L’oreal’s Way to Success in the European Haircare Products Industry Introduction: L’oreal, the name of the cosmetics giant, appears with high frequency in nearly all world-class newspapers and magazines in recent times. There is a striking headline in the Independent (London, England) on Feb 21, 2004 p54, “L’Oreal builds on two decades of growth as profits soar. ” The news is “L’oreal has set its sights on notching up two decades of consecutive annual double-digit growth after reporting a 13.
5 per cent rise in profit last year. ” Lindsay Owen-Jones, chairman, showed his confidence for the rate of internal sales growth next year.
Maybe it is not too difficult for a company to rank first of its annual sales growth. But it seems a mystery for a company to keep its position of market-leader in the world with annual double-digit growth for 19 years and even more enigmatical for a company in the cosmetics industry. How can L’oreal compete against its rivals and gain today’s success? Let’s go back to 1997.
At that time, L’oreal was the market leader in France and at the end of June, after considerable coordination between company headquarters and subsidiaries, Lindsay, stated the company’s new mission : Make L’oreal Elseve a leader throughout Europe.
Though shampoo was used by 83. 5% of the population, there was little brand loyalty and it was extremely difficult to create any. A widespread belief in Europe is that changing shampoos frequently was good for the hair because otherwise it would get used to a particular shampoo and the result would not be so satisfactory.
The important reason is that shampoo is a product which can help L’oreal penetrate into all households by all kinds of people. Leadership in the shampoo could give L’oreal a considerable boost in its brand recognition and make it accessible to the young customers and males.
The ardousness ahead of L’oreal was obvious. This article will base on L’oreal, the pilgrim’s progress, to analyze what critical success factors of L’oreal are to create its competitive advantage and how L’oreal has successfully sustained its advantage with the marketing strategy to underpin its position step by step in the European haircare market. Critical Success Factors of an Organization Critical Success Factors in General Johnson & Scholes states (p. 151) that critical success factors (CSFs) are those product features that are particularly valued by a group of customers and, therefore, where the organization must excel outperform competition. ” Hooley et al (1998, p. 45) thought that “ The essential factors in choosing how to create the competitive advantage are that it must be on a basis of value to the customer (lower prices, superior quality, better service). ?Core Competences: Hamel and Prahalad (cited Lynch 2003, p. 235) said that “Core competence are a group of production skills and technologies that enable an organization to provide a particular benefit to consumers …. hey act as a fundamental resource of the organization. ” Johnson & Scholes (2002, p. 156) thought that the most important feature of core competence is robust, i. e. being difficult to imitate. The aim can only be obtained through the constant innovation. The following is the analysis of L’oreal’s critical successful factors. ?Resources Creating Competitive Advantage 1. Processes, Products, Services 2. Human Resources 3. Information 4. Financial Resources Porter (1985) suggests that the above four kinds of resources can create a competitive advantage and that cost leadership and differentiation strategies could be adopted.
The analysis of L’oreal’s success will be illustrated as follows. L’oreal’s critical successful Factors ?Core competences: Constant research and innovation— the determinant of L’oreal’s competitive position 1. Historical analysis: L’oreal was founded in 1907 by the chemist Eugene Schuller, since then the Group carried on the tradition that put research at the centre of his development strategy. From the review of L’oreal’s history, it is obvious that result of research and innovation is the determinant of its competitive position. . 978: Elseve had a positioning as a shampoo for damaged hair and was seen as too rich, too nourish and too heavy to be used on a daily basis. But at this time, the frequency in the use of shampoos increased dramatically and shampoos which has the hasteristic of being gentle and mild enough to be used every day became more appealing to consumers. Timotei, Ultra Doux and MIxa baby– a baby shampoo became the market leader because it was as so mild that it can be used every day. When planning Elseve’s brand extension, L’oreal decided to offer separate products for frequent and less- frequent shampooing.
This gave rise to products such as Elseve Baslsam, Elseve Frewuence, Elseve Volume Nd Elseve for oily hair. But the positioning has not made much improvement. 1987: Following a new product launched by Timoei, the market had its new trend: active ingredients were in fashion and products started to introduce natural ingredients. The Elseve products were renewed and L’oreal decided to target new market segments. The idea was to offer products for all types of hair, enriching the formula with a different active ingredient for each type of hair. 994: L’oreal developed a silicone-based formula which treated each stand of hair individually, leaving it very soft and easy to comb as it was thoroughly detangled. Consumers noticed this immediately and Elseve successfully enter the normal hair segment of the market. Thereafter, L’oreal profited from the advantage of polyesters and silicone. The successful combination of the two ingredients in the shampoo formula gave L’oreal a major advantage over its competitors and escalated its competitive position. 1995: The company launched Elseve Multicitamines and added the Technicare line to the Elseve product range.
