Prada Business Model Evolution and Future

2. TALLINN UNIVERSITY OF TECHNOLOGY Faculty of Economy Department of Business Administration Chair of Organization and Management Stella Pinsel Karin Maandi Mihkel Külaots PRADA – EVOLUTION OF THE LUXURY BRAND BUSINESS MODEL Research paper in Strategic Management Supervisor: Lecturer Alar Kolk Tallinn 2012

3. TABLE OF CONTENTS Abstract ........................................................................................................................... 4 Introduction .................................................................................................................... 5 1. Backround of luxury goods and fashion industry ................................................... 6 1.1. Luxury goods industry ........................................................................................... 6 1.2. Luxury fashion market........................................................................................... 8 1.3. Luxury fashion brand ............................................................................................ 9 2. The evolution of Prada’s business model ............................................................... 12 2.1. Prada’s business models ...................................................................................... 12 2.1.1. Early years (1913–1989) – search for a differential ..................................... 12 2.1.2. Beginning of Prada-Bertelli reign (1978-1989) – time for expansion.......... 15 2.1.3. The Golden Age (1990-2006) – growth, aspiration and acquisitions........... 22 2.1.4. The Present (2007-2011) – technology flows in .......................................... 31 2.2. SWOT analysis of Prada’s business strategy ...................................................... 39 3. Prada’s future business model suggestion – „The exclusive Prada’s experience with AMEX PRADA” .................................................................................................. 43 Conclusion ..................................................................................................................... 48 References...................................................................................................................... 50 3

4. ABSTRACT The PRADA Group is one of the world’s leaders in the design, production and distribution of luxury handbags, leather goods, footwear, ready-to-wear apparel, accessories, eyewear and fragrances. The Group owns some of the most prestigious international brands: Prada, Miu Miu, Car Shoe and Church’s and operates more than 70 countries through 358 directly operated stores, 30 franchise stores and a network of selected high-end multi-brand stores and luxury department stores. This paper examines the business model evolution of their company as well as focuses more on their first historical brand – Prada, which is strongly connected with the establishment of the company and taking us back to the very beginning of their first strategic decisions. Prada is one of the most innovative fashion brands that is able to re- define the norm and set new trends. Thorough analyse through different periods of the company’s business and strategies will be exposed through this paper, revealing companies strenghts and weaknesses as well as strategic decisions that were made from the early 1920’s until 2011. 4

5. INTRODUCTION Every company’s ultimate success or failure is based on its long-term direction, strategic moves, and business approaches. The better a business’ strategy is the more likely competitive success is achieved in the market place. Prada’s distinctive features and prestige derive from its particular industrial process management which allows the Group to offer its customers products of unequalled quality, creativity and exclusivity. Today, these values have transformed a family business into a major player in the luxury market worldwide. The aim of this paper is to look closely at the different periods of the Prada Group’s business model development to examine the nature and development of the luxurious Italian brand Prada and different change stages that characterise its evolutionary phases as well as management choices and competitive approaches. The research paper is divided into 3 main chapters. The first chapter gives the reader short overview of the concept of luxury goods and fashion industry as well as providing the reader with information about luxury branding and the main crucial elements for creating a luxury fashion brand. The second chapter focuses of analysing Prada’s business growth through time, starting from its establishment in 1913, carrying on to the time, when business expansion started (1978-1989). The third subchapter describes further growth of the business as well as aspiration and acquisitions taken place during that period (1990- 2006). The last subchapter analyses the transformation of the company from 2007 until 2011. The business model evolution and strategies will be concluded in the last chapter, where Prada’s SWOT analysis is presented. In the final chapter of the research paper the authors present their opinions and suggestions for the company’s new future business model. 5

6. 1. BACKROUND OF LUXURY GOODS AND FASHION INDUSTRY 1.1. Luxury goods industry Luxury goods are one of the most profitable and fastest-growing brand segments. (Berry 1994) The luxury goods market is significant not only because of its market value, but also its rate of growth – which has in the past 10 years significantly outpaced other consumer goods categories. Thus luxury goods are products or services that have attractive stories (history) and are expensive, high-quality, sensual, unique and available for a limited few. Luxury is neither a product, an object, a service nor is it a concept or a lifestyle - it is an identity, a philosophy and a culture (Okonkwo 2009). Within the luxury offer, there is an ever-expanding offer of luxury categories. Luxury industry basically consists of five bigger sectors (International University of Monaco 2010; Moore, Fionda 2009): branded jewelry arts de la table fashion and apparel (couture, ready-to-wear) perfumes and cosmetics accessories. 6

7. Nowadays luxury is manifested in a wide range of products, fulfilling every imaginable need of the consumer, for example tourism, hotels, spas, food, cars, arts, real estate, private banking, airlines, home furnishing and also education (International University of Monaco 2010, Amatulli & others 2011). Although many products appear to be essential to their owners, the selection often has less to do with function and more to do with status (Bruce & others 2004). Vickers et al (2003, 462) indicate, that until this time that the “...most widely accepted typologies have in common the idea that luxury goods products are modifications of a base product that involves satisfying consumer needs.” Luxury is identified in terms of its psychological value, its function as a status symbol and as a highly involved consumption experience that is strongly attached to a person’s self- concept. (Moore & Fionda 2009) The rate of growth of luxury goods market has been driven by a variety of factors, the most significant of which has been the increase in the number of high-net- worth individuals with an appetite for luxury brand consumption. The luxury goods suppliers have developed strategies that seek to better service consumer demand. Traditionally been described as top-of the-range products, the market of luxury goods has been rapidly growing in the past two decades, due to rise in standards of living and increasing consumer product knowledge (Vickers & others 2003, 459-460; Berthon & others 2009, 45-46). According to Bain & Company (2011) luxury goods sales are expected to be around €191 billion in 2011, up ten percent from €172 billion in 2010. The industry 7

8. encompassed eight main product categories: luxury apparel, accessories, leather goods, shoes, jewelry, watches, perfume and cosmetics. Apparel will experience eight percent growth in 2011, driven by both menswear (nine percent) and womenswear (seven percent). Perfumes and cosmetics consumption will grow by three percent globally, with much of that growth found in emerging markets such as China and Brazil. Accessories (including shoes and leather goods) will grow by 13 percent in 2011, as consumers often rely on these products as an entry to luxury consumption. Hard luxury (jewelry and watches) is delivering the strongest growth for 2011, however, with 18 percent estimated for 2011. Increasingly, consumers are shifting their hard luxury purchasing from unbranded to branded items, and purchasing these branded products in direct-owned stores. The post-crisis world of luxury goods has proven that luxury’s mature markets are still relevant, both in absolute terms and in growth rates. Bain & Company expects 10 percent growth in Europe and 12 percent growth in the Americas for 2011 at constant exchange rates, although the weakening Euro eats into these growth rates by three to four percent. Japan yields the biggest surprise in terms of growth. It remains luxury’s second market with five percent growth at constant exchange rates for 2011. Developing market growth (China, 35 percent; Brazil, 20 percent; Middle East, 12 percent) is still notable and remains a priority for brands. (Bain & Company 2011) 1.2. Luxury fashion market Luxury fashion accounts for the largest proportion of luxury goods sales, with around 42 percent share. (Moore & Fionda 2009: 348) Fashion luxury goods are comprised of apparel, accessories, handbags, shoes, watches, jewelry and perfume, for which just the mere use or display of a particular brand brings prestige to the owner and functional utility becomes a side issue. (Amatulli & others 2011) Many have argued what are the determinants of purchasing tension for fashion luxury goods and the answer 8

9. lays external and social and interpersonal motivations of consumers. External motivations concern those cases where the goal is essentially that of publicly displaying luxury so as to affirm the consumer’s status while internal motivations relate to luxury consumption based on emotions, state of mind and subjective sensations related to an individual’s self-perception. Today you are not what you wear, but who you wear. The biggest main traditional luxury fashion markets are Europe and USA, but also China has shown a great increase in consumption of luxury fashion goods and that market is growing in time. (Gao & others 2009, 515) Increased wealth accumulation across the globe over the last decade has enabled more consumers than previously to buy luxury goods and that has led to increased numbers and types of luxury firms and products. (Okonkwo 2007) Many studies have suggested that branding of luxury fashion goods is more complex than other sectors by virtue of the speed of change within the sector as well as the scale and number of fashion items that are marketed using a single luxury brand name. (Moore & Fionda 2009) The other aspect supporting luxury fashion is that the marketing of fashion goods is typically more complex and costly as a result of differences in product numbers, operating scale and the tendency for luxury fashion companies to take direct control of the distribution of their goods within markets. As such, these costs and the complexity of managing the marketing of this category of luxury goods have previously been shown to exceed those of the other luxury brand categories. (Moore & Birtwistle 2004) 1.3. Luxury fashion brand There are many definitions of luxury which mentioned earlier is associated with extravagance, prestige and elitism, but there are few of the luxury brand. Luxury brands have heightened status that affords an opportunity for their owners to charge premium prices. Luxury brands possess a desirability that extends beyond their function and provides the user with a perceived status through ownership. (Moore & Birtwistle 2006) There is no corresponding delineation of what constitutes a luxury brand. Moreover, there is no clear understanding of their dimensionality, and no rigorous 9

