Sustaining a Competitive Advantage in The Fashion Luxury Market: A case-study of Emerging Fashion Brands

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S USTAINING A

C OMPETITIVE A ^DVANTAGE

IN THE F ÂSHION L ÛXURY M ÂRKET

– A CASE STUDY OF EMERGING FASHION BRANDS -

Thesis for One-Year Master, 15 ECTS Textile Management Paula Font Thesis number – 2020.18.10

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Title: Sustaining a Competitive Advantage in The Fashion Luxury Market. A case- study of Emerging Fashion Brands.

Publication year: 2020 Author: Font Paula

Supervisor: Ekwall Daniel

Abstract

This research aims to present, analyse and discuss how to sustain a competitive advantage in the Fashion Luxury market throughout a case study of Emerging Fashion Brands. The analysed data determines that considering the customers’

demands, the attributes of the Emerging Fashion Brands and the idiosyncrasy of the Fashion Luxury Market these brands must apply a Differentiation Strategy directed to a focal target group in order to sustain their competitive positions in the market.

Furthermore, the findings of the research prove the relevance for Emerging Fashion Brands to identify their innovative capabilities where to design or redefine their Business Models. Also, this research describes a future scenario of the Fashion Luxury Market whereby the identification of the upcoming trends and opportunities are identified. Therefore, a holistic approach of the Fashion Luxury Market is provided in order to help the managerial decision-making.

Keywords: Emerging Fashion Brands, Fashion Luxury Market, Strategy, Competitive Advantage, Innovation, Business Model

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List of Tables

Table 1 Three Generic Strategies Table 2 Purposive Sampling

List of Figures

Figure 1 Porter Three Generic Strategies Figure 2 Porter Stuck In The Middle Figure 3 IPF

Figure 4 Luxury Goods hierarchy model Figure 5 Future Luxury Scenario Matrix Figure 6 BMC

List of Abbreviations

BMC Business Model Canvas CH Channels

CR Customer Relationship CS Customer Segments EFB Emerging Fashion Brands i.e. That is (lat. id est)

IPF Innovative Pivot Framework IO Innovation Object

KA Key Activities KP Key Partnerships KR Key Resources ROI Return On Investment RS Revenue Streams ROI Return On Investment VP Value Proposition

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1 Introduction

The following sections present a description of the context of this thesis. It describes the background of this study, which motivates the chosen topic. Then it follows with the relevance of the study, where the problem researched is presented. Additionally, the research question that this thesis intends to answer is stated along with a description of its purpose and delimitations.

Background

For the past decade, startups have been popping up in all markets all over the world. From Uber to Facebook and Amazon, the most valuable companies in today’s economy are results of entrepreneurial projects that, with disruptive business ideas, have changed the way society lives (Sonnemaker, 2020).

Startups are on the rise which is supported by their growth of investments (Statista, 2020).

However, launching a startup is a challenging project, where risk of mortality is fixed around 90 percent (Patel, 2015). The most common cause of failure is the incapacity of these businesses to acquire enough capital to grow. However, another element directly related to their failure which is underestimated by most of the entrepreneurs, is the lack of a proper business model as the basis to build a solid and fructiferous company (Henry, 2017; Skok, n.d). Furthermore, the intrinsic characteristics of the startups together with the high degree of market uncertainty that they must face, are also critical elements that must be tackled by particular and innovative business plans (García-Gutiérrez & Martínez-Borreguero, 2016).

Overall the probabilities for these companies to fail decrease when proper business plans are designed according to their capabilities and market circumstances (Yingyu & Ye, 2008).

The recent turmoil situation caused by COVID-19 has highlighted the high sensitivity of markets towards unpredictable events, identifying the necessity for businesses to implement well-structured models. The fashion industry, which has been specially affected by the detrimental consequences of this global crisis, is forced to redefine itself and leave behind an obsolete mass productive system incompatible with the uncertainty of the markets (Bianchi et al., 2020; McKinsey & BoF, 2020). Furthermore, the new scenario of the fashion industry must consider the current customers’ mindsets as in these difficult times, necessity is leading the consumption of the post pandemic era (McKinsey & BoF, 2020).

Therefore, fashion players must take this crisis as an opportunity, reset and prepare for the new reality of fashion (Bianchi et al., 2020). In order to do so, they must act quickly in

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response to market reaction, be resilient and introduce new tools and strategies where innovation is imperative in their business models (McKinsey & BoF, 2020).

Long before the occurrence of this outbreak, the fashion luxury market was already experiencing a shift in the customers’ behavior (D’Arpizio et al., 2020). The pinnacle of social status, excess and wealth display that luxury once embraced, is now disrupted by conscious customers who are seeking to fulfill emotional values, uniqueness and authenticity (Adegeest, 2018; Danziger, 2020). Also, the new generations of customers are pushing the old conspicuous ideal of fashion luxury towards a change (Gutsatz & Heine, 2018). Here, experiencing is the new owning and “buy less, but better” is the new market trend (Adegeest, 2018).

The new dynamics of the Fashion Luxury together with the growth of its economic value have created an appealing opportunity for entrepreneurs to penetrate in this market (Deloitte, 2019). New players identified as Emerging Fashion Brands are taking the Fashion Luxury Market by storm, being supported by an increasing market demand (Gutsatz & Heine, 2018).

However, as competition is rising in this market, Fashion Brands are required bold strategies that through increasing the brand’s value, makes it non-comparable with any other (Kapferer, 2014).

The future of the global fashion agenda is expected to be led by these Emerging Fashion Brands (Klich, 2014). Furthermore, the young generation of customers and technological improvements are contributing to create a fructiferous environment for them to grow and gain a competitive and sustainable advantage (Gutsatz & Heine, 2018). However, the Emerging Fashion Brands are only able to redefine the meaning of luxury and revolutionise the fashion industry if they are able to identify their unique attributes in order to maximise them and build innovative business models whereby their competitive advantage in the market can be sustained (Adegeest, 2018; Danziger, 2020).

Relevance

The economic force represented by luxury in the global economy (BCG, 2020) has raised the academic interest in this field (Aliyev et al., 2019). A Literature review has been conducted towards the definition of luxury (Cristini et al., 2017; Hudders et al., 2012), the understanding of customers’ purchasing intentions (Choi et al., 2016; Choo et al., 2012; Kauppinen- Räisänen et al., 2017; Kim, 2019) or the prediction of future trends (Gutsatz & Heine, 2018;

Yeoman & McMahon-Beattie, 2018). However, according to Aliyev et al., (2019) it is required

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to conduct research in order to gain knowledge towards “proper business models for the new luxury” (p.24).