Elseve Multivitamines used a silicone-based formula that tested better than the composition of Procter &Gamble’s silicone-based Pantene which at the time was the European market leader. Launching Elseve Multivitamines enabled Elseve to increase its target segments, addressing not only consumers with damaged hair or other hair care problems bur also people with normal hair. The new formula was the milestone of L’oreal’s shampoo battle. The innovation of research brought a series of good results: increase of sales and so did prices.
The high revenue made it possible to increase the advertising budget, further increased its market share. Since then, with the leading position of the new skills and constant development as well as successful implementation of marketing strategy, L’oreal went steadily towards its No 1 position. 2. Panorama of Research & Development in today’s L’oreal: The continuous innovation has helped L’oreal gain its competitive advantage and kept on escalation of its competitive position, from a French leader to be a European Leader and now the world leader.
L’oreal regards research as the heart of the business. The investment in research is much higher than that of its rivals. 1)Delicate combination of Research and Marketing: a)A balance between the creative R&D and marketing-led R&D has kept L’oreal launching new viable products continuously. i. Advanced research: this is a long-term research with the aim of developing new ingredients, better understanding and improving the effectiveness of new ingredients and products as well as better understanding its toxicological effects.
For example, marketers wanted a natural fruit-based shampoo range for the European market. It took 10 years of hard R&D to develop the formulae for the Fructis range. L’oreal is reasonable to give scientist freedom to work on their long-term ideas. Ultimately, in July 1996 in France tests showed spectacular results of the Fructis range on the quality of hair. Within the first six months alone, it had sold nearly 5 million units and since then it has helped L’oreal capture 28 percent of the European shampoo market by being rolled out into not only European market but also in Scandinavia, Russia and Chile.
On the health front, an International Safety Assessment Department of L’oreal looks in-depth at the toxicological profile of all the ingredients used and assesses the safety and tolerance of all formulations before they are used and put on the market. ii. Applied research: this level takes over ideas from both L’oreal’s own advanced research and from what has been done outside the company to refine new materials and put them into practice. It will take a long time to evaluate its effectiveness, its acceptance in use.
For example, Research Institute in Chicago is dedicated to advanced research to improve understanding of the properties and specific requirements of the skin and hair of people of African descent.. 2)During the development work of new product, it is quite important of the researchers not lose sight of industrial reality. There more formal contacts between scientists and marketers which is unusual in other companies. Some formal meeting held usually including the contents such as: one day per month to discuss the progress of current projects; two or three meetings per year for the scientists to reveal their goodies to the marketers. )Renovating faster than competitors: In the hypercompetitive market conditions, it is no longer enough to plan for sustainable positions. In order to gain advantages, firms must be prepared to pre-empt imitation by others. With continuous launch of new products and brands, L’oreal hopes to make a strong and immediate impact on the market. ?Resources Creating Competitive advantages: Companies can add value by creating competitive advantage through the incremental management of the following resources. 1. Processes, Products , Services: )Selecting Raw materials and close relationship with suppliers: L’oreal pay much attention on the selection of the raw materials. With the aim of product safety and effectiveness, all the 2,800 raw materials used are continuously being renewed at a rate of 150 a year. The suppliers all over the world manage L’oreal to obtain the highest natural ingredients. L’oreal set out to promote and develop the use of raw materials from natural, renewable sources. In 2002, 39. 7% of their raw materials in volume terms came from plants.
These new raw materials are the product either of L’Oreal Research or of research carried out by suppliers. A constructive ongoing dialogue with its suppliers plays an important role during the process. Using this diversified approach, progress has already been made in raw material selection. Partnerships allow them to establish a close, long-term relationship with suppliers based on innovation, safety and quality. 2)Reducing operating cost of products: It streamlines packaging, gains economies of scale in the aggressive management of the top performing brands.
Elseve (Elvive, El’Vital) shampoo bottles have been improved and now require almost 25% less material, which equates to almost 450 tons of polyethylene a year saved. In addition to this reduction, the indirect effects on transport and recycling are also minimized. 3)Address possible segments: L’oreal has made an elaborate and deep study so as to address possible market segments. It has divided up the total European market according to the geographic segmentation, age, gender, typology, nature of hair, washing frequency, and amount used (See Appendices 1 to 4).
