LOreal International Strategy

LOreal international StrategyThe cosmetic diligence drop be analysed using hall porters five forces framework, by identifying threats of New Entrants, Industry Competitors Suppliers, Substitutes and Buyers. check to Euromonitor International (2008), the threat of sassy entrants into the cosmetic foodstuffplaces is low, considering that major(ip)ity of the trade is already possess by leading companies much(prenominal)(prenominal)(prenominal) as LOreal, Unilever, Proctor and Gamble (Appendix 4). Hence, it would be extremely difficult for a rising firm to establish their score name, over referable to the intensity of aspiration. Since there are few differentials between harvest-festivals, and due to strategical objective of harvest-tide by byplay rivalry is steep. doorkeeper (2004) so it can be argued the American barrier to entry into the application is fairly low, which is a key driver for world(prenominal)isation. However if a crude firm is un equal to com pete there is the possibility of business trial or threat of being subscribed by leading manuf achievementures. Due to the intentness leaders acquiring a variety of cosmetics, pig and sweetie companies, consumers sport the option of an array of substitute increases as a result this tear downs the industry attractiveness and sets a limit on price directs. However in monastic lay to overcome the issues LOreal lead established a prestigious carry bod based on quality and allowing them to soaring price compared to their competitors.This allows the dicker power of buyers to be greater, since there are many sellers in the industry and fewer dominant buyers. The bargaining power of supplier is currently low, since majority of the establish firms do not require dependence on suppliers to go forth cosmetic products. Porter (2004)Therefore in rural area to identify LOreals agency with in the industry a SWOT analysis has been conducted, (Appendix 2).LOreal, How it BeganThe French association LOreal started in 1909, with production of worlds first blur food coloring product. The products were first sell in Parisian whisker beauty shops, using very tight production, gross sales and commercialiseing dodge and by 1912 the products were distributed in other European component parts such as Italy and the Netherlands (LOreal 2010). consort to LOreal (2010), in order first come on on their fool portfolio, the social club had acquired a number of French companies such as Lancome and Garnier, thereby diversifying into other securities industrys, such as upscale perfumes and cosmetics. The learnings had allowed LOreal to maturation their cathode-ray oscilloscope of products among voltaic pile distributors and by 1970 eighty percent of fraternity sales were approach shot from France, (Cardona 2000). Hence the alliance became Frances leading beauty ac confederation, so far the globalist strawman was still little and the c at oncept of expensive Parisian products by consumers roomrate LOreal ability to expand into international merchandises. match to Cardona (2000), LOreal first enrolled the American commercialise in 1954 by forming a licensee with the cosmetics and hair product company Cosmair Inc. Licensing as method of entry into the mart involves LOreal granting rights under contract to intangible property. This had LOreal at began by distributing their products to U.S. beauty salons, however the company armorial bearing was still lessened due to the company spots being managed individually. Hence, without a licence it could have proven difficult for LOreal to enter the market, consider that there product was unfamiliar to the American market. as well as this had allowed LOreal to understand the American market, the buyer behaviour and level of competition. However, fit in to Bartlett and Ghoshal (1989) the dis return of this method is it forces LOreal to depend on the skills, abilities and re writ ers of the licensee as the source of revenue.However it is further argued by Cardona (2000), that LOreal acquired Cosmair Inc in 1994, which en equald the company to further strategise its beguile in the American market and acquire cosmetics company Maybelline in 1996. match to Ono (1995) Maybelline was Americas third largest cosmetics company, sold nearly(prenominal)ly in supermarkets, cosmetic speciality stores and mass market discount stores. LOreal believed by improving the Maybellines products, marketing and grime image would give the products huge international potential. According to Edmondson et al (1999), this gave LOreal entry into the jr. consumer base from the affluent European consumer base, due to its strong American brand image. Maybelline was a cheaper product, carried a wider statistical distribution network and a wider product setting which appealed to a vast number of pagan consumers in America and outside. As a result, LOreals sales from Maybelline outside the United States had grown by 50 percent (Edmondson 1999). The acquisition of these businesses gave LOreal a seventeen percent role of the $2.3 gazillion U.S. cosmetics industry, (Ono 1995).Therefore it can be argued the mode of entry into the market presently developed into strategic acquisitions, in order to pursue the scheme of growth and internationalisation. This method according to Bartlett and Ghoshal (1989), allows LOreal spread risk and contract the level of competition since rivals are ride over. This has also given LOreal greater market share for horizontal integration within the industry and thus allowing them to sharpen higher price for their products. However