Strategic Analysis of L’Oreal in China

The paper gives an overview of L’Oréal: its short history, the current and previous strategy adopted by the company, the strategy analysis of its external and internal environment, its strategy formulation and the possible options. The French company has strong financial base, 45 factories and 18 research facilities worldwide. It is a market leader in the cosmetics industry with 28 international brands, operating in over 130 countries. The company could use their existing research facilities and production capacities under the strong global brands name to implement the propose new strategy to grow their business revenue.

1. INTRODUCTION
With the growing competition in the cosmetics industry and the saturation of domestic markets, companies are forced to exploit international new markets by internationalize their operations for the intention of growing the business besides surviving (Souvik, 2006). 1.1. Organization Overview

L’Oréal, headquartered in Clichy, France is a global cosmetics manufacturing company. It offers a range of skin and hair care products, make-up and perfumes under 28 international brand in over 130 countries and registered 624 patents in FY2013 (L’Oréal, 2014). The product portfolios are divided into three branches: cosmetics, body care and dermatology. At the end of 2013, the company employed 77,500 people (L’Oréal, 2014). In FY2013, L’Oréal recorded total revenue of 2.98 billion Euros with an operating profit of 3.875 billion Euros, an increase of 4.8% over FY2012 (L’Oréal, 2014). 1.2. Mission

L’Oréal’s mission is to offer the best innovated cosmetics in term of quality, efficacy and safety to all genders worldwide (L’Oréal, 2014).
1.3. Goals
The company aims to win over another one billion consumers worldwide through products innovation to meet individual consumer’s beauty needs and desires (L’Oréal, 2014).

1.4. Current Strategy adopted by company
The company uses acquisition strategy to expand its business portfolio and new distribution channel in potential luxury cosmetics products market (Euromonitor, 2012). It also uses multi-brand strategy to expand internationally, thus it gives the company a flexible portfolio which helps to drive yearly growth globally (Euromonitor, 2014). In order to strengthen the company’s brand image, it uses brand segmentation strategy for its strategic product launches in the target market segment (Euromonitor, 2012). Product differentiation strategy is use to enable the company to make their cosmetics products accessible to more consumers thereby helping the company to grow its customer base. 1.5. Previous Strategy adopted by company

The company started off with a French chemist developed and marketed hair dye to hairdressers throughout France. The previous strategy adopted by the company is constant product innovation (Euromonitor, 2012) and long term research and development strategy for a range of haircare products: hair dye, hair color, hair spray, coloring shampoo, skincare products, perfumes and dermatology beauty products to stay competitive in the beauty and personal care industry (L’Oréal, 2014). 1.6. Assignment Objectives

The assignment objectives is to analyze the business strategy of L’Oréal’s key success in China’s cosmetics industry.

1.7. Assignment title
The assignment title is ‘‘Analyzing the business strategy of L’Oréal’s key success in China’s cosmetics industry’’.

2. STRATEGIC ANALYSIS
2.1. External Environment Analysis
The paper will discuss how the macro-environment in China will affect the survival of L’Oréal in the luxury cosmetics industry. The study of the macro-environment in China enables the company to have an overview of the China market thus the company can develop competitive advantage and effectively identify opportunities and threats especially for effective
decision making (Yuksel, 2012). 2.1.1. PESTEL Analysis

Political
China is a single party state which is governed by the Communist Party of China (Sharma, 2012). It has high tariffs which is on decreasing slope (Sharma, 2012). China has a complex and frequently changed taxation system, thus change in the taxation system may limit the revenue growth in China. Economic

China’s economy is the world second largest (Economics, 2014). The private sector is growing rapidly and the market-oriented China’s economy provide a platform for L’Oréal to expand its business portfolio (Economics, 2014). Social

China has a population of over 1.3 billion (Statistics, 2014). The population density of China in 2014 is 145 people per square kilometer (Statistics, 2014). China’s latest family planning policy will benefits parent who is an only child as the family can have two children (Statistics, 2014). More than 81 percent of Chinese students have a secondary degree (Statistics, 2014). The country has a big educated population but it is facing an ageing population (Statistics, 2014). The change in China’s family planning policy and the ageing population provide L’Oréal an opportunity to grow their beauty and personal care revenue. Technological