The aim of L’oreal is to “seeks to make accessible to women and men all over the world”. L’oreal launched the brand L’oreal’s Studio Line for men and P’tit Dop for children. 4) Market Targeting: L’oreal makes deep and thorough survey about the people’s attractiveness of different European countries. For example, Germany was more price-oriented than other countries, so using the strategy of price reduction can increase Elvital’s market share increased significantly. Another example is that Spain was the European country with the most greasy and least straight hair.
The market accepted the introduction of new products that contained technological innovations. Natural ingredients were very well accepted. 5)Umbrella brand strategy: Competing with a number of different L’oreal brands enabled the company to position its products in more market segments and compete for market leadership by adding all together sales for its different brands. At the same time, product cannibalism was avoided by designing different positioning strategies: every single product invested in creating its own personality. )Broadest Distribution channels: L’oreal is able to make its most advanced technologies available to a large number of people. All the Group’s brands, particularly those whose purpose is to provide a wide group of people with the most innovative products at affordable prices, make the latest discoveries more accessible. 7)Communications Srategy: L’oreal’s communications strategy involves signing contracts with major international stars from the world of show business and fashion to make them the spokespersons for specific items. In the UK, Jennifer Anniston, an actress on the leading TV sitcom “Friends” was chosen as the brand spokeswoman.
Jennifer Anniston transmitted a modern, powerful image because she was a famous actress and very popular among generations aged 15 to 35. She was also very admired for her beautiful, stylish hair. The Ceramide R molecule , which was able to “Wash the strength back into your hair. ” , was claimed by its advertising for the entire range in the UK. Delicate design of the advertising helped Elvive capture more than a 6% market share in 1997, and rose to 8% in the following year, making it the second –ranked brand on the market. Another example is about the leading brand Elvive.
Elvive tries to capture the essence of pleasure using advertisements that sound tempting: “Because I’m worth it. ”, says L’oreal. (Principle, Kotler, p. 459) 2. Human Resources: 1)Implement the best possible working conditions and try to make employee relations as personal as possible. 2)Recruit talented people from multicultural backgrounds and develop diversity. 3)Offer Sharing achievements: In 2003, L’Oreal paid a total of €43 million in bonuses under the WPS scheme for the 2002 financial year, equivalent to an average of two weeks’ salaray. 4)Motivate people, particularly through a highly dynamic approach to remuneration and mobility. )Promote personal and professional development through the training programs offered by the Continuing Education and by comparing experiences. 6)Developing partnerships with Universities: The Group’s involvement with universities has been stepped up and it now maintains 120 close partnerships all over the world. These take different forms, including: financial backing for chairs, such as those at Oxford (Business School) 3. Information Resources: Information is one of the most basic ingredients of a successful marketing strategy. (Keegan, p. 189) Another job for applied research mentioned above in L’oreal is to watch the competition.
About 20 people in L’oreal do nothing else but surfing the web and getting hold of 1,000 new products of other companies. Between 700 and 800 of them are examined in minute detail. 4. Financial Resources: Strategy is influenced and constrained by the financial resources of a company. John & Scholes said (p. 348), “The advantage of ‘deep pockets’ is that a competitor can withstand an intensive competitive war. The organizer can gain competitive knowledge worldwide and also move resources wherever they are necessary either to preserve their own interests or to tackle competition.
L’oreal’s success in the European started after it created its competitive advantage in its financial resource. In 1995, the success of new formula allowed L’oreal to increase the price of Elseve products by 20%. Increased revenue meant that Elseve could spent more on advertising. This enabled Elseve to address more segments with differentiated messages, thereby further increasing its market share. The Marketing Environment Kotler et al (1997, p. 64) stated that “Managing the marketing functions would be hard enough if the marketer had to deal only with the controllable marketing-mix variables. The company operates in a complex environment (macro- and micro- )which consists of uncontrollable forces and actors which affect the company’s ability to perform well. Successful company is able to analyze its environment and so that it can avoid the threats and take advantage of the opportunities. ?The Macro-Environment This consists of a number of broader forces that affect the company, which are largely uncontrollable, a new product or marketing program is likely to be more successful if it is in-line with strong macro environmental trends rather than opposing them. 1. Political:
Political changes in the 1990s meant that almost all trading nations function with market –based economies and their trade policies have tended to encourage free markets between nations. (Johnson , p. 105) Governments are breaking up monopolies and introducing more pro-consumer legislation concerned with making the customer the ultimate decider on what will and will not to be produced. (Wright, p. 5) 2. Economical: With the adoption of the euro as a standard currency, many political boundaries will fall. By removing currency conversion hurdles, the switch will likely increase cross-border trade. (Kotler, et al , p. 59) 3. Social cultural/Natural: There is an increasing convergence of markets world. In some markets, customer needs and preferences are becoming similar 4. Technological: The fast development of technology is the key characteristic of environmental turbulence. It brings the high innovation turbulence. New technology creates new markets and opportunities and also makes markets and companies obsolete. ?The Micro-Environment: It includes the company itself, suppliers, customers, and competitors as well as public. The above analysis of L’oreal’s critical successful sectors has made relevant detailed statement. SWOT Analysis:
Understanding the environment, taking good advantage of the opportunities and avoiding the threats are important elements of L’oreal’s success. SWOT analysis is useful for a good understand of L’oreal. Strength: L’oreal’s high speed of renovation (over 3,000 new formulas) and the absolute competitive advantage of technology provide solid barriers for the potential entrants to entry. Its products cover all possible segments. The aim of L’oreal is to “seeks to make accessible to women and men all over the world”. L’oreal is able to make its most advanced technologies available to a large number of people in all areas of products.
