[SERI COLUMN] ‘Masterpiece brands’ beat recessions

There are companies that enjoy steadily high growth and create high value added regardless of economic booms or busts. Medtronic, Harley-Davidson and Hermes are examples, having maintained sales growth of around 10 percent over the past 10 years. Even during the current global economic crisis they have overwhelmed rivals with a more than 20 percent ratio of operating profit to sales.

These companies possess masterpiece brands, products that make a customer want to purchase them even at the expense of other spending. Unwavering love and trust for these products make them highly resistant to recessions.

The DNA of these companies is craftsmanship. Their secret to success is upholding exceptional quality and technology. Three key elements come into play.

First, these companies promote scarcity. Eschewing mass production, they produce a limited supply to implant the idea of exclusivity in each customer. Even if demand for a product is high, automation is resisted to keep everything handmade. For example, a single craftsman averages 32 hours to produce a single Hermes Kelly or Birkin bag, creating an average wait of four years per order.

Hermes is known for buying leather only after a thorough inspection and more than eight months of tanning with extracts of oak. No chemicals are used.

Second, masterpiece companies operate in-house training and offer wealth and reputation for exceptional craftsmen. Hermes bag makers must first undergo five years of training. The companies also inherit craftsmanship and creativity across family generations.

Romanee-Conti, one of the world’s finest wine producers, maintains a unique terroir by retaining wine makers at vineyards even if ownership changes. There is also a culture of respect for history and tradition, as exemplified by Mercedes-Benz, whose Maybach line was inspired by Wilhelm Maybach, the chief designer there during the early 20th century.

Finally, masterpiece brands are not created exclusively through the artistic spirit of a craftsman, but also through continuous contact with customers. New hires at Medtronic, a U.S. medical technology company, start their career by going to hospitals and consulting with customers. Sometimes employees become customers themselves to identify buyers’ needs. Harley-Davidson executives participate in the company’s annual “H.O.G.” event, which brings together buyers.

Most recently, Harley-Davidson invited an anthropologist to the event so it could better understand customer needs and incorporate them into its strategy. It also has an after-service program for all its products to maintain a prestigious brand image.

For companies, the ideal situation may be to combine numerous masterpiece brands into a conglomerate, since this will allow continuous growth and to retain high value added. LVMH is the representative example. This company has successively acquired luxury brands including Christian Dior, Louis Vuitton, Givency, Genzo, Tag Heuer, and Fendi. LVMH deems acquisition of existing brands more effective than launching new ones, gaining greater synergy through multiple brands.

Companies that now mass-produce may seek a major transformation into a masterpiece brand. They could start a small, stand-alone luxury unit, and, if it is successful, remake themselves. One example is Nokia in Finland. The leading mobile phone maker established Vertu, a handmade mobile phone manufacturer, in 1998, and it now operates 500 stores in 50 countries.

Yet the mass producers run the risk of overextending their resources to develop luxury brands, creating cash-flow problems before their products gain the necessary status. A product becomes a masterpiece brand only through the love of customers over a long period of time.

For resource-challenged smaller companies, it is crucial to concentrate on quality and after-service. A product without exceptional quality or after-service cannot advance to the premier ranks even if no effort is spared. Yet pursuit of just short-term profit should be resisted, and differentiation based on thorough craftsmanship and taking responsibility for products sold should follow.

Since HJC, a small Korean firm specializing in motorcycle helmets, started motorcycle helmet manufacturing in 1971, it has upgraded and retained its quality based on R&D.

HJC’s R&D-to-sales ratio surpasses 10 percent, while other small manufacturers are at 3 to 4 percent. The company thoroughly examined the characteristics of Harley-Davidson and Honda motorcycles and focused on safety. After U.S. motorcycle racer Aaron Yates fell off his bike, bumped his head in a series of rolls, and still finished second at a motor show in Indiana state in 2001, it was discovered that he wore HJC helmets. The company won free publicity.

Companies producing masterpieces are not swayed by the temptation of mass production and retain their craftsmanship. A masterpiece product is sustainable only when the artistic spirit of a craftsman and a customer’s needs combine harmoniously. Perfect quality and service are the most important things for this kind of company. For consistent growth, companies of all sizes need to pursue such masterpiece strategies regardless of business conditions.

*The writer is a research fellow at Samsung Economic Research Institute. Fore more SERI reports, please visit www.seriworld.org.

by Youn Young-soo