LOUIS VUITTON enter CHINESE MARKET
Luxury product sales boost in the emerging marketing like China, which has extraordinary growth and strong potential consumers for the development of luxury goods in the China market. With gradually lower and lower increase of revenue in the European countries, Louis Vuitton (abridged as LV in the following sections) commits itself to set up more stores in China. However, LV is faced with the problems of declining profits in China, which urges it to adjust its entry strategy into the China market. In this case, this report will focus on distinguishing the factors that influence LV’s development in China and laying out schemes for LV’s entry into China market by initially examining the internal and external environment for LV; analyzing the operational plan for LV’s entry into China based on the environment examination, and generating an action plan for LV’s entry strategy at the end of the report.
Louis Vuitton (abridged as LV in the following sections) is planning to set up more stores in the China market. However, it is now faced with the problems of declining profits in China, which urges it to adjust its entry strategy into the China market. In this case, this report is to lay out schemes for LV’s entry into the China market by distinguishing the internal and external factors that influence LV’s development from the perspectives of country factors and internal advantages of LV with reference to the SWOT analysis model; analyzing the operational plan for LV’s entry into China based on the environment examination and including suggests on firm strategy, organization structure and management, entry strategy and modes, manufacturing management, marketing plan, and accounting as well as finance management; and generating an action plan for LV’s entry strategy at the end of the report according to the specifications of the business operational plan.
The research method of literature searches is adopted to generate this report. This method is chosen because there are plenty of existing studies on the development of luxury goods, which makes it possible for abundant literature searches. Also, there are a great many resources on the annual reports of Louis Vuitton available which offer insights into the financial performance of this company. Anyway, luxury goods are indeed possessed by the majority of people, which makes direct interviews or surveys less available.
External and Internal Environment
The internal and external factors that influence LV’s development will be examined in this section from the perspectives of country factors and internal advantages of LV. A SWOT analysis will be involved in this section, which aims to find out the strength, weakness, opportunity and threat of the company according to analysis on the internal conditions of the company and the external environment the company is faced with (Johnson & Scholes, 2002, p122). External environment: Country factor analysis
The external environment for LV’s entry into China will be discussed in terms of the politics and government policy of China, the economy and the China market, the social culture and transportation of China, and will be concluded from the perspectives of opportunities and threats for LV’s entry into China. In terms of politics and government policy, China is now actively opening up to the world and enhancing trade relationships with world brands since the reform and opening up policy. In terms of the economy and the China market, according to Yuval and Vinay and Cathy (2011), the analysts of Mckinsey quarterly, China has increasing booming urban cities including the second- and third-tier cities and the world second-largest GDP which means strong purchasing power the China consumers for luxury goods and great market potentials (para 8). They also pointed out that by 2015, Chinese consumers will account for more than 20 percent of the global luxury market. On the other hand, the large market potential has drawn a host of luxury-goods companies to enter the China market, which makes the competition fiercer and fiercer. And it is troublesome for LV that there are plenty of fake goods imitating LV’s style prevailing in China, which are actually not likely to reduce LV’s high-end consumers, but would exert negative influences on consumers’ impression and awareness of LV.
I terms of social culture, for one thing, the China consumers are attracted by middle- and high-end products and somehow more attracted by French luxury goods, and they believe that the higher the price, the better the quality (Yuval, Vinay and Cathy, 2011, para7) (Exhibit 1). For another thing, the traditional virtue of thrift is rooted in the mindset of the Chinese, with which some of the rich in China indicate that they would not spend a large sum of money to get a product. (Exhibit 1) In terms of transportation, airlines are increased like the Emirates group which launched air routines in the main cities of China, and railway transportation as well as road transportation is more and more available, making it convenient and fast for cross-national transportation. Therefore in conclusion, the opportunities for LV’s entry into China can be concluded as China’s encouraging policies on foreign brands’ entering into China; China’s booming urban cities and increasing middle- and upper- class consumers with strong purchasing power; Chinese consumers’ purchasing preference for French high-end products; and the more and more convenient cross-national transportation in China.
