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A Case Analysis:

EXECUTIVE SUMMARY

The year is 2000, Gucci Group is at a cross road and its strategic decision at this juncture will
define the future of the world’s fourth largest US$1.2 billion luxury group. Gucci is a 77 years old
group, established in 1923 in Florence selling luggage imported from Germany. It has transformed
itself over the last 77 years and moved from a family owned entity to a public listed company. After 77
years of its existence, it now sells a wide range of luxury goods starting from leather goods, fragrance,
cosmetics, shoes, watches, apparel, jewelry, silk ties & scarves etc. More importantly, what started as
a single product, single brand company that was focused on small leather goods has now transformed
itself into a multi-brand, multi-product group with worldwide presence.

The case Fashion Faux Pas: Gucci & LVMH deals about the hostile takeover and the legal
battle between the aforementioned companies in the controlling ownership of Gucci shortly after its
initial public offering. Thus, J4 examined the actions pursued by Gucci as it has practiced the “poison
pill” mechanism.

With such a study, the proponent aims to recommend actions that will enhance the
competitiveness of the company. Further, the group identified area of opportunity in which the internal
organization of Gucci can focus on to deliberately align its strategies with its mission and vision.

To achieve these goals, the proponent used several tools in congruence with the identified
problems hindering the company’s endeavor to achieve its goals. The proponent initially looked into
the internal structure of Gucci through its company profile. Acknowledging the significant impact of
external environment and the fashion industry in the performance of the company, the proponent used
the PESTL Analysis and Porter’s Five Forces of Competition Analysis. With the PESTL, it was found
out that the economic and social aspects of environment have the utmost impact to the company.
Porter’s result on the other hand posted a moderate to high level of competitiveness within the fashion
industry. Furthermore, the proponents included other analysis of general environment to completely
realize what action(s) to undertake to satisfy the goals of Gucci.

TOWS Matrix evaluates the company’s historical transactions and strategies to gain a better
picture of the company’s current status and lead the proponent to a realistic action plan for the future.
This tool is an aid to identify strengths and opportunities that can serve as armours in battling the
weaknesses and threats in the organization.

With the integration and matching of the results of the tools used, the strategic action chosen
as the grand strategy was determined to be the pursuance of market expansion. This can help the
company proceed to development and growth. This action is appropriate since the company’s status
in the industry has been at par with the superior brands like LVMH, Prada, Hermes, and the like.
A Case Analysis:

Objectives:

The proponents aim to examine the actions pursued by Gucci in the case when LVMH
attempted a hostile takeover. Other intents of the groups are the following:

(1) To identify strategies that will help maintain and strengthen the company’s competitiveness in
the luxury goods industry.
(2) To identify opportunities that will satisfy the company’s mission of rapid growth development
in the next five years.
(3) To propose tactics and/or courses of actions that Gucci can undertake to increase its market
share by 10% next year.

Problem Statement:

The battle between LVMH & GUCCI brought the latter to spill a “poison pill” (ESOP) into
competition with the former’s attempt of hostile takeover. Gucci then faced a dilemma on how it will
reposition itself in the fashion industry and how it will find opportunities to enjoy organic growth to pro-
actively prevent takeover of a competitor like LVMH.
A Case Analysis:

COMPANY PROFILE

The House of Gucci or famously known as Gucci, was founded by Guccio Gucci in
1921. As one of the world’s leading luxury fashion brands, Gucci is known for its renowned
reputation for quality and Italian craftsmanship, designs, manufactures and distributes highly
desirable products such as leather goods, shoes, ready-to-wear, silks, timepieces and fine
jewelry.

After Guccio’s death in 1953, his son Aldo helped the company lead the company to
a position of International prominence, opening the company’s first boutique in New York.
Gucci targeted the Far East for further expansion in the late 1960s wherein they opened
stores in Hong Kong and Tokyo. They also developed on that time their famous logo, GG,
the Flora silk scarf and the Jackie O shoulder bag which was created by U.S. President John
F. Kennedy’s wife, Jackie Kennedy.

