The purchase of Tiffany
What Are The Reasons Behind The Purchase Of Tiffany By LVMH?
The marriage between LVMH and Tiffany had a lot of benefits for both sides since the two are large companies that have operated for a long time. However, LVMH had more to again from the marriage and here are some of the reasons based on the case study.
- LVMH had plenty of cash and buying Tiffany was a form of investment
- LVMH needed Tiffany’s America to expand its brand
- Tiffany had a better communication cache that LVMH required to solidify its position as a global luxury powerhouse
- The marriage would help LVMH to have more American luxury consumers since Tiffany had more consumers in the market base.
- The acquisition would boost LVMH’s share in the United States
- Marriage between the two firms would help Tiffany meets its objective of being the Next Generation Luxury Jewelry
- LVMH purchased Tiffany since it had no resource and talent to achieve its goals
- Lastly, Tiffany had lots of brand issues that LVMH would help
The reasons for LVMH’s purchase of Tiffany can be examined through Porter’s five forces analysis and the PESTLE model.
Porters Five analysis
Narayanan & Fahey (2005) pointed out that porter’s five forces are a framework is a method that is used to provide a comprehensive insight into the competition of a business. It contains five elements that determine the competitive intensity and level of profitability in an industry. Grundy (2006) noted that the forces include supplier and buyer powers, competitive rivalry, a threat to new entries, and substitution. LVMH reasons for buying Tiffany are based on the five forces as explained below;
Bargaining power of consumers- by buying Tiffany, LVMH had more power over buyers since its product portfolio would be increased. Reduction in consumers’ bargaining power is a benefit to the company since they would have more control. In another view, LVMH, as a buyer of Tiffany Company, had plenty of cash and could easily purchase.
Competitive rivalry- From the case, LVMH purchased Tiffany to reduce the level of competition in the industry. This would help LVMH to take control of the American market share. Tiffany had several competitive advantages over LVMH, and by marring the two, the LVMH market position would rise.
The threat of substitution- Tiffany was a threat to LVMH since it had a strong brand in the American market share. Buying Tiffany would reduce the substitution threat and help LVMH stabilize its brands.
The threat of new entry in the market- since luxury jewelry is a profitable market, it attracts many firms. The entry of new firms into the industry would mean a reduction in profits. By merging with Tiffany, LVMH would have reduced the number of firms in the industry and move towards monopoly.
In addition to the porter five force model, the idea of buying Tiffany can be explained based on the PESTLE analysis of the business environment. Perera (2017) noted that PESTLE analysis examines the external environment of a business providing insights on its macro-environment factors that influence operations. The macro-environment entails political, economic, social, technological, environmental, and legal factors that impact business operations. From the case study, a critical analysis of LVMH business external factors indicates that it was economically desirable to purchase Tiffany Company.
LVMH had a favorable political environment that enhanced the smooth running of the business. In many cases, political instability disrupts business operations, which is not suitable for the business. On the other hand, conditions of political stability promote both foreign and domestic trading, thus more profits for the companies.
Economically, both LVMH and Tiffany were stable with a large market share. The external economic environment and that of the entire industry were favorable encouraging LVMH to purchase Tiffany.
In terms of the technological environment, Tiffany had an efficient communication cache that, when integrated with LVMH systems, then the product would lead to significant improvement. Both the two firms are noted to have no legal issues and breached contracts that could cause challenges.
Tiffany was a better choice for LVMH since it had an excellent digital profile. It was ranked at position six out of 200 brands in omnichannel measurement. Further, the firm also had strong customer engagement since it integrated digital-savvy and white-glove customer services. The combination provided the best customer engagement that enlarged its customer base. According to Keith Daniels, the marriage between the two firms will help extend their global reach in which both will have a stronger market share in Europe (Danziger, 2019). This will improve margins and help the firms grow topline. The marriage would help LVMH to have more American luxury consumers since Tiffany had more consumers in the market base.
How Does LVMH Try To Gain Competitive Advantage?
From the case study, LVMH intends to gain a competitive advantage by taking over Tiffany’s America. Further, it intends to take over Tiffany’s customer base and its digital profile. By buying Tiffany. LVMH will expand its global reach and increase its market position. A critical examination of the case indicates that LVMH focuses on four methods to gain a competitive advantage.
- Pool resources together through strategic marriage with Tiffany
- Product differentiation through integrating Tiffany brands with its original brands
- Sell similar products as Tiffany sold before in the American market
- Move to a higher market position by applying defensive strategies
- Expand its market base by acquiring Tiffany’s America
Danziger (2019) noted that one of the most excellent deals that LVMH gets from marriage is Tiffany’s America. From the case, Tiffany had a strong market base in America by selling its global brands. It is noted that Tiffany had over 6.5 million desktop traffic, with 75% from the United States (Danziger, 2019). Acquisition of Tiffany would boost the LVMH U.S market share to approximately 46.8 Euros in a year. This is expected to increase LVMH watches and jewelry group performance, which is weaker at 9% of the total revenues (Danziger, 2019). The U.S is the largest jewelry market, an increase in LVMH market share will increase its overall performance hence a higher competitive advantage.