While the threats for LV’s entry into China entail the fierce competition from the peer companies and brands; the trouble coming from increasing produced counterfeit products imitating LV in China; China consumers’ cautious traditional views on luxury goods purchasing. Anyway, when it comes to China consumers’ rational attitude towards luxury goods purchasing, it may be an opportunity for LV if it succeeds in drawing out their desires and needs for LV’s products, otherwise it may turn out to be a threat for LV’s expansion in China. Internal environment based on national level
The advantages of internal environment for LV on national level lie in the its preference and prospect to greatly expand its business in China, its experiences of operating in China market for about twenty years, and its strong influence on and temptation to the China consumers, as well as customer loyalty for it. On the contrary, the disadvantages lie in its high price which will greatly influences China consumers’ will to purchase the products, and in its could-be easily imitated appearance and style which is made used of by some China manufacturers in producing fake goods. Internal environment based on firm level
The nature of LV’s products
Dubois and Czellar and Laurent (2001) delineated Luxury goods as products with extraordinary quality as well as high price, rareness and uniqueness, aesthetic appeal, respectful long history, and the sense of being superior to others (p156). Yacine and Johnathan and Motohiro (2004) argued that luxury goods manual crafting and diligence should be involved into the manufacturing and designing of luxury goods (para 2). Based on these studies, the nature of LV’s products can be abstracted as unique, rare, and excellent-quality, and extraordinary. I
ndustry characteristics of luxury goods
Kapferer (1996) suggested that luxury industry distinguishes the needs and demands of the wealthy people like prominent social figures, and produce unique superior products for them, which acts like a status symbol for the rich (p251). While Heine (2010) stated that the luxury industry is also fashion-oriented and high-quality guaranteed. And it is closely associated with the needs of the wealthy. Judging from these studies and the advancement of luxury products nowadays, the industrial characteristics of luxury products can be concluded as extraordinary quality with high guarantee, extremely personalized with unique designed style, strong brand recognition and customer loyalty, and highly profitable sales based on its high price.
Advantages and disadvantage of internal environment for LV on firm level The advantages of LV on firm level mainly lie in its good brand image, abundant product portfolio, wide expansion in the China markets covering most of the first- and second-tier cities, and its control on the designs of products. This can be told from the following aspects. Above all, LV enjoys a good reputation of high quality and excellent services that it has occupied the first place of the 2012 Hurun Ranking of the Top ten luxury brands in the world (see Appendix 1), in which LV beats Hermes, the second in the list by nearly 43%. Also, LV offers manual crafting designed products which are special for certain customers. What’s more, it offers permanent after-sale serves to its customers (Paul, 2012, p79).
The disadvantages of LV mainly lie in its lower production rate and high price which leaves it less price elasticity. It possessed relatively lower production rate, for it takes certain time and manual efforts to make a high-quality products (Jill & Glenn & Taro, 2009, p122). It sets high prices for its products based on the quality and meanwhile aims to distinguish market segmentation, which however makes the price too high from the perspectives of the majority of China consumers.
In recent years, the China government has made adjustments towards Foreign Direct Investment. It cancelled the extra bonus policy which had existed since the 1980s when China actively encouraged investment on foreign enterprises (Dan, 2009, para1). Anyway, the general tendency of attracting foreign companies to enter into China is still unabated. Therefore, government policies and regulations are still positive for LV’s advancement in China, which indicates that China remains great market potential for LV if it adjusts itself to seek advantages and avoid disadvantages according to the environment.
Based on the external and internal environment analysis, an operational plan to help LV enter and compete effectively in the China market will be generated in the following section, which includes consideration to firm strategy, organization structure and management, strategy and modes of LV’s entry into China, manufacturing management, overall marketing plan, and accounting and Finance management of LV facing the entry. Corporation strategy helps direct the future development of firms, including differentiation strategy and low cost strategy (Gerry & Keven & Richard, 2008, p245). The firm strategy suggested for LV to compete in the China market is to differentiate itself from other luxury companies and brands, and the strategy to lower its costs.
Apart from the regular introduction of new products or the quality control of products like most luxury companies may do, LV is supposed to give extra care to its customer services, delivering extraordinary experience to customers, like regular special consultancy for every customer to lead the their needs and help them realize personal values relative with LV’s values. As for methods to lower costs, it can be achieved through managing the operational cost of LV and through cost control in the supply chain of LV. For example, to integrate its resources and improve its supply chain by cooperation with fixed partners who professionally manage logistics in order to get a price discount, which may lower the costs of transportation and save time for product updates.