During the late 1970s, the establishment remained one of the premier luxury goods
establishments. Family quarrels and disastrous business decisions had brought to the
downfall of Gucci. His two sons, Rodolfo and Aldo acquired equal 50% shares of the
company. Rodolfo’s contribution was much less than what Aldo and his sons did. Aldo
created the Gucci Accessories Collection (GAC) wherein the main intention was to boost the
Gucci Parfumes Branch and it was operated by his sons. GAC consisted of small
accessories, such as cosmetic bags, lighters, and pens, which were priced at considerably
lower points than the other items in the company’s accessories catalog.

GAC proved to be profitable but it had resulted to the lost of Gucci’s reputation as the
one of the world’s most stylish brands. Soon, cheap counterfeit Gucci products began
appearing, with the knockoffs looking exactly the same as the originals. This became a big
stain to the company’s name. Rodolfo’s death paved way for the eventual control of his son
Maurizio of the Gucci Company and further mismanagement caused him to introduce
déclassé products which further cheapened the then-weakening Gucci brand name.

The company suffered heavy losses in October 1993. The business was set up for
liquidation and Maurizio was forced to sell his shares in the company to Investcorp in August
1993. This was the start of Gucci’s turnaround and redemption with Investcorp’s bold move
of hiring Domenico de Sole as Gucci’s CEO and Tom Ford as Creative Director.
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In 1999, Pinault-Printempts-Redoute (PPR) made a strategic investment worth $2.9


billion and eventually became the current owner of the Gucci Group. At present, Gucci is one
of the leading luxury brands in the world with several luxury brands under its portfolio like
Balenciaga, Yves Saint Laurent and Alexander McQueen to name a few.

Mission:

To become a group leader in the luxury market at world-wide level through: putting
into effect and maintaining.
The company’s objective was to enhance its rapid development and growth plans, as
well as to bring about great flexibility to its production and business processes.

Vision:

To become the global multi-brand, well-diversified luxury goods company leader.

MAJOR PRODUCTS and SERVICES

Gucci Group produces a range of fashion products and related items. The company
offers the following products and brands:

Luxury goods
Women’s ready to wear
Luggage
Handbags
Leather goods Time pieces
Shoes
Jewellery
Ties
Scarves Eyewear
Perfumes
Cosmetics
Skincare products
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BRANDS:

Alexander McQueen Boucheron Yves Saint Laurent


Balenciaga Gucci YSL Beaute
BEDAT & Co Sergio Rossi
Bottega Veneta Stella McCartney

Segment information
The Group has five operating segments:

Gucci Division (excluding Gucci Timepieces)


Gucci Division (excluding Gucci Timepieces) includes all revenues from the sale and
licensing of Gucci branded products other than those from the wholesale distribution
activities of the Gucci brand watches.

Gucci Group Watches


Gucci Group Watches includes the production and distribution of Gucci and other
Gucci Group brand watches.

Yves Saint Laurent


Yves Saint Laurent includes all revenues from the sale and licensing of Yves Saint
Laurent branded products other than those from the wholesale distribution of Yves Saint
Laurent perfumes, cosmetics and watches.

YSL Beauté:
YSL Beauté includes revenues from the sale of perfume, make-up and skincare
products other than Gucci and Boucheron brand perfume.
A Case Analysis:

Gucci vs. LVMH: The Battle for Control

The battle for the takeover of Gucci by LVMH, and efforts by Gucci management to
defend against the intended takeover at all costs, is a classic example in the fashion goods
industry. The case can be seen as mainly a battle between the two majority stakeholders in
Gucci, namely the management of Gucci itself versus the other majority stakeholder LVMH.
It can also be seen as the battle between two personalities, De Sole of Gucci and Bernard
Arnault of LVMH, each determined to get their own way, regardless of the other minority
shareholders.

The following are claims of LVMH against Gucci’s poison bill creation:

Nature of ESOP

An ESOP is a type of employee benefit plan designed to invest primarily in


employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible
contributions to it. In the case of Gucci, it has created ESOP as a strategy to protect
the ownership of the management and its long-time employees. With the
growing percentage of shares of LVMH, extending up to 34.4%, Gucci has been
alarmed of the possible hostile takeover. De Sole, CEO of Gucci, instituted ESOP
in the form of Trust. This is viewed as a company-centred move because as was
mentioned, ESOP was merely a Trust, meaning, employees can not expect for
premium and dividends. The company also, did not actually issued stocks to
accumulate additional capital, rather only shares that converted into its power to
retain its majority voting rights.