10. conceptualization of the different types of luxury brands. They are generally treated as homogenous — a luxury brand is a luxury brand.... Researchers and authors tend to leave the definition implicit. (Ervynck & others 2003) One thing is sure, consumers tend to use brand as a quality indicator and they are very loyal to the idea that every well-known brand has to be of good quality. (Husic & others 2009) Jean-Noel Kapferer (1993) has identified a list of attributes of luxury brands - quality, beauty, sensuality, exclusivity, history, high price, and uniqueness. There are different key components that identify the luxury fashion brand dimensions. The main key indicators that build up the management of a luxury brand are marketing strategy, endorsements, product integrity, iconic products/design, flagship stores and store brand concepts, premium pricing and culture and heritage. (See Figure 1). It is important for a luxury brand to value brand’s cultural values and as well as company spirit and personality. Marketing strategy in this circle includes focusing strongly on fashion shows, store windows displays, PR activities, product packaging, and sponsorship. Communication strategy must be highly visible; also personality and consumer group support is essential as well as celebrity endorsement. Culture/ Heritage Premium Marketing Pricing Luxury Flagship Fashion Stores/ Brand Endorse Store -ments Brand Concepts Iconic Products Product Integrity / Design Figure 1. A model for luxury fashion branding Source: Moore & Birtwistle 2006, with author’s modifications. 10

11. Products must be of high quality, credibility and excellence and product manufacture must be controlled (product integrity). It is also vital that a luxury brand has its own iconic products and recognisable symbols. Products and design should be innovative, creative and unique. Also the designer can be used as PR face of the brand. The development of a network of flagship and directly operating stores (DOS) in tandem with controlled retail and wholesale brand distribution and superior service are also crucial elements of a successful luxury brand as well as the last component – premium pricing, which is a defining and non-negotiable dimension of luxury fashion brand positioning. These attributes are crucial for creating a luxury fashion brand in the context of the luxury fashion market. The greater the emphasis placed in these characteristics, the greater is the fashion orientation of the luxury brand. The process of creating and maintaining the luxury fashion brand is an extremely complex activity that requires continual planning, investment of resources, consistent marketing and management decision making to generate the possibility of desired success. 11

12. 2. THE EVOLUTION OF PRADA’S BUSINESS MODEL 2.1. Prada’s business models 2.1.1. Early years (1913–1977) – search for a differential The company was started in 1913 by Mario Prada and his brother Martino as a luxury goods shop called Fratelli Prada (English: Prada Brothers). It was situated in the prestigious landmark Galleria Vittorio Emanuele II in Milan, Italy. The arcade has a very good strategic location and has been linked with high-end retailing since its opening in 1877. This was one of the factors that helped Prada claim premium market positioning right from the beginning. (Moore 2010) Initially, the Prada shop sold leather handbags from Austria, English steamer trunks, Hartman luggages made in America, leather accessories, beauty cases, luxury accessories (crystal, tortoise, and shell accessories) and articles of value (silver from London as well as now obsolete articles made from exquisite materials). Mario Prada travelled throughout Europe in order to familiarize himself with those materials and elements, which would build his essential concepts of style and luxury. He was an attentive and refined observer of the signs of his time, as well as an inventor and precursor. His search for the rarest, most precious materials as well as the use of the most sophisticated techniques, allied with an insatiable curiosity and an innovative nature, were at the base of his creations (Reference Answers 2011). Therefore, due to its premium location, exclusively designed goods, which were handcrafted using fine materials and sophisticated techniques, Prada rapidly became a point of reference for European aristocracy and the most elegant members of the haute- bourgeoisie in Europe. 12

13. Photos: Interior of Prada’s first shop, trademark logo, official appointment letter from the Italian Royal Household. In 1919 Prada was appointed “Official Supplier to the Italian Royal Household”. It gave Prada the privilege to incorporate the House of Savoy’s coat of arms and knotted rope design into its trademark logo, still present there today. The House of Savoy ruled Italy for 85 years from 1861 until the end of WWII (Badkar 2011). Very soon the Prada store in Galleria Vittorio Emanuele II becomes a favourite port of call for the most elegant and refined members of the whole European aristocracy and upper classes. When the signature Prada suitcase, made from heavy, cumbersome walrus skin, proved to be ill suited for air travel that became more popular in 1930’s and made a boom in 1950’s, Prada concentrated on designing exquisite leather accessories and waterproof handbags (Grosvenor 2011). But in addition to that, we should keep in mind, that it was also due to wartime (WWII 1939-1945) and the shortage of materials that made Prada search for alternatives. In 1950 Prada launched a special type of nylon - made of a fine, twisted weave, appearing as precious as silk, obtained through a special chassis - which is the result of a long research and development of production techniques, technology and innovative materials. This fabric becomes an icon and sets the trends of fashion in the years to come. Interestingly, Mario Prada did not believe that women should have a role in business, and so he prevented female family members from entering into his company. Ironically, Mario's son harboured no interest in the business, so it was his daughter Luisa Prada who took the helm of Prada as his successor, and ran it for almost twenty years. Her own daughter, Miuccia Prada, joined the company in 1970, eventually taking over from her mother in 1978 (CarolineDaily 2011). Her most important decision before actually owning the company was in 1977 when Miuccia Prada and Patrizio Bertelli, a 13

14. Tuscan businessman active in the national and European markets with several high-end leather goods companies, started their partnership, laying the foundations for Prada’s development. Patrizio Bertelli set up I.P.I. spa to consolidate the production resources that he had built up over the previous ten years, including those of Sir Robert and Granello. In the same year, I.P.I. spa obtained an exclusive license from Miuccia Prada to produce and distribute leather goods bearing the Prada brand name. The following Figure 2 describes Prada’s business model during the Early years of their business: CAPABILITIES CAPABILITIES CUSTOMER CUSTOMER Production Production RELATIONSHIPS RELATIONSHIPS Importation (U.K) Importation (U.K) Personal assistance Personal assistance PARTNER VALUE PROPOSITION VALUE PROPOSITION CUSTOMER CUSTOMER NETWORK “High quality luxurious “High quality luxurious CLIENT SEGMENTS SEGMENTS HOW? products” products” SEGMENTS Aristocracy and Aristocracy and Raw material and upper class (Europe Products: upper class (Europe luxury items Products: and US travelers Trunks, bags, suitcases and US travelers suppliers Trunks, bags, suitcases mostly) mostly) (incl. I.P.I. Spa) KEY RESOURCES KEY RESOURCES DISTRIBUTION DISTRIBUTION Staff Staff CHANNELS CHANNELS Material Material Stores in Milan (1) Stores in Milan (1) Know-how Know-how COST STRUCTURE COST STRUCTURE REVENUE REVENUE Production related costs, Production related costs, FLOW FLOW stores stores Sales of goods Sales of goods Figure 2. Prada’s business model during the Early years (1913-1977) Source: Compiled by authors. During the period of the Early years (1913–1977), the business model of Prada is quite simple and at the beginning of its expansion. They offered high quality luxurious products to aristocracy and upper class travellers that found their way to Milan, which was already at that time an important travel destination. 14

