L\'oreal\'s Strategic Direction Amidst the Global Economic

L'Oreal's Strategic Direction

Amidst the global economic downturn, France's cosmetics giant L'Oreal corporation outperformed projections in the first ten months of 2010. With the first three quarters earnings exceeding +11% in sales revenues, the L'Oreal Group continued a strong trend following € 17.5 billion consolidated sales in 2009, with 23 global brands in 130 countries, and 674 new patents. Innovation has kept L'Oreal's market position in front of its competitors, and the company has upheld its promise to stakeholders and its 64, 600 employees alike to continue as the world leader in cosmetic products. Insight into L'Oreal's rare success in a moment in crisis is revealed in the Company Mission Statement,

"At L'OREAL, we believe that everyone aspires to beauty. Our mission is to help men and women around the world realise that aspiration, and express their individual personalities to the full. This is what gives meaning and value to our business, and to the working lives of our employees. We are proud of our work."

Corporate citizenship is at the forefront of the L'Oreal vision, and customer and employee equity is recognized as priority to a company well recognized as an innovative leader in cosmetics; converging scientific knowledge with local manufacturer and supplier partnered trade. Under Chief Executive Officer, Jean-Paul Agon the corporation's distinctly 'French' vision precludes standardized theories on management as discussed by North American scholars, in that the firm has historically relied upon 'psychology and culture' not only at the consumer level, but in the operational relations of L'Oreal's various national markets. Recent application of those change management principles where fresh impetus was given to strategic agreements in emerging markets in Asia, Agon's leadership style and his role in the development of those markets for future growth make relevant the type of talent that is characteristic of L'Oreal's presence as a multi-tiered, luxury product company.

A chemist by trade, Eugene Schueller invented the first synthetic hair dye in 1907, and by 1909 had established L'Oreal or Aureole (French for "aura of light") (Hoovers). Expansion of the company was immediate, and the efficacy of mass advertising introduced consumers to beauty as a "necessity" and product concept. Radio announcements of L'Oreal's products commencing in 1920s into the inter-war period placed Schueller's business on the map and served to intensify demand for distribution of licensed products, internationally upon the close of WWII (Hoovers). In 1963 the company went public, and since then, how effective L'Oreal has been in selling a 'better you' to consumers is recorded in its performance in the competitive landscape, illustrated in Table 1.

Competitive Landscape

KEY: Best of Group. Companies listed are Top Competitors.

Key Numbers

L'Oreal

Estee Lauder

Revlon

Shiseido

Annual Sales ($ mil.)

25,041.7

7,795.8

1,295.9

6,949.6

Employees

5,804

31,200

4,800

28,968

Market Cap ($ mil.)

50,180.8

13,750.8

671,417.2

Profitability

L'Oreal

Estee Lauder

Revlon

Shiseido

Industry2

Market3

Gross Profit Margin

71.00%

76.53%

65.20%

75.14%

50.93%

28.77%

Pre-Tax Profit Margin

15.71%

8.83%

4.69%

7.26%

15.37%

8.48%

Net Profit Margin

11.01%

6.14%

3.39%

5.23%

4.59%

5.53%

Source: L'Oreal. Hoovers, 2010. Web.

Critical analysis of L'Oreal's position within the market may optimized by way of Porter's Five Forces, where the: 1) Nature of Rivalry; 2) New Entrants; 3) Substitutes; 4) Strategic Partners; and 5) End Point (buyer power) are put into consideration toward continued sustainability at L'Oreal. The foregoing essay looks at how L'Oreal's emphasis on product innovation impacts the model of management. The potential of Porter's Five Forces as a benchmark to L'Oreal SA's market potential is illustrated in Table 2.

1. Nature of Rivalry

Optimizing task environment and operational procedure through change management practices. Reaching consumers better than competitors, and accountability of competitor' vision.

In the case of product line companies, research and design is of critical importance in response to annual design changes on the cosmetic manufacturing market.

2. New Entrants

Extent by which it is easy or difficult for L'Oreal to enter into a new market niche. It is at this stage that L'Oreal will want to offer value added incentives in an attempt to stop customers from 'switching costs' or hopping from one brand to another.

Response to this criterion may result in substantially lowered profits.

Where new entrants are concerned, a profit loss is typical.

Strategic planning and close attention to material and labor expenses are traditional methods of mitigating those costs, and by increase in market share upon release of new strategy or product.

3. Substitutes

The challenge of creating price or 'psychological' blocks to alternative products advertised to be substituted for existing offerings from L'Oreal.

Where there are fewer available substitutes the greater the profits.

L'Oreal is challenged to offer exceptional quality products to stay ahead of its competitors.

