Explaining the Dominance of French and Italian Luxury Goods Market - Essay Sample

Introduction

There is a dominance of the luxury goods market by companies from France and Italy. The purpose of this paper is to use the porter's diamond model to explain this dominance. The paper also looks at the effect of the acquisition of small companies by large companies on this dominance.

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Firm Strategy, Structure, and Rivalry

Different firms have different approaches and structures. Strategies are the tactics employed by a company in various aspects of its operation, such as production and marketing. The country in which a company is located affects the structure and strategy it adopts. The rivalry of companies located in a country increases their competitiveness. There are many luxury goods companies in Italy and France, which results in the intense competition since each company wants a share of their countries market. When there is rivalry, companies have to innovate and adopt effective strategies for them to have a competitive advantage. Luxury good companies in Italy and France have to innovate and improve in order to maintain a competitive advantage in their domestic market. Their competitiveness enhances the quality of its products and lowers the cost of their products. They are able to reduce the cost of their products by adopting efficient production and distribution strategies. This, in turn, improves the competitive advantage of good luxury companies from France and Italy in the global market. The competitive advantage due to constant innovation results in the dominance of these companies in the international market.

Factor Conditions

These are capital resources, natural resources, and human resources available in a particular country. These play a role in the competitive advantage of companies in a country. There are factor conditions that influence the competitiveness of France and Italy's luxury goods companies in the international market. Factor conditions can be either essential factors or advanced factor conditions. Primary factor conditions are factors such as natural resources and unskilled labor. These factor conditions do not offer any competitive advantage for the companies located in the country. However, advanced factor conditions provide a competitive advantage. Advanced factor conditions are factors such as skilled labor, scientific knowledge base, and excellent infrastructure. France and Italy have a large number of workers trained to work in the excellent luxury industry. This gives them a competitive advantage over other countries where the number of skilled workers is few. For good luxury companies to have skilled labor to produce competitive products, they have to spend a lot of money and time to train their workers, unlike in France and Italy, where skilled labor is readily available. Other factor conditions, such as infrastructure, affect the competitiveness of good luxury companies. Italy and France have created infrastructure geared to support the operation of these companies, therefore, giving them a competitive advantage in the international market.

Demand Conditions

These are conditions regarding the local demand for products or services in a country. For companies from a particular country to be competitive in the international market, there must be strong demand for their product or service in the local market. The local demand encourages many companies to invest in the industry resulting in early market saturation, therefore, increasing competitiveness. For companies in the industry, innovation is used to gain competitive advantage and satisfy varying and challenging demands by the customers. The competition and challenging market demand conditions make firms to be flexible and adaptable, making them competitive in the international market. There is a demand for luxury goods in Italy and France, which increases the competitiveness of good luxury firms in both countries. The increased competitiveness encourages innovation, which improves the quality as well as the efficiency of these firms. French and Italian luxury goods are recognized to be of high quality in the international market. This gives them a competitive advantage and gives them a large global market share of luxury goods.

Related and Supporting Industries

The presence of similar and supporting industries creates a strong foundation to establish firms in that industry in a particular country. Companies are reliant on other related companies to be able to operate in a market. Companies depend on supply from other companies; therefore, the presence of competitive and robust supply chains enhances the company's efficiency and competitiveness. Luxury good firms require many inputs to operate. Luxury goods companies in France and Italy rely on other companies for the supply of raw materials for the production of these luxury goods; this has led to the creation of competitive and robust supply chains supplying quality raw materials needed for production. This gives companies located in these two countries an advantage over other luxury goods companies. This is demonstrated by companies like Louis Vuitton Company in America importing leather from Europe due to low quality leather in America. Companies in Europe have an advantage over companies in America is due to the availability of high-quality supplies required for the production of luxury goods.

Acquisition of Small Companies

Moet Hennessey Louis Vuitton (LVMH) has been acquiring small companies in the good luxury industry in the past. LVMH owns more than seventy brands. In 2017 the French fashion house Dior was acquired by LVMH. Some other companies acquired by the company are the high-end jewelry company Bulgari and the watchmakers Hublot and TAG Heuer. The acquisition of these small companies by LVMH has a negative effect on the excellent luxury industry in Italy and France. With the acquisition of small companies, the number of independent companies reduces, and this results in reduced rivalry and competition, which is essential for the growth of the industry. Companies operating in a competitive market are always innovating to gain competitive advantage, which in turn gives the companies in these two countries a competitive advantage in international markets. The loss of competitive market results loss of competitive advantage of companies from these two countries in the world market.

The acquisition of small companies by LVMH will cause a loss of diversity in the market. A market with many different products from different companies is desired due to its competitive nature. The demand is higher in markets with various products since many varying customer needs can be met. Lower demand for luxury goods in France and Italy will affect the competitiveness of companies from the countries in the international market since there needs to be a strong local demand for companies to be competitive internationally.

The acquisition of small companies will result in the loss of jobs by skilled workers. Large companies like LVMH have significant production rates, which can justify the large investments required for automation. The skilled workers who could have been engaged in production in small companies will lose jobs. Loss of these jobs will result in loss of the incentive to invest in acquiring these skills, and in time the two countries will lose advantage in this factor condition and therefore lose their competitive advantage in the international market.

LVMH Investments in the US

LVMH has invested in America by creating a plant in Texas to produce bags for the American market (Dalton, 2019). This investment was made due to changing market conditions. Production of the company's products in the US protects the company from European and US trade disputes. This is making supply chain decisions considering the current industrial logic and geopolitics. This lets LVMH supply the large US market with its products economically.

LVMH has also made another investment in America by acquiring Tiffany & Co. tiffany was facing reduced demand in the US and abroad for its jewelry (Dumett, Kapner, Dalton, 2019). LVMH wanted to invest in jewelry, observing that jewelry was one of the fastest-growing businesses in the luxury goods sector. The acquisition of Tiffany by LVMH was to gain access to the jewelry market since there is a steep entry barrier into the jewelry market for new companies; this is because LVMH has limited jewelry business. The acquisition was also to gain access to the younger Tiffany shoppers.

The acquisition of Tiffany and the establishment of a production plant in Texas enhances the competitiveness of US companies in the luxury goods market internationally. The establishment of the Texas plant improves factor conditions such as the availability of skilled labor working in the luxury goods market since many people are trained to work on the plant. However, the increased competitiveness of the US luxury goods industry will have a negative effect on luxury goods clusters in Italy and France since they will lose their competitive advantage in the international market.

Conclusion

Porter's diamond model provides a way to explain the dominance of Italian and French luxury goods in the international market. There is a negative effect on this dominance and competitiveness by the acquisition of small companies by large companies such as LVMH. Expansion of companies from these luxury goods clusters in Italy and France to other countries also affects this dominance.

References

Matthew Dalton. 2019. Louis Vuitton makes a home on the range. WSJ. Oct. 18.

Dumett, B., Kapner, S., Dalton, M., 2019. LVMH bets $16 billion to make Tiffany shine. WSJ. Nov. 20