Academia identifies the present market of luxury, as new luxury (Aliyev et al., 2019; Gutsatz

& Heine, 2018; Kauppinen-Räisänen et al., 2017), modern luxury (Kapferer & Valette- Florence, 2016) or contemporary luxury (Allyev et al., 2018; Roberts, 2019; Yeoman &

McMahon-Beattie, 2018), a conceptualisation that implies a disruption of what the traditional market of luxury used to represent and involves new market trends and future perspectives (Kapferer & Valette-Florence, 2016).

In this transition of the luxury market, new emerging companies have been appearing in a market which is recognised as highly entrepreneurial (Gutstaz & Heine, 2018). However, the managerial research in this field has been directed towards the analysis of the largest luxury brands (Kapferer & Valette-Florence, 2016; Roberts, 2019) that are considered the relevant market players (Gutstaz & Heine, 2018).

To the best of the author’s knowledge, limited research has focused on these Emerging Fashion Brands that are born from entrepreneurial projects, and have strong attributes to be the new wave of brands pioneering the Fashion Luxury Market (Klich, 2014). Furthermore, the necessity to conduct research on these companies is also supported by Som and Blanck (2015), who differentiating the largest brands from the smaller ones, highlighting the importance to do research on how small players can survive the new luxury competition.

Overall, the relevance of conducting a research about the Fashion Luxury Market and concretely on Emerging Fashion Brands is found, firstly, in the originality of the topic as a gap in the literature; secondly, from an academic perspective, it is important in order to expand newlines of research in an area that has been drawing the literature’s attention as the economic value of luxury has raised; finally, in terms of managerial implications, this thesis aims to give a potential opportunity for Emerging Fashion Brands that, aligned with the current market dynamics, trends and customer purchasing intentions, can implement innovative business models to gain competitive advantage.

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Research Quesiton

After the identification of new trends in the Fashion Luxury Market, a shift in the customer’s purchasing intentions and a rise of a new type of companies, which are identified as Emerging Fashion Brands (EFB) are found. Hence, the following research question is formulated:

How Emerging Fashion Brands can sustain a competitive advantage in the Fashion Luxury Market?

Purpose

The purpose of this thesis is to conduct a business research towards business models for EFB in order to sustain a long-term competitive advantage in the Fashion Luxury Market.

Concretely, following Porter’s model of Three Generic Strategies, the Innovation Pivot Framework and The Business Model Canvas this thesis aims to develop an innovative business model for EFB in the Fashion Luxury Market while addressing a gap in the literature.

Delimitations

One of the main limitations of this research has been the identification in the academic studies of a definition of EFB that matches the objects studied for this thesis. Furthermore, only in grey literature, such as Vogue or Business of Fashion, the author of this thesis has identified the brands covered by this research.

Hence, considering the secondary-data gathered from non-academic sources, this thesis identifies the concept of EFB as referred to fashion startups (Sherman, 2016), Next-Gen brands (Sherman, 2017), newly-launched fashion brands (Laplaca, 2019) or up-and-coming fashion companies or EFB (Perez, 2019). These companies are born from entrepreneurial projects of fashion designers (Min & Wilson, 2019) and are constituted in one-person businesses or micro firms with few employees (Janssens & Lavanga, 2019). Furthermore, these types of brands have strong attributes that enable them to engage and connect intimately with customers through social media strategies and direct-to-customer businesses models (Sherman, 2016). Also, they are recognized by their transparent image displayed in the market (Sherman, 2016). This situation is created through storytelling marketing strategies that allows them to build communities of followers increasing their levels of customer loyalty (Sherman, 2017).

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The limited timeframe and scope of this master thesis has also been a limitation in terms of the number of interviews conducted. Hence, the short amount of empirical data gathered impacts the analysis of this thesis and, consequently, the accuracy of the results.

Furthermore, the unexceptional and uncertain circumstances produced by the COVID-19, has influenced the limited number of interviewed companies to conduct the empirical study.

2 Theoretical Background

This chapter presents the theoretical background of this study, which serves as the base to build the research as well as an overview for the reader. First of all, the different managerial theories Porter’s Three Generic Strategies, the IPF and BMC are presented. Secondly, an exploration of the relevant academic literature in regard to the concepts used in the research is described.

Porter’s Three Generic Strategies

In order to frame the theoretical foundation of this study and support the argument of the analysis, Porter’s (1980) Theory of Generic Strategies is described and followed.

Porter (1980) defines a competitive strategy as an offensive action taken by a company in a specific industry to cope with competitive market forces and thereby, increase business’

profitability. In a specific industry, as the Figure 1 shows, Porter (1980) identifies three generic strategies, Overall Cost Leadership, Differentiation and Focus, which are used to sustain a long-term competitive advantage while outperforming competition.

Figure 1. Porter’s Three Generic Strategies (Porter, 1980).

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2.1.1 Overall Cost Leadership

Porter’s (1980) first strategy developed, Overall Cost Leadership, helps companies to obtain a competitive position in the market by achieving low production cost and thus the ability to offer products or services below the average market price of the competitors. This competitive position is reached through different policies to minimise costs, such as, the construction of efficient scales facilities or the pursuit of cost reduction from experience.

However, this strategy requires aggressive pricing positions and extreme measures to advance capital, which is used for investing in innovative technology in order to build market share.

If a company successfully implements this strategy, it is able to obtain higher profits than the average industry competitor while increasing their market performance. Furthermore, as costs are reduced and the organisation performance is increased, the competitive advantage is sustained in the long run. Moreover, reaching such low costs implies that firms have stronger positions in front of buyer’s bargaining power, as better price cannot be reached.

Additionally, companies are more flexible in front of suppliers and finally, this strategy leads to an entry barrier in the market (Porter, 1980).

2.1.2 Differentiation

The second strategy that Porter (1980) suggests is Differentiation, which is focused on the uniqueness of a company’s product or service. By following this strategy, companies seek to distinguish themselves from competitors. This strategy can be achieved through different elements, for instance design, brand image, technology, product’s features, customer service and dealer network (Porter, 1980). Therefore, the relevance of this strategy is found in the market’s perception of value and uniqueness of a product or service rather than being cost efficient.