15. Regarding the distribution, then in the first era Prada remained a domestic business with one store in Milan that was little known outside of Italy. With its reliance upon imported finished goods, mainly from England, Prada’s product range as well as brand identity was indistinguishable. Since sales of those luxurious (mainly imported) indistinguishable goods were their only source of revenue, finding and keeping their customers was crucial. Therefore, as to the clientele, due to the field and nature of their business, customer relations and personal approach played an important role since the very beginning. Prada paid close attention on developing good relationship with their customers and offering personal touch. Meanwhile Prada tried to set itself apart from competitors by enlarging their capabilities. As Helfat (2003) has stated in his analyses about capability lifecycle, crises (in Prada’s case shortage of raw materials after WWII and tightened competition with Gucci) could motivate companies to improve their level of capability. It was Prada's first step from zero-level capabilities to dynamic capabilities. So in in 1950’s they launched a special type of nylon and started expanding product range. However, engaging new dynamic capabilities is not always successful, it depends of each firm and its competitive context (Winter 2003). Unfortunately, despite moving from zero-level capabilities to dynamic capabilities, no clear distinction and competitive advantage came before Miuccia took the lead of the company with Bertelli beside her. In the Early years Prada still mainly stayed reliant on importation and produced few products themselves. Key resources (material, staff, know-how) started playing more relevant role in the end of the first era and in the future. By switching from importation to fully production based business, raw material suppliers and know-how grew in importance. It made Prada more in control of their business also regarding the cost structure, sine as mentioned above, in the Early years they were reliant largely of importation and the high prices of those luxurious goods. 2.1.2. Beginning of Prada-Bertelli reign (1978 – 1989) – time for expansion Over the years, the Prada name gained increasing renown and prestige. The Group saw a turning point in the development of its activities at the end of the Seventies, when 15

16. Miuccia Prada, Mario's grand-daughter, launched a partnership with Patrizio Bertelli, a Tuscan businessman already involved in the leather goods sector with Granello and Sir Robert. This partnership combined creativity and business ideas to start a new era. Prada at that time was still mainly a leather goods manufacturer. The sales were up to U.S. $450,000, but the company had actually been struggling financially for several years. Competition from other fashion houses like Gucci began to have its effect. When Miuccia inherited the company in 1978, she turned things around and steered the House of Prada towards the world of haute couture (Grosvenor 2011). But this change was not easy. In fact, Miuccia had initially distanced herself from the family business since it was not as important to her as the goals she had set for herself. She received a degree in political science, followed by a 5 years long period of study at the Piccolo Teatro di Milano in preparation for a career in acting (mime). By her mid-20s she was a committed participant in the political activities of the 1970s in Milan. In the light of her education and interests it is perhaps clearer why she was rather reluctant to take over the company. Miucca has said herself that Patrizio Bertelli was a great support to her at that time: "If I hadn't met him, I probably would have given up - or at least not been able to do what I have done" (Craven 2011). However, although her qualifications did not seem appropriate, her sense of fashion was unmistakable. She was taught to value quality materials and craftsmanship since an early age. Miuccia was attracted to these same values (luxury, sophistication) as her grandfather Mario, but after inheriting the company she could integrate her own design philosophy to Prada’s products by which she enriched and expanded her grandfather’s legacy. With Bertelli beside her, Miuccia was allowed time to implement her creativity onto design. He also advised Miuccia - and she followed the advice - on better decisions for Prada. It was Bertelli’s advice to discontinue importing English goods and to change the existing luggage styles (Cultureoptical 2011). It can be said that the Bertelli-Prada combination was a match made in business heaven and played a crucial role in Prada’s future development. Miuccia has said in an interview: "He [Bertelli] energized me. He inspired me. He was a manufacturing and merchandising man, and I found his ideas exciting. ... And he made me see the creative 16

17. side of business, of commercial activity. We became co-muses ... inspiring each other. That situation still exists." (Heller 2003) Without a doubt, both Miuccia Prada and Patrizio Bertelli influenced the outcome of the brand a great deal. Therefore, to understand the core of Prada and its functioning, one must understand the character of its two key persons: designer Miucca Prada and CEO Patrizio Bertelli. Because about the same time as she took the helm of the Prada label, Miuccia married Patrizio Bertelli who not only supported her as a husband and partner, but also became the business manager. Bertelli became responsible for managing this balancing act. Miuccia Prada is the head designer, but Bertelli oversees everything the company's designers do. And when he and Miuccia disagree then the yelling begins. This type of management is unusual in a fashion. CEO, typically, the business brains leave the creative to the creatives. Bertelli "is very much into the product," says Patrizio di Marco, a senior executive at Louis Vuitton and former president of Prada's U.S. operations. "He can redo completely a collection of bags in an afternoon." As unusual as a CEO-designer is, what really makes Bertelli stand out is that he knows how to push fashion to the edge - think Lucite shoes and rubber dresses - and also to sell it” (Goldstein 1999). In the 1980’s Miuccia Prada began to develop and market an innovative line of fashion accessories eventually followed by a line of ready-to-wear clothes and footwear. Her first footwear collections (in 1979) combined classicism with elements of the avant- garde in such styles as spectator oxfords and embroidered and bejewelled suede slippers. In a magazine article, she was quoted as saying that her designs had freedom of movement, freedom from definition, and freedom from constriction. Bohemians, the avant-garde, the beatniks had been constant motifs in her designs. Her philosophy of dress also includes aspects developed and influenced by her own free-spirited personality. (Reference Answers 2011) 17

18. Photo: Prada’s first footwear collection in 1979 Bertelli recognized that the appeal of such products (footwear, clothes) was wider than that of walrus leather goods and exactly what the struggling business needed. Till beginning of the 80’s Prada remained domestic business with only one store. For the future outlook and better competitive advantage, that needed to change. In 1983, Bertelli began to open more Prada stores. Second outlet in Via della Spiga in Milan, a sleek and minimal place that could not have been more different from the baroque design of the original store, was opened. This store represents the new image of the brand, combining traditional elements with a modern architectural setting, and introducing the pale-green colour, which will become Prada’s stores’ symbol around the world. (Badkar 2011) Photos: Prada’s first and second store in Milan Since sales were down, Miucca expanded into luxury tote bags and backpacks in black with flat classic lines, made from nylon. She began making waterproof backpacks out of Pocone (Grosvenor 2011). Prada's nylon bags that were processed to resemble silk were a huge success. Its backpack became a sensation once it was launched in 1984 (Badkar 2011). 18

19. Photos: Miuccia Prada, classic Prada backpack, Patrizio Bertelli In 1985 Miuccia released the "classic Prada handbag" - black, originally unlabelled, hard-wearing, but finely-woven nylon handbags, that became an overnight sensation. Its sleek lines and craftsmanship exuded an offhand aura of luxury that has become the Prada signature. The bag was functional and sturdy, practical and fashionable. The high price tag (retail prices starting at around £250) that accompanied the handbags caused an onslaught of designer knock-offs, which only helped to make the genuine Prada articles more in demand. More importantly, seen on Jerry Hall and Marie Helvin, Prada bags were established as the accessory of choice for supermodels and fashion editors all over the world. Even later, the logo on these initially unlabelled black nylon backpacks and tote bags was not as obvious a design element as those on bags from other prominent luxury brands such as Louis Vuitton. It tried to market its lack of prestigious appeal, including the apparel, was its image of "anti-status" or "reverse snobbery.” The bags were originally sought after by the fashion-conscious as antistatus. This image became growing as Prada’s competitive advantage. Now that Prada had two exclusive stores in Italy, they knew they needed to expand internationally. From 1986, new stores were opened in New York and Madrid, followed by London, Paris and Tokyo. In the 1980's, other labels were creating designs that played on sexuality. Frilly, lacy, brightly coloured garments that were low cut on top and short on the bottom were popular. Prada hit the runway in 1988 with its pret-a-porter collection, with elegant, simple pieces featuring clean lines, luxurious fabrics, and basic colours. The fashion world took notice, and Prada's popularity skyrocketed (Grosvenor 2011). 19

20. Photo: presentation of the Prada’s autum/winter 1989 collection The collection was created for intelligent women that appreciated clean line, luxurious fabrics and basic colours. Prada became the declaration of antistatus. (Seabra 2011) One admiring fashion journalist described Prada's clothes as "uniforms for the slightly disenfranchised". (NYTimes 2011) Miuccia's personal beliefs and her education probably ascribed to her convictions about fashion industry. She says that female designers are successful because they know how to express in clothing what contemporary women truly feel. If we look at Prada’s designs, we see clearly that they are not preoccupied with sex appeal, but rather stress the functionality and comfort, the quality of materials. (Reference Answers 2011) Interestingly, Miuccia Prada is known to say that designing clothes is silly, and yet it's her love of clothes that has got her this far. As a student, she wore Courrèges and Yves Saint Laurent while handing out communist flyers at protest marches. Those frocks, still in her closet, inspire her signature radical-chic combo of high-end couture and everyday industrial. Her ability to create trends out of unlikely garments and accessories--from bowling bags to olive green polyester--inevitably sends competitors running back to their drafting tables. Three seasons ago, she launched the frumpy '50s housewife look, which would rule other designers' runways for several seasons. In February she stunned the colour-happy fashion industry with an all-black collection. This means that for now at least, black is the new black. (Betts 2005) 20