All the Group’s brands , particularly those whose purpose is to provide a wider group of people with the most innovative products at affordable prices, make the latest discoveries more accessible. It can be said that L’oreal has managed to satisfy the desire of different segments of buyers. All these strength made it quite difficult to be substituted, at least provide the delay of being substituted. L’oreal is adept at continuously bringing innovation to the marketplace and maximizing the use of established brand names with new products targetd at these subsegments and niches.
The advanced research result make many promising question marks become stars. Based on the solid financial resources, the stars will become cash cows as their markers mature. So many stars and cash cows of L’oreal shine actively in the world. Every product’s advantage is temporary, and will be eroded. However, long-term advantage of L’oreal maybe sustained through a series of temporary advantages. Weakness: L’oreal is present in 130 countries, has 290 subsidiaries. Because of social and cultural difference, it is not easy to make the management is efficient in each subsidiary.
The large distribution may meet unexpected trade trouble because of political risks, such as loosing all control, ownership of assets and market access. (Bradley, p. 133) Opportunities: In 1995, the French haircare products market was saturated at that time. The success of the new fomula made L’oreal occupy the capability to enter the European market. The opportunities to enter the European market gave L’oreal a shot in the arm. Globalization and deregulation as well as the emerging of European Union speeded up the entry. In haircare industry product, customers’ needs and preferences of different countries are becoming more similar.
The trend of healthy and shiny hair has gained popularity. All these opportunities offered L’oreal more space to develop. Threats: Facing powerful threat from world famous brands of Procter & Gamble, Unilever etc, L’oreal has had to invest heavily in innovation. The Group has 3 percent of consolidated sales devoted to research, 2823 people engaged in cosmetics and dermatological research, 501 patents registered in 2002. By comparison, Procter & Gamble, Unilever, spend only 1. 7 percent and 1. 5 percent respectively of their cosmetics turnover (which is 20 percent lower than that of L’oreal in any case. The threat can be low if L’oreal can keep on developing patents and launching new formulas faster than other Group. (Brassington & Pettitt, p. 385) Conclusion: L’oreal’s opportunities outperformed the rivals’ threats and its weakness seemed much less important than its strength. The whole trend of environment is in favor of L’oreal’s progress. It can be convincible that L’oreal’s powerful core competence of constant innovation and flexible, efficient marketing strategy has forged and sustained L’oreal’s success and bring it a bright future. References: . Kotler, P. , and Armstrong, G. , 1997. Marketing: an Introduction. 4th ed. Harlow: Prentice Hall. 2. Wright, R. , 1999. Marketing: Origins, concepts, Rnvironment. 1st ed. London: Thomson Learning. 3. Doyle, P. , 2000. Value-based Marketing: Marketing Strategies for Corporate Growth and Shareholder Value. 1st ed. Chichester: John Wiley & Sons, Ltd. 4. Keegan, W, J. , 2002. Global Marketing Management. 7th ed. Person Education, Inc. 5. Bradley, F. , 2002. International Marketing Strategy. 4th ed. Harlow: Prentice Hall. 6. Brassington,F. , and Pettitt, S. 2003. Principles of Marketing. 3rd ed. Harlow: Pearson education limited. . 7. Kotler, P. et al . 2001. Principles of Marketing. 3rd European ed. Harlow: Pearson education limited. . 8. Johnson, G. , and Scholes, k. , 2002. Exploring Corporate Strategy. 6th ed. Harlow: Prentice Hall. 9. Hooley, G. J. , et al. 1998. Marketing Strategy & Competitive Positioning. 10. Porter, M. E. , 1985. Competitive Advantage. Free Press. 11. Prahalad, C. K. , and Hamel, G. , The core Competence of the Corporation. Harvard Business Review (May/June 1990), p. 79-91.