Idea in Brief The Puzzle The existence of the successful luxury groups LVMH, Kering, and Richemont runs counter to the idea that being part of a conglomerate doesn’t add value. A study of more than 350 fashion houses has established that group-owned brands are more creative than independent brands. The Answer The main source of the groups’ value is that their diverse business portfolios provide talented employees with extraordinarily rich learning opportunities. How It Happens The groups offer job mobility across product categories and countries, enabling the transfer of best practices and providing new sources of inspiration for innovation in marketing and design. They also prime the entry-level talent pipeline for both designers and managers and strategically hire functional experts from outside the luxury goods industry. Fifty years ago fashion and luxury goods were all about family businesses and entrepreneurial designers. Today most of the world’s leading brands and labels belong to one of a few groups, of which the biggest by revenue is LVMH, the owner of Moët & Chandon and Louis Vuitton. Two other groups—Richemont, the owner of Cartier and Chloé, and Kering (formerly PPR), which owns Gucci and Saint Laurent—give LVMH fierce competition. To some extent the existence of these successful groups runs counter to management orthodoxy. A large body of research suggests that companies generate superior returns by focusing on a core line of business or competencies. Diversification generally does not add value unless there are significant cost savings and operational synergies across units—which isn’t necessarily the case with all luxury groups. Their portfolios include a wide variety of product categories, and their individual brands are managed autonomously. Each has its own P&L. The performance evaluations of senior managers are closely tied to their brands’ profitability, which leads to a lot of internal jockeying. As an executive in one group joked, “When I was in charge of my group’s distribution, my group’s brand managers kept secrets from me. Sometimes I learned more about my group’s brands from the customers than I learned from the brands themselves.” Yet despite all this, being owned by the likes of LVMH, Kering, or Richemont does add value to a brand. When we analyzed the drivers of performance for more than 350 fashion houses from 2000 to 2010, we found that producing successful, creative fashion collections was positively correlated with being part of a business group. On average, retailers and wholesalers of high-end clothing judged collections made by group-affiliated brands to be three times as creative as collections made by independent competitors. (See the exhibit “Group Affiliation and Foreign Experience Give Designers an Edge.”) Of course, a few cost benefits are generated by centralizing support functions such as operations and logistics, finance, and real estate management. Another advantage is the relatively efficient internal market for capital that luxury groups, like successful private equity firms, provide by identifying promising brands and supporting them with the capital management they need to grow. But our research suggests that the real source of the groups’ value is the way they exploit their diverse business portfolios to offer rich learning opportunities to both managers and creative talent. This is why their brands excel at design and business innovation. To understand just how the groups developed this talent advantage, we conducted detailed case studies, which involved more than 50 in-depth interviews with senior executives. What we saw was that within their boundaries, the three groups have all created a vibrant circulation of talent that allows them to spread knowledge and best practices, despite the sometimes intense rivalry between their brands. In the following pages we’ll look at the management practices that enable this phenomenon. Offering Mobility Across Categories Talented people often leave good companies because they want fresh experiences elsewhere. But at Kering, LVMH, and Richemont, an ambitious luxury goods manager looking to diversify her résumé need never depart the group, because many of the companies that she’d want to move to are in fact within it. That’s why about two-thirds of management openings in LVMH’s brands are filled by people from inside LVMH. What’s more, by remaining in the group, high-potential employees can more easily stay in touch with and benefit from the networks they have established. From their perspective, the luxury conglomerate is fertile ground in which to grow their skills. From the group’s perspective, the advantage is that the organization captures the full value a manager can derive by developing her experience and networks in new jobs. As a senior marketing executive commented, “It is important to share talent across brands to retain talent. Sometimes a top executive sees that within an individual brand there are no opportunities to grow, and we’d rather this executive take an assignment in a different brand than lose this person to the competition.” The groups all have programs to encourage and support internal job moves. At Richemont, senior executives assess their subordinates on four metrics: mental agility (general intelligence), results orientation (ability to achieve goals), change management (ability to steer a business in a new direction), and people management (general skill at leading others). Individuals who achieve in these areas are put into a pool that the brands’ senior managers look at when making new hires. LVMH’s FuturA initiative, which had 300 participants in 2013, serves a similar purpose. It identifies and develops managers whom the group would like to put into key positions within five years. The FuturAs are evaluated on three factors: agility at learning, engagement and commitment, and ambition. Of course, similar programs exist in many other industries, but a few features set the luxury groups’ initiatives apart: Participants usually don’t know they’re in a program. As a senior executive from Richemont told us, “Letting someone