21. The following Figure 3 describes Prada’s business model at the beginning of Prada-Bertelli reign (1978-1989): CAPABILITIES CUSTOMER Production RELATIONSHIPS R&D Personal assistance New stores VALUE PROPOSITION “High quality luxurious CUSTOMER PARTNER products made of SEGMENTS NETWORK innovative materials” Upper class (Europe, Raw material and US and Japan) luxury items Products: leather goods, Fashionistas suppliers footwear, accessories, Models, mostly women backpack, women’s clothing line DISTRIBUTION KEY RESOURCES Staff CHANNELS Material Stores in Milan (2) + Know-how DOS in New York, Madrid, London, Paris, Tokyo COST STRUCTURE REVENUE Production related costs, FLOWS stores Sales of goods Figure 3. Prada’s business model at the beginning of Prada-Bertelli reign (1978-1989) Source: Compiled by authors. As mentioned earlier, Bertelli-Prada combination was a match made in business heaven and played a crucial role in Prada’s future development. By late 70’s, beginning of 80’s the competition with other luxury brands like Gucci became more intensive. Prada and Gucci had many similarities between them: both were founded in the early 20th century in Italy within important commercial and travel destinations (Prada in Milan, Gucci in Florence), each focusing on travel accessories for upper class. However, during the early years of Miuccia Prada and Patrizio Bertelli co-operation Prada managed to create one very important distinction: the image of anti-status among upper class intellectuals. 21

22. Another important strategic move was expanding its product line and fully relying on its own production. By doing so, Prada controlled fully its cost structure and established the growth platform – new modern and distinctive product line (backpacks, handbags made from nylon, women clothing) which was critical element for the future international development of the brand. By end of 1980’s Prada had its own factories and a large network of third party suppliers based across Italy. Prada was able to extend its brand presence into adjacent product categories with relative speed and ease. Global competition can give the company an edge in reputation and credibility. In the high-fashion industry, a firm significantly benefits from a presence in Paris, London and New York in order to have the image to compete successfully for example in Japan. (Porter 1980). After securing production and product line, Bertelli started expanding their business internationally, choosing very strategic global locations at the same time: Paris, Madrid, London, Tokyo and New York. Prada’s development of network of “experience-branded” flagship stores, in addition with controlled retail and wholesale brand distribution, are discriminating elements of the luxury fashion brand. 2.1.3. The Golden Age (1990-2006) – growth, aspiration and acquisitions By the 1990's, Prada was a leading force in fashion and the establishing of the “growth platform phase” continued. The garments and accessories were sophisticated, smart and extremely high quality. Luxurious fabrics and simple styles, mostly in blacks, browns, greys, greens, and creams, became Prada’s signature look. Prada’s Fashion House popularity skyrocketed the fashion world because of its clean lines, the House of Prada designs reflecting the feminine worker aesthetic, which made it quite unique in contrast to other fashion brands. (Fashion Wear Today 2011) Five years after the launch of the womenswear line, the Prada brand was extended to shoes, fashion accessories and menswear. In 1993, the company sought to extend the coverage of its business through the launch of Miu Miu as a diffusion brand. Named after Miuccia’s nickname, the second line – comprised of ready-to-wear, leather accessories and shoes, was targeted at a younger, fashion-forward female customer. The collection and brand are less expensive 22

23. that the mainline collection and with a more vibrant colour identity. More flowing shapes and earthy colours and prints set this collection apart, although the simple designs and classic appearance continued the quality of the Prada label. (Prada Group 2011). During that period, leading fashion stockists were recruited as wholesale stockists and an international retail network of stores was rolled-out. (Moore & Doyle 2010, 921) Today, Miu Miu is an increasingly important component of Prada Group’s sales. Soon after that, the push for growth was given even further pace when Prada Leisure & Sportswear line was created the same year. The line provided Prada with the opportunity to showcase its technical dexterity through the use of advanced performance fabrics created through complex production techniques. Sold within Prada mainline stores, the line provided a vehicle for the business to engage in sports participation and sponsorship. (Moore & Doyle 2010, 921) The line was followed by a first men’s collection line (ready-to-wear, footwear and accessories). Photos: Miu Miu, Prada’s Sport label collection and first men’s collection line In 1993 Prada also received the Council of Fashion Designers of America award for accessories. The same year Patrizio and Miuccia created an exhibition space called “Milano Prada Arte”, which soon became a project called “Fondazione Prada”. The purpose of this project was to gather the most challenging mental provocations of our time in art, architecture, cinema, philosophy and culture in general and combine it to one big “customer experience”. (Fondazione Prada 2011) During that time sales were at US$210 million, with clothing sales accounting for 20% (expected to double in 1995). Prada won another award from the CFDA, in 1995 as a "designer of the year" 1996 witnessed the opening of the 18,000 ft² Prada 23

24. boutique in Manhattan, New York, the largest in the chain at the time. (Prada Group 2011) In 1997 Patrizio decided to try a new marketing move as he started to sponsorship the “Prada Challenge for the America’s Cup 2000” sailing team. The boat “Luna Rossa” won the Louis Vuitton Cup in Auckland, New Zealand in 2000. By 1998, Prada’s sales were reckoned at $31.7 million. Patrizio took charge of the growing business in the United States. He was successful in having the Prada bags prominently displayed in department stores, so that they could become a hit with fashion editors. Prada's continued success. Miuccia and Bertelli led the Prada label on a cautious expansion, making products hard to come by. Another store in Milan opened the same year. By this time, the House of Prada operated in 40 locations worldwide, in which 20 of them were in Japan. The company owned eight factories and subcontracted work from 84 other manufacturers in Italy. In 1998, the first Prada menswear boutique opened in Los Angeles. During this year, Prada was determined to hold its leading portfolio of luxury brands as its biggest competitors – Gucci Group and LVMH. Prada’s main strategy during these times was stock actions and co-operation. An early indicator of Prada’s ambitions was evidenced in its acquisition of just 9,5% of interest at US $260 million of Gucci shares in the summer of 1998. Analysts began to speculate that Bertelli was attempting a takeover of the Gucci group. The proposition seemed unlikely, however, because Prada was at the time still a small company and was in debt. (Fashion Wear Today 2011) The idea for Prada was to participate in a defiant alliance with the mighty Louis Vuitton Moët-Hennessy (LVMH) group to secure Gucci. Prada sold its shares to LVMH the following January at a profit exceeding $100 million. (The M&A Journal 2002) LVMH had been purchasing fashion companies for a while and already owned Dior, Givenchy, and other luxury brands. But that did not stop Prada and LVMH collaborating once more in a luxury brand alliance. In 1999 they joined again forces with LVMH to purchase 51% stake in fashion world-known Rome-based luxury goods company called Fendi (25,5% share belonged to Prada – worth $241.5 million). Prada took on debts of Fendi, as the latter 24

25. company was not doing well financially. These acquisitions elevated Prada to the top of the luxury goods market in Europe with revenue more than $2 trillion. (Moore Dooyle 2010) Later (in 2001) Prada sold its Fendi share stake to LVMH again. Perhaps encouraged by the conglomerate development activities of Prada’s near rivals (Gucci and also LVMH), Prada decided to take strategic move and develop its own multi-brand strategy to enhance, support and compliment the Prada and Miu Miu brands. First independent acquisition was a 51% stake in German-based company called Helmut Lang’s (for $40 million) in March 1999. This purchase was then followed by its securing of a 75% stake in same year in the Jil Sander Company (Prada paid over $105 million to have the full control). According to The New York Times (1999), the acquisition would provide Prada with a stronger foothold within the German market (as Jil Sanders was born in Germany) and would provide an opportunity to combine stores. The authors think that it also provided access to the design and creative talent of the brand’s founder as she remained to be the head of the company. Bertelli became the head of Jil Sander’s supervisory board. But the success was short lived, as Jil decided to leave the company in 2004. Prada’s acquisition of shoe brands proved to be more successful. In September 1999, Prada also secured ownership of English shoe company called Church’s (for £106 million) and historic Italian brand called Car Shoe – known for its famous patented driving moccasins, characterized by a soft sole with black rubber studs. This was a great strategic acquisition as both companies were well established and enjoyed an excellent reputation for quality and sophisticated elegance. These two acquisitions also provided access to complimentary design, technical and production skill set that would develop the Prada core shoe business. A joint venture between Italian eyewear manufacturer Luxottica and Prada was also formed that time to produce Prada eyewear. Prada wanted to become a leader in the eyewear industry. 25

