Thank you Audrey,
Your comment is perfectly aligned with my understanding – I will add to your point that this is also an excellent management practice to fully empower your employees. As we have seen in class – such practices often deliver amazing results !
Thank you CO,
That’s a very interesting question. The amazing thing about Hermès is that they have an extremely focused marketing approach with very limited advertising in the media and no “egeries”.
The Group sometimes uses printed media, primarily to advertises its fragrances and watches in national/ international fashion and lifestyle magazines but it mainly communicates about its products and more specifically about how the products are made through exhibitions and shows. The objective is to show the level of craftsmanship and details involved so as to justify its premium prices.
Since 1993 – Hermès launches annual themes, that capture some of the spirit of Hermès to unify its marketing efforts across the different collections, (cf http://hermes.digitalurbana.com/2015/01/yearly-themes/) however the Group doesn’t hire any “star” to represent the brand. The star is the brand / the product itself. Especially as the company’s core target market would partially be part of this star system and the group would thus potentially partially cannibalize its own market.
Finally the group is quite active in terms of public relations, focusing on sponsoring events that highlight the company’s heritage, inspiration and tradition (e.g Prix de Diane (horse race) or the Saut Hermes au Grand Palais http://www.sauthermes.com/fr/) or using its flagship stores (les “Maisons “) as venues for exhibitions, social gathering….
Again, the group is coherent in terms of business model and operational model – everything is made to support the brand, reach and connects with its unique target audience and leverage the Group’s history and skillset.
Many thanks for your comment – I also admire this group – probably because its values go far beyond the mere financial return.
I guess that these values gave them the long term perspective and the statement of purpose – the clear mission, that enabled them to strive.
The family’s leadership is so far exemplary and helped the group navigate through difficult times when the model was under attack. Their vision and resilience proved to be right.
A great lesson of leadership.
You are spot on – imagine that there are two years + waiting lists for certain handbags – and that it is a true challenge to get on these lists. You even have books written about this quest: http://bringinghomethebirkin.blogspot.com/2014_04_01_archive.html
Considering that some of these models have been released 70 years ago – this demonstrates how a well conceived products can just become must-have and tremendously increase your brand value.
Hermès brand management should be a case taught @HBS 😉
Thanks for your post – indeed the Group found a clever way to harvest beyond its natural base which is impressive.
Many thanks for your comments.
1) On the freelance model – my understanding is that they do work with contracts preserving their IP rights; Hermes contributes its technical knowledge, produces and sells (it seems to work like a partnership, however I have limited info on that point); Please find here an example of a freelancer https://jumpedonthebandwagonlate.wordpress.com/tag/hermes/
2) Absolutely – the group can have a long term perspective and isn’t focused on short term profits – it can use this time as a competitive advantage to differentiate itself- it can invest in long term training, can develop its network with limited pressure…The lack of focus on short term gain was for example a way for the group to integrate vertically – buying companies which were distressed (but had know-how, expertise…), integrating them and creating long term value for the group while reinforcing the barriers to entry. Time is of the essence for this business model – time is somehow the ultimate luxury.
3) On growth and scale – I completely agree with your point – as mentioned in my reply to Anna so far the brand has done an amazing job at balancing accessibility for its core customers and sufficient rarity to keep an exclusive image. This was possible mainly thanks to smart stores supply and management empowerment.
Thanks for your post – My take on innovation is that in this group it can come from everywhere and the Group’s culture values/ encourages it. Hermes is not a fashion company it is a luxury company – they are not interested in fitting/ inventing a trend but in providing long term value to their customer by offering high quality products that matches their needs & envies. By employing highly crafted people they can adapt to any demand and can remain alert – able to adapt quickly (cf the above mentioned Apple Watch). From my perspective this is how they manage to stay ahead of the innovation curve.
Very interesting comment – few thoughts on that.
The firm’s success has stemmed I believe from its clear vision, consistency and focus on quality (which from my perspective defines true luxury) – international expansion has just been a way to increase sales and thus capture more value. I do not have data on the split between new and returning customers however it seems that the core customer base is extremely loyal to the brand. (e.g Victoria Beckman is rumored to have more than 100 Birkin bags – a collection worth circa EUR 2mn …). The group keeps growing by adding new references however I’m not sure growth to be a major objective of the Group – family owned and very successful.
On your point relative to the Chinese market – Hermes started the Shang Xia group in 2007, however the two brands / groups are separated – just a common holding -Hermes International – the idea is to leverage on the Chinese culture and its unique ancestral techniques to develop another ultra-high end producer – using local materials (e.g jade, bamboos, porcelain…). Both groups thus have the same philosophy. So far ramp-up has been slow – but I believe this is normal as it takes time to develop the sourcing networks, source the employees with the appropriate skillset (or train them) and develop a brand that resonates with a high-worth customer base. I however personally believe they should be able to have an interesting asset in the medium term.
Finally on the family business model – my take is that such structure buys time to the group. They don’t have to face the market pressures and can remain independent to pursue their own long term vision. The group just embodies the family values and exigency. Family members are still everywhere in the company’s hierarchy, and at all crossing points/ decision points. The listing of the company few years ago was a way to enable certain members of the third & fourth generation(s) to exit and monetize their shares. However by retaining a double shares structure (not all shares have voting rights, and family members have pacts) the family managed to maintain an absolute control – as underlined by the recent failed attempt by B. Arnault to take over the group.