know that they did not make it to the high-potential group would be demotivating and create uncomfortable discussions between subordinates and superiors [whose evaluations determine membership in these programs] or other unpleasant dynamics. Thus, it’s better not to tell at all.” There is usually no preset career path. A person in the high-potential program will be offered assignments in different brands, but what specific brands these will be and how fast the rotation will happen are determined on a case-by-case basis. This reflects the uncertain nature of the luxury industry, where it’s hard to predict what will or will not work. The programs emphasize the history of the brands. Any executive on a rotational assignment at Château d’Yquem quickly discovers that the property has been a vineyard since the early 18th century and that its customers included Thomas Jefferson and George Washington. It’s this kind of knowledge that has inspired marketing campaigns that persuade consumers to buy the wine for tens of thousands of dollars a bottle. Even with a promising internal career path, many talented people will still leave a group to pursue a track not available there or to work with a particular team elsewhere. But some groups don’t treat this as a rejection, and many of their executives stay in touch with former employees. LVMH routinely rehires ex-employees (although this is not the case for other groups). One senior executive we spoke with left to work for a high-tech cosmetics start-up and then came back to Guerlain with ideas about how to integrate beauty products with digital technologies. Another went to Google and returned with expertise in designing high-tech wearable items. A senior executive commented, “It’s good for our people to leave, learn from the competition, and come back.” Career mobility has helped groups identify and transfer best practices across products. Consider watches, which luxury brands have traditionally marketed on the basis of technical and aesthetic excellence. To boost sales growth, the groups’ watchmaking companies started hiring marketing managers from their groups’ cosmetics and fashion companies. People from those businesses have proved adept at developing stories that explain why a company created a particular model of watch and what the aspirations of its creators were. The ability to draw on deep brand-building and advertising expertise from other companies within their groups gives affiliated watch brands an advantage over independent watch companies, which have to hire it externally, often at a hefty price. Experts from outside the watch business offer new hard skills as well. One executive reflected, “I’m responsible for a luxury watch brand in Asia. My team never had a CRM function, so I recruited an executive who had experience in CRM in fashion and cosmetics firms in our group. She brought the tools and the processes, as well as the knowledge about performance benchmarks. She helped our people change their mindset from being focused on the product to being more customer-oriented.” The new CRM systems improved the brand’s customer understanding and reduced its risks of stock buildup, since they provided quick feedback on market reactions to products. And the relationship-based approach the former fashion executive introduced has played an important part in making this brand one of the most-sought-after luxury lines in China. Leveraging International Experience It’s well known that spending time overseas is critical to executive development and performance. One of the advantages of luxury groups is that with their worldwide operations, they can easily find managers who’ve had jobs outside their home countries or can easily put people into such positions. This has contributed to the success of the groups’ flagship brands in two ways: A source of inspiration. In our statistical analyses of fashion performance, we found that fashion designers were more likely to produce creative collections if they had worked abroad. (See the exhibit “Group Affiliation and Foreign Experience Give Designers an Edge.”) Working in two to three foreign countries was particularly beneficial. At LVMH the leading designers all bring cross-cultural perspectives to their work. Phoebe Philo, a Paris-born British fashion designer educated at Central Saint Martins, in London, runs Céline—a quintessentially French brand—from London. Marc Jacobs, who during his tenure at Paris-based Louis Vuitton expanded its product mix from travel accessories to clothing, was born and trained in the United States. Karl Lagerfeld, a creative director at Fendi and at Chanel (which does not belong to LVMH), often works in both France and Italy during the same day and has called himself “a one-man multinational fashion phenomenon.” These three stars have developed ties with other designers, manufacturers, and suppliers beyond their local networks, who give them fresh ideas. The diverse cultural influences incorporated into their collections have invigorated their traditional luxury brands. Kering feels so strongly about the importance of cross-cultural exposure that it organizes “inspiration tours,” which take European and American designers to Japan, China, Africa, the Middle East, and other foreign locations. These tours give designers the opportunity to see unfamiliar patterns, new fabrics, and new concepts that they can integrate into their work at home. A better understanding of customers. As a senior executive of Tomas Maier (a maker of luxury swimwear and knitwear partly owned by Kering) told us, “If you have a designer who has never been to China, that’s a problem.” Many of the executives we interviewed emphasized that their professional foreign experience helped them serve as “bridges” between Switzerland, France, or Italy, where many luxury goods are produced, and the United States, Asia, and the Middle East, which are now their largest markets. Although Europeans can explain to customers what luxury means, they also must have experience in foreign markets to understand which aspects of luxury the customers there actually care about. For