26. Photos: Church’s, Car Shoe and Prada Eyewear Despite apparent success, the company was still in debt. Prada’s mergers and acquisitions slowed in the 2000’s. However, in 2000, Prada signed a loose agreement with Azzedine Alaia to produce skin care products. Different products were introduced in the United States, Japan and Europe. As an international company, operating an ever-expanding network of stores, Prada faced an important challenge. Company realised that expansion may also provide for a redefining of the brand and came to the idea to introduce two kinds of stores: „the typical and the unique“. Its unique store concept, they named the Epicenter store and the first store in New York Soho district was opened in 2001 in collaboration with designer Rem Koolhaas. The idea of this project was to rethink the concept of shopping with a new approach, and to experiment innovative interactions with customers and to create a meeting space that would contribute to the cultural landscape of the location through the hosting of concerts, exhibitions and other public events. Koolhaas was commissioned to review trends in global shopping, provide new concepts of new retail tools and apply these to new kinds of stores. A total of three stores were created to be distinct from the „GreenStore“ typology. Photos: Prada’s first Epicenter in New York 26

27. In 2003 Prada signed an agreement with Spanish fragrance house PUIG Beauty & Fashion Group for the production and worldwide distribution of the feminine and masculine fragrances. The same year, second Prada’s Epicenter was opened in Tokyo (probably Prada’s most important market in terms of revenue), designed by Swiss architects Herzog & de Meuron. (Prada Group 2011) The six floor building includes retail sailing space, lounges and public events space. Photos: Prada’s second Epicenter in Tokyo Prada had managed to gain such a high level of international renown that it captured the attention of literature and the movie industry (the best-selling novel “The Devil Wears Prada” was published also in 2003, followed by a movie of same name in 2006). (Prada Annual Report 2010) The third Epicenter, designed by Rem Koolhaas again, was opened in 2004 in Beverly Hills, Los Angeles. One of the most distinctive features of this store is that the storefront is completely open, protected with an air curtain only and open directly on to the street. Photos: Prada’s third Epicenter in Los Angeles 27

28. In 2005, Prada decided to try its hand in film industry by presenting a short film “Thunder Perfect Mind” at the Berlin Film Festival. This short movie was sensational marketing ad that increased Prada’s brand value a lot. In 2006, Prada’s first masculine fragrance was launched. By that time most of the labels that Prada had bought, were sold. Also the movie “Devil wears Prada” was launched that gained world-wide attention to the brand. Having sought to establish a luxury brand conglomerate in the late 1990’s, the inability of Prada to secure its commercial success for its highest profile acquisitions required that they radically tidy-up its balance sheet by selling their non-profit making businesses. Prada sold 45% stake of the Church’s & Company brand to private equity fund Equinox, also Jil Sander business to British equity firm ChangeCapital Partners and finally Helmut Lang brand to Japanese company called Link Theory Holdings. But more radical action was required to reduce company debt. To reduce the debt directly, a 5 % stake in Prada was sold to Banca Intesa for €100 million in 2006. As Prada sought to recover from the debt, it has focused upon protecting, maintaining and developing its core businesses and decided to invest more to its core brands - Prada, Miu Miu and Church’s. Figure 4 will conclude Prada’s business model during the Golden Age. (See Figure 4 below). By the end of the 1990’s, Prada had transformed from being a marginal, domestic and small-scale firm to a multi-national, multi-segment business with a reputation as a leading influence upon fashion trends and consumer taste. During 1990-2006 we can see that the companies target customers were both women as much as men, who belonged to the upper middle class. Strategy of differentiating the product or service offering creates something that is perceived industrywide as being unique (Porter 1980: 37). Prada used the approach of differentiating its customer service with Epicenter project. Re-thinking the whole concept of stores and investing in innovative Epicenters not only increased the sense of Prada’s brand exclusivity and value proposition, but it also reinforced the diverse and intriguing aura of the brand. The stores significantly contributed to advancing thinking of retail store design. 28

29. That innovation also contributed to customer relationship, because the innovative shopping experience and excellent service started to exceed clients’ expectations by providing an insight into the personality and soul of the company, which assists in the development of a working relationship. CAPABILITIES CUSTOMER Production, R&D RELATIONSHIPS Personal assistance Combining fashion & fine arts, globalization, Innovative shopping marketing, stock actions service VALUE PROPOSITION PARTNER “Smart, sophisticated, CUSTOMER NETWORK luxurious high quality products SEGMENTS Raw material and with innovative shopping Upper middle class, luxury items suppliers, experience“ celebrities, Luxottica, Azzedine fashionistas Alaia, Puig Beauty & Products: leather goods, women’s clothing, footwear, accessories, Men&women Fashion, architects and designers backpack, Miu Miu, Car Shoe, Church’s Sport line, men’s collection, skin care, eyewear, fragrances DISTRIBUTION KEY RESOURCES CHANNELS Staff Stores in Milan + Material DOS in NY, Madrid, Know-how London, Paris, 8 factories & 4 Tokyo, Japan, LA manufactures COST STRUCTURE REVENUE Production related costs, FLOWS DOS, marketing Sales of goods, stock actions Figure 4. Prada’s business model during the Golden age (1990-2006) Source: Compiled by authors. The multi-brand strategy and new products line (sport, men’s collection, skin care, eyewear and fragrances) offered clients a wide range of exclusive and quality products to choose from and even more clients became loyal and keen on Prada. 29

30. New transformation gave the business confidence and appetite to enter a further phase of development – to become a global luxury conglomerate as new store in Japan, Los Angeles were opened. The creation of the exclusive distribution network enabled not only to make considerable profits, but also to control the decor, products and services in all its stores. Prada’s capabilities enlarged and they knew how to combine fashion & fine arts (by creating Fondazione Prada project, co-operating with film industry etc.). During this period, Prada actively used the strategy of merge and acquisitions. According to Baghai (2008) merge and acquisitions are the most dynamic, also difficult strategic activities firms can undertake, but in modern times this is one of the major part of business growth. Bekier and others (2001) stress that mergers and acquisitions pay off, constant attention to revenue needs is crucial. Too many companies lose their revenue momentum as they concentrate on cost synergies or fail to focus on postmerger growth in a systematic manner. Success is determined by the ability to protect revenue and to generate growth just after a merger. Prada managed the strategy well and it helped the company to gain power on the luxury fashion market as well money to pay debts. To increase brand awareness and a luxury fashion brand proposition, the company started to use every field of communication – advertising, visual merchandising, publications, architecture, store design (as mentioned above) and sponsorships. Prada’s book and movie (released in 2003 and 2006) helped the company to gain even more global attention and that lead the way to networking strategy, where people talked about Prada and wanted to wear more Prada. That a bit led the way to mass marketing. The more users, the more momentum behind the product, such that company’s producing complementary goods or services would be attracted to the mass of users. (Chesbrough & others 2007) That happened to Prada as well, even though Prada did not market to the masses intentionally. During this period, Prada formed many intra-industrial strategic alliances – parnerships between firms which decide they can better pursue their mutual goals by comgining their financial, managerial, technologial, financial as well their distinctive competitive advantages. (Gulati 1998) Together new products and new value proposition were created as well as entering to new markets was made possible and 30

31. benefitial for each party. Some of industry-level factors that drive companies to form strategic alliances include the extent of competition, the stage of development of the market, and demand and competitive uncertainty. Numerous studies have shown that there are quite high failure rates of alliances. Prada has closely watched all the necessary aspects of the magical formula for alliance success that Gulati stresses (1998): flexibility in management of the alliance, building trust with partners, regular information exchange, constructive management of conflict, managing partner expectations etc. Moreover, strategic partnering have helped Prada to contribute to manufactoring process as by the end on 2006, Prada had 8 factories & 4 local manufactures, which fastened the production side not understimating the design and quality of the products. 2.1.4. The Present (2007-2011) – technology flows in Exploiting the potential of a strategic brand alliance, Prada collaborated with LG to launch the Prada mobile phone. Within the first year of launch in 2007, more than one million units were sold, providing Prada with lucrative and much needed revenue from the license agreement. (Zibreg 2009) In December 2008 Prada launched its second smart phone – LG Prada II or LG KF900. The second LG Prada phone looked almost the same as the previous phone, but had ultra-thin QWERTY keyboard that slides out beneath the screen, 3G and Wi-Fi accessibility, full HTML browser among other improvements. (Zibreg 2009) They also made the PRADA Link (model: LG-LBA-T950), a special Bluetooth watch to accompany the phone. It has been designed to let you see who’s calling by glancing at your wrist, as well as reading text messages without fishing the handset from a bag or pocket (Elite Choice 2008). 31

