Business Strategy

Michael Porter's Five Forces Model

Created in 1979 by Harvard Business School Professor Michael E. Porter

The 5 Forces is a framework that is used to analyze competition in a specific business industry. It is derived from the industrial organization (IO) economics that determine the competitive intensity and how well it does or does not attract to an industry and its profitability.

Force	Strength	Description	Response
Industry rivalry	Low	No direct competition, unique luxury products	Brand loyalty is high, features and quality create strong brand image
Bargaining power of suppliers	Low	Large amount of suppliers with little control within industry	Contracted a large amount of suppliers to exclusively provide Gucci
Bargaining power of customers	Medium	Customers forfeit power to obtain status but maintain ability to purchase substitutes	Gucci accounts which provide benefits to customers as well as create switching costs
Threat of new entrants	Low	High entry barriers prevent entrants	Low likelihood of new entrants does not warrant a direct response
Threat of substitutes	High	Cheaper apparel that serves the same purpose	Gucci's longstanding establishment lessens the likelihood that customers will purchase substitutes, thus not warranting a response.

Industry Rivalry (Low): While competition within the fashion industry is especially abundant, being at the higher end of a luxury industry, Gucci does not have many direct rivals. The very few direct rivals are not a particularly large threat due to Gucci's strong brand imaging and quality products that have developed a high level of brand loyalty over the years.

Bargaining Power of Suppliers (Low): There is a surplus of suppliers attempting to break into the fashion industry, due to low demand by companies like Gucci, the suppliers do not have much control within the fashion industry. Gucci does not have to worry about their suppliers bargaining power becoming an issue because they have amassed a network of nearly 600 first and second tier suppliers. A portion of the suppliers are under contracts of varying exclusivity, some being so exclusive that the suppliers only work with Gucci.

Bargaining Power of Customers (Medium): Being that Gucci handles luxury items, the buyers of said products forfeit a portion of their buying power to obtain the status of owning these products. However, customers still maintain the ability to buy lesser quality goods due to the discretionary nature of luxury items. In response to this, Gucci created Gucci accounts which provide benefits to their customers and create a relatively high switching cost, dissuading customers from purchasing from either direct competitors or substitutes.

Threat of Substitutes (High): While being in the luxury industry has its benefits, a major drawback is the essence of being a luxury items. Luxury items are discretionary, thus the purchasing of them can be postponed or replaced by cheaper products that fulfill the needs of the consumers for a lower, more affordable price. However, Gucci's longstanding establishment within the fashion industry lessens the likelihood that customers will purchase substitute products. While Gucci continues to innovate and create unique products, this is not interpreted as a direct response due to the threat of substitutes.

Threat of New Entrants (Low): The difficulty of obtaining entry into the luxury fashion industry is a major factor that deters possible new entrants from making the jump into the industry. There are very high standards regarding status, quality, and customer care that take a considerable amount of time and money to develop. Due to these factors, the threat of new entrants into the industry is very low.

Competitive Strategy

For our company Gucci, the competitive strategy that the company follows is differentiation, trying to make a better product/service, within an industry segment. Gucci accomplishes this by providing what they claim to not only be better, but the best products within the industry segment. Gucci deals in luxury, and wealthy individuals, who are their primary customers, will want to purchase the most luxurious goods that they can get their hands on. Gucci utilizes the superb Italian craftsmanship and materials they have access to in order to profit greatly in the fashion industry. What makes Gucci different from other luxury brands is that they are one of the world's most desirable fashion houses. They represent Italian craftsmanship with their superior quality and attention to detail.

One of the ways Gucci utilizes information systems to obtain a competitive advantage is their use of the financial accounting enterprise resource planning (ERP) software, Lawson. Lawson allowed Gucci to dismantle past information silos and more efficiently and effectively transfer information within departments across the over 500 establishments Gucci has around the globe. Without the use of Lawson, Gucci would not be able to effectively communicate crucial information across their establishments as they do so today. However, throughout the course of this project we have discovered that Lawson is not without faults and those will be addressed further.

VALUE CHAIN