According to Porter (1980), if a company is able to implement a Differentiation strategy in the market, its levels of customer brand loyalty are increased. Hence, as customers perceive a product or service as unique and valuable, they are more attached to it and inclined to pay higher prices. Furthermore, this also results in higher levels of market trust. Another benefit of a successful Differentiation strategy is the raise in margins which leads to companies to reject low-cost strategies as the customer’s price sensibility is reduced. Furthermore, as margins are increased, companies can manage costs more effectively, which results in a better position in front of suppliers. Additionally, a Differentiation strategy mitigates the bargaining power of buyers as no available purchasing alternatives are found in the market.

Finally, as a firm is able to stand out from their competitors, a Differentiation strategy creates

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an exclusive market position. However, Porter (1980) highlights that the degree of exclusivity achieved is incompatible with market share. Therefore, to maintain a sustainable standout position, firms are required to invest in costly activities such as product design, quality of materials or an intensive customer support.

2.1.3 Focus

Focus is the third strategy proposed by Porter (1980). This approach is directed from the company towards a specific group which can be, i.e customers that share interests, a buyer, a product or a specific geographical market. By implementing focal actions, organisations improve their offerings towards this group in order to fulfill better their demands. What companies are required when implementing a Focus strategy is to assess if, either a Differentiation, or an Overall Cost Leadership strategy is applied (Porter, 1980). However, while a Focus strategy implies a narrow perspective of the industry, as represented in the Figure 1, a Differentiation and Overall Cost Leadership have an industrywide approach as they are not directed towards a specific target (Porter, 1980).

2.1.4 Implementation of the Three Generic Strategies

Porter (1980) stresses that firms must implement one strategy rather than try to simultaneously implement the three at once, as it is found that different skills and organisational resources are needed when applying them, which is reflected in the following Table 1:

Table 1. Three Generic Strategies

Own representation, based on (Porters, 1980)

Generic Strategy Required Skills and Resources Required Organisational Resources

Overall-Cost Leadership

‘Sustained capital investment to access to capital’

‘Process engineering skills’

‘Intense supervision of labour’

‘Products designed for ease in manufacture’

‘Low-cost distribution system’

‘Tight cost control’

‘Frequent, detailed control reports’

‘Structured organisation and responsibilities’

‘Incentives based on meeting strict quantitative targets’

Differentiation ‘Strong marketing abilities’

‘Product engineering’

‘Creative flair’

‘Strong capacity in basic research’

‘Corporate reputation for quality or technology leadership’

‘Long tradition in the industry or unique combination of skills drawn from other businesses’

‘Strong cooperation from channels’

‘Strong coordination among functions in resource and development, product development and marketing’

‘Subjective measurement and incentives instead of quantitative measures’

‘Amenities to attract highly skilled labour, scientists, or creative people’

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Focus ‘Combination of the above policies directed at the particular strategic target’

‘Combination of the above policies directed at the particular strategic target’

2.1.5 Stuck in the Middle

Firms that fail to successfully implement one of the Three Generic Strategies have higher possibilities to end in a situation, which is defined as “Stuck in the Middle” (Porter, 1980, p.

41). This creates a poor market position where firms are required to invest an amount of time and a sustained effort in order to overcome their inefficiency. When it comes to companies who are more likely to be Stuck in the Middle, Porter (1980) identifies these with the medium- size firms. Further, Porter (1980) states that while larger companies usually apply Overall- Cost Leadership strategies, smaller companies chose Differentiated or Focused strategies.

The Stuck in the Middle situation does not only result from not succeeding in implementing one of the three generic strategies but also, from not choosing to implement any of them or, viceversa, trying to implement simultaneously more than one. As each of the three generic strategies requires different skills and organisational resources, the companies that decide not to be consistent to one, have higher risks of failure (Porter, 1980).

Porter (1980), represents the Stuck in the Middle situation with a relationship between the Return On Investment (ROI) and the market share. Following the strategies already presented, Porter (1980) considers that the performance of a company forces a U-shape as

illustrated in Figure 2.

Figure 2. Porter Stuck In The Middle.

(Own representation based on Porter, 1980)

When a firm is trapped in the middle it has a lower profitability as it either loses the high market share, where customers demand low prices, or bides away its profits to separate from

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the low-cost firms. Also, in this situation, a firm is renouncing to high-margins businesses that can be achieved through focusing on a specific target group or not placing a standing out position in the market. Apart from these detrimental economic consequences, the Stuck in the Middle situation can also result in a lack of capital investment, organisational conflicts and an absence of corporate culture as well as a lack of business motivation (Porter, 1980).

However, Porter (1980) notes that the U-shaped relationship is not representative of every industry. While in some industries costs are the most relevant element, and no room for a Differentiation or Focus strategy is available, in other industries, where product or the buyer’s characteristics are the most important, the relationship among ROI and market share may be inverted. Finally, in industries where the competition is extreme, the Overall Cost Leadership is not an option and firms must implement Focus or Differentiation strategies (Porter, 1980).

Overall, the stuck in the middle situation brings companies to fail as no competitive advantage can be sustained in the long run. To overcome this situation, companies are required to implement one of the three strategies presented (Porter, 1980).

2.1.6 Inherent risks of the Three Generic Strategies

Each of the three generic strategies involve in their implementation different resources but also different risks (Porter, 1980). First of all, since the Overall Cost Leadership strategy requires high investments in technology, the different technological advancements that can occur may invalidate the technological investments or the acquired learning skills already implemented by companies. Furthermore, new entrants and their possibilities to enter in a specific market with the same technology or capacities to invest in advanced technology are also risks to be considered when applying a Cost Leadership strategy. Additionally, if a company is too focused on reducing costs there is a possibility that it does not identify the trends of the market or the product changes.

Secondly, the Differentiation strategy implies other risks that Porter (1980) relates to the specific characteristic of the product or service. For instance, buyers can no longer be more interested in the uniqueness of a specific product. Furthermore, as industries mature, the market perception between an imitation and the uniqueness of a product is blurred, and thus, the strategy fails. Finally, when the price difference between a unique product or service is too broad from the one offered by low-cost competitors, the brand loyalty of the outstanding firm can be damaged as customers may sacrify the uniqueness for cost saving. This last threat needs to be highlighted as it holds the dependence of the Differentiation strategy to the price (Porter, 1980). Hence, if a differentiated firm falls too far behind the costs of a cost-

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leadership firm, the latter may be in a strong position to relieve the standout market position of the former.