32. Photos: LG Prada II phone and Prada Link watch Successful partnership continues as Prada and LG Electronics renewed their exclusive mobile phone partnership, the two companies will develop the PRADA phone by LG 3.0, for launch in early 2012 (LG Newsroom 2011). Chang Ma, vice president of marketing strategy at LG Electronics' mobile communications division, said the partnership with Prada provides LG much-needed insight to the luxury goods market. Two companies collaborated on every aspect of the phone's development—from design to functions to marketing. (Solomon 2009) Prada has never used a good deal of conventional marketing, but is well-known for collaborations with architects, designers, filmmakers and photographers worldwide. For example Prada premiered its first animated short film, „Trembled Blossoms“ in its Epicenter stores in 2008. The film depicts a lush, slightly scandalous, landscape of flowers and nymphs that evokes Miuccia Prada’s vision blending suggestions of Art Nuveau, Liberty, Aubrey Beardsley and Hieronymus Bosch. (Prada Trembled Blossoms Premiere 2011) The imaginative short film „ represented dreamlike situations inspired by the Spring 2008 collection (Fashion Week Daily 2008). Prada has also used film students and already famous filmmakers to create short films inspired by its products. That is Prada’s first step towards open innovation! Open strategy balances the tenets of traditional business strategy with the promise of open innovation. It embraces the benefits of openness as a means of expanding value creation for organizations. (Chesbrough 2007). Prada noticed the potential value of external resources that are not owned by the firm and that created value for the firm. 32

33. To promote its brand essence, Prada book was has published in 2009 presented - 706-pages covering 30 years of its innovations and experiments in fashion, art, architecture, cinema and communications. Miuccia Prada and Patrizio Bertelli declare: "The purpose of the book is to retrace and represent the multivalent aspects of Prada from fashion to communication, from the pursuit of excellence to technological advancement, from architecture to art. All these qualities work together to compose Prada's engagement in the world of ideas and innovations, as it has always considered fashion, luxury and style as an overarching project beyond the continuous production of clothes, shoes and bags." (Senatus 2011) Photos: Prada Book and a picture from “Trembled Blossoms” Prada’s globalization capability was supported by localization or in other words glocalization – globalization with localisation at the same time. This was expressed by launching “Prada Made in...“ lineup that featured collections from around the world. Photos: “Prada made in…” collection 33

34. Researches have brought up the incompatibility between luxury and Internet, since one characterized by exclusivity and other by inclusivity. For brands in the mass market, the purpose of communication is visibility. Accordingly, the Internet appears to be the media that consumers use the most. Conversely, the luxury market has to show an image of selectivity and rarity. (Geerts & Veg-Sala, 2011, 81-82) On the one that fact is true, but on the other hand Internet today is THE information source so any business that wants to be successful, has to be in the Internet. Brands have to stay in step with their times to avoid becoming outmoded. Even since recently most luxury brands kept away from the Internet. Versace and Prada did not have corporate websites until 2005 and 2007, respectively (Okonkwo 2009, 302). Since then Prada has been actively developing the website, in 2009 May online store was launched in Europe and in 2010 July in the USA. The merchandise in the online store is limited to leather goods and eyewear, Prada Group COO Sebastian Suhl Since told that „...the e-store had shown very encouraging growth.“ Currently Prada e-store is available in 19 countries. E-commerce doesn’t make Prada unique, though, because competitors are catching up aswell and big players in luxury such as Louis Vuitton, Ralph Lauren, Versace, Gucci and others also have e-commerce set up. On the 24th of June 2011 Prada launched on the Hong Kong Stock Exchange. Prada was the first Italian company to list in Hong Kong and it's demonstrating the importance of the Asian markets to luxury brands right now. Prada's choice of Hong Kong as a listing venue was controversial at home in Italy, but owner and designer Miuccia Prada said that the decision was an easy one, given China's relevance as a major economy and its voracious appetite for luxury products. China's consumption of luxury goods is forecast to grow 18 percent annually to about $27.5 billion by 2015, from about $12.2 billion in 2010. (Barreto 2011) Prada raised about $2.14 billion from the initial public offering (IPO), with a majority of shares coming from existing stock owned by Miuccia Prada, and others in the company. The IPO's aim was to pay down debt and fund expansion. Right now Prada Group has 358 directly operated stores aims to have about 550 directly operated stores by the end of 2013. (Zargani 2011) Let’s take a closer look to the Prada group’s results in 2010. Net revenue was €2.017 billion which is 31.8€ higher than the year before. EBIT (earnings before 34

35. interest and taxes) amounted to €418.4 million in 2010. 79% of the net sales came from Prada brand, another 17% from Miu Miu and Church’s, Car Shoe together with other brands contributed only 4 percent. Biggest net sales among the product lines came from leather goods – 50,3%. Footwear and clothing both have a share of about 24%. Prada started with leather goods and it still is the most important product line. 43% of the €2 billion net revenue came from Asia (Japan and Asia Pacific). This determines the fact that Asia is the most important market for Prada and its importance will most likely grow even more. Second largest market is Europe, including Italy – 41,8% of the net sales in 2010. Europe has historically been the biggest market for Prada. Now the Asia has exceeded Europe and will most likely grow in importance in the near future. Most of the sales came from directly operated stores in 2010 – 70,8%. Prada is actually trying to increase this percentage - right now Prada Group has 358 directly operated stores aims to have about 550 directly operated stores by the end of 2013 (Zargani 2011). To sum up - the main brand for the group is still Prada, giving 79% of the net sales. The most important product line is still leather goods. Directly operated stores bring in 70% or the net sales. Europe and Asia are both important markets, but Asian market is growing faster and it already is slightly more important to Prada Group. Asian countries, especially China, are placed in a strategic position in Prada's new expansion plan and half of the new stores will be located in Asia. Prada had 38 stores in China and they have announced plans to open 50 new stores in China in the next three years. (China Retail News 2011) Importance of Asia, especially China can be explained by the simple facts: market growth in China in 2011 was 3% when factoring in spending in Mainland China and spending by Chinese tourists abroad, luxury consumption by Chinese people is now just over 20 percent of the global market (Bain & Company 2011). That is one fifth of the whole luxury market. 35

36. Source: Prada Annual Report 2010 36 Compiled by authors

37. The following Figure 5 illustrates Prada’s business model from 2007 until 2011: CAPABILITIES CUSTOMER Production, R&D, RELATIONSHIPS Combining fashion & fine arts, globalization, Personal assistance marketing, stock actions Innovative shopping Combining fashion experience &technology VALUE PROPOSITION PARTNER NETWORK CUSTOMER “Smart, sophisticated, Raw material and luxury SEGMENTS luxurious high quality products items suppliers, Upper middle class, with innovative shopping Luxottica, Puig Beauty & celebrities, experience“ Fashion, architects and fashionistas, men & designers, women Products: leather goods, women’s LG and men’s clothing, footwear, accessories, backpack, sport line, skin care products, eyewear, fragrances KEY RESOURCES mobile phones DISTRIBUTION Staff, material, CHANNELS know-how 358 DOS , 11 factories & 4 Franchise (30) manufactures E-store COST STRUCTURE REVENUE FLOWS Production related costs, Sales of goods, stock actions DOS, marketing Figure 5. Prada’s business model from 2007-2011 Source: Compiled by authors. Focus of the business model has been Asia. China comprises 20% of the world’s luxury market, therefore it is very reasonable that Prada’s initial public offering took place in Hong Kong in 2011. IPO brought in $2.14 billion to support Prada’s continuous expansion. Strong partnering with LG led to two consecutive luxury smart phones and third one will be launched in 2012. This partnering led to totally new products for Prada and also showed its capability to combine technology with fashion. Fashion firms are willingly accepting intra-industrial collaborations as well as inter-industrial partnerships 37

