The paper provides an overview of L’Oreal, including its short history, current and previous strategies adopted by the company, an analysis of its external and internal environment, its scheme preparation, and possible options.
The French company has a strong fiscal base, with 45 mills and 18 research installations worldwide. It is a market leader in the cosmetics industry with 28 international trade names, operating in over 130 countries. The company could utilize its existing research installations and production capacities under strong global trade names to implement the proposed new scheme to grow their business revenue.
Introduction:
With growing competition in the cosmetics industry and domestic markets becoming saturated, companies are forced to expand their operations globally to grow their businesses and remain competitive (Souvik, 2006).
Organization Overview: L’Oreal is a global cosmetics manufacturing company based in Clichy, France. It offers a range of skin and hair care products, makeup, and fragrances under 28 international trade names in over 130 countries. The company registered 624 patents in FY2013 and employed 77,500 people at the end of the year. In FY2013, L’Oreal recorded total revenue of 2.98 billion Euros with an operating profit of 3.875 billion Euros, representing an increase of 4.8% over FY2012 (L’Oreal, 2014).
Mission: L’Oreal’s mission is to offer the best-innovated cosmetics in terms of quality, efficacy, and safety to all genders worldwide (L’Oreal, 2014).
Goals: The company aims to win over another one billion consumers worldwide through product innovation to meet individual consumers’ beauty needs and desires (L’Oreal, 2014).
Current Strategy adopted by the company: The company uses an acquisition strategy to expand its business portfolio and establish new distribution channels in potential luxury cosmetics products markets (Euromonitor, 2012). It also employs a multi-brand strategy to expand internationally, which provides the company with a flexible portfolio that helps to drive annual growth globally (Euromonitor, 2014).
To strengthen the company’s brand image, it uses brand segmentation strategy for strategic product launches in the target market segment (Euromonitor, 2012). The product differentiation strategy enables the company to make its cosmetics products accessible to more consumers, thereby helping the company to expand its customer base.
Previous Strategy adopted by the company: The company began with a French chemist who developed and marketed hair dye to hairstylists throughout France. The previous strategy adopted by the company was constant product innovation (Euromonitor, 2012) and a long-term research and development strategy for a range of hair care products, including hair dye, hair color, hair spray, colorizing shampoo, skin care products, fragrances, and dermatology beauty products to remain competitive in the beauty and personal care industry (L’Oreal, 2014).
Assignment Aims. The assignment aim is to analyze the business scheme of L’Oreal’s cardinal success in China’s cosmetics industry.
Assignment rubric. The assignment rubric is “Analyzing the business scheme of L’Oreal’s cardinal success in China’s cosmetics industry.”
STRATEGIC ANALYSIS
2.1 External Environment Analysis
The paper will discuss how the macro-environment in China will impact the endurance of L’Oreal in the luxury cosmetics industry. The survey of the macro-environment in China enables the company to have an overview of the China market; therefore, the company can develop competitive advantage and effectively identify opportunities and threats, particularly for effective decision-making (Yuksel, 2012).
PESTEL Analysis
Political China is a single-party state governed by the Communist Party of China (Sharma, 2012). It has high duties, which are on a decreasing incline (Sharma, 2012). China has a complex and often changed tax system; therefore, changes in the tax system may limit the gross growth in China.
Economic China’s economy is the world’s second-largest (Economics, 2014). The private sector is growing rapidly, and the market-oriented China’s economy provides a platform for L’Oreal to expand its business portfolio (Economics, 2014).
Social China has a population of over 1.3 billion (Statistics, 2014). The population density of China in 2014 was 145 people per square kilometer (Statistics, 2014). China’s latest family planning policy benefits parents who are only children as the family can have two children (Statistics, 2014). More than 81 percent of Chinese students have a secondary degree (Statistics, 2014). The country has a large educated population, but it is facing an aging population (Statistics, 2014). The change in China’s family planning policy and the aging population provide L’Oreal with an opportunity to grow their beauty and personal care gross.
