Prada A Case Study Essay

(Part 2)

 

The High cost of Prada

 

Both Porter, Treacy and Wiersema have identified that in order for an organization to benefit from a certain strategic position it in doing so has elected to not take a different position. For the case of Prada by differentiating itself from its competitors it does not have the advantage of being a low cost producer. Where in 2012 Prada’s COGS accounted for 28.5% of the companies totally revenues where Kering was able to offer luxury brand products with significantly better operating expense costs with just 18.4% (Kering, 2012). Consistent with the choice of Prada to focus on differentiation over lowering costs, Prada has chosen to continue manufacturing its goods in Europe, with the Prada brand manufactured in Italy, and its subsidiary shoe line Church continued to be manufactured in England. The high manufacturing costs of Prada goods is a result of one of the sources of trade-offs which Porter has defined as inconsistencies of image or reputations’ where ‘a company known for delivering one kind of value may lack credibility and confuse customers or even undermine its reputation if it delivers another kind of value of attempts to deliver inconsistent things at the same time’ (Porter, 1996). The choice made by Prada to make an ‘unwavering commitment to quality and style’ (Johnson, 2013) has held Prada consistent to its brand.

 

What does your Prada fit?

 

A third source of Prada’s competitive positioning is derived from its ability to derive the right ‘Fit’ through its strategic decisions. In Porter’s model of strategic positioning he argues that organizations need to establish appropriate ‘fit’ through company activities that interact and reinforce one another’ (Porter, 2005). Most notable among Prada’s strategic decisions which mutually reinforced its strategic positioning was the successful acquisitions of high quality leather good companies in both the church and car shoe brands (Prada Case Study, 2012). By selecting to acquire brands that shared the established characteristics of Prada as a high quality, hand crafted, European manufactured, Prada was able to reinforce the image of the Prada brand by maintaining consistency across its product offerings. By aligning its decisions around ‘fit’ Prada has been able to benefit from a strong brand protection and has been able to succeed with a successful marketing strategy by only spending 5.1% (Prada Group, 2013) of its annual expenses on marketing. This is stark contrast to the large marketing costs spent by LVHM of 35% in 2012 (LVHM, 2012).
Section 2: Prada, Acquisitions, Strategic Logic, and Divorce

 

The road to Prada’s product diversification strategy

 

In the ever growing competitive luxury brand fashion industries companies seek new avenues to strengthen their competitive advantage, this can lead to pursuing a strategy of Mergers and Acquisitions. ‘Mergers and Acquisitions(M&A) are a common managerial strategy, used by firms to enter new markets, subdue a rival, or acquire a valued resource such as technology, location or people’ (Calipha, 2010). Acquisitions can be entered into for a variety of different motives including strategic, financial, and for managerial desire (Trautwein, 1990). Although M&A are a popular growth strategy many companies pursue this route have so with mixed results, Porter found that the use of M&A has been demonstrated to be a relatively weak strategy with more than 60% of acquisitions ultimately ending up being divested by the acquiring company (Porter, 1996). Even with the low success rate of most M&A, the most successful often tend to be when the company pursues a merger or acquisition with a related company, ‘where a firms market power may be increased through horizontal acquisitions or through product or market extension acquisitions’ p.62 (Montgomery, 2002). Prada’s use of M&A to expand geographically and grow its product offerings have provided great success for the company, however, many of its failed M&A initiatives are supported by common pitfalls of the M&A strategy.

 

Prada and the case of happy adoptions

 

Prada has had varying degrees of success with M&A, with the most beneficial of those ventures coming as a result of sound strategic motives that expanded the product offerings while remaining true to the core Prada branding. Porter has explained this strategic M&A approach as horizontal growth where by which the firm can accomplish horizontal growth by expanding their products in other geographic regions and or by increasing the range of products and services offered to current markets (Porter in (p.9 Porter in Calipha, 2010). When Prada made the decision to invest in the British brand Church shoes the strategic motivation had origins in the belief ‘that is would give them access to different clientele, namely men who appreciated high-quality shoes with a classical style and elegance’ (p.12 Prada Case Study, 2012). By making M&A decisions consistent with Prada’s high quality design and style Prada strengthened its brand remaining true to its value proposition. The success of this approach to M&A’s is demonstrated by the strong sales growth in both the Church Brand, up 17% in 2012 over 2011 and Prada’s core luxury leather goods sales up 18% for the same time period (Prada Group, 2013). Prada’s increased product diversification also assisted the company during the economic downturn where it was able to maintain steady growth and sales (Prada Case Study, 2012). When Prada has miss stepped with M&A initiatives it has often been when it moved furthest from its core brand identity. The case with the acquisitions of Helmut Lang and Jill Sanders, demonstrated this move from Prada’s core principles. Both brands catered to different clientele and had presented quite a different style. In the case of Helmut Lang the brand represented a focus on leading the way with minimalism and unorthodox advertising campaigns, which at times included adds in National Geographic (Wilson, 2005) diverged from Prada’s principles of selective high-end adverting and quality above all else. These acquisitions ultimately resulted in divestures by Prada.

