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Gucci Group N.V.

(A) (HBS 701037) KIM, KI BAEK 2013-12501


1. Map the competetive positions of the different players in the luxury good business
along the “cost leadership” (Y-axis) and “product differentiation” (X-axis) strategy map.
Where is Gucci’s position on this map in 1990, 1994 and 2000 respectively?

Gucci 1994 Gucci 2000


Gucci 1990
w/t De Sole

Gucci 1994
Before De Sole

The main incumbents in the luxury industry were Hermès, Chanel, Louis Vuitton, Prada and
Ferragamo. Hermès topped the market thanks to the popularity of the Kelly bag, which cost
over $4,300. Chanel – selling $1,500 leather bags – was another top tier brand right below
Hermès. Louis Vuitton and Prada took over the middle position of the market with products
ranging from $600 to %1,100. Ferragamo was positioned at the lower scale of the market.
Gucci was just a mere market follower in year 1990. Compared to market leaders like
Chanel and Hermès it was difficult to consider Gucci as a luxury company. Certain customers
even mentioned that they want to throw up when they look at Gucci’s products. The overall
level of differentiation was low as the majority of the Gucci products were based on canvas
material and thus, they were both cheap to produce and were sold at very low prices.
Year 1994 was a period of transition. The disoriented firm suffered loss until Maurizio Gucci
stepped down. The design team identified Gucci as a classic brand and produced highly
differentiated products such as horsebit loafers targeting wealthy aged women. However, the
products were too expensive. When De Sole came into head office with creative director Tom
Ford, there was a big difference. Gucci went through a radical transition from a classical brand
to a fashion-oriented brand for younger customers. De Sole considered cutting costs as first
priority. The firm also obtained cost advantage as they lowered prices of their items by 30%.
Later, in 2000, Gucci would have moved more to the right side of the x-axis as they put
emphasis on their differentiation strategy since the late 1990s. The firm’s advertising
expenditure in 2002(13% of revenues) nearly tripled that of 1994(4.6% of revenues). Gucci
put more effort into new product development. They introduced a new jewelry line since 1998.
The proportion of new styles increased and one-season fashion products took up 80%-90%
of Gucci’s whole volume in 1999.

2. What were the critical strategic choices made by DeSole in his turnaround strategy
(pg. 7 of Gucci N.V. case)? Try to match this to the internal value chain activities of
Gucci.
De Sole’s turnaround strategy was successful as he maximized customers’ satisfaction with
effective differentiation. However, this does not mean that he ignored the overall cost. Both
aspects are seen throughout the internal value chain activities of the Gucci.
Regarding firm infrastructure and human resource management, De Sole went through a
reorganization of the firm, which united seven Gucci companies together. This allowed
information to be shared among the companies and helped the company to make quick
decisions.
In terms of operations, Gucci had a cost advantage. The input costs in operations would
have been relatively low as suppliers did not have much bargaining power against Gucci. They
always had the fear of being switched Gucci also had innovative leather cutting technology.
Furthermore, the firm subcontracted the manufacturing of 95% of its leather goods. However,
Gucci was still able to maintain the quality of their products as they maintained a good
relationship with loyal group of suppliers who were the best manufacturers that De Sole has
persuaded to work with the firm. Such partnership was possible as Gucci financially supported
them for materials and technical expertise.
Considering distribution, Gucci strengthened their brand image by forming a sturdy network
of directly operated stores (DOS). The firm cut the franchises in the Asian market and instead
invested in their DOS. They renovated old-fashioned stores to match the hip fashion products
they are selling to young customers. De Sole made sure that stores are enhancing the image
of Gucci.
In marketing and sales, Gucci made a wise decision to relaunch leather goods for their
fashion-conscious customers. While the classic items targeted only a narrow segment of the
market, Gucci’s fashion-oriented approach allowed them to attract a bigger pool of customers.
The firm also gained advantage by cutting their price by 30%. Gucci provided their customers
products that had identical quality with incumbents at a cheaper price. Later, the firm increased
its advertising expenditure.