Technological As of 2011, China had 500 million internet users (Sharma, 2012). The increasing population of internet users and online shopping opens up the e-commerce market in China. The growing trend of internet-savvy consumers provides a platform for L’Oreal to explore social media marketing and mobile application of their luxury cosmetics products in China.
Environment China’s business environment is shifting from a manufacturer to becoming a world pioneer (Lennard, 2014). There is a growing trend that the labor cost is rising, although it is still cheap compared to developed states (Lennard, 2014). There is a growing skilled population, and the graduates from the field in Engineering, Manufacturing, and Construction accounted for 37.7% of all graduates in 2013 (Lennard, 2014). With the trend of a more educated workforce, it will drive up the labor reward scale, thus increasing L’Oreal’s overhead labor cost in China.
Legal With the new policy of removing compulsory animal testing for cosmetics in China (chemlinked, 2014), the change in legal policy gives L’Oreal an opportunity to expand their products portfolio, thus opening up different products’ brand gross stream for the company.
2.2 Industry Analysis
Porter’s Five Forces
Porter’s Five Forces is used to analyze the competition in China’s luxury cosmetics industry.
Threat of New Entry (Moderate) New entrants may be attracted to China’s luxury cosmetics industry due to its strong growth (Marketline, 2014). However, the entry barrier is high due to China’s authorities imposing strong regulations covering all aspects of the market, including product labeling, testing methods, and safety (Marketline, 2014). Furthermore, new entrants may not have the financial resources to compete with the bigger players who have strong financial capital to invest in capital-intensive forms of marketing (Marketline, 2014).
Threat of Substitutes (Low) There are few substitutes for luxury cosmetics products (Marketline, 2014). Mineral makeup products are one of the possible substitutes.
Supplier Bargaining Power (Moderate) Suppliers’ bargaining power is low due to the range of alternative natural materials available. Only suppliers who can fulfill China’s regulatory standards may have moderate bargaining power (Marketline, 2014).
Buyer Bargaining Power (Moderate) Corporate buyers, retailers, are positioned at the end of the value chain; therefore, they are obliged to offer what buyers want in the market (Marketline, 2014). As retailers need to maintain their own sales volumes, they must keep inventory stocks for popular luxury cosmetics brands.
The leading participants in the luxury cosmetics industry are mainly large multinationals which have huge marketing budgets to engage well-known celebrities to advertise their products, thereby helping the companies to build their brand loyalty (Marketline, 2014). Luxury cosmetics brands will attract many corporate buyers who want to sell their products; therefore, the buyer bargaining power is moderate.
Competitive Rivalry (Moderate) L’Oreal is the leader among the top four participants in the luxury cosmetics industry, which holds 30.3% of sales alone (Marketline, 2014). Consumers in China are more likely to buy leading luxury cosmetics brands; therefore, corporate buyers are very unlikely to switch between market participants (Marketline, 2014). Competitive competition in the cosmetics industry is moderate, as most of the leading market participants are geographically diversified (Marketline, 2014).
Conclusion of Porter’s Five Forces
Among the five forces, the company needs to be aware of its competition changes in the markets as its biggest rival, Estee Lauder, may capture its market leader position if L’Oreal does not strengthen the aligning focus of its luxury cosmetics products globally.
2.3. Key Factors of Success
L’Oreal uses its global brand to follow the mix in order to produce economies of scale to adapt to China’s luxury cosmetics industry. The company’s key factors of success are as follows:
- Strong international brands
- Strong distribution networks
- Strong financial resources
- Brand segmentation in target market segments
- Constant product innovation
- Long-term investment in Research and Development
- Leverage on economies of scale by gathering different sections for product production
- Investment in communication
- Building a pool of loyal customers
2.4. Internal Environment Analysis
Core Competence
The company’s core competence is its product innovation, long-term research and development on cosmetics products, multi-brand range of products which it offers through their strong distribution network worldwide.
Synergy The company is utilizing the synergy of its international trade name and reputation, which is well-known for utilizing its research facilities to make quality cosmetic products.