example, in America consumers will buy watches for their functionality or performance, whereas in Asia it’s more about the prestige of the brand. You can have too much of a good thing, however. The downside to working in China or Brazil is that you fall behind on what’s happening in Paris or Milan or Geneva, where the design actually takes place. Christophe Maincourt, a former president of Richemont Latin America and Caribbean, describes the ideal career trajectory this way: “People should travel widely in their twenties and thirties. But when you’re hitting your forties, it’s time to go back home.” His point is that it’s important for aspiring executives to spend time in their forties developing their understanding of a group’s strategic priorities, its relationships with its brands, how internal departments interact, and how to get things done within the organization. Managers who always travel and work abroad can have great careers in support functions (say, purchasing or distribution), but if they want group-level responsibility, they’ll eventually need to settle in the group’s home country. Strategically Managing External Talent Because of their brands’ prestige and their ability to offer rich career paths, luxury groups are very attractive as employers. People working in winemaking, fashion, jewelry, and other high-end businesses all want to have a name like Moët & Chandon, Gucci, or Cartier on their résumés. The groups don’t have to try too hard to find new people. But they also realize that maintaining their brands’ premium reputation ultimately depends on introducing new ideas and innovations, which may have to come from outside the group. For this reason, they take recruiting very seriously, investing their time and money in two ways: Priming young talent. Luxury groups actively support educational programs that develop managerial skills specific to the industry. Richemont, for example, sponsors a luxury goods marketing program at the Institut Supérieur de Marketing du Luxe, in Paris. Other groups are involved in similar initiatives: LVMH and Kering have joined Richemont in supporting an MBA in international luxury brand management at ESSEC, one of France’s famous grandes écoles. With a broad base in many categories of goods, the groups are positioned to partner with researchers and teachers to provide students high-quality educational content and practical experience. The students get more out of the programs, and the companies get exposure to promising young managers. These programs have increasingly become launchpads for the careers of group executives. In addition, all three groups focus on training young designers and artisans. LVMH runs a program in cooperation with some of France’s craft schools. Students from the Écoles de la Bijouterie–Joaillerie in Paris (which specialize in jewelry making), for example, can get apprenticeships with the master craftspeople at Chaumet or Louis Vuitton; and students from the École de la Chambre Syndicale de la Couture Parisienne (ECSCP), with dressmakers at Dior, Givenchy, or Kenzo. The other two groups also support ECSCP, which has trained many top designers, including Karl Lagerfeld (LVMH), Tom Van Lingen (Richemont), and Tomas Maier (Kering). These initiatives serve a dual purpose. On a fundamental level, they allow craftspeople to pass along their rare savoir faire, keeping the knowledge alive. And like the managerial programs, they offer the groups an opportunity to identify talent in the next generation. A former Louis Vuitton CEO once hired managers from Toyota to improve supply chain management. Recruiting from other sectors. The leaders of groups are well aware that people in other industries often have a better handle on best practices than anyone in the luxury and fashion business does. That is why the late Yves Carcelle, a former CEO of Louis Vuitton, hired a number of managers from Toyota. They helped the brand improve its supply chain management, especially the integration of its IT systems with suppliers. Just like Toyota, Louis Vuitton now shares real-time information about customer demand with its suppliers, so they can plan their manufacturing schedules accordingly. This allows the group to extract more competitive advantage from supplier relationships. People brought in from outside the field have also redefined customer service in luxury. Many luxury brands grew up catering to elegant, aloof aristocrats and bourgeois but now face a world in which their best customers are likely to be hip-hop artists or high-tech entrepreneurs. As a consequence there has sometimes been a mismatch between the way the staff in shops like Cartier and Gucci present themselves and the people who walk through the door. Richemont has responded by hiring managers from the hospitality industry, which has had to adapt more quickly to this change. One, recruited from a famous hotel chain in Asia known for excellent customer care, has helped a prominent Richemont brand train store staffers to play the role of hosts and treat customers as guests. She has also developed performance metrics for retail employees based on customer service measures from the hotel industry. Being a large diversified organization is an advantage for groups recruiting outside the industry. Toyota supply chain managers aren’t likely to be interested in joining a small independent luxury brand, because it could not offer an attractive next step. But because they can offer more opportunities and real career progression, companies like LVMH, Richemont, and Kering are well placed to import talent from other fields. The practices we’ve described have helped make the three luxury groups exceptional engines of talent at all levels and functions, providing win-win outcomes for employees and employers. This is what really explains the ability of the groups’ historic brands to adapt and to renew themselves. If collections from the brands of LVMH, Kering, and Richemont are considered to have high creativity, ultimately it’s because they’ve developed a talent premium through their investment in and management of human capital.

