Business Strategy of L’Oréal: A Strategic Management Plan

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Business Strategy

Table of Contents
Introduction....................................................................................................................................................3
Task 1: Prepare an internal and external analysis that provides a basis for strategic Planning.....................4
Analysis should include a PESTLE and SWOT of the organisation and an analysis of the organisation’s
capabilities.................................................................................................................................................4
Prepare analysis of the competitive environment of the organisation using Porter’s Five Forces Model.7
Task 2: Create a strategic Plan based on the environmental analysis and findings in task 1......................10
Evaluation of the different types of strategic directions available to the organisation..........................10
Justification and recommendation of the most appropriate growth platform and strategies...................12
Produce a strategic management plan with strategies, objectives and tactics.........................................13
Conclusion...................................................................................................................................................18
References....................................................................................................................................................19
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Introduction
The external environment surrounding an organisation and the internal environment of an
organisation keeps changing. The organisation needs to evolve through this changing
environment and define a direction that it could adopt to fulfil the expectations of the
stakeholders. In this manner, the business strategy of an organisation could be defines as a long
term process that organisation needs to implement in order to achieve its mission and vision.
This long term process needs to be strategically fir with the business environment and should be
based on the competencies and resources available to the organisation. There are different levels
of strategy such as corporate strategy, business level strategy and operational strategy. An
organisation needs to implement the business strategy to all these levels for the maximum benefit
of the strategy. To develop and implement the business strategy the organisation has to define a
strategic position and then make strategic choices to attain the objectives defined in the business
strategy. In the current report, the different business strategy relevant concepts would be
analysed using the example of L’Oréal, a cosmetic industry giant which was established in 1909
by Eugène Schueller in France. L’Oréal is the largest organisation in the cosmetic industry and
company operates in 140 countries. This report will examine the internal and external business
environment of L’Oréal and strategic position of the company will also be described before
developing a suitable business strategy for the company to suit its expansion plans.
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Task 1: Prepare an internal and external analysis that provides a basis for
strategic Planning.
Analysis should include a PESTLE and SWOT of the organisation and an analysis of the
organisation’s capabilities.
The PESTLE analysis of L’Oréal is explained in the below section.
PESTLE Analysis
Political
There are also Trade Agreements and Export Regulations that are applicable to L’Oréal as it
operates in different countries. Taxation laws also differ from country and country and it
becomes very difficult for the company to manage so many different laws. The BREXIT deal is
going to be a big challenge for L’Oréal because this deal would change the trade agreement of
the UK government with EU countries. This could result in a big policy shift of the UK
government for the Foreign Multi-National Companies like L’Oréal.
Another big concern for L’Oréal is the political approach of the different countries on animal
testing of the cosmetic products. For example, the Chinese government has banned the animal
testing completely and some of the company products for which the animal testing is mandatory
are not being sold in China.
Economic
L’Oréal is a big organisation and company has to manage its operations in 140 countries. Any
economic slowdown could affect the company hugely because of the large management
expenditure (Beard and Dess, 2014). L’Oréal also spends lots of money on the research and
development and R&D wing of the company constantly demands lots of funds to carry out its
operations that do not generate any direct revenue. Hence L’Oréal has to be very careful in
managing its financial resources. L’Oréal recorded €26.3 Billion revenue in the year 2018 with
17% increase in the total profit of the company. This figure shows the growth rate of the
organisation and also provides a glimpse of the financial stability of the organisation..
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Social
L’Oréal is one of the few cosmetic organisations that do not specifically represent women as
their prime customers but cater to the needs of the people of all age group and has women care
and men care products range. The company has a huge portfolio of 540 plus products with 33
brands in its portfolio. Because of this diversity, the company is able to appeal to the customers
belonging to different regions and cultures (Dentchev, 2016). The organisation culture of the
organisation is very good and its policies are suitable to the regions in which it operates. L’Oréal
also supports many charity organisations and regular events according to the CSR programs of
the company are organised
Technological
L’Oréal is an organisation that focuses a lot on the technology and its R&D department
continues to experiment with the new technologies to develop innovative products. Episkin, an
alternative to animal testing process is also designed by L’Oréal
The company also has an automated supply chain management which has reduced the cost of
resourcing the raw materials, manufacturing and distribution.