Finally, according to Porter (1980), the risks of implementing a focus strategy are related to the narrow perspective of a firm towards the specific target group. This situation affects the capacity of the firm to consider the whole perspective of the industry. For example, if firms are too focused, competitors can overtake their market share by applying other strategies that are more appealing for the strategic group.

Innovation

According to Ridel (2020) innovation is the main element of the modern age. It raises improvements in people's lives and also involves the biggest changes in the society.

Innovation is a product of evolution, a dynamic process which implies a constant redefinition of the present through new forms that are useful but unlikely to happen by chance. Hence, the innovative process is something gradual (Ridel, 2020).

Freedom is another element that goes in hand with innovation. Ridel (2020) highlights that the aim of innovation is to satisfy human desires that are freely expressed. Furthermore, it is a result from the freedom to exchange, experiment, imagine, invest and fail (Ridel, 2020 p.359). Hence, innovation is difficult to plan as human desires and their satisfaction can not be predicted in detail. Hence, collaborative businesses are more successful in innovation as two minds can define more easily what the society requires (Ridel, 2020). Additionally, innovation is organic because it is the product of authentic desires and not a response to government policies (Ridel, 2020).

Finally, Ridel (2020) supports that small companies are better in innovation than big companies. Big companies have a structure too complex and rigid. Therefore, innovation usually comes from outsiders, disruptors, who are open to competition and pay attention to the interests and potential of the market (Ridel, 2020).

2.2.1 The Innovation Pivot Framework

The IPF is a practical tool that aims to help start-ups in all types of industries to identify innovation within their business and use it as a source for designing business models. For these types of companies, formulating a business strategy based on innovation is crucial as it allows them to recognise new market opportunities where value can be created and competitive advantage achieved. Furthermore, the IPF is also a relevant framework for

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companies, which have been in the market for a while but need to redefine their strategies, explore their innovative capabilities and, upon them, design new business models.

Therefore, according to García-Gutiérrez & Martínez-Borreguero, 2016 what the IPF aims is to “foster the creative process of generating promising applications for an invention” (p.54).

Based on the BMC proposed by Osterwalder and Pigneur (2010), this managerial tool requires additional elements that can provide an in-depth analysis of business structure.

Hence, the IPF completes the BMC by enabling companies to identify their innovative capabilities while helping them to determine a more accurate business strategy. The structure proposed by the IPF allows entrepreneurs to map out the three essential elements considered in the design of an innovative business plan: the innovative idea or technology, a sustainable competitive advantage and the innovative business model. As a result, the IPF provides a holistic approach which is required to pivot innovative business models.

The IPF involves a four step analysis: innovation object, impact, uncertainty and sustainable competitive advantage (García-Gutiérrez & Martínez-Borreguero, 2016), as shown in Figure 3.

Figure 3. IPF.

(García-Gutiérrez & Martínez-Borreguero, 2016)

For Innovation Object (IO) the IPF understands it as the idea or invention, which can be either a product, a process, an organisational or marketing capacities that drive the start-up.

Hence, along the same lines, Ridel (2020) considers that innovations are infinite because it always involves new things to do or do the same things in another way (p.3).

In order to develop the analysis of the IO, the problems that this may solve in the market must also be identified. Hence, the problems solved are taken into account together with the newness of the invention that is determined by its degree of novelty. This element is identified by assessing if the IO is new in the market, either in terms of a geographical area,

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a product line, or because it is unique in the world (García-Gutiérrez & Martínez-Borreguero, 2016).

Connecting the IPF with the concept of innovation introduced by Ridel (2020), the IO is the result of the innovative process. Hence, the latter is what turns inventions into practical things that can be useful by society.

The impact analysis of the IPF considers the overall potential value that the IO can create for all the stakeholders. According to García-Gutiérrez and Martínez-Borreguero (2016), this involves identifying the utility or potential benefits that the IO brings.

Under the IPF, uncertainty is defined as both, the growth and the risk of failure of the innovation object. Hence, this analysis involves the assessment of the most important sources of risk, which is a relevant element for start-up as they are especially sensitive towards uncertainty. Furthermore, uncertainty is an inherent feature of an innovation, which, at the same time, depends on its degree of newness. Therefore, the IPF considers that the lower the level of uncertainty the lower is the degree of innovation, whereas, the higher the level of uncertainty the more disruptive is the innovative object (García-Gutiérrez & Martínez- Borreguero, 2016). This takes into consideration risk management actions to address the uncertainty by providing solutions (García-Gutiérrez & Martínez-Borreguero, 2016).

The last step of the IPF analysis, requires to determine the sources of differentiation and long-term competitive advantage deducted from the three following steps. First of all one must identify the innovative core competency which is derived from the IO as well as its complementary elements. Secondly, the business model innovation is developed in order to materialise the competitive advantage of the start-up. At this stage, the mapping process followed by the whole IPF analysis is materialised throughout the BMC, which has the IO as its epicenter.

In order for the core competencies to provide a competitive advantage, they must allow the start-up to penetrate to a wide variety of markets, as well as, make a contribution to perceived customer benefits towards the inimitable end product (García-Gutiérrez &

Martínez-Borreguero, 2016).

The Business Model Canvas

The BMC model of Osterwalder and Pigneur (2013) is followed in this thesis as it is the most common tool to represent a business model (García-Gutiérrez & Martínez-Borreguero,

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2016). Hence, the BMC is a common language in the managerial field that allows companies to easily describe a business model in order to create new strategic alternatives (Osterwalder

& Pigneur, 2013).

The BMC is divided in nine different blocks: Customer Segments (CS), Value Propositions (VP), Channels (CH), Customer Relationship (CR), Revenue Streams (RS), Key Resources (KR), Key Activities (KA), Key Partnership (KP), Cost Structure. According to Osterwalder and Pigneur (2013), these blocks cover what are considered the four main areas of business:

offer, infrastructure, customers and financial viability.

2.3.1 Customer Segments

The core of any organisation is to satisfy the needs of their customers. Here, companies need to divide their customers into different groups taking into account their specific needs, behaviors and interests. This division implies that businesses are able to provide a better service to each market by applying different business strategies.

Theoretically, there are some CS already identified, which according to Osterwalder and Pigneur (2013), have a different target focus. Therefore, most companies strategically address their businesses on a mass, niche, segmented, diversified or multi-sided market.

