management case study
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LVMHSlides.pptLVMH: Conglomerate?
Traditional Conglomerate
Traditionally, conglomerates are marked by:
Diversity of portfolio.
Buy and sell more frequently than corporate giant.
Relationship with HQ is lean. More financial than anything.
Weak relationships between divisions.
LVMH is different. Acts more like a “Diversified Corporation.”
Ex. Virgin Group
#1 ‘challenger brand’ by consumer audit – we ‘do things differently’
Sheet1
| Travel & Tourism | Leisure & Pleasure | Shopping | Media & Telecom |
| Virgin Atlantic | Virgin Games | Virgin Books | Virgin 1 |
| Virgin Holidays | Virgin Vouchers | Virgin Bride | Virgin Media |
| Virgin Trains | V Festival | Virgin Digital | Virgin Mobile |
| Virgin Blue | V2 Music | Virgin Drinks | Virgin Radio |
| Blue Holidays | Virgin Comics | Virgin Megastore | |
| Virgin Limited Edition | Virgin Experience Days | Virgin Vie At Home | Finance & Money |
| Virgin Vacations | Virgin Spa | Virgin Wines | Virgin Money |
| Virgin America | |||
| Virgin Charter | Social & Environment | Health | |
| Virgin Galactica | Virgin Earth | Virgin Active | |
| Virgin Nigeria | Virgin Green Fund | Virgin Health Bank | |
| Virgin Limobike | Virgin Unite | Virgin Life Care | |
| Virgin Balloon Flights | |||
| Virgin Limousines |
LVMH
- Levels:
Corporation
Branch = Group/Sector
Brand/Affiliate = Division
- Metiers:
Wine + Spirits
Fashion + Shoes
Perfume + Cosmetics
Watches + Jewelry
Luggage + Leather
Specialty Retail
- Economy of Scale
- Economy of Scope
Control / Centralization
Autonomy / Decentralization
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS?
I. Corporate Control
Planning
Budgeting
Structure
II. Economies of Scale (sharing activities)
Centralized activities at corporate level
Integrated activities across divisions
III. Economies of Scope (sharing knowledge)
Leverage ideas, experience, knowledge across divisions
Manage and upgrade intellectual capital
Invest in human capital
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS?
I. Corporate Control
A. 3-yr Rolling Strategic Plan
~HQ adjusts and approves
~Control ranges from ‘hands-off’ to close supervision
B. Resource Allocation Decisions Made by HQ
~budgets modified and approved by HQ
~HQ provides working and growth capital
C. Branch Structure
~extends corp. priorities and control into brands
~allows for scale economies in administrative costs ~facilitates transfer of ‘best practices’
History: ~Asian crisis ~Rapid growth
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS? (2)
II. ECONOMIES OF SCALE
Corporate-Level
Division-Level
A. CENTRALIZATION AT CORP. LEVEL
1) Advertising centrally negotiated
~largest buyer of magazine ad space
~DKNY ads cost 20% less for same exposure
2) Finance and Legal at HQ
~currency hedging operation
~accounting, legal, tax planning
~sophisticated financial expertise, lower cost of capital
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS? (3)
II. ECONOMIES OF SCALE
B. Integration Across Divisions
1) Organization Structure
~branch president responsible for integration across divisions
2) Perfume and Cosmetics: mostly separate
~integrated R&D and purchasing but…
~separate production and production planning
~separate negotiation with distributors
~retain founding entrepreneurs (20-40% stake)
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS? (4)
B. Integration Across Divisions (continued)
3) Fashion and Shoes: mostly combined (except for brand/mktg.)
~combined purchasing
~single factory for all shoe brands
~share technical and industrial knowledge
~joint retail space negotiations
~shared IT, HR, acctg. control system
~mobility of managers across brands
4) Watches and Jewelry: mixed
~synergies in product development
~integrated sourcing, production, distribution
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS? (5)
III. ECONOMIES OF SCOPE
economies of scale: efficiencies from doing more of something
economies of scope: efficiencies from doing something in more than one place
A. Synergy and Leverage Across Divisions
1) International Promotion and Distribution
~administrative and legal support
~operating experience in different markets & cultures
~brands leverage existing locations & resources
HOW DOES LVMH ADD VALUE TO ITS DIVISIONS? (6)
III. ECONOMIES OF SCOPE (continued)
B. Manage / Upgrade Intellectual Capital
1) A “Luxury Goods University”
~tailored seminars at leading universities
~attracts better talent than brands could afford
2) Intentional grooming of network (collaboration, integration)
~ “LVMH House” – forum to exchange innovation, best
practice, ideas & info.
~ “Transversal Projects” – at branch level (and across)
C. Invest in Human Capital
~succession planning and development
~create / support entrepreneurial culture
~recruit and retain a pool of motivated, qualified managers
Financial vs. Strategic Buyer
| ‘Financial Buyer’ | ‘Strategic Buyer’ | |
| Buy To Sell | Buy To Hold | |
| -Private Equity | -Corporation | |
| -Hedge Fund | -Private Co. | |
| -Target identification | -Target identification | |
| Strategy | -The investment thesis | -Financing |
| Formulation | -Diagnosing underperformance | -The corporate strategy for adding value |
| (plan for | -Matching deal requirements to firm style | -Economies of scale and scope |
| adding value) | -The plan for driving value | -Acquisition vs. alliance |
| -The exit strategy | -Valuation | |
| -Due diligence | -Realizing benefits of combination | |
| Strategy | -Valuation | -Integrating culture and HR |
| Implementation | -Raising capital | -Integrating control & IT systems |
| (realizing | -Retaining/Compensating mgmt. | -Integrating operations |
| value) | -Improving operations | |
| -Performance measurement and control | ||
| -The role of the center (firm) | ||
Concluding Thoughts
LVMH great example of diversification based on unique capabilities and resources
LVMH is successful because it:
is disciplined, i.e., only competes where its skills give it a competitive advantage (‘coherence premium’)
respects and supports the individuality of its brands
continuously renews its stock of intellectual capital by investing in its people
Less Conglomerate than “Diversified Corporation”
But, bears greater risk… (there is no free lunch)
Beware “Corporate Raiders” and the ‘Conglomerate discount’