As of 2011, China has 500 million internet users (Sharma, 2012). The increasing population of internet users and online shopping open up e-commerce market in China. The growing trend of internet savvy consumers provide a platform for L’Oréal to explore social media marketing and mobile application of their luxury cosmetics products in China. Environment

China’s business environment is shifting from a producer to becoming a world innovator (Lennard, 2014). There is a growing trend that the labor cost is rising although it is still cheap compared to developed countries (Lennard, 2014). There is a growing skills among the population and the graduates from the field in Engineering, Manufacturing and Construction accounted 37.7% of all graduates in 2013 (Lennard, 2014). With the trend of more educated workforce, it will drive up the labor wages scale thus increase L’Oréal’s overhead labor cost in China. Legal

With the new policy of removing mandatory animal testing for cosmetics in China (chemlinked, 2014), the change in legal policy gives L’Oréal an opportunity to expand their products portfolio thus open up different products brand revenue stream for the company. 2.2. Industry Analysis

2.2.1. Porter’s Five Forces
Porter five forces is used to analyze the competition source in China’s luxury cosmetics industry.

Threat of New Entry (Moderate)
New entrants may be attracted to the China’s luxury cosmetics industry due to its strong growth (Marketline, 2014). However the entry barrier is high due to China’s government imposed strong regulations covering all aspects of the market on the products labelling, testing methods and safety (Marketline, 2014). Moreover new entrants may not have the financial resources to compete with the bigger players who have strong financial capital to do capital intensive form of marketing (Marketline, 2014).

Threat of Substitutes (Low)
There are few substitutes for luxury cosmetics products (Marketline, 2014). Mineral make-up products are one of the possible substitutes.

Supplier bargaining power (Moderate)
Suppliers switching course is low due to the range of alternative raw material available. Only suppliers who can fulfil China’s regulatory criteria may have a moderate bargaining power (Marketline, 2014).

Buyer bargaining power (Moderate)
Corporate buyers, retailers, are positioned at the end of the value chain thus they are obliged to offer what buyers want in the market (Marketline, 2014). As retailers need to maintain their own sales volumes, they must keep inventory stocks for popular luxury cosmetics brands. The leading players in the luxury cosmetics industry are mainly large multinationals which have huge marketing budget to engage well-known celebrity to advertise their products thereby helping the companies to build their brand loyalty (Marketline, 2014). Luxury cosmeticss brands will attract many corporate buyers who want to sell their products thus the buyer bargaining power is moderate.

Competitive Rivalry (Moderate)
L’Oréal is the leader among the top four players in the luxury cosmetics industry which it holds 30.3% of sales alone (Marketline, 2014). Consumers in China are more likely to buy leading luxury cosmetics brands thus corporate buyers are very unlikely to switch between market players (Marketline, 2014). Competitive rivalry in the cosmetics industry is moderate as most of the leading market players are geographically diversified (Marketline, 2014).

2.2.2. Conclusion of Porter’s Five Forces
Among the five forces, the company needs to be aware of its rivalry changes in the markets as its biggest competitor, Estee Lauder, may overtakes its market leader position if L’Oréal do not strengthen the positioning focus of its luxury cosmetics products globally.

2.3. Key Factors of Success
L’Oréal uses its global brand to adopt the mix so as to generate economies of scale in order to adapt in China’s luxury cosmetics industry. The company’s key factor of success are as follow : Strong international brands

Strong distribution networks
Strong financial resources
Brand segmentation in target market segment
Constant products innovation
Long term investing in Research and Development
Leverage on economies of scale by gathering different segments for product production Investing in communication
Building a pool of loyalty consumers

2.4. Internal Environment Analysis
2.4.1. Core Competence
The company core competence is its product innovation, long term research and development on cosmetics products, multi-brand range of products which it offer through their strong distribution network worldwide.

2.4.2. Synergy
The company is using the synergy of its international brand reputation which is well-known for using its research facilities in creating quality cosmetics products.