Another competitive strategy employed by LVMH is making a pool of resources from the merge. From the beginning, it is noted that LVMH had plenty of cash, which, when combined with those from the merge, would make a pool of resources. Enough resources would help expand the market and make the company have a higher competitive advantage over its rivals.
Product differentiation through integrating Tiffany brands with its original brands and selling similar products as Tiffany sold before in the American market. From the case, it is noted that Tiffany had a long history of luxury brands with a high level of creativity and design excellence. The installation of these brand qualities at LVMH would foster consumer satisfaction, which is associated with a high competitive advantage.
With Tiffany’s brand equity integrated into LVMH talent, capital, and creativity, LVMH will have a strong competitive advantage over its rivals. Further, Tiffany’s product line that is composed of mostly 21st century affordable sterling silver with high brand values, presents LVMH with the opportunity to leverage high marker position. According to LVMH Luxury Marketing Council CEO, Greg Furman, buying Tiffany comes with a new vision and positioning of LVMH in the both domestic and global market.
Will the LVMH’s competitive strategies work?
Based on the industry and the strengths of LVMH after the acquisition, the competitive strategies implemented would definitely work for LVMH. The large capital base would promote a cost-leadership competitive strategy, which is very effective in most industries (Rastogi & Trivedi, 2016). Further, product differentiation will attract potential customers to the company. Besides, focusing on Tiffany’s customers, LVMH can build a strong market base since it already has loyal customers. Product differentiation increases the number of customers, which then increase the company’s profit margin significantly.
The marriage between LVMH and Tiffany can also act as a strategic alliance in which LVMH overtakes all the resources from Tiffany and build a strong market position through new competitive advantages over its rival firms. From the case, LVMH purchased Tiffany to reduce the level of competition in the industry. This would help LVMH to take control of the American market share. Tiffany had several competitive advantages over LVMH, and by marring the two, the LVMH market position would rise.
Sustainability of LVMH competitive strategies
Dälken (2014) argued that the sustainability of competitive strategies is based on the company’s assets, abilities, and financial base. LVMH has a strong financial base that can support its competitive strategies. The strategies are supposed to thrive, even in hard environmental conditions. Further, they are supposed to take into account the ethical practices in business operations. It is essential to note that most investors would want to invest in firms that bargain and avoid value trap. If LVMH does not implement sustainable competitive strategies, then it may be hard to recover from the stock bargain. Further, LVMH should have real value investments instead of value traps to attract more investors.
LVMH has a sustainable competitive advantage since it is a low-cost provider and offer low prices. It will enjoy economies of scale with efficient operations to keep its definite competitive advantage.
It has market power- by taking over the U.S market from Tiffany, LVMH will have strong market power. High market powers give companies the ability to charge high prices without losing market share. Further, buying Tiffany, LVMH had more power over buyers since its product portfolio would be increased. Reduction in consumers’ bargaining power is a benefit to the company since they would have more control. In another view, LVMH as a buyer of Tiffany Company had plenty of cash and could easily purchase
LVMH also shows a sustainable competitive advantage since it has a strong balance sheet. The company set over $14.5 billion to buy Tiffany and Company. The company evaluated $120 per share bid for the best interest of shareholders. The fourth-quarter of 2018 registered total revenue of 46.8 Euros, with 7% from Japan and 29% from the United States. From the total revenues, the firm can implement its strategic competitive strategies and become an industry giant.
In conclusion, the purchase of Tiffany was the right business decision since it presents various opportunities for LVMH. The marriage between LVMH and Tiffany had a lot of benefits for both sides since the two are large companies that have operated for a long time. However, LVMH had more to gain from the marriage. The marriage would help LVMH to have more American luxury consumers since Tiffany had more consumers in the market base. The acquisition would boost LVMH’s share in the United States. Marriage between the two firms would help Tiffany meets its objective of being the Next Generation Luxury Jewelry. LVMH purchased Tiffany since it had no resource and talent to achieve its goals, and lastly, Tiffany had lots of brand issues that LVMH would help based on its resources and talent.
References
Dälken, F. (2014). Are Porter’s five competitive forces still applicable? A critical examination concerning the relevance for today’s business (Bachelor’s thesis, University of Twente).
Danziger, P. (2019). LVMH And Tiffany Is A Marriage Made In Luxury Heaven. Business Policy Yohann Mauger, Phd.
Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15(5), 213-229.
Narayanan, V. K., & Fahey, L. (2005). The relevance of the institutional underpinnings of Porter’s five forces framework to emerging economies: An epistemological analysis. Journal of Management Studies, 42(1), 207-223.
Perera, R. (2017). The PESTLE analysis. Nerdynaut.
Rastogi, N. I. T. A. N. K., & Trivedi, M. K. (2016). PESTLE technique–a tool to identify external risks in construction projects. International Research Journal of Engineering and Technology (IRJET), 3(1), 384-388.