The first one, a mass market CS involves a business strategy where no difference is made among all customers. Secondly, a niche market requires targeting a specific customer where to address the different policies. Further, a segmented CS implies that businesses make a slight difference between the problems and needs of the target group while a diversified segment is when companies serve two unrelated target groups. Finally, a multi-sided market is when companies serve two or more independent CS (Osterwalder & Pigneur, 2013).

2.3.2 Value Proposition (VP)

The VP consists of solving a customer problem or satisfying a customer need. Hence, it is the reason why customers choose one company over the other and is where market value is created.

Companies achieve a VP throughout different sources which, according to Osterwalder and Pigneur (2013), can be either quantitative or qualitative. The first one involves elements such as price, speed of service, cost and risk reduction, whereas the second refers to design, the newness of the product, customer experience or brand status.

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For example, Osterwalder and Pigneur (2013) identify that customisation is a practice that enables companies to increase the VP throughout customers’ implication. Furthermore, the capacity of companies to tailor products and services to meet specific needs of CS is a competitive element in the economies of scale (Osterwalder & Pigneur, 2013). This market competitive element is also identified by Prahalad and Ramaswamy (2004), who highlight the relevance of business to create environments where the value is co-created. Additionally, by building strategies that put customers as the core of the business, companies allow them to have an active role throughout innovative experiences and the value is generated (Prahalad

& Ramaswamy, 2004).

2.3.3 Channels (CH)

According to Osterwalder and Pigneur (2013), the CH block identifies how a company communicates with the CS and delivers the VP. Furthermore, CH have the function of raising company awareness, helping customers to evaluate the VP delivered, allow customers to purchase specific products and services as well as provide post-purchase customer support.

Therefore, the managerial decision towards CH must be taken considering how the awareness of the company is raised, how customers can be helped in evaluating the VP, how the purchasing is made, how the VP is delivered and how post-purchase customer support is provided.

Companies have different CH to implement, which, according to Osterwalder and Pigneur (2013), can be either owned or partnered. While in the first one the company has a direct contact with the CS, throughout in-house sales force or websites, the second one implies indirect contact created by wholesale distribution, retail or partner-owned websites (Osterwalder & Pigneur, 2013). Furthermore, owned CH have higher margins but can be costly to put in practice, whereas partner CH have lower margins but can benefit companies taking advantage from the partner strengths (Osterwalder & Pigneur, 2013).

2.3.4 Customer Relationships

CR are motivated by elements of customer acquisition, retention and boosting sales which influence the overall customer experience (Osterwalder & Pigneur, 2013).

Different CR methods can be applied in the CR of a company towards its particular CS. They can be personal, where there is human interaction between the customer and the company, achieved through customer representatives or impersonal. The latter implies automated

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services using online platforms or also self-service strategies, where customers are directed on how to acquire a product or a service (Osterwalder & Pigneur 2013).

In the CR block, Osterwalder and Pigneur (2013) identify that co-creation of VP with customers is a new approach that overcomes the traditional CR between customer-vendor.

By engaging customers in the creation activity either by allowing them to write reviews or assisting with the design of products, the overall VP can be increased (Osterwalder &

Pigneur, 2013).

2.3.5 Revenue Streams (RS)

According to Osterwalder and Pigneur (2013), RS constitute the money generated by a company from each CS, once costs are deducted from revenues. These streams can be either traditional revenues, which are the result from one-time customer payments, or recurring revenues that are paid as a consequence of ongoing services.

Furthermore, each RS depends on a predefined pricing method. This can either be based on static variables (list price, customer segment, product feature or purchased volume) or dynamic, which consists of prices changing due to the variability of the market conditions (negotiated priced, yield management, real-time market and auctions) (Osterwalder &

Pigneur, 2013).

2.3.6 Key Resources, Key Activities and Key Partnerships

The KR block includes the most relevant assets to make a business model work, which can be physical, financial, intellectual and human (Osterwalder & Pigneur, 2013). The KA is formed by productive, problem solving, platform or networking activities that constitute the most important ones for a company in order to successfully operate. Finally, the KP describe the alliances created by companies in order to optimise their businesses, reduce risk and uncertainty and acquire resources and activities. In terms of KP there are different types of corporations, which can be strategic alliances between non-competitors, corporations between competitors, joint ventures and buyer-supplier relationships to ensure reliability of the supply (Osterwalder & Pigneur, 2013).

Furthermore, all the key elements, KR, KA and, KP are interrelated among them. Hence, Osterwalder and Pigneur (2013) highlight that for their identification, companies must analyse their feasibility in relation to their VP, CH, CR and RS.

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2.3.7 Cost Structure

The Cost Structure identifies the essential costs for companies to operate following a specific business model. These costs must be assessed once the elements of the other blocks are identified and then, classify them into fixed or variable costs. Furthermore, business models can be designed to be either cost-driven, which are models that try to minimise costs, or value-driven, which are more concerned towards the value creation (Osterwalder & Pigneur, 2013).

New Luxury Market

Luxury is a symbolic and fluid concept which has no universal meaning as it is constantly evolving in an ever changing social and cultural context (Kauppinen-Räisänen et al., 2017;

Makkar & Yap, 2018; Yeoman & McMahon-Beattie, 2018). Luxury can be a concept, an idea, a business and also a sector (Kapferer, 2014).

Notwithstanding the lack of objectiveness that luxury encompasses, academic research has traditionally been associating it with conspicuous consumption (Makkar & Yap, 2017; Nobre

& Simoes, 2019; Yeoman & McMahon-Beattie, 2018), where individuals, who socially belong to the high society, use it as the mean to fulfill their needs of wealth, status and power (Makkar & Yap, 2018; Yeoman & McMahon-Battie, 2018).

The rise in the demand over the last decade of luxury has implied its popularisation (Yeoman

& McMahon-Battie, 2018). According to Seo and Buchanan-Oliver (2015), this process has been influenced by three main drivers: cultural, social and external factors. Culturally, luxury has been affected by events, such as the globalisation of markets and the economic empowerment of emerging countries. Social elements that have influenced luxury are the wealth improvement of the middle class and the growing interest of the new generation of customers (Kauppinen-Räisänen et al., 2017; Kim J.H, 2019; Yeoman & McMahon-Beattie, 2018). The external drivers that have popularised luxury have been related with trends that mainly involve technological improvements (Kim, 2019; Seo & Buchanan-Oliver, 2015).