Thanks for your post,
I believe, the concept behind the model to be: nothing can replace a crafted and inspired Human being. For example a craftsman will be able to detect, almost immediately, how do make the best use of a skin for a certain product. Given the complexity of the thinking process and the amount of information needed to make these decisions – automated manufacturing is, from my perspective, far from being able to compete – or maybe at a very high costs (e.g Artifical Intelligence…) . As the production is not standardized at all I guess it limits the threat.
As mentioned Hermès focuses on high quality human capital, and invest with a long term perspective, it is also able to build based on “others'” innovation and form partnership to better serve its clients. For example they recently launched an Hermes version of the apple watch: http://www.hermes.com/applewatchhermes/en/?c=US so as to capture new trends in society.
Many thanks for your thoughts.
1) On your point on Petith – On top of counterfeits, my understanding is that it has been created to re-use scrapped materials (maximizing the use of expensive raw materials) as well as foster creativity of the Craftsmen in house. It is also a good way to value the employees know-how and show how all métiers can build on each other as long as they share the same core values of excellence and creativity. It is finally an excellent manner to distinguish yourself from competitors as you can build one of the kind objects – which would appeal to your core and aspirational customer base, and because your model is so unique – you only can do it – others don’t have the resources to imitate you. As far as counterfeits are concern – the core idea from Hermès is that quality will set them apart anyway – it takes years to develop the basic skills their products require and raw materials are just not available. In fact you will notice that the logo of the brand is not used as much as for other brands: you will recognize Hermes when you see it because of its quality no need for a logo. This is the whole concept behind understated elegance.
2) I completely agree on the potential dilution risk of scaling up – it is important here to keep a full control especially on the service side (as written above, risk is limited as regards quality) and actually so far the brand has done an amazing job at balancing accessibility for its core customers and sufficient rarity to keep an exclusive image. A way they used to favor that is how stores are supplied and management empowered: once manufactured, all products are all sent to a warehouse near Paris; “twice a year more than 1,000 store representatives come to Paris for an event called “Podium,” where they select which pieces of merchandise they will carry. Each flagship store must pick at least one item from each of the 11 métiers”. Managers are thus free to select their unique assortment – and the customers are constantly on a worldwide “treasure hunt”. “For example, only in Beverly Hills can they find a $12,900 basketball, and the $112,000 orange leather bookcase was sold exclusively at the Costa Mesa store. So when they fall in love with that $11,300 bicycle there’s a pressure to get it, since the company’s website, while ahead of many luxury competitors, offers just a smattering of the Hermès product line.”
Again the operational model is aligned to support the brand, create value to the customers and capture it.
Very interesting model; it raises two main questions for me:
– To what extent the change in strategy led to a change in the group’s culture and managerial practices? Was the group able to leverage its own talents to develop it or how did they built this incremental skills sets (especially in terms of IT)?
– How does this model answers the changes in the global hotel landscape and the entry of new market participants such as AirBnB? What is your view or their mid-term perspective?
Again, great post!
Great post! As you described, my understanding of the Arcelor Mittal merger was that Mittal (the scale) met Arcelor (the R&D) and that together they formed a unique ultra performing giant – offering the full range of steel. However I still have difficulties to perceive how such vision fits in today’s environment characterized by oversupply, low costs producers and new high tech materials. Especially as the production process is highly energy intensive and polluting. Could you maybe provide some more color on the perspectives of the steel market overall? e.g what is the split between the commoditized part of the business and the High Grade part, how it evolved over time? Do you believe the current crisis to be structural or cyclical?
On the existing model itself, since this is such a cyclical business, has AM envisaged to develop an hybrid model? e.g Mini-mill + large plants?. to prevent exposure to major economic swings. Are AM competitive advantages really scalable?
Finally do you have any idea why the group fails outside the US?
Many thanks again for the post, great company with a clearly aligned model – my only concern would be the purpose of the model and the mission statement of the company having in mind the future of this industry: is it still relevant given new environmental challenges ahead (cf COP 21)?
Thank you CO,
Very contemporary post on a challenging, hot topic. This reminded be the Siemens case we studied recently; with that in mind, you mention the management culture at VW, to what extend from your perspective did such culture contribute/ support the group’s success until recently? Do you believe it is necessary to overhaul it or could/ should a middle ground be found?
Very interesting post Fernanda,
So interesting that I have few follow-up questions for you:
1) I really appreciated the point about the crucial importance of picking the right location for production (tradition, expertise, low cost…) and very much appreciate the idea of re-melting unsold inventories – however could you please, maybe provide some more insight on the consequences of the ongoing country’s development (probably leading to increased wages ) and the potential threat it might represent for the medium term sustainability of their business model. (Difficult to relocate ? Higher production costs? …)
2) Do you by any chance have some insights on their procurement and/ or logistics system? Indeed it feels like they rely on a single metal, which is an important part of the value of the good, however having production located in Thailand, though Thailand isn’t a major producer of Silver, and having end-consumer spread around the globe must represent quite a challenge in terms of costs containment. In addition they must be highly sensitive to any variation in raw material supply/ price – do you know if this is hedged and / or could represent a competitive advantage / threat?
3) Finally I have the feeling the model heavily relies on one main product: i.e lucky charms silver bracelet, if so what are the real growth opportunities for the group ? (assuming, maybe falsely, that new products ranges are more incremental) – Do you see any major development areas they could envisage (e.g new metal…non-jewelry types of silver products…) or is the overall model capped from your perspective?
Many thanks again, very interesting