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
A. Analysis should include a PESTLE and SWOT of the organisation and an analysis of the
organisation’s capabilities..........................................................................................................................4
PESTLE Analysis..................................................................................................................................4
SWOT Analysis of L’Oréal...................................................................................................................6
B. Prepare analysis of the competitive environment of the organisation using Porter’s Five Forces
Model.........................................................................................................................................................7
Porter’s Five Forces Model....................................................................................................................7
Task 2: Create a strategic Plan based on the environmental analysis and findings in task 1......................10
A. Evaluation of the different types of strategic directions available to the organisation.....................10
Ansoff Matrix L’Oréal.........................................................................................................................10
B. Justification and recommendation of the most appropriate growth platform and strategies..............12
C. Produce a strategic management plan with strategies, objectives and tactics.....................................12
Strategic Management Plan (Market Penetration)...............................................................................12
Conclusion...................................................................................................................................................15
References....................................................................................................................................................16
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Introduction
Every organisation has its specific mission and vision that defines the objectives of an
organisation. To achieve these objectives and make sure that the organisation is able to success
in meeting the success criterion defines by its mission and vision, it is essential that a well-
defines strategic approach is adopted by the organisation. The business strategy of an
organisation is one such approach that is used by the organisation. However, business strategies
could be divided into long term and short term strategies, the ultimate goal of these strategies
remain same. In the current report, the business strategy related concepts and impacts of the
different environmental factors on the business strategy of an organisation would be described
using the example of L’Oréal which is the largest cosmetic company in the world. Since its
establishment in 1909 by Eugène Schueller, the company has come a long way for which the
credit could be given to the planned strategic approach of the company management. Currently,
there are more than 34 Brands which are owned by the company with a range of more than 500
types of product. L’Oréal recorded revenue of €27.12 billion in 2018 which is a huge success for
the company. Since L’Oréal operates in more than 150 countries and has more than 91,000
employees, the company has diversified approaches for the different regions with a different skill
set of the employees. The current report would analyse the different micro and macro
environmental factors that contributes in the formation and implementation of the business
strategy of L’Oréal and provide a strategic plan for the company.
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Task 1: Prepare an internal and external analysis that provides a basis for
strategic Planning.
A. Analysis should include a PESTLE and SWOT of the organisation and an analysis of the
organisation’s capabilities.
The Macro Environment surrounding a business organisation could be described using the
PESTLE model that contains Political, Economic, Social, Technological, Environmental and
Legal factors. The PESTLE analysis of L’Oréal is provided below:
PESTLE Analysis
Political
Being in the cosmetic industry, L’Oréal has to deal with the strict guidelines set by the
governments regarding the safety of the products. However, the company is based in
France; it also operates in 150 other countries which make it difficult for the company to
have a universal political approach towards the governments’ decisions. There are also
FDA related government policies that affect the business operations of the company in
other countries (Akter et al, 2016). The current BREXIT situation in the United Kingdom
is also a big challenge for the company as it would expect certain duties on its products in
the country by the government.
Economic
Cosmetic industry is categories by the experts as an industry which is recession resistant
but still there are economic fluctuations that would affect the business strategy of the
company. There are fiscal policies and monetary policies of the governments that affect
the investment of the organisation in its operations. The company has to generate more
funds for the branding, marketing, research and development and expansion. The
cosmetic industry has shown a growth of 13.4% in 2018 which was good news for
L’Oréal. The company has also recorded revenue of €27.12 billion in 2018.
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Social
Brand loyalty is one of the most important social factors in the cosmetic industry. When
it comes to skin care and hair care, people only trusts the recognised brand and they tend
to stick with the brand if it performs as per their expectations (Buckley and Ghauri,
2015). L’Oréal has established itself as one of the favourites in more than 150 countries.
Another social factor that is associated with the cosmetic industry is the ethical behaviour
of the organisation. L’Oréal runs many corporate social responsibility programs for the
betterment of the society that has made the company products acceptable among people.
Technological
Technology plays an important role in developing the business strategy of the
organisation in every industry. In cosmetic industry, L’Oréal has been trying to develop
new technologies to help it improve its products. Currently, the company has its 5
research and development centres that work to develop products with improved quality
and better safety. L’Oréal has also invested heavily in its digital marketing campaigns to
improve the branding of the company products (Chang, 2016).
L’Oréal has developed a latest technology known as Episkin that has provided an
alternative to the animal testing of the cosmetic products. In this technology, skin sheets
are reconstructed in Vitro Laboratory that used as a replacement to animal testing.
L’Oréal has also acquired ModiFace, a technology company that provides digital
makeover of the different company products. All these new technologies has helped
L’Oréal in attaining a competitive advantage in the cosmetic industry.