38. – as Prada has with LG. LG obtains the improved global connectivity to mainstream luxury and innovative markets, and Prada expands its influence into an innovative technology-related market identified as creative trendsetter. These kind of inter- industrial partnerships are referred to as „co-marketing alliances“. In a co-marketing alliance, by partnering a fashion and non-fashion brands, two brands may become a part of each other’s association, which ultimately leads to an incremental positive attitude. Based on both brand’s own speciality, these brands technologically cooperate in developing a new product (Prada is in charge of designing and LG takes on manufacturing), and sell it at each brand’s store. Partnering with other companies has become more important than ever. Pierre Dussage and Bernard Garrette (1999: 8) found that the specific characteristics of strategic alliances (multiple decision-making centres, constant bargaining, and clashes of interest) inevitably make cooperation an unstable form of industrial organization. This observation is confirmed by several statistical studies of alliances. In one such study, which examined the fate of 880 alliances, K.R. it was found that only 40% survived four years in existence and that fewer than 15% lasted longer than a decade. In the light of these facts Prada has been very successful regarding co-operation, because the company has had decades long partnering going on with raw materials suppliers, manufacturers, cooperation with LG has been prosperous for five years and new LG Prada smart phone will be launched in 2012. Authors consider Prada’s cooperative strategy to be sustainable and profitable to all sides. It is very important to choose a strong brand with great equity to secure a successful match-up perception in co-marketing alliance. Ahn and others (2010: 17) have suggested through their research that it is quite difficult to create profitably successful fashion collaboration between partners in the same industry. It is more important to discover the alliable product category in terms of the match-up perception. Most of the marketing in 2007-2011 was done by linking Prada with culture and art, for example in the form on different short movies inspired by Prada products and Prada book. Prada has never used a good deal of conventional marketing, so this means that Prada’s way of marketing still works for them. Globalization capability was supported by fusing it with localization – the result was “Prada Made in...“ line-up that featured collections from around the world. 38

39. The Group’s decision to invest in the expansion of its retail network proved to be a winning one. Investment in new stores, the appeal of the products offered and decisive action taken in terms of efficiency, while safeguarding the prestige of the brands, made it possible to achieve volumes of sales and income not previously seen in the century long history of the Group. The growth rates achieved were among the highest recorded in the worldwide luxury goods market. According to W. Chan Kim and Renée Mauborgne (2005: 4-5), there are two kinds of markets, called red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space. In the red oceans, industry boundaries are defined and accepted and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. (Kim, Mauborgne 2005: 4-5) To set a company on a strong, profitable growth trajectory in the face of these industry conditions, it won’t work to benchmark competitors and try to outcompete them by offering a little more for a little less (Kim, Mauborgne 2005: 27). Authors’ view is that Prada right now is doing business in Red Ocean, meaning that luxury fashion market is very well-known market space and has quite a lot of competitors, they all fight for their market share. Differences in marketing or product design don’t really set them apart. What Prada should do, is find an untapped market space in the luxury market – its own blue ocean, where competition is irrelevant, because there aren’t any competitors. 2.2. SWOT analysis of Prada’s business strategy To summarize the evolution of Prada’s business strategies as well as Prada’s current position on the luxury fashion market, authors have drawn up the main strengths, weaknesses, opportunities and threats of the company’s business upon which new innovative suggestions for the future business strategy can be made. (See Figure 6) 39

40. STRENGHTS WEAKNESSES - design/quality/heritage; product portfolio - competitors have a stronger brand value and are more aggressive - dynamic capabilities - too scattered business model - controlled distribution and production, globalization - few iconic products - marketing strategy and skills - high cost structure - intra-industrial; inter-industrial alliances OPPORTUNITIES THREATS - increase brand value through value - growing debts adding (new value proposition), innovation - loosing luxury brand value - new strategic partner - competitors growth is faster - concentration on certain products and - unsustainable partnerships brands - counterfeits and copying - gaining competitive edge over competitors Figure 6. SWOT analysis of the company’s business strategy The core strength lies in the design, uncompromising quality and the heritage that represent the best of Italian culture and tradition with a unique style and sophisticated elegance. Prada has a wide range of product segments: leather goods, clothing, footwear, fragrances and accessories. According to the company’s annual report (2010), 50.3% of total net sale comes from leather goods and about 48.9% from clothing and footwear. Through time, Prada has always been strategically innovative (from materials to innovative store concepts and strategic alliances). Prada has developed constant capability enlargement from launching special type of nylon, innovating new designs and innovative store concepts. Prada’s innovative approach and quality standards also apply to distribution as well as production. Prada has developed a strong network of directly operated stores (DOS) that provide a direct relationship with customers as well as franchise stores, that gives them the opportunity reduce financial risk, but at the same time controlling the distribution really carefully. Prada tends to go beyond conventional solutions to anticipate and satisfy consumer tastes and needs to create a strong relationship with customers (from products to innovative shopping experience). 40

41. Prada is also represented in selected high-end multi-brand stores and luxury department stores that guarantee a number of points of sale in prestigious locations in key markets and immediate comparison with the competition. As for production, Prada products are made in 11 state-of-the-art facilities in Italy and through a network of external sub-contractors – all of them selected for their craftsmanship skills. This system enables close control of the overall production process and guarantees the utmost quality and highest level of flexibility. Prada’s marketing strategy has also been strong, including fashion shows, strong and innovative merchandise as well as Epicenters project and they also have their own E-store. Special projects carried out in fields other than Prada’s core business form an important part of the Company’s communications strategy, highlighting the many different facets that identify the brand. Film production has also helped Prada to gain success. They put great emphasis on PR activities and sponsorship and avoid strongly mass marketing as they are exclusive luxury brand. Prada has even let film students and filmmakers to make movies inspired by its products – strategy towards open-innovation. Through different periods Prada has always co-operated with different companies and entered into inter-industrial as well as intra-industrial alliances (LG). Prada is also known for well-known for collaborations with architects, designers, filmmakers and photographers worldwide. If we look at the weaknesses, we see that according to different brand analytics competitors have a stronger brand value and are more aggressive on marketing to the mass markets (even though being a luxury brand). The threat at this point is that competitors just grow faster and take a better position at the market and Prada’s luxury brand value is in threat. Prada’s opportunity here is to increase their brand value through value adding (new and innovative value proposition). They have the opportunity to think of something that would gain them a competitive edge over competitors. Maybe a new value proposition (product or service) or even new strategic alliance will give them that advantage? The authors also have an opinion that Prada’s business might be too scattered – even though they have a wide range of luxury products, they have actually only few iconic products, mostly leather goods and clothing. The same goes with managing different brands. The solution could be in concentration on certain products and brands. 41

42. Also the cost structure of the business is quite high and as Prada still have debts the threat can be even more growing debts so arranging over the product and brand management as well as looking into where to increase profit and reduce cost is essential. In luxury fashion market, there is constant threat of counterfeits and copying as there is no copyright protection. Counterfeits can lead to tarnished brand image and increased expenses. For this purpose, Prada invests in worldwide trademark protection and in monitoring the market in order to take tough measures against counterfeiters of trademarks and designs. What concerns copyrighting, there is nothing that Prada can do to reduce the risk as this is the constant process of the luxury fashion market – fashion designers are actually quite often inspired by other designers and take over some of their ideas and amplify it further. 42

43. 3. PRADA’S FUTURE BUSINESS MODEL SUGGESTION – „THE EXCLUSIVE PRADA’S EXPERIENCE WITH AMEX PRADA” As it is seen from previous Prada’s business model SWOT-analysis, one of the biggest weakness Prada has is that its main competitors (Armani, Gucci, Louis Vuitton) have a stronger brand value. Prada’s goal should be to become the most powerful Italian brand by 2017 (present ranking according to MPP Consulting (2011) is 3rd with $4439 million, after Ferrari and Gucci) and to gain once more a high ranking in Interbrand’s top 100 most powerful brands (last position in 2009 87th place, before that 2008 91st place) (Interbrand 2008). This would give strength to Prada’s “brand equity” as a fashion brand’s desirability must be accompanied by equally strong appeal and recognition. In addition, Prada needs to revitalize the brand and expand its global grip while preserving and deepening its genuine identity and core values. A proposition of doing that will be explained further on in this chapter. Prada has tried to produce quite large range of products to different segments and managed quite non-profitable sub-brands. Every brand has costs for their upkeep. Car Shoe and Church’s offer footwear, but Prada itself offers shoes, too. Therefore one could say that in some cases Prada is competing with its own sub-brands. Since the two small brands only contribute 4% to the Prada Group’s revenue and offer similar products, we suggest Prada to sell Car Shoe and Church’s brands since these are niche brands, which demand more upkeep costs than bring profit and selling them can reduce the company’s debts. According to Prada’s annual report (2010), especially Car Shoe revenues continued falling (-2.8% in comparison with 2009) as well as in previous years. Prada should focus more on Prada and Miu Miu and products like clothing, leather goods and footwear, but it is still vital to keep accessories, eyewear and fragrances – as they are lower priced and reachable for the target group with average 43