Corporate Culture The company adopts an adaptable culture that enables them to quickly interpret and respond to any signals of environmental changes to maintain its market-leading position in the cosmetics industry.
SWOT Analysis
Decision of SWOT The SWOT analysis identifies the danger of external, uncontrollable forces that the company may face. Cosmetics products are not essential goods, therefore in the event of a global financial crisis, L’Oreal’s revenue is likely to be affected.
2.5. Internal Resources Analysis
Tangible Resources Fiscal Resources In FY2013, L’Oreal had an operating profit of 3.875 billion euros (L’Oreal, 2014). Thus, the company has a strong financial base that enables them to generate internal funds for its global marketing activities. Organizational Resources The company has formal reporting structures that enable them to manage its global operation and align all international offices’ business objectives with its mission and goals.
The Operations Division oversees the entire seven lines of business production supply chain, which enables them to achieve total quality from raw materials to end product delivery (L’Oreal, 2014). Physical Resources The company has 45 factories worldwide, which enables them to maintain its production quality control (L’Oreal, 2014). The research facilities give L’Oreal its distinctive competencies against its competitors.
Technological Resources The company has high-tech machinery and equipment in its research facilities and manufacturing plants. It also owns patents, trademarks, and trade secrets for its innovative cosmetic products, which contribute to the company’s valuable assets.
Intangible Resources Human Resources The human capital, which enables the company to leverage employee diversity, contributes to its current business success. Innovation Resources The company has a pool of research workers and scientists whose creativity and innovative ideas provide its scientific capabilities and give it the capacity to innovate (L’Oreal, 2014).
Reputational Resources The knowledge and experience of the company’s research workers and scientists allow them to use advanced and applied research methodologies, ensuring the cosmetics products’ quality and safety to consumers (L’Oreal, 2014). The company has a strong history for its brand name globally; therefore, consumers’ perception of L’Oreal’s multi-brand range of products is reliable and of high quality.
STRATEGY FORMULATION
Corporate Strategy
The company needs to focus more on its brand reputation, product innovations, and global marketing to ensure the quality of its products. Hence, L’Oréal formed a joint venture with the Nestle Group in search of new niche markets.
Business Strategy
The company uses a business strategy to compete in the cosmetics industry by creating new and innovative products that cater to the changing trends and demands of consumers.
STRATEGIC OPTIONS
The main objective of all profit-generating companies is to generate profits and maximize shareholder wealth. 4.1 Identifying Strategic Options Available to the Company Based on the SWOT analysis, we have identified two possibilities to improve L’Oréal’s current situation in the beauty and personal care industry in China.
Option One: With the growing trend of consumers seeking foot reflexology, the company can create foot care personal products that leverage its strong brand name for the luxury and mass markets.
Option Two: The company can introduce and customize existing hair and skin care products targeting male consumers between the ages of 18 and 50.
STRATEGIC CHOICE
Selection of Our Strategic Choice. We have chosen option two. The foot reflexology business in China is booming with many stores along the street. L’Oréal can promote to the foot reflexology business owners, who can become the major corporate purchasers for foot care personal products.
EXECUTION
The execution process for the selected strategic choice is straightforward. The company’s existing technologies can be used to produce the new range of foot care products, thereby maximizing any fresh resources and capacities.
RECOMMENDATION
The company can leverage its existing production capacities and fresh resources to manufacture the new range of products by achieving economies of scale to achieve cost leadership for the new target market segments. Hence, the company can gain new market shares in the foot reflexology business. The company must act quickly to manufacture the new foot care personal care products before its rivals gain the upper hand.
DECISION
L’Oréal started as a small company selling hair dye to hairstylists throughout France. The success of the company lies in its organizational structure and strategic management built on top of its constant product innovations and long-term investment in research and development. Its integration of core competency, synergy, corporate culture, internal resources, strategy formulation, innovation strategy, brand segmentation strategy, product differentiation strategy, and acquisition strategy have contributed to the success of the company.
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