All these events have transformed the concept of luxury (Yeoman & McMahon-Beattie, 2018), which has disrupted the traditional view of conspicuousness (Kauppinen-Räisänen et al., 2017; Makkar & Yap, 2018; Nobre & Simoes, 2019; Roncha & Montecchi, 2017; Yeoman

& McMahon-Beattie, 2018). This opens the door to a new scheme that academia identify as the new luxury (Allyev et al., 2018; Kauppinen-Räisänen et al., 2017; Roncha & Montecchi, 2017), contemporary luxury (Yeoman & McMahon-Beattie, 2018) or modern luxury (Kapferer

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& Valette-Florence, 2016), where luxury has changed its essence and behaviour (Kapferer, 2014).

Traditionally, the notion of luxury was only related to a certain range of products and services belonging to a specific market. This market, which is academically defined as the luxury market, is built on different segments. One of its segments gathers all the personal goods and includes from watches and jewelry to fashion, perfumes and cosmetics and is labeled as the Fashion Luxury Market (Makkar & Yap, 2018; Roberts, 2019).

As the interest for luxury rises, the Luxury Market grows, targeted by an expanded clientele (Kapferer & Valette-Florence, 2016), who are moved by new trends that set their preferences (Kauppinen-Räisänen et al., 2017; Makkar & Yap, 2018; Roberts, 2019; Yeoman &

McMahon-Beattie, 2018). Furthermore, the desires of the middle social class for trading up and emulating the lifestyle of the high society has been seen as an opportunity for luxury companies to change their strategies in a highly profitable market (Yeoman & McMahon- Beattie, 2018).

Hence, the economic growth of the Luxury Market forced luxury companies to enlarge their businesses in order to gain a market share in a strongly competitive environment (Kapferer, 2014). By doing so, luxury companies have boosted revenues and directed luxury to the masses through diversifying their product range, lowering their prices and distancing themselves from the expensiveness of luxury, prioritising volume over exclusivity (Kim et al., 2018). This profit-driven business model has brought luxury to be present in a wider market by creating a new scenario that academia identifies as the democratisation of luxury (García- Ferrer, 2019; Kapferer, 2014; Roberts, 2019).

Silverstein and Fiske (2003) highlight the fact that companies operating in luxury have brought luxury closer to the middle-market, which has influenced the appearance of three types of democratised luxury: accessible super premium, old-luxury brand extensions and mass prestige or “masstige”. These categories conform to a luxury which is characterised by products and services that are more affordable than premium goods and thus, more appealing for a larger market (Kim et al., 2018; Roberts, 2019).

The first category included in the democratised form of luxury is confirmed by products and services that, priced at or near the top of their category are still affordable by the middle - market customers. Silverstein and Fiske (2003) exemplify this category of products with

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coffee. The second category is formed by lower-priced versions of luxury products or services that traditionally have been only affordable by high classes. For instance, BMW decided to launch the 325i sedan model that, even if ranked with a higher price than similar vehicle models from other non-Luxury Brands, the brand increased benefits by offering an affordable car, compared to their price range, with an advanced technology and a hard product. Another example for the second category are Luxury Brands, such as Burberry and Ermenegildo Zegna that, according to Silverstein and Fiske (2003), offer affordable products alongside their traditional ones. Finally, the last type of democratised luxury is conformed by products and services that are priced well below the super-premium and old-luxury brand extensions goods. For example, the Fashion Luxury Brand Coach, sells leather goods at prices that are below Gucci but still above other Fashion Brands (Silverstein & Fiske, 2003).

Furthermore, Silverstein and Fiske (2003) highlight that the appearance of democratised luxury evoked the trading-up phenomena. This situation implies that customers acquire luxury products in relevant categories to trade up but, at the same time they trade down by low-cost products in categories that, according to them, are not as relevant.

2.4.1 Fashion Luxury Goods and Luxury Brands

According to Kim et al. (2018), Luxury Goods are products with a high functional and symbolic value, handmade from the finest materials that are related to the attributes of craftsmanship and quality. Furthermore, these products are identified with exclusivity as they are distributed in limited quantities through specialised retail channels.

Another definition used to define Luxury Goods is, according to García-Ferrer (2019), their differentiation from the conventional ones. Hence, the standout attribute is that luxury goods imply a purchasing process that does not arise from the satisfaction of only a functional need, as the conventional goods, but rather is born from the satisfaction of a desire (García- Ferrer, 2019).

Figure 4. Luxury Goods hierarchy model.

(Jiang & Nagasawa, 2016)

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In order to determine the specific categories that conform fashion Luxury Goods, which are included in the Fashion Luxury Market, the hierarchy model of Luxury Goods developed by Alleres (1990) (cited in Jiang & Nagasawa, 2016 p.608) is used in this thesis. This theory, as shown in Figure 4, identifies Fashion Luxury Goods in terms of a scale that is built on three levels: inaccessible, intermediate and accessible luxury. The first level is formed by extremely highly priced products, which are offered in the market that is only accessible by the elite class. According to Roberts (2019), this type of luxury is considered as meta-luxury.

The second level is related to products that are affordable by the socioeconomic class, which Allers (1990) identifies as a professional class. Finally, the last part of the hierarchy include s the accessible luxury, which is formed by the affordable products able to be purchased by the middle socioeconomic class. These are goods that serve the mass-targeted market to gain prestige and emulate the lifestyle of the highest social class (Jiang & Nagasawa, 2016).

With this hierarchy model, this thesis aims to highlight the fact that the Fashion Luxury Market is no longer identified solely by goods that are only included in the category of inaccessible luxury, thus focused on the elite-class but, also by other products that are targeted to other market segments (Jiang & Nagasawa, 2016).

Notwithstanding the differences reflected in the hierarchy of fashion luxury goods, according to García-Ferrer (2019), what is shared among them is that customers are willing to pay a higher price in exchange for a product but also of an added value inherent to them. Hence, the financial (price paid), functional (usability, quality and uniqueness), individual or emotional (materialism hedonic and self-identity value) and social value (conspicuousness and prestige) need to match with the demand that fashion luxury goods fulfill (García-Ferrer, 2019; Kauppinen-Räisänen et al., 2017; Kapferer & Valette-Florence, 2016).