L’Oréal uses online promotion campaigns for the promotion of its products and relies heavily on
the social media while designing the promotional campaigns (Dyllick and Hockerts, 2015).
Environmental
L’Oréal considers itself an organisation which is aware about the impact of the manufacturing
process and other activities on the environment. Because of this, L’Oréal uses latest technology
to minimise the emission of the harmful chemicals from its manufacturing plants. Many
environment awareness initiatives are also being run by the company.
Legal
L’Oréal belongs to cosmetic industry which is considered to be very sensitive when it comes to
the health of the people. Because of this, L’Oréal has to adhere to the strict regulations of the
governments applicable to the cosmetic sector in all 140 countries where it operates. There are
also many legislations passes by European Union that are applicable to this sector and L’Oréal
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has to make sure that it fulfils all the safety conditions in these legislations. In UK, L’Oréal has
to adhere to the Health and Safety Act, Employment Act, Equity Act and other legislations
passed by the Parliament of UK.
SWOT Analysis
Strengths Weaknesses
1. Loyal Customer Base
2. Operations in 140 countries
3. Huge financial resources and assets
4. Trained, skilled and experienced
workforce
1. Most of the customers in the high
income group
2. Inability to sell some of its cosmetic
products in China because of the
restrictions on animal testing in the
country
3. Not much further potential of product
diversification
Opportunities Threats
1. New opportunities rising in the
Emerging Markets
2. Technological advances such as
Episkin (An alternative to animal
testing)
3. Ability to develop innovative and
creative products because of highly
efficient R&D department.
1. Increasing competition in the cosmetic
industry
2. Local business organisations in small
countries
3. Recession
4. Trade war between US and China
5. Negative BREXIT impact
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Prepare analysis of the competitive environment of the organisation using Porter’s Five
Forces Model
Porter’s Five Forces Model
It is essential for an organisation to assess the level of competition in the market before it could
develop its business strategy. There are many different variables that are used in the analysis of
the competitive environment of an organisation. Porter’s Five Forces Model is one of the most
used models for the competitive environment analysis. L’Oréal environment analysis using this
model is explained here:
Bargaining Power of Customers
In every industry, customers hold the bargaining power as they are the revenue source for an
organisation. This power increases when there are many different organisations in the same
sector providing same set of products that are inherently same in the purpose (Ghemawat et al,
2017). Customers bargain with the organisation on the price of the products and they also want
excellent services. However, L’Oréal has a loyal customer base but it needs to continue its
efforts to keep that customer base intact and the company also needs to expand by increasing this
customer base. Hence, company needs to provide quality products on lower prices to the
customers.
Threat of Competition
There are many other famous brands in the cosmetic industry such as Revlon and Avon. These
are the main competitors of L’Oréal in the industry. However, there are also many other
organisations especially the local industries in foreign countries that create competition for
L’Oréal (Hitt and Ireland, 2015). These competitors continue to evolve and counter the business
tactics of L’Oréal. Hence, L’Oréal has to be proactive and use creative methods to address this
concern.
Threat of New Entrants
Cosmetic industry has become one of the fastest growing industries across the world because of
the increasing demand of the personal care products. Because of this, the industry looks very
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lucrative to the entrepreneurs and many new organisations are joining the industry. These new
organisations are well-funded and have young and energetic entrepreneurs who always try to
find new creative ways to enter in the market using different, more advanced, highly
technological methods and creative products. Although, L’Oréal’s customers are loyal and stick
to the quality products by the company but still the company has to keep an eye on the new
entrants in the market.
Figure 1: Porter’s Five Force Model (Joia, 2018)
Bargaining Power of Suppliers
L’Oréal has a large network of suppliers who are responsible for the raw materials required for
the products manufactured by the company. There are suppliers who supply to L’Oréal as well as
to the competitors of L’Oréal. If another organisation provides better rates than L’Oréal, then
supplier has a bargaining power over L’Oréal. In another case, a supplier who has a monopoly in
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the industry for a specific type of raw material also holds bargaining power over the
manufacturer. L’Oréal has to establish strict binding contracts with its suppliers to minimise the
bargaining power of the suppliers
Threats of Substitutes
The products in the cosmetic industry are very common such as Creams, Shampoos, Body
Lotions, Moisturisers, and Lipsticks etc. Every Medium and large size organisation has a range
of these products. Hence, L’Oréal has to stand out in the market with a set of products that could
not be substituted by the products of other companies (Lynch and Smith, 2014). The cost of
substitution of the products in the cosmetic industry is not a significant factor for the customers.
