Economic Strategies. Potential Improvements of Burberry

Table of Contents

1. Introduction

2. Strategie Evaluation of Burberry
2.1 Environmental analysis
2.1.1 Focused PESTEL analysis
2.1.2 Focused Porter's 5 forces
2.2 Analysis of strategic Capabilities
2.2.1 VRIO analysis
2.2.2 Value Chain analysis
2.3 International Strategies
2.3.1 Modes of international market entry
2.3.2 Porter's 4 international strategies

3. TOWS - analysis
3.1 Burberry's Threat
3.2 Burberry's Opportunity
3.3 Burberry's Weaknesss
3.4 Burberry's strengths

4. Recommendation for Burberry's future

Reference list

Appendices
Appendix 1: PESTEL (Thompson etai 2017, pettinger 2004)
Appendix 2: Porter's Five forces model (Lynch 2015, Van Deusen et al 2007)..
Appendix 3: VRIO analysis (Lynch 2015, Johnson etai 2015)
Appendix 4: Value Chain (Johnson et al 2015, Thompson et al 2017)
Appendix 5: Modes of international market entry (Thompson et al 2017, Lynch 2015)
Appendix 6: Porter's 4 international strategies (Thompson et al 2017, Johnson et al 2015)
Appendix 7: TOWS - analysis

1. Introduction

Burberry PLC is a manufacturer, wholesaler and retailer based in London, which operates in the luxury sector and is selling apparel and non-apparel products on high quality standards. The company has about 10.000 employees in over 500 stores around the world (Burberry 2017). Its revenue in 2016/17 was about £2,8 billion and its EBIT close to £400 million, making it one of the strongest companies in the UK. Because of its high status and quality, it received two royal warrants from Britain's royal family over the years giving the company high prestige and backing up their operations. The sector of luxury goods is a fast-paced, highly competitive with strong names such as Gucci, Luis Vuitton, Prada and Hermes (controlling over 50% of the revenue made in the sector) (Deloitte. 2017). Designs change fast and so does fashion. As most of the large luxury companies, Burberry operates mainly in Europe, the US and Asia. The wealthy areas of central Europe with its high living standard, the rising number of millionaires in China and India and the constant need of luxury in the United States give all prestigious companies reasons to expand and do business in those regions. Due to its strong reputation and its history reaching back into World War I, Burberry has a strong customer base and is able to stand its ground in the sector.

The following analysis will be based around three areas: 1) the environment Burberry operates in 2) the value they add to the products and 3) the strategies Burberry uses to compete internationally. A PESTEL analysis will be the start to determine external factors of the environment influencing Burberry's business, following up on that will be Porter's 5 forces model, to examine what the forces that influence the company and its competitors. To analyse the strategic capabilities Burberry has, a VRIO and a value chain will be used to see which activities add value to for the consumer (Johnson et al 2015, Thompson et al 2017). Lynch (2015 and Thompson (2017) suggest that the model for modes of entry and Porter's 4 international strategies are a good way to evaluate a company's international strategies, so those will be used in a combination for this report.

2. Strategic Evaluation of Burberry

2.1 Environmental analysis

The following analysis of Burberry's strategies related to the environment they operate in, will be based on the concepts of a PESTEL analysis (see appendix 1) and Porter's 5 forces model (see appendix 2) which were adapted to Burberry's needs.

2.1.1 Focused PESTEL analysis

Thompson et al (2017) and Lynch (2015) use PESTEL analysis to define the environmental challenges that a company is facing. These challenges can be related to location, innovation or uncontrollable events. Due to current events political and economical factors will be focused upon here.

The big and obvious event that will influence the way a UK business is going to operate, is BREXIT, which has the potential to change trade relations and conditions completely in Europe. Now trade barriers are minimised, therefore exporting goods and moving money is not regulated heavily. With those regulations under pressure now, the UK has to negotiate terms with the EU to keep trade simple and barrier free to be able to keep UK businesses, such as Burberry, competitive. Best-case scenario for the UK and Burberry would be to receive a status similar to Switzerland or Norway as argued by Schoof et al (2015).

At the economical side, Burberry is influenced strongly by tourism to European countries (Burberry 2016), which makes up a large part of their revenue and sales in this area. Due to the current danger of terror attacks, including large countries like Spain, France and Germany, the number of tourists dropped and therefore spending on luxury products has been going down. While the negative impact has not been major, continuing reduction could turn into a problem in the long term.

2.1.2 Focused Porter's 5 forces

Porter's five forces model (Johnson 2015, Thompson 2017) splits companies' competitive influencers into suppliers, buyers, new entrants, substitutes and existing competitors. While Burberry does not have major issues with the first three, substitutes and competition can be a problem for the firm.

Substitutes are an issue the whole sector of luxury goods is faced with. China's cheap replicates of branded items, hurts Burberry just as much as its competition Prada, Gucci and Hermes. However, fakes are not the only danger that Burberry faces. High street vendors with cheap and accessible clothing and accessories, such as H&M or similar shops, make it hard for premium vendors to sell their items as unique.

The next point Porter's model uncovered to be a challenge for Burberry, is that the luxury vendors are in constant competition. Burberry has a strong customer base, competition like LMVH, Richemont and Hermes ruling the market with over 50% of sales combined (consultancy.uk 2014). With Burberry not under the top 20 of the luxury brands, it has to try new things, such as children's wear, to be in a stronger competitive position.

2.2 Analysis of strategic Capabilities

In this section Burberry's strategic capabilities will be examined via a VRIO analysis (see appendix 3) and an assessment of with what actions of their production chain Burberry adds value to its products (see appendix 4).