Bartlett and Ghoshal (1989) further argue this mode of entry can often cause clash in cultures, which is dispute further in this report.According to LOreal (2010), during 1980s the company had purchased stakes in two additional American companies, the cosmetics maker capital of Montana Rubinstein and R alph Lauren Fragrances. Both firms were later on fully acquired in 1988 and 1990. Weil (2006) argues, even though Helena Rubinstein had lost most of their product appeal among American consumers, LOreal believed with effective merchandising and a know re-launch of the brand, the products would be successful in the U.S. Market. This was due to the brand having a costly position in other regions such as Europe and Asia, where Helena Rubinstein products were considered upscale, according to Weil (2006). On the other hand, the acquisition of Ralph Lauren Fragrances was completed in order to strengthen LOreals sumptuousness products division, which possessed a smaller mass market fragrances brand (LOreal 2010). Due to Ralph Lauren established brand image and excellent distribution networks with stores such as Saks Fifth Avenue, it had allowed LOreal to enter a younger consumer market.It had been set that the key acquisition for LOreal in order to increase their global presence was b y the purchase of Kiehls, in 2000. According to Anon (2000), Kiehls was a meaning(a) addition to LOreals luxury product division, offering a diverse melt of specialised products for the high cost segment of the market from perfumes, skin, body and hair condole with. Thus by acquiring Kiehls, LOreals was able to increase their product wave and influence on American society. Considering that LOreal had expensive multi- cardinal pound publicize campaigns, Kiehls did not require such advertising due to exclusivity of the products at the time and its quotation among famous individuals (Anon 2000). This had allowed LOreal to grow, with the company revenue increasing yearly, (LOreal 2009).Therefore the acquisitions of such major U.S. companies allowed LOreal to increase its global presence and enter new emerging markets. Also the company has been able to develop an effective internal organisation, which is split into Consumer Products, original Products and Luxury Products. Due to t hese factors approximately twenty to twenty five percent of the company annual revenue comes from the United States (Cardona 2000).Diversifying into Other MarketsLOreal had acquired the victor hair product company Redken in 1993. This acquisition had allowed LOreal improve the social organisation of their hair product division, due to Redkens elongated distribution networks (LOreal 2010). Hence LOreal had reassessed the company hair care division to focus on the sales to salons and hairdressers. Compared to the European market where luxury hair products were sold in department stores, in the U.S. luxury hair products were primarily sold in hair salons and speciality beauty supply stores. According to Nichol (2010), LOreal was able to increase their revenue, since sales from salons carried a higher profit margin compared to mass market hair products. Hence, LOreals sales from the professional hair care division had provided one third of the companys sales from hair care (LOreal 20 10).According to Morais (2000), in 1998 and 2000, LOreal had made a combined strategic acquisition of the companies Soft Sheen and Carson, in order to enter the ethnic hair care market. Soft sheen was one of the leading American ethnic hair care products and Carson had an eighty two percent share of the U.S ethnic hair care market. Rhea (1997) argues in concomitant the acquisition of Carson had helped LOreal to entire the South African market which was worth an estimated market cling to of one billion dollars, due to the establish presence Carson had already developed.LOreal had precept the entrance into the American market particularly important, since African Americans represent 12.85% of the American population (Appendix 1) and accounted for thirty percent of the total U.S. hair care expenditure, totalling $1.2 billion in 1997 (Morais 2000). The purchase of the companies allowed LOreal to increase their distribution channel further, since majority of sales come from wholesale s such as Costco and beauty shops. According to Morais (2000), the market is fragmented, and in general responsive to word of mouth, hence does not require much advertising or promotions.From the analysis it can be identified that LOreal has followed the Uppsala Model (Appendix 6) in the process of internationalisation. The model illustrates the gradual international expansion of the company by the four portrays. In stage one it was LOreals objective to first build a presence in the American market through a licensee with Cosmair rather than make a large foreign direct investment. This allowed the company to develop market knowledge in order to control the international expansion within the American market. Therefore this method of entry was the most idyllic approach for LOreal, since according to Forsgren (2002) business will enter a new market using the lowest possible resource freight and expand from there on to establish the firm. As a result, LOreal was able to control the l evel of risk and eventually increase resource commitment. In Stage two, LOreal had exported their products through independent representatives in America through regional middlemen. In the third stage, LOreal had made establishment of sales subsidiary through Helena Rubinstein and Ralph Lauren Fragrances. According to Forsgren (2002), in this stage LOreal is able to collect to the highest degree market conditions, leading to a to a greater extent wide market make love and give greater information regarding factors of language, culture and governmental system. In stage four LOreal had established a foreign production facility in the American market.Intensity of Competition for LOrealAs seen on Appendix 4 the level of competition in the cosmetic industry is high however due to LOreal strategic international strategy the company has been able to be the industry leader. This was accomplished due to LOreal developing brands in different market segments and vast distribution channels i n mass market, hair salon products, pharmacies and department stores, (LOreal 2009). Due to the companys operations in different markets, LOreal experiences a high number of challenges from competitors in different markets.According to Drier (2004) in the consumer cosmetics division, the chief(prenominal) competitors for LOreal are Proctor Gamble, Revlon and Unilever. Similar to LOreal, Proctor Gamble had established brands in health, beauty as well as household care. The company receive a major competitor for LOreal due to the companys acquisition of Clairol in 2001, Gillette in 2005 and majority stake in hair care brand Wella in 2003. Hence, Proctor and Gamble was one of the leading cosmetics businesses in the United States, where it had a seventy percent share of the American market from its hair colour brand Clairol (Drier 2004). Hence a key globalisation driver for LOreal was to enter the hair care market, which was accomplished by the acquisition of Redken and rather than mass-market LOreal hard on specialised hair salons.In addition, Unilever had also streamlined their brand portfolio, by developing similar strategies to that of LOreal and Proctor and Gamble. The company had developed a competitive advantage by identifying potential acquisitions. For example, the purchase of American business Chesebrough-Pond, allowed Unilever to make out one of the world leaders in personal care and cosmetics, (Anon 1997).Therefore in order to compete, LOreal has developed their competitive advantage by positioning the business above the drug store cosmetic brands such as Revlon. Their marketing strategy has allowed them to establish a prestigious brand name LOreal has been able to charge high prices.According Trout and Rivkin (2009), in order for companies to charge higher prices, the products should offer prestige, thus consumers will pay a little more for the perceived cling to. Hence, by putting a particular emphasis on their packageing and advertising camp aigns using celebrity models, the company has perceived the brand as elegant among consumers, (LOreal 2010).It can also be argued that LOreals factor of success in the industry is due to being able to develop a comparative advantage over competitors by fashioning a powerful commitment to research and emergence. According to (La Roche-Posay 2005), the company had invested $612 million on research in 2005, which was three percent in de consortment compared to the industry average. As a result LOreal was able to significantly reduce production costs and the purchasing cost of goods for the company fell to 19 percent of sales compared to there rivals Wella, who had cost of twenty five percent, (Morais 2000).Therefore it can be argued that LOreal competitive strategy falls into Porters Differentiation strategy as seen on Appendix 7. This is due to LOreals high research and developing costs and acquisitions of companies such as Soft Sheen which involves producing a range of products that meets the particularized needs of the consumer segments.Thus by creating uniqueness and developing a prestigious brand image, LOreal is able to charge high prices for their products compared to the competitors. According to Porter (2004), this lowers the sensitivity to price of the brand loyal customers and can also act as a, entry barrier for new firms. It is further argue that, this strategy could generate higher revenue than the low cost strategy, due to the development of high barrier to entry and therefore making it difficult for new businesses to enter. However, the higher price is likely to result in a lower volume of sales and thus one strategy will not necessarily mean high profit than the other. It is argued by Kim et al (2005), the competition based strategy of Porter is not sufficient to sustain high business performance and firms should develop new growth opportunities through value innovation. In order for value innovation to be created for both the company and b uyer, the company must discover unused areas of the market and create the new demand. Thereby focus is shifted towards innovation rather than competition.LOreals Organisational StructureIt can be identified from Appendix 3 that LOreal has incorporated a matrix organisational structure. According to Bartlett and Ghoshal (1990), matrix structures tend to be complex and combines two or more organisational responsibilities. For example, the CEO of LOreal is placed at the Head office rigid in France, with the top regional leaders reporting directly to the CEO. The righteousness of the division executives is to manage the brand strategy, global brand sales, profitability and marketing. The contribution Managers (i.e. Asia, U.S.A, Africa and Europe) are responsible for the sales in their region and executing sales strategies. The strategies are developed by brand teams based in their various(prenominal) region and brand teams work mostly with their