44. income. The revenues gained from selling these brands shall be used to strengthen Prada’s global brand image and to provide an even better customer relationship by focusing on increasing investments on its most valuable customer. The authors consider Prada’s most valuable customer to be from upper middle class to high society, aged 35 to 60, who is fashion-conscious and appreciates high quality products, exclusivity, culture and art events and luxury traveling. (See Figure 7) Personal assistance with this segment is crucial for Prada. Prada’s competitive edge over its competitors is unique design, company’s heritage and historical background as it is one of the first luxury fashion brands on the Italian luxury market and relationship with culture and art. Prada’s customers are mostly traveling around and buying products from different distribution stores all over the world. Culture and tourism were two of the major growth industries of the 20th century, and towards the end of the century the combination of these two sectors into ’cultural tourism’ had become one of the most desirable development options for countries, regions but also companies. (Richards, 2009) Even today cultural tourism is one of the largest and fastest-growing global tourism markets. According to the World Tourism Organization’s (UNWTO) statistical overview international tourism grew by almost 5% in the first half of 2011 totalling a new record of 440 million arrivals. Results confirm that international tourism continues flowing. By the end of the 2011, worldwide tourism is expected to grow about 4-5% (UNWTO World Tourism Barometer 2011). For re-enforcing customer relations and increasing brand value by focusing on Prada’s roots and core values and customers interests (fashion, culture, art and travel), we suggest Prada to create new value proposition by providing the customer the “Exclusive Prada travel and lifestyle experience” which combines providing Prada’s existing and new potential customer with luxury travel, fashion and cultural related services and privileges all over the world. The experience could consist: Luxury travel and service privileges (personal travel assistance for travel planning and arrangements, 24-h travel service, car rental and hotel benefits, free access to VIP lounges at airports etc.) Cultural events (reserved tickets for various cultural events such as exclusive theatre plays, opera, movie, music and awards festivals). 44

45. Fashion events and service privileges (exclusive seats at Prada’s annual fashion shows, benefit points that customers can cash in at Prada stores all over the world). The suitable partner for realizing Prada’s aspirations is unique and powerful service company - American Express (AMEX). AMEX is the only company with a strong, global presence across the entire payments chain and has premium network for high-spending card members. (American Express 2012) AMEX offers four different types of personal cards: American Express Green, Gold and Platinum and Centurion Cards. From these Platinum Card is the most suitable for Prada’s clientele. On one hand because of its limited access according to income and assets ($3250 income + $121923 reserve) and on the other hand due to its wide range of benefits for people belonging to upper middle class and high society. The benefits that Platinum Card offers are mostly travel-, purchase- and entertainment-related. In co-operation with AMEX new card “AMEX PRADA” will be released. This card will include all AMEX Platinum card benefits as well as Prada’s new value proposition benefits related to fashion and culture (mentioned above). (See Figure 7) Who can get the card - almost anyone who matches the criteria of AMEX platinum card as well as Prada’s loyal customer, according to their annual purchase volume. Figure 7. AMEX PRADA exclusive card and its benefits. Source: compiled by authors. 45

46. Since AMEX is globally known and very secure partner, this alliance will also deepen customers trust towards Prada. Greater trust will keep the existing clientele. Also, the alliance will bring Prada new customers with high incomes, who are interested in fashion, travel and culture and who could become potentially Prada’s loyal customer. Through additional luxury travel, culture and fashion services offered, better customer relationships will be created. It will also increase brand value in general. This partnership will provide Prada with additional source of revenue: firstly, because the bonus system motivates clients to buy more Prada’s products; secondly, from paybacks to Prada from additional financial turnover that the card creates to AMEX. What is more, this alliance would create an important network and reduce transaction costs. According to Jarillo (1988) long-term alliances between effective partners will establish trust, network and lover transaction costs. For AMEX this strategic alliance will bring new clients with high income who are gladly willing to pay annual fee of $300 for AMEX PRADA. By diversifying customer segment they will increase awareness of their brand and services in Asia and Europe. Co-branding will re-enforce their premium brand image as well. Exclusive Prada travel and lifestyle experience sets the company apart from its competitors and follows the main idea of the Blue Ocean Strategy – find an untapped market space. To bring customer closer to Prada heritage and brand, Prada could organize a campaign called “Back to Prada’s roots”. The campaign could be held twice a year in Milan, simultaneously with Fashion Week. With this campaign, also AMEX PRADA card owners will gain great value when they travel to Italy or buy Prada’s products. The advantages proposed are exclusive tickets to fashion and cultural events, parties related with fashion week and double AMEX Prada points for each Prada product bought. In addition, educational seminars on Italian fashion industry-related topics will be held – available to everyone and Prada will also set up historical exposition in Fondazione Prada to show the evolution of the brand and its core values. As for the main marketing strategy, we recommend Prada to continue focusing on fashion shows, innovative store branding and PR. Prada should keep sponsoring sport events related to high-class society, like sailing, golf and tennis to be associated with healthy luxurious lifestyle and to always be presented in elite events to create positive brand associations. (See Figure 8) 46

47. By 2013 there will be 550 distribution stores. Authors suggest increasing the share of franchises from 10% to 13%, also raise the franchising fee to increase profits as well as keeping only the strongest at the market who will gain the competitive edge. E- store will remain an important distribution channel and connection platform with customers. At the moment Prada’s e-store is available in 19 countries – this figure should also be increased in order to offer Prada e-shopping to a bigger audience. CAPABILITIES CUSTOMER Production, R&D, RELATIONSHIPS globalization, marketing, stock Personal assistance, actions innovative shopping Continuing globalization experience, Combining luxury with AMEX PRADA fashion, travel and culture PARTNER NETWORK VALUE PROPOSITION Raw material and luxury „The Real Prada’s experience – CUSTOMER items suppliers, Luxottica, high quality products, SEGMENTS Puig Beauty & Fashion, innovative shopping experience Upper middle class, and luxury travel & lifestyle High society AMEX with AMEX PRADA“ Age: 35-60 Products: bags and other leather goods, women’s and men’s clothing, footwear, accessories, KEY RESOURCES eyewear, fragrances DISTRIBUTION Staff CHANNELS Material Benefits from AMEX PRADA DOS (539), Know-how E-store, Franchises Partners (11), new stores in Egypt, Peru, India REVENUE COST STRUCTURE FLOWS Production and Sales of goods, stock partnership related actions, paybacks on costs, DOS, marketing partnership deals Figure 8. Prada’s potential future business model, compiled by authors Prada Group operates in more than 70 countries, but there are still some potential markets yet to conquer. According to Business Insider's Mamta Badkar (2011) there are 12 countries where customers are about to noticeably increase spending. Among these countries we suggest Prada to open stores in Egypt, Peru and India. Egypt's retail market is expected to grow 10% over the next five years with over 47

48. 80.4 million people gaining in purchasing power. India has a population of over 1 billion and they are getting wealthier and wealthier, organized retail in India which only accounts for 7% of the retail market is expected to jump to 20% by 2020. Peru has seen rapid economic growth over the last five years and will most likely grow even more. 48

49. CONCLUSION Through this research paper, authors studied the evolvement of Prada’s company by analysing the evolution of the company’s business model and current business strategy. In the end, authors suggested a new business model for their future business. As the analysis of Prada’s evolution from a single store business to a major global brand indicate, the „system“ of fashion retailing has become complex in response to changing consumer tastes, and extended competition base and advances in marketing technology. The company has made quite many significant improvements in its business performance through different periods. Words that describe their business development through years are constant innovation (materials, products, customer experience, new value propositions), close customer relationship, dynamic capabilities, constant quality control (design, production, distribution), globalization, aspiration and acquisitions, strong marketing, intra- and inter-industrial partnerships and luxury brand marketing. By analysing Prada’s business strengths, weaknesses, opportunities and threats, authors made suggestions for Prada’s future business. First, Prada should strengthen its brand value and sell its non-profitable sub-brands Car Shoe and Church’s. That way Prada can focus more on Prada & Miu Miu brands. To add value to Prada’s existing customer and to gain more loyal customers the authors suggested that Prada could create strategic alliance with a global company American Express (AMEX). In co- operation new card – AMEX PRADA will be released which offers Prada’s clients a wide range of fashion, luxury travel and culture related benefits. Also a new strategic marketing proposal “Back to Prada’s roots” was introduced. As for continuing globalization process, authors suggested Prada to enter new markets – Egypt, Peru and India, because the retail markets are expected to grow in these countries over the next 5 to 10 years. Consistent business management decisions and innovative approaches are crucial for the company’s future business in order to keep its luxury exclusivity and position among the most preferred luxury fashion brands in the luxury fashion market. 49

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