Luxury Goods Market – Key success Factors

Comparatively, Gucci maintains high profitability from the certain


product lines . They maintain the company’s profitability, market position,
and brand superiority over time. It is highlighted that the gross margin is
higher in the case of watches and leather goods @ 75% to 80%, followed
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by Silks @ 65% to 70% and apparel @ 50%. Secondly, the primary
consumer of luxury goods is women in the age group from 25 to 50 and a
major portion of such sales for many brands are from Asia (especially
Japan).

Spread of Luxury Products – Source: HBS Case 9-701-037

Luxury goods industry

The Luxury Goods industry is defined by the personal consumer goods positioned in
the high end of the market. Luxury products transcend product functionality. Traditionally, the
Luxury Goods industry has been associated with French families and designers and is
becoming a global industry.

The main characteristics of luxury goods are:


- A strong branding that relates to an exclusive and wealthy lifestyle.
- High quality, especially in terms of design
- Premium pricing

The luxury brand is perceived as being exclusive (82% of consumers), high quality (80%),
stylish (75%) and extravagant (65%). Only 55% perceive it as lasting and only 51% perceive
A Case Analysis:
it as expensive.

Market segmentation

Total sales in 1999/2000 amounted to USD 60 to 80 billion. The market growth has
been 6.3% between 1996 and 1999, and is supposed to be 7-10% between 1999 and 2003.
The market can be divided into different business segments and geographical areas.

The market is divided among:


· Fragrance and cosmetics (24 to 37% of the luxury goods, depending on estimates)
· Ready-to-wear and fashion (14-30%)
· Leather and shoes (13-16%)
· Watches and jewellery (8-32%)
· Wines and spirits (15-22%)
· Table wear (4-5%)
· Accessories (5-9%)

Geographical segments
The market is divided into 3 geographical areas: in 1999, USA accounted for 30%,
Europe for34%, and Asia for 36% (increasing to 60% if we include purchases abroad by
Asian tourists).
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PESTL ANALYSIS
A Case Analysis:

Porter’s Five Forces Model Analysis

Industry rivalry

The competitiveness in the industry can be qualified as relatively high, but given the
high margins and the customers' perception about the price, the competition is not on price,
but rather on quality and image perception, as well as on the ability to attract the right
designers.

Competitors

The barriers to entry are very high. They are the intangible image and the perception
built around the brand.
The barriers to stay are also very high: there is a continuous need to "feed" the
image, to maintain the perception but still to respond to customers' needs and changing
expectations.
The trade off between exclusivity, stylishness, extravagance and lasting image
makes it difficult to be for a long time in the business.
There are hardly any barriers to exit given the high barriers to entry and to stay and
the low barriers to exit, the dynamics of the industry are: few big players and only the best,
as the others either cannot get in, or are easily out.

Suppliers

The bargaining power of the suppliers depends on the segment. As some tended to
have increased bargaining power, this leads to the concentration and vertical integration
trend in the industry, one of the reasons for which is to lessen the bargaining power of the
suppliers.
Until now, there is not observed concentration among the suppliers of the luxury goods
industry among themselves. There is however a trend for larger houses to buy smaller
suppliers and to deprive the market form access to those suppliers.
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Customers

There are two types of customers:


• The super-rich
• The middle-market customers, who selectively trade-up to higher levels of quality,
taste and aspiration

The super-rich customers (or High Net Worth Individuals) seem not subject to the world
economic cycles. In addition, they are a growing number. Estimates predict that their number
will increase from ~ 26 millions in 2000 to ~ 40 millions in 2005 (an increase of ~ 9% p.a.)
The middle-market customers are those that are willing to buy luxury goods, but "they want
the hottest, trendiest design, which increasingly have to be marketed in creative and
expensive ways". They can potentially expand the market quite dramatically, as they are part
of the upper-middle class. They are considered to be both a great opportunity (show no price
sensitivity when buying the "hottest" product) but they are also a threat. "They are more
demanding, more selective and show less brand loyalty than the super-rich class".
This implies for the luxury goods industry a difficult equilibrium between the two kinds of
customers, because both are not necessarily compatible. This can lead to a difficult trade off
between satisfying a smaller number of loyal customers and a larger number of more volatile
customers.

