saved these special features of the business and is still focused on prestige, he has improved the profitability of each division by creating synergy between subsidiaries in terms of cost, corporate and management synergy.
“Synergy, in general may be defined as two or more agents working together to produce a result not obtainable by any of the agent independently. Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation” (Synergy). As result of corporate synergy and this partnership, LVMH now has a bigger market share, wider range of products and less competition because the competitors are now members of the group and are all working together in a coordinated way. On top of that, they can take advantage of the existing selective retailing outlets to differentiate their products by adding value in their offering and demonstrate them as distinctive. Also, prestige, luxury and quality associated with the brand ‘LVMH’ influences every item being presented in these shops.
“A cost synergy refers to the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating costs that are viewed as duplicate within the merged entity.” (Synergy) This means reducing; promotional and advertising costs, sales cost, shipping cost, travel cost and also some managerial cost such as certain executives, human resources and head quarters office cost which finally influences companies bottom-line.
“Synergy in terms of management and in relation to team working refers to the combined effort of individuals as participants of the team. The condition that exists when the organization's parts interact to produce a joint effect that is greater than the sum of the parts acting alone” (Synergy) As stated in the text of this case study,” Arnault implemented a corporate restructuring that groups the company’s subsidiaries into divisions. Previously, the heads of individual subsidiaries reported directly to Arnault; now, division heads meet with him to discuss strategy. Notes Arnault, “It’s much more efficient, because it allows us to put into practice all the synergies between the different brands in a coordinated way.”
Francesco Trapani, CEO of the Bulgari Gruop, the luxury brand recently acquired by LVMH, said: “The 2010 financial results show how the Company was able to brilliantly overcome the economic slump, reaping the benefits of the efficiency and cost containment strategy and therefore becoming more solid. At the same time, the intense creative and product development activity generated an even more competitive product offer, which enjoyed great success in all product categories.” (Knowel) He added: “At this positive moment...