division executives in order to impl ement effective marketing strategies within the region. Hence, in order to wield an effective level of communication, managers of each country often keep close kinship with the general managers of each brand to identify needs of the specific country. In return, the general mangers provide information on marketing strategies for their region and product development ideas, which then requires co-operation with Research Development.Cogmap, (2009)However, Bartlett and Ghoshal (1990) argue a matrix structure can prove to be unmanageable in the international context, since multiple reporting often leads to confusion and creates overlapping responsibilities. As a result distance is created between language, culture and time.LOreal have invalidate such problems by keeping a strong central solicitude over executives of each division, since it then allows LOreal to identify whether each executive is effectively managing the division and the responsible regional mangers, to ensure there is no redundant work or conflicting interests. Therefore the implementation of the matrix structure has allowed LOreal to save costs, as fewer people are required due to employees sacramental manduction information between different projects. In addition, resource sharing saves time and costs, since those employees engaging in different projects often share related information. Hence it has been identified by Appendix 3, that LOreals executives work on more than one project at a time and keep a regular flow of information about the progress of the company, this has made the company stronger since different departments are working together and not against each other.ethnical Issues for LOrealIt has been identified that LOreal had experienced number of cultural issues, due to their international strategy to become a global brand. When LOreal had decided to enter the American market through licensee with Cosmair in 1954, the company had faced cultural differences. According to Sharma (2010), compared to the European Market, in the American market LOreal was required to have business relationship with local middlemen rather than national distributors in order to distribute product to salons. This had become significantly difficult for the company, since LOreals presence within the U.S. market was limited, such relationships was hard to acquire. In addition, American salons were also unfamiliar with the quality of the products and disagreed on selling such goods.To resolve the issue, LOreals primary goal was now to increase there global presence and was accomplished by strategic international expansion and by taking the company public in 1963. According to Sharma (2010) LOreals strategy was to sell cosmetics through different channels of distribution which in turn affected the macro economic levels of sales. The four types of distribution channels from professional salon hair specialists, beauty advisors, medically trained advisors in pharmacies and self service department stores allowed LOreal to develop their international presence and acquire a competitive advantage over competitors.Political RisksHowever, LOreal had now once faced issues while operating in Europe. After the company had become a publicly traded company in 1963, LOreal was under threat of state control by the French government and feared that the company strategies for international growth would be jeopardised. Hence, LOreal took steps to internationalise the ownership structure, in order to stay the government control by selling fifty percent of LOreal billet to french personal care manufacturer Gesparal and keeping other half(prenominal) of the company publicly traded (Moodie 2004).According to Balassa (1985), the reason for the French government to take ownership was due to threat from international companies. Therefore the French political system considered that it could provide security to the French communities trade by subsidising and directing publicly owned c ompanies. Since, LOreal had become publicly traded in 1963 the company was attached to come under state influence.Using Yips model (Appendix 8), it can be identified one of the key globalisation drivers for LOreal to enter the cosmetics market is growth of global and regional channels. This is a key market driver, since it has allowed the company to develop their distribution channels worldwide. By entering the American market and acquiring ready established brands, LOreal was able to access the acquired companys resources. Another market driver can be identified from Appendix 1, which indicates that America has an aging population, therefore demand for LOreals anti-aging products have increased. These products success were a result of the companys extensive investment in research and development. It has been identified that global acquisitions by consumer product companies also acted as a competitive driver. Since, the existence of various global competitors had indicated that the industry is good for globalisation where global competitors have the cost advantage over local businesses, according to Bartlett and Ghoshal (1989). One of the key reasons for LOreals globalisation development is due to the lowering of trade and investment policies internationally, where GATT (General Agreement of tax and Trade) have made free trade agreements between participating countries. According to Hill (2007), this can also benefit the countries that do not have a large amount of sources to utilise their resources and hence encourage foreign direct investment companies to invest.