 

Learning from ones Successes

 

For the most part Prada has demonstrated satisfactory level of competency in the area of M&A’s. A key area that Prada has been effective in is the successfully applying the learnings from good acquisitions to the identification and execution of subsequent acquisitions. Most notably, ‘following the successful integration of Church’s line, Prada decided to increase its presents in the men’s footwear market further and made a bid for Italian specialty shoe manufacture Car Shoe’ (p.12 Prada Case Study, 2012). Hamel, Doz and Prahold in Calipha et.al. emphasized the importance of learning from previous acquisitions as an avenue to learn from one another as a key contributing factor to future successful with M&A’s (Calipha, 2010). When, Prada has failed in its M&A projects it has often fell victim to a common critical mistake where by which companies underestimate the future investments and other capital needs of the company’s (p.3 Calipha, 2010). In the case of Fendi, the amount of debt Prada was required to absorb for the acquisition was over looked which ultimately resulted in Prada divesting is ownership stake in the company to LVHM (Prada Case Study, 2012). Although there have been more than one failure by Prada in the arena of M&A, they have been able to emerge without any financial losses (Prada Case Study, 2012). Their ability to remain on harmed by their failures has bolstered the sustainability of their competitive advantage.

Section 3: Can Prada Compete?
Competitive Strategy

 

As examined earlier in this paper Prada has positioned itself utilizing a differentiation strategy relative to its competitors. In order to under Prada’s ability to compete with the larger brands of Kering and LVHM on a sustained basis an examination of its overall defences will be conducted on what Porter has defined as the Five Forces of Competitive Strategy; threat of new entrants, power of suppliers, power of buyers, threat of substitutes, and competition among rivalries. The below section examines how Prada is positioned in relation to these competitive forces and its rivals – LVHM and Kering.

Threat of new entrants – In the case of the luxury brand fashion industry the threat of new entrants is relatively weak as much of the advantages the industry as a wholes enjoys stem from established brands. The advantage of an established brand, as it the case with Prada, and the proprietary design innovations weakness the strength of potential new entrants (Porter, 1999). Potential new entrants into the luxury band market would likely have to invest significantly more in advertising and other promotions than the 5.1% (Prada Group, 2013) spent by Prada to promote and establish their products with the fickle luxury brand consumers. Prada already enjoys a significant advantage in this area in comparison to LVHM and Kering who spend greater on advertising.

Power of Suppliers – When suppliers are powerful they are able to ‘capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants’ (p.83 Porter, 1999). Prada has been able to combated high supplier power by engaging in vertical integration through strategic partnerships with the leather suppliers in Italy and controlling the manufacturing phase directly from the raw material through to the finished products (Prada Group, 2013).

Power of Buyers – Buyers can assert power over the industry particularly in the case of ‘intermediate customers who can gain signi?cant bargaining power when they can in?uence the purchasing decisions of customers downstream’ (p.84 Porter, 1999). Prada has sought to establish a stronger defence over the buyers power particularly when it comes to wholesale distribution of its product by controlling the downstream sales of its products through directly owned retails stores. In the Prada group’s most recent annual report the company further reinforced its intention to move away from wholesale retailing to have more direct control over ‘the purchasing experience’ by focusing on expanding it direct retail store offerings. This move should also garnish stronger financial performance where in the past wholesales have provided limited financial benefit to the Prada company overall accounting for only 18% of net sales in 2012 (Prada Group, 2013). Kering has demonstrated increasing concern for its high reliance on its wholesale sales at 30%, noting in its most recent annual financial report that it is limiting its luxury brand sales through wholesale channels in attempt to ‘more effectively controlling their distribution and reinforcing their exclusivity'(p.136 Kering, 2012).

Threat of Substitutes – ‘A substitute performs the same or a similar function as an industries product by a different means’ (p.84 Porter, 1999). Porter goes on to note that, when the threat of substitutes is high, industry pro?tability suffers. If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of pro?tability – and often growth potential (Porter, 1999). Prada and other luxury brands face a high threat of substitutes from counterfeit good makers, particularly China (Rocks and Halperin, 2008 in Douglas, 2011). Prada has taken an offensive position against such threats and spent extensively on product authenticity measures as well actively engaged in various groups to curb the proliferation of counterfeit goods to the more established North American and European markets.

Rivalry Amongst Competitors- Rivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements (Porter, 1999). In the luxury brand fashion industry rivalry is particularly high as increasing fixed costs force companies to grow and expand their brand at a faster pace to satisfy shareholders. Prada’s strategy against its rivals has been to avoid head to head competition. This is most evident of Prada’s slow and steady approach to expansion in the emerging Asian markets where ‘with 21 stores in China, Prada has half as many stores as Luis Vuitton with 43’ (Johnson, 2013). This careful move into markets, has helped Prada avoid over exposure and has added a 46% increase in profits from 2011 to 2012, while LVHM has reported slower growth in profits (Johnson, 2013). As Prada continues its expansion into emerging markets and expands its product offerings, it will be likely sustain profitability and growth in avoiding direct head to head competition with the larger brands. This avoidance of direct competition will assist Prada in avoiding what Porter has called a zero sum game of competition.

Conclusions

 

Prada in their own way have grown from a small Italian leather goods brand to a dominating player in the luxury goods industry. They have established a brand known for its quality and simple elegance which resonates with both men and women all around the world. While other companies have pursued strategies in lowering costs and rapid expansion, Prada has remained true to its strategy of quality above all else. In the coming years Prada, along with the luxury brand industry will face increased pressure as the economies of Asian powerhouses China and Japan begin to slow. The importance of a sustainability effective competitive strategy will likely be the difference maker in through the next economic downturn.

 

 

Prada