The Fall and Rise of Gucci Part 2
This article is part of a series on what causes a firm’s value to increase and will be in two parts
Last month we discussed the fall of one of the most respected brands in the style/fashion industry – Gucci – in the mid-1970s. Our aim in these classic strategy stories is to bring to life the other articles in this series over the last fifteen months. We chronicled Gucci family struggles and intrigue as the founder’s sons tried several strategies to turn the company around after some disastrous strategic moves. The sons had diluted the brand of Gucci by putting the name on playing cards, whiskey – you name it – among other blunders. Once again I will be paraphrasing on the Gucci example from Cynthia Montgomery’s great new book The Strategist: Be the Leader Your Organization Needs.
At the end of Part 1, I asked what would you do if you were Domenico De Sole, who was brought in to save the company? In Part 2, we will discuss what he did to return Gucci to its former prominence.
Recall in 1992 right before De Sole was brought in one of the sons, Maurizio, tried to bring the company to life. His implicit purpose for the company was for it to return to its roots. That is, it would offer “style that never goes out of style” to the customers of old who could pay extremely premium prices. These customers would buy a handbag and keep and use it until it wore out. But these customers did not return after Gucci’s blunders and Gucci was stuck in a high cost position.
De Sole, aided by Tom Ford, the thirty-two year old junior fashion designer, looked at this situation and decided they needed a “fact based current baseline situation” for the company. Only by understanding where Gucci really was could it begin to decide where to go. And before starting out, they must decide where Gucci would be heading. In addition to the old customers not returning and Gucci being in a very high cost position, they also found that it was products that were in the fashion category and not the style category that were getting the best traction. Some of Gucci’s greatest successes were in a few trendy seasonal items, not products that were expected to last and be used over many years. They determined it would take more time and money to return Gucci to its roots and that a new purpose and strategy framework that was faster and more profitable must be forged. So they decided they would position the company in the upper middle of the market (like Prada and Louis Vitton) where luxury could be aimed at the masses. Their theme was “fashion-forward, high quality and good value”.
So to succeed, Gucci would have to change nearly everything. It would have to cultivate new customers – younger and more modern – and let go of the wealthy, conservative older women who had been the mainstay. As Ford said, the fashion conscious “ have a short attention span… and fashion customers consume, shop, buy, and dispose of and buy again”. And they are maybe be much less brand loyal. “Good value” would also require Gucci to drastically lower it costs to be able to price lower.
And this is exactly what they did by 1995. Ford’s first collection was not a success but his second was. This Gucci was not your mother’s Gucci at all – instead wildly coiffed supermodels did their thing to the point that Harper’s Bazaar wrote, “The effortless sexuality of it all had a chill factor that just froze the audience to its seats”. Credit Suisse dubbed the resulting turnaround spectacular with operating profits growing at 54% on revenue growth of 34% and return on invested capital of 34%.
So what is the key learning here? A clear purpose aimed at enough customers that have a willingness to pay to meet financial objectives is a first. But it is not at all sufficient. De Sole and Ford then aligned the entire value creation system to that changed purpose. The change from old was profound:
Products – created a line of trendy and exciting ready-to-wear clothing each year that was its draw
Brand – the increased focus on fashion generated excitement and brought people to the stores where they could be sold high margin leather goods
Stores – changed from Maurizio’s clubby “living room” to a clean modern look
Marketing – they doubled advertising spending to 7 percent of sales and leverage the good looking Ford as a marketing asset
Supply Chain – Gucci’s network of manufacturing suppliers left the firm when cash was tight. De Sole personally recaptured the best
Management – De Sole and Ford created a partnership that was not family based but merit based and performance focused.
Everything they did in design, product line up, pricing, marketing, distribution, manufacturing, logistics, organizational culture and management was tightly linked to the new purpose.
How aligned is your organization to your compelling purpose?
Next Up: The Rise and Fall of Husky Injection Molding Systems
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at firstname.lastname@example.org