New entrants

The new entrants are mainly new designers who start their own brand on their own.
Usually, these new entrants, if successful, are quickly acquired by the big names of the
industry, by providing them the needed infrastructure for growth. However, new entrants, if
remaining independent, can represent a threat by capturing the volatile middle market
customers. These customers go after the established name and the perception build around
it, after the quality and design. All these elements take time to be built, which makes the
threat of new entrants less significant.
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Luxury Goods Market – Competitive Position Mapping

From a position mapping point of view, Hermes and Vendome form the high priced
luxury goods range. Gucci, LVMH and Prada take the mid-tier followed by Ferragamo,
Emporio Armani etc in the low end tier. As for products, many of these are moving from
traditional classic prints to new fashion. Several of these have global reach with some
brands limiting their presence and others expanding aggressively. For example, LVMH has
1005 direct stores where as Gucci has only 126 stores but uses different sources like 6700
point of sales for watches, 301 departmental stores and 54 duty free shops for variety of its
products.

LUXURY M

Luxury Company Positioning Matrix

The competitive position mapping table below was done based on five key areas that
are recommended by Macmillan (2000) for assessing competitive advantage.

GUCCI Rest of Competition

Cost-based Its recent remaking effort and its The in-house manufacturing model
Advantage outsourced manufacturing adopted by Hermes, LVMH and
model has helped to reduce many others have shown to
cost and thereby price by 30%. increase the fixed investment and
It also minimizes fixed thereby resulting in lower return on
investment and helps to invested capital and thereby
maintain its return on invested reducing cost advantage and
capital at 36% increasing the price
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GUCCI Rest of Competition

Differentiated It focuses heavily on the unique Many competitors focus heavily on


Product or customer service experience to customer services experience as
Service maintain its brand image. It also part of maintaining their luxury
has different range of products branding efforts. However, LVMH
including jewelry, watches, focused more on leathers in the
leather, apparels etc. luxury products and others like
liquor. As shown in figure above,
not many brands have a spread of
luxury products and they mainly
focus only on high margin leather
products or watches only

First mover In a 150 years old industry, LVMH, Hermes and several other
Advantage Gucci has been around for 77 brands have been in the industry
years. Though it had ups and longer than Gucci and are well
downs, the recent strategy has known to the consumer and are
put it back on growth track. If considered the pioneers with first
this track record continues it will mover advantage
overtake the leaders

Time based The revamp effort has reduced Products like Kelly bag from
advantage manufacturing time considerably Hermes had a long waiting list and
in many product lines. A 35% became a fashion statement that
reduction noticed in the leather worked to Hermes advantage given
bag manufacturing cycle – 104 the product’s market image and
days to 68 days. It also built 20- success. However, the same may
30% additional capacity to cater not apply to fast moving ‘ready-to-
for growth in the current wear’ product lines and that calls
outsourced production line, for focus on demand management
which will position them to and reducing manufacturing cycle
address any growth quickly time for fast moving products

Technology Heavy focus on technology by While some brands have realized


Based senior management is visible as the internet potential and
advantage part of Gucci’s revamping effort. established website and online
This includes online sales, EDI shopping, there is a hesitation to
network connecting Gucci- adopt the technology aspects fully
suppliers-partners, and data by many luxury companies. This is
mining on customer preference because of a common belief that an
and market demand exclusive clientele would prefer a
management etc. traditional luxury shopping
experience and luxury is not
synonymous with e-commerce.
Luxury Company Competitive Assessment

The TOWS MATRIX


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STRENGTHS WEAKNESSES
INTERNA 1. Well-known brand
1. Company size is small
2. Price of products are
L 2. Wide-ranging presence
relatively high
3. Limited target customer
worldwide
– the professionals
3. Aggressive strategy
through diversification and
communication
4. Expansive product lines
5. Novel product lines
matching up trends in
customer tastes and
EXTERNAL preferences
Controlled and integrated
distribution network
6. Leather goods, watches
and other accessories are
Gucci’s first-line products

