Louis Vuitton Vertical Integration

3. Why is Louis Vuitton highly vertically integrated? (specify the factors that shape LV’s vertical scope). 

The reason that Louis Vuitton is highly vertically integrated is because of the nature of the business they are in. They are a luxury goods company and a significant factor contributing to the success of luxury goods companies is the aura of exclusivity and quality around their products and brand. Given the often-astonishing prices they charge for their products, they must offer quality products in return. Therefore, companies like Louis Vuitton must ensure that their products are indeed high quality. This requires direct control over the production of their products to ensure high level of certainty. Moreover, to ensure exclusivity and consistency in how their brand is portrayed, they must also have direct control over distribution. Selling their products at discounted prices or at discounted outlets dilutes their brand and cheapens their image. Customers should not be able to purchase their products more cheaply because the company will slowly lose value in the eyes of their consumers. When it comes to suppliers, Louis Vuitton was selective when picking their suppliers and had strict requirements to ensure that the supplies being purchased met the required quality standards. Vertical integration is a good strategy for a company like Louis Vuitton which operates in an industry that relies heavily on the value of a label and by ensuring clear-cut control, the company can guarantee that the brand stands for exactly what it wants and that this is clearly communicated to their customer.

What are the benefits/advantages and costs/ disadvantages/ risks of its strategy of vertical integration? 

There are benefits of vertical integration. As stated above, you have direct control over quality and brand-image (exclusivity and positioning). Moreover, by selling your products via directly owned stores (DOS), you can collect and keep in-house valuable data about your customers. They also ensured their products didn’t end up in the grey-market and ensured that consumers knew that their products can only be purchased at Louis Vuitton stores (rather than the confusion of hearing “At approved retailers”, which could be any.) The costs of vertical integration are obvious ones: if you cannot trust others to ensure quality of your raw materials, production, and final material, then you must do it yourself and this is usually more expensive than outsourcing.

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