Organization Structure and Management
Organizational structure management is for accomplishing certain goals effectively Gerry & Keven & Richard, 2008, p137). For LV as an international company, the organization form of departmentalization is rather appropriate. With human resources gathered and organizational structure formed through departmentalization, the process of delegation is to be introduced. Delegation is to delegate certain authority and responsibility to the staff and achieve harmony and trustworthiness among leaders and staff (Robbins & Mary & Nancy, 2005, p165). LV has a big number of stores in China, and it will be better if the headquarter delegates authority for the managers in the branches in China, who are then able to manage the stores more practically and efficiently.
Based on the managing form of departmentalization and the method of delegation, the form of decentralization can be adopted. If the business of a company is in fast pace and tend to change quickly, and is operated in diversified different areas, it should choose the form of decentralization (Robbins & Mary & Nancy, 2005, p165). As an international luxury company with operating areas in all geographic parts of China, LV values timeliness and adaptability towards the quickly changing fashion world, which makes decentralization suitable for LV’s development in China market.
Entry strategy and modes
The entry modes for international companies entail strategic alliance, exporting, licensing or franchising, joint venture, a new wholly owned subsidiary, and acquiring established enterprises (David & Cynthia, 2004, p147). As for LV, a luxury brand which is positioned as high-end, unique and high-price, it would be better for it to establish its own stores in the targeted country (Giacalone, 2006, p33). Since LV has its own stores in China, it adopts the wholly owned subsidiary method of entry so as to hold its characteristic of unique and independent, and to pursue global standardization. Where to enter into is essential for LV’s operation in China. LV has already set up stores in all the geographical areas of China (Exhibit 2), and most of its focus is the first-tier cities and less second-tier cities. For example, nearly 33% of LV’s stores in China are located in Hongkong, Macau and Taiwan (Exhibit 2), while there are a great many second-tier cities where many wealthy people inhabit in mainland China.
According to the table of index of China’s cities for luxury product operation (Exhibit 3), second-tier cities like Shenyang, Dalian, Hangzhou, and Chengdu have great potentials for luxury product operation. Moreover, second-tier cities like Dalian, Hangzhou and Chengdu are among the most popular tourism cities in China, where tourists are more likely to purchase luxury products when they are in their pleasant holidays with planned shopping lists. Also, the renting rate of second-tier cities is much cheaper than first-tier cities like Beijing and Shanghai. As for LV, whose stores often cover a large amount of space, second-tier cities will save it considerable amounts of costs. Therefore, second-tier cities should be the primary choices of LV’s operation in China market.
Manufacturing management is associated with production for global markets, outsourcing and logistics management (Philip & Gary, 2009, chap13). As for LV, its production is unique and enjoys good reputation among consumers for they are produced in France, labeled as high-quality and high-level. Therefore in this case, production activities of LV are supposed to be located in France. In terms of logistics, it will be better for LV to outsource the management of logistics to companies that are professional in this field, for LV has no experiences in logistics and it should focus on the production and sales of products instead.
Marketing Strategy can be formulated with references to the following aspects: Product attributes, Distribution methods, communication approaches, and pricing strategy (Alan and Simon, 2012, p399). Apart from the four aspects listed above, marketing strategy is influenced primarily by market segmentation (David & John, 2012, p102). With regards to age, socio-cultural factors, economic development and the psychological factors, LV narrows its target market in China to the young and adult generations who are under the age of forty. Anyway, the primary focused consumers are adults. In this case, LV is supposed to give more care to the young, who are the right future potential customers for LV. Besides, the young of the rich families in China can often easily win parents’ compromise and financial support to purchase luxury products.
Therefore, emphasis on unique products for the young is highly profitable in return and may also bring vigor to the growth of LV. In terms of product attributes, it is critical for the development of products, for it the product attributes satisfy the customer’s needs, the product will definitely boost sales (Alan and Simon, 2012, p399). LV’s product attributes as products with extraordinary quality as well as high price, rareness and uniqueness, aesthetic appeal, respectful long history, and high-class awareness greatly meet customers’ needs for supreme experience and extraordinary taste. Therefore, it should focus on product designs that can differentiate its products from those of other brands to keep its customer loyalty. As for distribution methods, LV should stick to its strategy of selling its products directly to consumers through its stores, for it has independent stores and distribution system. Anyway, it is possible for LV to set up online stores under the circumstance of the China market. In terms of internet shopping, which is now prevailing in China, and the electronic commerce of China is gradually become mature.