Environmental
There are environmental concerns with every organisation that is in the manufacturing
sector. L’Oréal has adopted a zero carbon emission approach through which the company
has claimed that it would reduce the emission of carbon from its manufacturing plants by
2024. Company is also running many environment awareness campaigns through its CSR
programs that has helped in making the people aware about the importance of the
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environment and launched many successful tree planting campaigns. L’Oréal has to
follow strict environment laws enacted by the EU.
Legal
Since L’Oréal operates in 150 different countries, the company has to follow the legal
systems of these countries. There are different rules and regulations relevant to the
different business fields that company has to follow. The legal department of the
company has to make sure that it includes the employment legislations, health and safety
act, competition policy and anti-discrimination legislation in the business policy of the
company.
SWOT Analysis of L’Oréal
Strengths
1. L’Oréal has a bundle of brands under its umbrella that provides a big strength to the
company. NYX, Maybeline, LANCOME and Shu Uemara are some of the international
brands that have very high demand in the market (Eaton and Kilby, 2015).
2. L’Oréal has a loyal customer base that has always stuck with the company even in the
tough times. These are the people who desperately wait for the new products by the
company and provides good initial sale.
3. A large geographical area is covered by L’Oréal through its operations in 150 countries
that help the company in handling economic slowdown in specific regions.
Weaknesses
1. There is a saturation problem in the cosmetic industry as it lacks the number of areas in
which the company could expand its product range
2. The profit margin ratio in the cosmetic industry is shrinking because of the increased cost
of products. The capital expenditure of the company is also increasing because of the
extended operations.
Opportunities
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1. The emerging markets have come as great prospects for L’Oréal as demand for the
cosmetic products in these markets is increasing rapidly.
2. The increase in per capita income and increased expenditure by the people on cosmetic
products is good news for the company (Kourdi, 2015).
3. The introduction of the new technologies such as Episkin is helping the company in
improving its brand value and lowering the cost of animal testing.
Threats
1. The competition in the cosmetic industry is rising and L’Oréal is facing tough
competition from recognised brands such as Head and Shoulders and Sunsilk.
2. The technology product Episkin is not approved by China as Animal Testing is
mandatory for the skin care products in the country.
3. BREXIT threat is looming in the UK operations of the company as it would have to face
tough import duties on the products in UK. The labour problem would also arise as free
labour movement across the EU countries border would be restricted by BREXIT.
B. Prepare analysis of the competitive environment of the organisation using Porter’s Five
Forces Model
Porter’s Five Forces Model
Porter’s Five Forces Model is one of the most used and effective tool for the environmental
analysis which is used by the organisations to assess the internal and external environment so
that appropriate business strategy for the growth of the organisation could be developed. The
Porter’s Five Forces Model for L’Oréal is provided below:
Competition rivalry: High risk:
Competition rivalry is one of the main concerns for L’Oréal as there is a tough competition in the
cosmetic industry. There are many big organisations like Avon, Sunsilk, Unilever and Revlon
that competes with L’Oréal in this sector. Most of these organisations have big brand names and
they own a fair share of the market in this sector. L’Oréal has to make sure that it is able to create
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a business strategy that improves the company share in the market. The competitors of L’Oréal
are also investing heavily in the research and development and introducing new products in the
market to counter the latest products by L’Oréal.
Threat of new Entry-Low risk:
In the modern world, the demand for the cosmetic products is very high and people in every
income group now want to have good cosmetic products. This has provided an opportunity for
the new organisations to enter in the cosmetic industry. The initial capital required to start a
small or medium size cosmetic company is not very high and there are also many venture
capitalist people who look for the new organisations to invest (McAdam, Bititci and Galbraith,
2017). Hence, many new start-ups in the cosmetic industry are coming to compete with L’Oréal.
However, the threat of the new entrants is not very significant for the company because it is
tough for a new company to offer a challenge to an established brand like L’Oréal, but still
L’Oréal needs to continue look for these threats. L’Oréal has adopted the strategy of acquisition
in which the company acquire a smaller but competitive organisation that could add value to its
brand.
Bargaining power of buyers- Medium risk:
Customers these days have become more aware about the products in the market and they tend to
research a lot about a product before they make a buying decision. Because of this, the customers
have become very price and quality sensitive which creates a challenging situation for L’Oréal.
L’Oréal has to make sure that it is able to meet the expectations of the customers when it comes
to the quality and price. L’Oréal needs to focus on creativity and innovation to make sure that is
able to increase its loyal customer base and acquire more market share (Oldman and Tomkins,
2018).
Bargaining power of suppliers- High risk:
L’Oréal depends heavily on its suppliers who provide raw materials to the company for its
various products. The range of the cosmetic products is very large and it needs lots of different
types of raw materials. Some of the materials used in the cosmetic products are available in low
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amount and there are a limited number of suppliers who provide these materials to L’Oréal.