Andrew Shipilov

Frédéric Godart

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Puzzle</h5>
  <p>The existence of the successful luxury groups LVMH, Kering, and Richemont runs counter to the idea that being part of a conglomerate doesn’t add value. A study of more than 350 fashion houses has established that group-owned brands are more creative than independent brands.</p>
  <h5>The Answer</h5>
  <p>The main source of the groups’ value is that their diverse business portfolios provide talented employees with extraordinarily rich learning opportunities.</p>
  <h5>How It Happens</h5>
  <p>The groups offer job mobility across product categories and countries, enabling the transfer of best practices and providing new sources of inspiration for innovation in marketing and design. They also prime the entry-level talent pipeline for both designers and managers and strategically hire functional experts from outside the luxury goods industry.</p>
 </div>
</article-ideainbrief><p>Fifty years ago fashion and luxury goods were all about family businesses and entrepreneurial designers. Today most of the world’s leading brands and labels belong to one of a few groups, of which the biggest by revenue is LVMH, the owner of Moët &amp; Chandon and Louis Vuitton. Two other groups—Richemont, the owner of Cartier and Chloé, and Kering (formerly PPR), which owns Gucci and Saint Laurent—give LVMH fierce competition.</p>

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<p>Fifty years ago fashion and luxury goods were all about family businesses and entrepreneurial designers. Today most of the best-known brands belong to a diversified group like LVMH, Richemont, or Kering. The success of such groups contradicts the management notion that a focus on one core leads to superior returns&#8212;and that diversification adds little value. An analysis of the performance of 350 fashion houses suggests that group affiliation <em>does</em> add value, say INSEAD&#8217;s Andrew Shipilov and Fr&#233;d&#233;ric Godart. They found that the fashion collections of group brands were more successful, and judged more creative by industry buyers, than those of independent brands over a 10-year period.</p>
<p>How do luxury groups get this edge? Through the way they groom their designers and managers. The groups exploit the variety of their businesses by setting up internal talent markets that offer rich learning opportunities. Rising stars are thus less tempted to leave the organization, and cross-group job moves help spread knowledge and best practices. Group watchmaking companies, for instance, have been able to boost their sales by hiring experts in marketing and CRM from their groups&#8217; fashion and cosmetics firms.</p>
<p>Worldwide operations give groups another advantage, because spending time overseas is critical to executive development. This is especially true in the luxury field, where international experience exposes designers to creative influences and executives to new but fast-growing customer segments.</p>
<p>However, it isn&#8217;t just in their approach to internal talent that groups excel. They prime the entry-level pipeline by sponsoring educational programs and offering apprenticeships to promising students, as well as recruit external functional know-how more effectively than the independent brands do.</p>
<p class="reprint">HBR Reprint R1506H</p>

Luxury&rsquo;s Talent Factories

Fifty years ago fashion and luxury goods were all about family businesses and entrepreneurial designers. Today most of the best-known brands belong to a diversified group like LVMH, Richemont, or Kering. The success of such groups contradicts the management notion that a focus on one core leads to superior returns—and that diversification adds little value. An analysis of the performance of 350 fashion houses suggests that group affiliation does add value, say INSEAD’s Andrew Shipilov and Frédéric Godart. They found that the fashion collections of group brands were more successful, and judged more creative by industry buyers, than those of independent brands over a 10-year period. How do luxury groups get this edge? Through the way they groom their designers and managers. The groups exploit the variety of their businesses by setting up internal talent markets that offer rich learning opportunities. Rising stars are thus less tempted to leave the organization, and cross-group job moves help spread knowledge and best practices. Group watchmaking companies, for instance, have been able to boost their sales by hiring experts in marketing and CRM from their groups’ fashion and cosmetics firms. Worldwide operations give groups another advantage, because spending time overseas is critical to executive development. This is especially true in the luxury field, where international experience exposes designers to creative influences and executives to new but fast-growing customer segments. However, it isn’t just in their approach to internal talent that groups excel. They prime the entry-level pipeline by sponsoring educational programs and offering apprenticeships to promising students, as well as recruit external functional know-how more effectively than the independent brands do. HBR Reprint R1506H

Luxury’s Talent Factories

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