Amazon and China’s T-Mall online shopping has reached high turnover in recent years (The Economist, 2011). In terms of China consumers, who prefer to shop online especially the young and the adult, with internet becoming more and more available for the Chinese people, China online market has high potential for LV’s attempt at online stores. In terms of communication approaches, LV is involved more in direct selling, and advertising. In terms of direct selling through stores, it creates opportunities for deepening the communication between consumers and the staff of LV. In terms of advertising, LV focuses on delivering its value and product attributes to consumers and it choose its spokesperson cautiously. Selecting spokesmen for LV is quite a good choice for the development in China, especially for attracting the young. For example, the newly selected and the only spokesman for LV in China, Bingbing FAN is quite appropriate for the disposition of LV, unique, independent and elegant, which has become a big piece of news in China and has intensified the public focus on LV recently.
Therefore, the right choice of spokeman will benefit LV in the China market. Anyway, the country-of-origin effect takes effects on the Chinese people who deeply believe in French luxury products (Glamheden, 2006, p35). In terms of pricing strategy, it will be better for LV to keep the same price in different countries, which means the amount of money consumers spend in a LV store in China is the same as that in France in value. This is because that some Chinese prefer to fly to France to get the LV products for it’s cheaper in France. In order to boost sales in China market, it’s better to apply the same pricing strategy.
Accounting and finance management
As for accounting management of LV in China, LV has to pay great attention to the inflation conditions of the China market, which has been rising in recent years both in food and non-food prices (Jay and Azhar, 2011, para2). LV should adjust its pricing strategy and accounting management according to the inflation conditions of China, for if inflation goes high, assets will be depreciated and the original price cannot represent the real value of LV’s products (Mankiw, 2011, p643). Mankiw states that inflation results to the value depreciation of money, which will benefit the export of the home country and make it disadvantageous for the import from foreign countries’ import to the home country. This explains the significance for LV to adjust its price according to the inflation conditions in China market. In order to create and maintain a competitive advantage, LV’s financial management should be involved financial control and money management (Alan & Simon, 2012, p423).
Now that LV has already decided to invest in the China market, financial decisions and the money management are to be focused on. In terms of financial decisions, according to Alan and Simon’s theory (2012) on financing decisions, LV may prefer local debt financing in the China market, where local currency has recently depreciated. In terms of money management, LV should try to reduce the transaction costs, which is generated when a firm transfers cash from one currency to another (Alan & Simon, 2012, p433). Recommendations- action plan
With the help of the discussion of the China market environment for LV, and the analysis and conclusion of the operational plan for LV’s entry into China in the previous sections, recommendations for action plans for LV will be given as follows. As for formulating firm strategies, LV is supposed to take the differentiation strategy by distinguishing itself from other luxury companies by emphasis on high quality and exclusive customer services, and to adopt the cost reducing strategy by integrating resources of its supply chain and reducing transportation costs through the long-term cooperation with professional partners of logistics fields. As for organization structure and management, the organization form of departmentalization with a combination of functional forms, product, consumer service and geographic area is recommended. Next, the method of delegation can be introduced for LV so as to delegate authority for the managers in the China stores.
Last but not least, it will be better for LV to implement the form of decentralization, which will improve the effectiveness and efficiency of LV’s operation in China. As for entry strategy and modes, with wholly owned subsidiary, LV should cautiously select its targeted locations in China. Apart from the first-tier cities, second-tier cities where there is considerably strong purchasing power and lower renting costs would be appropriate for LV to set up new stores. As for manufacturing management, production activities of LV are supposed to be located in France, for effect of country-of-origin works on China consumers who believe that goods produced in France would be more reliable and high-end. In terms of logistics, LV is supposed to outsource its management of logistics to companies that are professional in this field. As for marketing plan, LV should continue to highlight its product attributes like high quality and exclusive design to consumers, to apply the communication approach of advertising using the spokesman strategy, and to keep price nearly the same in different countries without dramatically change. As for accounting and finance management, LV should adjust its pricing strategy and accounting management according to the inflation conditions of China, and to focus on its financial decisions, and money management decisions. Specifically, LV may adopt local debt financing in the China market, and try to reduce the transaction costs.
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