Lead in all segments of the market requires that weak products or product lines are supported by other factors such as promotions.

4. Strategic partners

Collaboration of L'Oreal' stakeholders at all subsidiary entities, suppliers and employees are critical to the equity equation which enables the company to maintain its competitive edge and financial solvency.

Regulatory partners impact price through research and development, and in ongoing operations. Integrated management practices, that give attention to compliance at each stage in the company's logistics ensures long-term benefits that may be passed on to consumers in lower than 'full cost pricing.'

The increase in cost of new technologies to maintain those resources has inserted higher overhead into the internal manufacturing picture. L'Oreal also emphasizes its 'local' relationships which enable the corporation efficiency in distribution and manufacturing, as well as cost savings.

While change management can do much in this area, other external forces indicative of third term legislative policies (i.e. 'responsible management' of chemicals) that have placed an enormous force upon the foci of the company's decision making, and with it L'Oreal's strategic planning and social responsibility as a core objective to its 'sustainability' platform.

5. End point (Buyer Power)

Consumer leverage informed by 'equity' in marketing, transformation of L'Oreal's identity as an iterative process in change management strategies, as the company is forced to shift according to product and competition.

Trends may fuel fiscal flows, and Identity control critical to portfolio management toward determinant of fiscal performance.

Protection against copy of proto-type products here, as competitors may curtail planned expansion through 'corporate espionage,' or unwanted press.

The efficacy of identity management as an expression of L'Oreal's commitment to sustainability as a reputable and trusted manufacturer of luxury cosmetics will be the primary basis for buyer' discernment between their products, and those of competitors.

Table 2. Porter's Five Forces: L'Oreal SA, France.

In the 21st century, transformations in global operations and flexible capitalization have increased the need for new approaches to measuring market strategy. L'Oreal is committed to integrated chain management of its products from inception at the stage of R+D innovation, to the point of retail distribution. Metric measurement of those processes enables the company to execute a highly imaginative and effective strategy in consideration of all elements mentioned in the Porter's Five Forces analysis. Modern Portfolio Theory (MPT) underscores the importance of measured metrics known to Six Sigma analysts as "leveraged" or capacity-building strategies (Edgeman). L'Oreal's prospectus is no exception. The cosmetic company is constantly looking for ways to harness limited resources and advance increased market share. Apportionment and 'cause-and-effect' are central to the Company's reporting instrument, and capture of macro systems based outcomes seen in Pareto Charts and trend analyses of the industry. From the point-of-departure of business development, metrics allow L'Oreal executives to interpret the relationship between segment sales and the internal expense of marketing on a particular product segment. The cost-benefit analysis of the relationship between consumer segmentation and product sales can then be determined by mid-level analysis.

Where improvements are fostered, of course, is in the savvy apprehension of L'Oreal as a flexible, global corporation. The willingness of Agon and the Company's executive staff to change management practices across the board in order to attract venture capital to new enterprises within the Group clarifies the vision of the strategic model as a corporation dedicated to the idea of futures; where Science meets trend. Organizational analysis of L'Oreal in a Six Sigma tool, a modified SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis (Edgeman) is illustrated in Table 3.

Criteria Strengths Weaknesses Recommendations

1. Strategy

Comprehensive Strategic Plan based on reasonable estimates of finance and costs.

Effective global approach rather than restructuring plan; meets downturn with an integrated model of cost reduction.

Variety of stakeholders in chain of operations will impact consistency, and at times efficiency which is part of the overall goal.

Seek measures to adequately account for horizontal operations, and support strategic plan as acquisitions influence chain management practices

2. Structure

The 'local-global' concept is provides the framework to the infrastructure of regional distribution, manufacturing and sales.

L'Oreal's French-international image adds value to projects where local cultural knowledge and strategies are incorporated.

The main drawback to the decentralized model of L'Oreal's oversight is in the area of product accountability, and also management of fiscal allocations.

L'Oreal should continue it's 'business' approach to product development and brand identity through acquisition of existing entities where there is already profitability.

Avoidance of 'recreating the wheel' in national and regional markets currently benefits L'Oreal in this regard.

Building legacy systems of operations and logistics into L'Oreal's oversight at these locations may be enhanced by IT database and also regulatory compliance measures for 'total' quality control.

3. Shared Value

L'Oreal has an exceptional reputation that resonates with the traditional identity of French beauty; and also incorporates new market interests

Ethics, equity, social responsibility and sustainable growth all correlate with contemporary values addressed within current advertising, business practice and trade policies.

L'Oreal's sustainability platform is responsive to1) community contribution through philanthropy; and 2) and in support of an ethical business culture.