OPPORTUNITIES SO STRATEGIC/TACTICAL WO STRATEGIC/TACTICAL


1. Promising wide market ACTION ACTION
potential of luxury
markets is growing in Asia 1. Market Expansion (S1, 1. Product Development
2. Consolidation of other S2, O1,O5, O6) (W1, W2, W3, O1, O2,
brands that can serve as 2. Related Diversification O3, 04, O5, O6)
competitive advantage (S1, S2, S4, S5, S6, O1,
3. Expansion of product O2, O3, O4, O5, O6)
portfolio 3. Innovation and
4. The latest developments Improvement of
in multimedia technology Current Technology 2. Skills and Technology
for advertisements and (S3, S4, S5, S6, O1, O2, Advancement
marketing O3, O4, O5, O6) Trainings (O3, O4, O5,
5. E-marketing O6)
6. Prominence of e-
commerce leading to 4. Strategic Alliance with
online presence acquired companies (S1,
S3, O1, O2, O3, O4)

THREATS ST STRATEGIC/TACTICAL WT STRATEGIC/TACTICAL


1. Stiffening competition ACTION ACTION
2. Presence of substitutes
such 1. Market Penetration (S1, 1. Backward Integration
as medium brand products S2, S4, S5, S6, T1,T3, (W1, W2, T1, T2, T3,
3. Possible takeover of T4) T4)
holding company Pinault-
Printemps-Redoute 2. Product Line Extension
4. Fake Gucci Products ( T1, T2, T3, T4)
5. Exposure to political and
economic turmoil of local
operations.
A Case Analysis:

Alternative Courses of
Strategic/Tactical Actions
The TOWS matrix aided the proponents to identify the strengths and
opportunities of Gucci which can battle its own weaknesses and threats. Through
this matrix, the group was able to come up with several alternative courses of
actions which eventually will lead the company to strategically position itself as a
fast-growing luxury goods brand.

1. Market Expansion
Its well known brand and high consumer recall worldwide of its brand, it is
given that the company finds a favourable pick of action in market expansion as
it can venture into expanding in the growing economies in the Asian continent
and other potential markets.

Advantages Disadvantages

1. Growth in terms of market share 1. High investment is required to


support the action

2. Improved market position 2. The company needs to


undertake legal proceedings
needed to enter new markets

3. Above average returns through


widened market

4. Strengthening and adding more


value to the company and its brand
name

5. Nearer to its market as more


distribution network will be added

1. Related Diversification
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Related Diversification is possible through the company’s aggressive
strategizing and expansive product lines.

Advantages Disadvantages

1. Increase in market share 1. The company may need to


resolve operational efficiency
issues and improve its supply
and value chain management

2. Widened product choices for 2. The company’s distribution


consumers network may be disturbed

3. More established brand name and


more value to the brand

3. Innovation and Improvement of Current Technology


The multimedia way of marketing the products can pave way to
innovative operations for Gucci since its controlled and integrated network
provided the company the tool to possibly seek this course of action for further

Advantages Disadvantages

1.Enhancement of marketing and 1. Investment to Research &


broadening the scope of distribution development is high

2. Increase in product portfolio 2. Costly operating expenses

3. Strengthening and adding more 3. Additional cost for training &


value to the company and its brand development for human
name resources

4. It can serve customers faster and


more conveniently.

improvements.

4. Product Development
Fashion fades too fast and for Gucci’s brand to remain fresh and new, it
should create, new products that would create value for the company and would
stabilize its financial position in the luxury good industry.
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Advantages Disadvantages

1. Improvement of financial base 1. The company needs to incur


greater research and
development expense

2. Increase in product portfolio and 2. Uncertainty in product


product mixes acceptance

3. Strengthening and adding more


value to the company and its brand
name

5. Strategic Alliance with acquired companies


The company can improve its cash base and expand its revenue base
thereby increasing its market share if the company ventures into alliances with
its acquired companies in order to promote and market its products.

Advantages Disadvantages

1. Improve cash and revenue base 1. High Investment costs

2. Increase in market share 2. Result of high debt for Gucci

3. Strengthening and adding more


value to the company and its brand
name

6. Backward Integration
Gucci could cost in its production/ manufacturing of goods without
compromising quality by means of backward integration, with this strategy,
Gucci could distribute and sell its products at a lower price making them more
competitive and could threaten substitutes.