Hence, outstanding quality of the products, unique features and lower price could be very
effective factors for L’Oréal in addressing the threats of substitution.
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Task 2: Create a strategic Plan based on the environmental analysis and
findings in task 1
Evaluation of the different types of strategic directions available to the organisation
An organisation needs to assess the market conditions and also its capabilities before it takes a
strategic direction. The strategic direction of the company should be based upon the critical
market analysis and the organisational resources. The PESTLE analysis and SWOT analysis
conducted in the previous task would help L’Oréal is selecting a strategic direction. In the
current section, the different strategic options available to L’Oréal are analysed using the Ansoff
matrix
Ansoff Matrix
The Ansoff Matrix provides 4 different strategic directions that an organisation could take
depending upon the market conditions, competition in the market, capabilities of the organisation
and its expansion plans. These 4 options are shown in the figure below:
Figure 2: Ansoff Matrix (Peter and Ashley, 2016)
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Market Penetration
This is a strategy that L’Oréal could adopt to increase its market share in the regions and sector
where the organisation is currently functioning. Currently there are approximately 140 countries
in which L’Oréal is selling its cosmetic products. While there are some markets like France,
United Kingdom and Australia where L’Oréal is the largest organisation in the cosmetic sector,
there are some other countries like China, Brazil, India and United States Of America where
L’Oréal is struggling to compete with other organisations. If L’Oréal focuses more on the
branding and promotion of its products in these countries, it could do better and increase its
market share in these regions (Schwartz and Davis, 2017).
Market development
L’Oréal could use this approach if it decides to expand its reach into the new markets. However,
the company would be expanding into new regions, it would not be launching a new product but
use its existing inventory of the new products. There are many countries such as emerging
markets that have been focusing a lot on the Foreign Direct Investment these days such as China
and India. These are the ideal choices for L’Oréal to enter as company would get many tax
benefits and also support of the government policies. However, the company will have to face
tough competition from the existing players in these markets.
Product development
This strategy involves the development of new product and then selling the product in the
existing markets. L’Oréal is an organisation that gives lots of importance to research and
development and always tries to create a product which is not provided by any other organisation
in the market. L’Oréal has been focusing a lot on its research department and investing lots of
money in hiring scientists and technicians to develop a new range of personal care products.
These products would make the company stand at a higher space among the competitors in the
existing markets. L’Oréal could also enter in the accessary segment which is in high demand
these days.
Diversification
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This is one strategy that involves the launching a new range of products to an entirely new
market. L’Oréal needs to identify a market where there is a demand for certain type of product
and current organisations in that market are not available to fulfil that demand. If L’Oréal could
develop that product, it would be easily able to acquire a huge share of the new market. This
strategy would also result in L’Oréal developing a whole new line of product that it could later
launch in its existing markets.
Justification and recommendation of the most appropriate growth platform and strategies.
In today’s competitive world, it is tough for an organisation to survive if it depends entirely on a
single product or just one type of product range. Even if an organisation is as big and successful
as L’Oréal which is the market leader in the cosmetic industry, it is good for the organisation to
diversify its product range so that it could offer a different type of product to its customers. For
an organisation like L’Oréal that already has a huge number of customers across the world, it
would be a good choice to introduce a range of new product line which is similar to its existing
range and the company could sell the new range of product to the existing customer segment.
Also, it would be a good choice for an organisation to expand its operating regions if company
has already reached to an extent of saturation in the existing market (Stephen, 2016). L’Oréal is
already the largest cosmetic seller in France and many other European countries. If company
could expand into the emerging markets such as India and China and other Asian countries, it
could easily capture a good share of the cosmetic market segment in these regions.
Hence, a business strategy that uses a combination of Product Development and Diversification
has been identified for L’Oréal. The company would use Product Development by developing a
new line of Products – Luxury Handbags for Women in the current markets. According to the
data provided by L’Oréal, 78% of the customers of the company are women and 69% of these
women belong to high income group that use premium products of the company. These are the
ideal targets for the company to sell its luxury handbags. Once L’Oréal launches the new
handbag range in the existing markets, it could use this new range along with the existing
products to enter the emerging markets.
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