2.2.1 VRIO analysis

The VRIO will assess Burberry's products and their ability of creating a competitive advantage for the company over its competition.

Firstly, the classic Burberry coat will be examined, which was already used in World War I, giving it a strong reputation. Because its history is unique and the style is classic, it is valuable and rare to the customer. While it is not inimitable by companies that can produce and sell at lower costs and aim at another buyer group, the organisation exploits the resource properly making it highly competitive. Due to its history the coat still is a major selling point, sustaining competitive advantage to this day.

With the classic clothing working for adults in a long term, Burberry introduced children's wear was introduced, which adds the same unique value and rarity to the product, as the coat does. Just as its adult version, the children's version can be copied and imitated, making it vulnerable. While the company exploits the adult coats properly, the children's fashion sold out several times, making the product miss out on sales and the company on revenue.

2.2.2 Value Chain analysis

The value chain is used to identify the activities, which create value for the customer (Johnson et al 2015, Thompson et al 2017). Besides the brand name, Burberry adds value in several ways. Here are two of these ways will be examined.

Burberry adds value to the product from the very first step of its value chain, with its inbound logistics. With “Burberry Beyond” (Burberry 2013) being introduced, the company sets a high standard on the ethics and sustainability for its suppliers. The company enforces these guidelines with announced and unannounced audits to ensure those standards are met. The products purchased include wool and other resources, as well as production factories to make the whole process fit for the future.

Marketing and sales is another big influencer on value, as the company reaches many people in new ways. While online shopping is a must-have in this day and age, Burberry connects to its customers via social media platforms and adds 3D holographic fashion shows to their sales strategy. With more and more of the shopping going online, consumers appreciate the classic brand to get more modern, while still perceiving it as the premium brand it is, as suggested by the JP Morgan & Co report to investor in November 2017 (Rousseau 2017).

2.3 International Strategies

Below Burberry's strategy to compete in international markets will be discussed, by using the modes of entry framework (see appendix 5) and by identifying which of Porter's four international strategies the company uses (see appendix 6).

2.3.1 Modes of international market entry

Thompson et al (2017) suggests the modes of entry to be essential to think about when entering new markets. Burberry focuses on wholly owned subsidiaries and joint ventures, when entering new markets, as in China they tried to franchise their brand, but were not happy with the results.

Wholly owned subsidiaries mean a long-term, and in this case very costly (£70 Mio), commitment and with the purchase of franchise locations throughout China in 2010, that commitment was made. While those commitments can be dangerous, it gives Burberry full control over their brand in other countries and makes it possible for the company to bring in their values. When subsidiaries are owned they are also easier coordinate and include in their corporate strategy.

The other way Burberry expands its business, is by joint ventures in new countries. The company owns 51% of the subsidiaries opened in other countries, but shares the economic risk of entering a new market with a partner. This was the case in Japan and India and has shown to be a successful strategy for Burberry.

2.3.2 Porter's 4 international strategies

Adapting to Burberry's needs, Porter's (1986) strategy provides an overview over the strategies a company can try to adapt for international trade. While most of the production for the firm is done overseas in Asia, the raincoats are still made in the UK. These are exported around the world after production, just as the other products from the Asian factories are. Because Burberry's Headquarter and all the strategic decisions are made in London, following Porter (1986), the firm uses a complex export strategy for its international retailing. This way the company stays in full control over the distribution and the production, however has to put a lot of effort into the coordination and configuration of its actions on a national and international scale.

3. TOWS - analysis

After analysing different strategies that are used by Burberry, the next part will be an evaluation of the company and its Threats, Opportunities, Weaknesses and Strengths.

3.1 Burberry's Threat

While terrorism is a great threat from the outside impacting tourism in the ELI, the negotiations around a post-BREXIT Britain bring a great deal of uncertainty surrounding trade and movement of money within the ELI. The agreements that are made between Britain and the EU-countries will be essential to Burberry, as they rely on moving their items quickly from one country to another, with their main distribution hub in Europe being located in Italy. While the ELI will aim for good relations with one of the most powerful countries in central Europe, their negotiation position in this case is stronger than the UK's. Burberry has to rely completely on what the negotiations bring without being able to influence them, which inherits threats of changes in trade regulations between the EU and the UK.

3.2 Burberry's Opportunity

Over the last couple of years Burberry's business has been expanding largely into Asian markets. In this region the market for luxury goods has been growing due to the increasing amount of millionaires in China, India and surrounding countries. While markets in China have been explored via a franchising model earlier, those were bought back in a £70 Mio deal to regain full control over them. In India and Japan however, Burberry chose a model of joint ventures to expand its business. Because those models worked very well, this could be adapted and used for countries in for example the Middle East and other unexplored areas.

3.3 Burberry's Weakness

The largest weakness Burberry has, is that the competition in the sector is very strong. The top three companies control over 50% of the revenue and the top ten controlling just around 80% (Deloitte. 2017). Those companies can set the pace of the sector, which Burberry will have to follow with its accessories and non-apparel products. Some of the competition, such as Michael Kors and Swatch, tries to engage with new areas of customers, including timepieces and other accessories that are popular amongst the younger generation and the working class.

3.4 Burberry's strength

Marketing has been one of Burberry's main strengths in the recent years. With a large fan base on social media and VR/AR experiences to view the products in a new way the company reaches new potential customers and makes sure to retain their current customer base. While online marketing is still rising in importance, classic marketing on the streets is still very powerful, especially when celebrities are involved. Burberry's new children's line, marketing is supported by the Beckham family, wearing the classic designed trench coat and the scarf with Burberry's pattern. With this product series receiving such great feedback, Burberry ensures a strong supply chain now to ensure the products make the largest amount of profit within its high.

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