L’Oréal has no other option but to use these materials which provides the bargaining power to
the suppliers (Priem, Wenzel and Koch, 2018). If demand for these materials rises in the industry
it would further enhance the bargaining power of the suppliers. L’Oréal needs to establish long
term contracts with its suppliers to make sure that it has the required materials on the reasonable
price from the suppliers.
Threats of substitute product or services-Medium:
Because of the higher number of organisations in the cosmetic sector, there are always
substitutes available for the cosmetic products. If the quality of the substitute products matches
the quality of the product by L’Oréal and price is also reasonable, then there is a chance that
consumer could replace the L’Oréal product with another product. Trends in the cosmetic
industry also keep changing such as bathing soap is being replaced by the gel based products.
Hence, L’Oréal faces a tough challenge in having a stable positioning in the market when it
comes to the threat of substitutes.
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Task 2: Create a strategic Plan based on the environmental analysis and
findings in task 1
A. Evaluation of the different types of strategic directions available to the organisation
There are many different types of strategies that are being adopted by L’Oréal to counter the
various challenges in the industry. Since L’Oréal operates in more than 150 countries and every
country has a specific challenge that has to be addressed in the business strategy of the
organisation, L’Oréal develops region specific strategies along with a central business strategy of
the organisation. Some of the different directions available to L’Oréal in which it could develop
its business strategy could be described using Ansoff’s Matrix which is provided below:
Ansoff Matrix L’Oréal
Market Penetration, Market Development, Product Development and Diversification are four
different strategic directions suggested by Ansoff’s Matrix that L’Oréal could adopt to develop
its business strategy.
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Figure 1: Ansoff Growth Vector Matrix (Pisano, 2015)
Market Penetration
This is one strategic direction where L’Oréal would be operating in the existing markets it
currently operates and the products of the company would also remain same. In this strategy,
L’Oréal would have to use its resources in increasing its market share while using the current
market portfolio. To execute this strategy, L’Oréal would have to focus more on the marketing
and advertisement so that it could reach out to more customers and increase its customer base.
L’Oréal would also renegotiate with its suppliers to have more reasonable pricing of the raw
materials so that the company could reduce its manufacturing costs (Razak et al, 2016). Use of
technology in improving the supply chain management is another option that L’Oréal could use
while focusing on this strategy.
Market development
This is another very important business strategic direction that could benefit L’Oréal in
increasing its business. In this strategy, L’Oréal would enter into new markets while offering the
range of same products. L’Oréal already has many famous brands in its portfolio and there is an
increasing demand for the skin care cosmetic products in the emerging markets (BRIC – Brazil,
Russia, India and China). These countries offer perfect market conditions to emerging markets as
they are focusing on bringing more foreign investments in the domestic market.
Product development
This is another strategic direction in which emerging markets would be developing a new
product for an existing market. L’Oréal already has 23% market share in the cosmetic sector in
France and company also has its operations in more than 150 other countries. If L’Oréal
develops a new product which is currently not in the company portfolio and offers it to its
existing customer base, the company would receive a good response from the customers.
Diversification
The diversification strategy provides a very strong direction as it uses a new product for a new
market. L’Oréal would be launching a new product to a market which is entirely new to the
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company. This could be a risky strategy because the brand value of the company is not
established in the new market and the product performance is also not yet proved. However, if
this strategy works, it could result into exponential growth for L’Oréal as it would add a new
strong revenue source for the company.
B. Justification and recommendation of the most appropriate growth platform and
strategies.
Four different strategies that L’Oréal could adopt for the growth of the organisation were
suggested in the previous section. Since L’Oréal is already operating in 150 countries including
most of the emerging markets, entering into another market is not a very good choice for the
company when it is already present in the main markets in the world. L’Oréal alrady has a
portfolio of 34 brands and including more products in the portfolio is another strategy that might
not benefit the company in the present situation (Santos, Au-Yong-Oliveira and Branco, 2018).
However, the research and development wing of the company continuously try to create new
products, right now there is not new product in sight which could be a game changer for the
company. Hence, one strategy that could benefit the company in the long term is trying to take
hold of the existing market with current range of products. There are many different techniques
available in front of L’Oréal that it could use to increase its share in the cosmetic industry in the
existing markets. L’Oréal might use aggressive marketing strategy to attract more customers and
increase its loyal customer base. Another aggressive strategy under the Market Penetration
direction is use of acquisition which could be very useful for L’Oréal. Acquisition would not
only help L’Oréal in reducing the competition in the market but the company would also acquire
the customer base of another company in the process. Hence, these 2 techniques of aggressive
marketing and acquisition under Market Penetration could be considered the best approaches for
the company in the current market conditions.
C. Produce a strategic management plan with strategies, objectives and tactics
Strategic Management Plan (Market Penetration)
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