Thursday, November 15, 2012

Bags and Bubbles: How LVHM Capitalizes on Strategic Capabilites


While a layperson might think that the holding company of Louis Vuitton Hennessy Moet (LVHM) can attribute its industry success simply to the ingenuity of merging a group of luxury goods as diverse as champagne, cognac, and high-fashion clothing, their keys to success are actually much less apparent.  Barnaby S. Donlon and Zach Walmer in their article "Does Your Organization Have the Capabilities to Execute Strategy" expose that in order for any company to form a truly successful strategic direction, they must first understand their particular core competencies that act as strategic differentiators when matched against similar competition.  LVHM has taken the proper steps to conducted such an analysis, and therefore has developed a firm understanding that they posses the following specific high-level capabilities:
  • Design 
  • Marketing Communications
  • Distribution
  • High-Quality Products
While capitalizing on these capabilities, LVHM has learned that another important component to its business, "pricing" is something that they can purposely de-emphasize as a direct result of maintaining above-average competency in the aforementioned capabilities.  As illustrated by Dave Ulrich and Norm Smallwood in the HBR article "Capitalizing on Capabilities", successful firms can purposely choose to focus on acheiving excellence in only small number of organizational competencies, and receive a greater benefit then trying to spread themselves too thin and focus on everything.  In the case of LVHM, this has resulted in the ability to charge a premium over competitors, resulting in much higher profits.  Customers are drawn to LVHM's portfolio of brands because they know to expect superior quality communicated through industry leading marketing, which keeps them paying premium prices.


LVHM also understands that success in their core capabilities must be spread throughout their holding portfolio, which grants them what Donald Sull calls "Organizational" and "Portfolo Agility" in his article "Competing through Organizational Agility", published in the McKinsey Quarterly.  LVHM mitigates their risk through both brand and geographical diversification, which has allowed them to adapt to economic downturns in the US and China, as well as capitalize on booms in China and India.  Similarly, they employ what Sull calls "staying in the game" or strategic perseverance.   LVHM often stays with struggling brands and rides their downturn on the back of its more profitable assets.  This has payed off in places such as Japan, where more individualistic or cost conscientious buyers have shaded towards lesser known labels, especially in times of economic decline.  It can be attributed not just to organizational flexibility and diversification, but also to the passion and commitment of its leadership.

In their marketing and production, LVHM has borrowed from the core competencies of European auto manufactures to ensure high quality products and lean production processes with low rates of mechanical error.  This cross industry sharing is also evident on a micro-level within the organization, as they have also shared strategic core competencies within each brand to foster synergistic partnerships, such as the watchmaker Tag Heure assisting in the design and production of a line of Louis Vuitton watches.  LVHM has clearly shown that a proper understanding of core competencies, both within and outside of an organization allow for much higher rates of adaptability and flexibility, leading to better opportunity capitalization and ultimately competitive success.  

Additional Resources
http://www.economist.com/node/14447276
http://news.morningstareurope.com/news/im/msfr/lvmh%2029-07-09%20Morningstar.pdf

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