Advantages Disadvantages

1. Improved Quality Products 1. This entails additional costs to


the company

2. Improved customer Services

3. Updated products and services

1. Lower operating cost


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7. Strategic Alliance with Local Distributors and Retailers

The company can easily penetrate the market if it can close an alliance
with local distributors and retailers thereby increasing cash and revenue base.

Advantages Disadvantages

1. Improve cash and revenue base 1. High Investment costs

2. Increase in market share

3. Strengthening and adding more


value to the company and its brand
name

8. Product line extension

Gucci could also extend its product line and innovative products that are
related to its core business.

Advantages Disadvantages

1. Increase revenue/sales 1. High Investment costs

2. Increase in market share 2. Research and development


entails efforts and costs

3. Wide variety of products2.


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Activity Responsible Who Needs To Resources Timeframe KPIs/KRAs


Person Cooperate Needed

Market Expansion
➢ Conduct Market Marketing R&D; Financial Last Quarter of Identification of
Study in Asia(first Department; Marketing Resources; 2001 onwards demand in Asia
target market for Research & Human
further Development Resources;
Expansion)

➢ Assessment of Marketing Finance.; Human First Quarter of Result indicating


Market Study Department; Marketing Resources; 2002 onwards potential market
Result Financing in Asia based
department from rigid
studies

➢ Launch of Gucci Human All employees Financial Last Quarter of


expanding in Asia Resource of Gucci Resources; Fixed 2001 onwards
Department; Capital; Project
Operations Human Engineering
Department; Resources;
Marketing Technological
Department, Resources
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SUMMARY OF ANALYSIS

Assessments Findings and How can it


Recommended contribute to
Actions enhance its
competitiveness?

PEST DG
Economic, Political and It helps the company
Legal segment has gain sustainability
utmost impact to Gucci. despite the economic
Analysis The company has to
expand market and
crisis. Further, it helps
the company gain
integrate the competitive increased customer
advantage of acquired loyalty and gain market
companies with strategic share thereby providing a
alliances strong revenue and cash
base

Porter’s
There is a very high It helps the company
competition in the achieve strong staying
industry because of few power in the industry by
Five but competitive players
and of the high capital
having majority influence
in the fashion industry

Forces investment required in


entering in the industry.
trending backed up by
partnerships aiding the
The company has to company in lowering its
penetrate new markets cost and offsetting the
and achieve dominant threats of substitutes
leadership in the industry

TOWS
The company has more It helps the company
strengths than
weaknesses which can be
Analysis matched with its many
opportunities to combat
threats.
The company should take
advantage on the
promising wide market
potential of luxury
markets. Since the
company possessed a
large potential in market
growth, it should invest
in market expansion
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MATCHING AND DECISION STAGE

PEST DG Porter’s Five TOWS Decision


ANALYSIS Forces of Analysis
Competition
Market Market Market
Expansion Expansion Expansion
Market
Penetration
Strategic
Alliances
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Recommendation:

The Market Expansion step is that period when a company assesses current markets, identifies untapped
markets, and seeks opportunities for revenue growth through new market opportunities. The market expansion step will
result in estimates for delivering new capabilities to current markets, and potential new markets for existing products.

Gucci has a strong brand image worldwide but it has not expanded yet into other markets mainly because for
a couple of years of operations, it has focused in major markets in Europe and North America.

The step that the company can undertake is to capitalize on favourable opportunity- Asian market. Asia,
according to studies, is a fast growing economy worldwide. High net worth individuals are increasing in number in the
region- quite an opportunity for luxury good company like of Gucci.

Gucci can also treat Asia as country-by-country region to identify and categorize more potential markets from
the less ones. In that case, it will reduce cost in investments. Japan, China, Hong Kong, Korea, Singapore are top five
most countries that are seen by most researchers that can be tapped by Gucci.

Thus, market expansion is the best pick for the company to strategically maintain and enhance its position in
the industry as one of the superior branded product worldwide. Market Expansion satisfies the mission of the company
to rapidly develop and grow. With this strategy, Gucci will also be able to hold its position to be one of the top brands in
the luxury good industry. Market share will substantially increase competing head to head with its competitors like
LVMH. With the opening of new distribution networks in the selected areas in Asia, Gucci will now be closer to its
clients serving them with convenience and offering a wide array of products that are fresh and new. This would further
lead to stronger brand equity and increase sales and profit and a higher dividends/income for stakeholders.

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