2.4.3. Corporate Culture
The company adopts an adaptability culture which enables them fast ability to interpret and translate any signals of environment changes to maintain its market leader position in the cosmetics industry.

2.4.4. SWOT Analysis

2.4.5. Conclusion of SWOT
The SWOT analysis identify the danger of external uncontrollable forces that the company may face. Cosmetics products are not a necessity products thus in the event of a global financial crisis, the revenue of L’Oréal is likely to be affected.

2.5. Internal Resources Analysis
2.5.1. Tangible Resources
Financial Resources
In FY2013, L’Oréal has an operating profit of 3.875 billion euros (L’Oréal, 2014). Thus the company has strong financial base which enables them to generate internal funds for its global marketing activities. Organizational Resources

The company has formal reporting structures which enables them to manage its
global operation and aligning all internationals offices business objectives with its mission and goals. The Operations Division oversees the entire 7 lines of business production supply chain which enables them to achieve total quality from raw materials to end product delivery (L’Oréal, 2014). Physical Resources

The company has 45 factories worldwide which enables them to maintain its production quality control (L’Oréal, 2014). The research facilities give L’Oréal its distinctive competencies against its competitors. Technological Resources

The company has high technology machinery and equipment in its research facilities and manufacturing plants. It also own patents, trademarks and trade secrets for its innovated cosmetics products which contribute to the company’s valuable assets. 2.5.2. Intangible Resources

Human Resources
The human capital, which enables the company to leverage on the employee diversity, contribute to its current business success. Innovation Resources
The company has a pool of researchers and scientists whom creativity and innovative ideas provide its scientific capabilities and gives it the capacity to innovate (L’Oréal, 2014). Reputational Resources

The knowledge and experience of the company’s researchers and scientists allows them to use advanced and applied research methodology thus ensuring the reputation of the cosmetics products’ quality and safety to consumers (L’Oréal, 2014). The company has a strong history for its brand name globally thus consumers’ perception of L’Oréal’s multi-brands range of products are reliable and of high quality.

3. STRATEGY FORMULATION
3.1. Corporate Strategy
The company needs to be more focus on its brand reputation, product innovations and global marketing to ensure its product quality. Hence L’Oréal formed a joint-venture with Nestle group in search of new niche market.

3.2. Business Strategy
The company uses business strategy to compete in the cosmetics industry by creating new innovative products to cater to the changing trends and needs of consumers.

4. STRATEGIC OPTIONS
All profit generating company’s objective is to generate profits thereby maximizes shareholders wealth. 4.1. Identify the Strategic Options available to Company
Based on the SWOT analysis, we consider two possibilities to improve L’Oréal’s current situation in the China beauty and personal care industry. Option One
With the growing trends of consumer going for foot reflexology, the company can create foot care personal products which can leverage on its strong brand name for the luxury and mass markets. Option Two

The company can innovate and customize existing hair and skin care products targeting male consumer between age of 18 and 50 years old.

5. STRATEGIC CHOICE
5.1. Selected our strategic choice
We select option two.
The foot reflexology businesses in China is booming with many shops along the street. L’Oréal can promote to the foot reflexology business owners which can become the major corporate buyers for the foot care personal products.

6. IMPLEMENTATION
The implementation process for the selected strategic choice is very easy. The company’s existing technologies can be used to produce the new range of foot care products thus maximizing any unused resources and capacities.

7. RECOMMENDATION
The company can leverage on its existing production capacities and unused
resources to manufacture the new range of products by achieving economies of scale to position cost leadership for the new target market segments. Hence the company is able to gain new market shares in the foot reflexology business. The company must act quickly for the manufacturing of new foot care personal care products before its competitors gain the upper hand.

8. CONCLUSION
L’Oréal started off as a very small company selling hair dye to hairdressers throughout France. The success of the company lies in its organization structure and strategic management build on top of its constant product innovations and long term investment in research and development. Its integration of core competence, synergy, corporate culture, internal resources, strategy formulation, innovation strategy, brand segmentation strategy, product differentiation strategy and acquisition strategy help to contribute the success of the company.

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