Nueno and Quelch (1998) (cited in Jiang & Nagasawa, 2016 p.607) describe Luxury Brands as “those whose ratio of functional utility to price is low while the ratio of intangible and situational utility price is high”. Furthermore, according to Jiang and Nagasawa (2016), luxury brands are timeless, modern, fast growing and highly profitable where exclusivity meets the creative and emotional value for customers.

The idea of relating Fashion Luxury Brands with their emotional component is also supported by García-Ferrer (2016), who identifies them as a “symbol of personal and social identity that expresses the personality and lifestyle, strengths the projection of self-image, status and self- concept” (p. 1132).

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Since luxury is a subjective term, the concept of luxury brand also has a non universal meaning that is strongly dependent on a customer’s perception (Roberts, 2019). Hence, what is understood for a luxury brand is influenced by many psychological factors that create a particular image that depends on each individual (García-Ferrer, 2016; Kim et al., 2018).

Therefore, Ko et al. (2019) identifies a luxury brand by linking it to a product or service in terms of customer’s perception. According to them, Luxury Brands rely on high quality, authentic value and are able to fulfill functional and emotional needs. Furthermore, these brands are built on a prestigious image, which is fostered by their attributes of artisanship, craftsmanship, premium price and customer service, and are capable of creating a deep connection with the customer.

This thesis identifies Fashion Luxury Brands with the above mentioned definitions and attributes. However, as fashion intrinsically involves as a phenomena that has a semiotic meaning (Barnard, 2002), as it is closely linked with cultural, artistic and beauty contexts (García-Ferrer, 2016), for Fashion Luxury Brands, it is even more relevant to consider signs and symbols that depend on personal perceptions (Barnard, 2002), as these will affect the conceptualisation and association that customers have towards fashion luxury.

According to Okonkwo (2007) (cited in Jiang & Nagasawa, 2016 p.608), how customers perceive a brand creates its identity, which at the same time, is formed and thus, influenced by its personality and image. While the brand’s personality affects the customers’ preference for one brand or another, the image depends on the way customers decode the signals emerging from the products, services and communications offered by the brand (Jiang &

Nagasawa, 2016). Therefore, Fashion Luxury Brands do not only have to consider the functional and economic value that the traditional concept of luxury implies but also symbolic and individual needs that have a positive influence on the purchasing intention of customers (García-Ferrer, 2016; Kauppinen-Räisänen et al., 2017; Ko et al., 2019).

The fact that Fashion Luxury Brands must fulfill individual or emotional values is not only required to create a strong brand identity or to compensate for the higher price of a fashion luxury but also is a market demand which is driven by exigent customers (Kapferer & Valette- Florence, 2016). Today’s luxury customers, who also gather the new generations, search to satisfy in luxury complex values through personal experiences (Cristini et al., 2017).

This new trend that has appeared by the new, contemporary or modern luxury (Gutstaz &

Heine, 2018) has transformed its concept and market, pushing Fashion Luxury Brands to identify a new demand, where customers are searching to develop their personalities (Nobre

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& Simoes, 2019). Hence, according to Kapferer and Valette-Florence (2016), in the modern luxury, Fashion Luxury Brands are not simply product-sellers but dream-sellers, who put in the market desires attached to their identities and the world they symbolise.

However, as customers become more demanding and the competitiveness in the Fashion Luxury Market increases, Silverstein and Fiske (2003) highlight the poor strategic situation of some Fashion Luxury Brands that, relying on the democratisation of their businesses, are stuck in the middle. A situation that has resulted from their inability to match the exclusivity of luxury with lower prices and the emotional requirements of customers. Furthermore, this strategic position has also been influenced by the loose of prestige of Fashion Luxury Goods that are attainable for a larger market (García-Ferrer, 2019) as something to accessible loses its exclusivity and thus its prestige and appeal (Yeoman & McMahon-Beattie, 2018). Hence, this situation creates a good opportunity for new Fashion Luxury Brands that can better match customers’ demand while delivering similar benefits of intermediate and accessible luxury (Silverstein & Fiske, 2003).

2.4.2 Emerging Fashion Brands

Taking into account the hierarchy model of Luxury Goods developed by Alleres (1990) and the notion provided by Jiang and Nagasawa (2016), this study considers EFB as “brands created recently and providing [fashion] Luxury Goods in or above the intermediate level of the Luxury Goods products hierarchy” (p. 608). Furthermore, this thesis also shares with Jiang and Nagasawa (2016), that EFB can be paired with the notion of new entrant and be related to designer brands, who are neither part of the traditional nor the democratised luxury but leaders in the new, modern, contemporary concept of luxury.

EFB are positioned in the hierarchy model of Allers (1990) in a place that is not the accessible luxury, which includes Fashion Luxury Brands such as, Ralph Lauren, Coach or Michael Kors (Kapferer, 2014) that implement a profit-driven business which has been identified as democratised luxury but rather Fashion Luxury Brands belonging to the second level identified as Louis Vuitton, Chanel or Hermes (Jiang & Nagasawa, 2016).

The idea of relating EFB with the concept of new entrants is also supported by Gutstaz and Heine (2018) who identify these companies as new business models that reflect a new type of luxury. In addition, these authors consider that the transition experienced in the Luxury Market mainly resulting from the new customers’ preferences, trends and technologies have created an appealing environment for startup companies to enter into a market that is recognised as highly entrepreneurial.

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Another reference in the luxury managerial research regarding new entrants is found in the study developed by Som and Blanckaert (2015). These authors differentiate new entrants as companies that have different attributes from conglomerate and family business, such as Louis Vuitton or Gucci, who are considered the traditional and relevant players in the Fashion Luxury Market. Furthermore, in their research, Som and Blanckaert (2015) specifically identify new entrants with examples of fashion brands like Jimmy Choo or Tom Ford.

2.4.3 Future drivers in the Fashion Luxury Market

The dynamism that the Luxury Market encompasses require to identify its new trends and the drivers behind them. Hence, to structure business strategies, Emerging Fashion Brands must have the bigger picture of the market in order to align their actions with the future scenario of luxury (Yeoman & McMahon-Beattie, 2018).

First of all, Fashion Luxury Brands must identify the functional and emotional demands behind the purchasing intentions of Luxury Goods. Here, the distribution channel chosen becomes a key element for their retail strategy, which must be a facilitator that stimulates sensory experiences (Guldager, 2016) while the exclusivity of the Luxury Goods is reached (Kapferer, 2014). Furthermore, Luxury Fashion Brands must consider the post-purchasing experience of customers, where the expectations are evaluated and the capacity of a brand to retain its customers is created (García-Ferrer, 2019). Hence, the CR system implemented by Fashion Luxury Brands becomes strategically crucial (Kapferer, 2014).