Communication of L'Oreal's commitment to 'global' values should be further developed to support core to competencies.

4. Systems

Streamlined and flexible strategic planning within L'Oreal's business model translates new products to market through subsidiary brand identities.

Local systems may impinge upon timing of logistics.

Taxes and tariffs may shift according to market legislation.

Six Sigma tools such as the SWOT Analysis serve as addendums to internal auditing. From cost analysis of total chain operations, and R+D strategy, front-end evaluations advance regulatory and other risk mitigation efforts

5. Environment

Environmental responsibility is essential to the L'Oreal brand identity, and works toward its obligations to fulfill 'green' business recommendations.

Responsible management of chemical engineering in cosmetics raises concerns of ecological damage.

Use of alternatives oft means 'full cost pricing;' and consumers may reject products unless labeling and other promotions indicate that cost is derived from high degree of 'green' product consciousness.

L'Oreal stands to benefit from a dual approach to internal accountability to environmental management of risk and safety at the company's facilities and in the R+D of its products in accordance with state regulation and consumer preference for such products.

6. Design

L'Oreal's packaging design concept is built into product segmentation.

Appearance and reliability of the functional use of the product coincide. L'Oreal offers a wide array of products, and not all readily recognized as the brand identity by consumers.

Control of pilfering of proto-types by 'corporate spies' in R+D critical to market timing of new product introduction. Global firms with multi-tiered strategies find this a challenge.

7. Human Aspect

L'Oreal follows a French management strategy in regard to training and compensation. Benefits are good.

The micro corporate environment of a subsidiary in a new market may not be prepared to synthesize all aspects of recommended management practice.

National labor markets pose quite specific problems where employee compensation and 'rights.'

Implementation of standardized protocol at acquisition entities may be difficult without feasibility study in human resource development.

Table 3: SWOT Analysis: L'Oreal, SA.

Analysis of internal and external factors in an organization such as L'Oreal, puts competitiveness into negotiation with trade law, and serves to further define the strategic scope of organizational policy. L'Oreal is subject to a range of international trade laws; and attendant labor rules in the markets where it also manufactures. The decentralized approach of L'Oreal, where its main holdings and its subsidiaries share some cultural values and certainly procedures, must also be put under the microscope of external forces that may affect market position. Although retaining some of the traditional vertical hierarchy of highly qualified managers and technical experts, L'Oreal classifies its management model according to business development of product lines -- and those concerns may be very distinct dependent upon the consumer and operations contexts. L'Oreal assumes itself to be 'consumer-centric' in that the potential of its product and its 'magic' in the world of advertising must first meet the psychological needs of customers. The lesser told story, are liability issues and other legal considerations masked as social responsibility to the market and to the planet.

The seeming recalcitrant position of managers circumscribed to mostly 'local' roles and operational responsibilities actually clarifies the relationship between the power of the product, and the innate knowledge of strategic management in a regional or national market location. Thoroughgoing understanding of L'Oreal's legal agreements and training in this area would require additional research, yet the import of law to ethics within L'Oreal's articulation of conduct is interesting. All L'Oreal R+D innovation of products, their manufacture, distribution and sale refer to stipulations never seen in the seductive realm of mass advertising. L'Oreal's defiant success in the last several quarters certainly underscores the outcome to the Company's strategic management of the 'total' product channel (Blattberg and Thomson). Nevertheless, it is in the global marketing function and its impractical, practicality that we find the source of efficient mechanism realized.

Strategic planning at L'Oreal has been well thought out. Core competencies point to the end point assumption in comparative analyses of the cosmetic firm's product life-cycles. Chain management oversight still varies where local markets are introducing unique products drawn from natural resources, and subject to distinct regulation. L'Oreal's value chain activities must continue to increase quality control in order to meet new market recommendations. Green market participation inevitably means specialized facilitation of operations, outbound logistics, marketing, sales and services. Subsidiary interests have done much to update L'Oreal's traditional brand identity. The depth of consumer consciousness integrated into the company's strategic model can be addressed from the perspective of new market, or 'green' consumerism and its influence on business decisions by the global cosmetics conglomerate. Sustainable growth as a 'green' identity is quite literally an aspect of a complex of regulatory mandates and activities which have transformed the industry's methods of chemical compounds application and L'Oreal's innovations in new 'potion' design. The international polemic toward advocacy against 'animal testing' has been especially pronounced within the cosmetic industry's press; and this of course has change the scope of actual risk mitigation within L'Oreal's financial and research operations. Public debates over the appropriateness of cosmetic testing where animals are concerned has, quite conclusively, changed consumer cosmetics market in perpetuity.