Another future driver that Fashion Luxury Brands have to implement is the fashion trend supporting sustainability (Kapferer, 2014). According to Ranfagni and Guercini (2016), luxury and sustainability are not unrelated ideas but rather two notions that appeal customers who search to materialise their aspirations of individual environmental and social responsibilities.

Therefore, these new customers are pushing a sustainable change, where conspicuous is moving into conscientious consumption in the Luxury Market (Guldager, 2016).

To build strong sustainability strategies, Fashion Luxury Brands must align their values with sustainable practices that, according to Ranfangni and Guercini (2016), are created by identifying sustainable values that are reflected in the brand’s socio-economic actions.

Further, to be true to sustainable principles, Fashion Luxury Brands must be able to control their growth, staying true to environmental but also social and financial initiatives (Kapferer, 2014). Among other actions, a plan that enables Fashion Luxury Brands to develop a sustainable statement is to emotionally connect with their customers (Guldager, 2016). If

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Fashion Luxury Brands are able to develop irreplaceable products, by which an intimate and strong bond between them and customers is created, the lifecycle of the products is increased while the emotional value of luxury is fulfilled (Ranfangni & Guercini, 2016).

Therefore, Yeoman and McMahon-Beattie (2018) identify that a new face of luxury implies to build it to last, where sustainability becomes attached to Luxury Goods throughout narrative strategies.

According to Yeoman and McMahon-Beattie (2018), the rise of a more demanding customer is driving the luxury competition, where market expectations are higher. Furthemore, the pressure that customers are placing on Fashion Luxury Brands is determined by a greater choice of products and alternatives in the marketplace. Therefore, these brands need to develop strategies that allow them to increase their perceived value while creating a unique position in the market (Kapferer, 2014).

However, in the attempts of being different, Fashion Luxury Brands need to consciously manage digital technologies, which can be either a supportive tool, helping them to increase the market reach or a drawback as the brand’s exclusivity can be decreased. In the digital world, the key is to strategically evaluate how technology can support the online distribution channels while not diluting a brand’s identity (Kapferer, 2014). Further, new technologies must go in hand with the brand’s physical spaces in order to build premium environments as the uniqueness and quality of the shopping experiences support the exclusivity of the luxury (Yeoman & McMahon-Beattie, 2018).

According to Kapferer (2014), customers are also more demanding in the Luxury Market as they have become world shoppers. However, as the options where to acquire Luxury Goods have increased by their presence in online platforms, the market trend is now driving to identify what is local. Furthermore, customers are cultivating a purchasing culture based on a locally acquisition, which involves purchasing in the flagship store of the Fashion Luxury Brands that represents the highest level of the symbolic luxury experience (Kapferer, 2014).

Related to the idea of local luxury, Gutsatz and Heine (2018) consider that especially Fashion Luxury Brands need to develop a cultural capital as, according to Yeoman and McMahon-Beattie (2018), geographical and historical provenance of luxury can have a significant appealence for global shoppers.

The technological age, as identified by Gutstaz and Heine (2018), has not only changed the way brands sell and communicate their products to customers but also, the way luxury goods

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can be an interesting field to explore as it can influence the exclusivity of Luxury Goods. High technology can serve as tools in order to produce small quantities (Gutstaz & Heine, 2018), allowing Fashion Luxury Brands to create on demand and providing waiting lists that repercute on the exclusivity of the Luxury Goods (Yeoman & McMahon-Beattie, 2018).

Yeoman and McMahon-Beattie (2018) have identified four future scenarios for the New Luxury Market which are prestige, trading up, craft and authentic and enrichment and experiential luxury. These new scenarios as shown in Figure 5, relate each of them with the forms access and pricing of luxury.

Figure 5. Future Luxury Scenario Matrix.

(Yeoman and McMahon-Beattie, 2018).

The prestige luxury is driven by ultra-wealthy customers, who represent the most prestigious concept of luxury. The second scenario is targeted by middle class customers demanding to trade up and have an appetite for top Luxury Goods that are affordable. The third scenario implies an enriched and experiential luxury that targets customers who prioritize sensing through tailored experiences with fulfillment of deeper and spiritual ambitions. Finally, the fourth scenario of craft and authentic luxury represents the idea where originality and authenticity from a past heritage converges with original experiences that have a clear link to a specific place, time or culture.

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3 Methodology

This part of the thesis presents the methodology used to conduct the research. It contains a general approach where the theoretical implications of the research strategy are presented followed by an assessment of its quality. Furthermore, this chapter contains an explanation of the motivations of the theoretical background chosen along with a specific description of the empirical data gathered, which allows to ensure the validity of the results of this study. Finally, the chapter ends by explaining the empirical investigation identifying the interviewed companies.

General approach

This thesis adopts a research strategy based on a qualitative research method, motivated by the research question that is formulated in a way that requires to understand and discover a particular social phenomena where words rather than numbers or measurements are involved (Bryman, 2012). Hence, in order to answer the research question, the gathering and analysis of qualitative data is implied. In addition, qualitative research allows the implementation of research techniques that are useful to examine a dynamic context (Bryman, 2012) therefore, suitable for the investigation of a particular economic sector.

The qualitative research is often paired with an inductive approach, where the theory results from the findings (Bryman, 2012). However, this thesis begins with and applies three different managerial frameworks, including Porter’s generic strategies, the IPF and the BMC in order to analyse the luxury market and a specific type of companies, which are identified as EFB that operate in it. Furthermore, as the topic of this thesis is to determine the competitive advantage of EFB, which can be related to the identification of a specific business performance, this requires to follow a research method where the theory moves to the findings (Wilson, 2014a).

The theory is applied as a framework for the bases of the research in order to structure, guide and gather empirical evidence whereby the results of this study are drawn (Bryman, 2012).

Furthermore, as the research is based on the in-depth study of a particular type of brands and a specific market, this research adopts a research design identified as a case-study.

According to Bryman (2012) this approach allows to develop an intensive analysis of a single phenomena and is commonly used in qualitative research. Concretely, as Voss et al., (2002) identify, case research is useful in managerial fields particularly in the development of new theories, i.e. emerging fashion brands and a competitive advantage. Furthermore, this