Prerequisites for Success of Este Lauder - Research Proposal Example

Estée Lauder Anti Wrinkle Eye Cream in the Middle East Table of Contents 1.Introduction 2 2.Company Background 2 2.1.Target Market 3 2.2.Results in the Middle East 4 2.3.Product/Range/Brand 4 3.Industry Analysis 5 3.1.Porter’s Five Forces Analysis 5 3.1.1.Industry Analysis using Five Forces Tool 7 3.1.2.Company Analysis 9 4.1.Resource Based View 9 4.2.Relationship Based Analysis 13 3.1.3.Conclusion 14 3.1.4.Recommendations 15 References 16 1. Introduction Cosmetic products are important consumer products which plays an essential role in everyone’s life. Other than the traditional cosmetic products, such as make-up and perfumes, it also includes products for individual hygiene. Nowadays, the cosmetic industry is driven by innovation which includes new colour pallets, treatments for particular skin types and unique formulas meant to meet different needs. It is seen that most cosmetic products have a lifespan of less than five years, and thus manufacturers have to reformulate 25% of their products each year. The need to keep products constantly improving in order to stay ahead in the competitive market where more choice and efficacy are required is felt by the manufactures. This project tries to find a marketing strategy for an anti wrinkle eye cream produced by the company Estée Lauder. It makes an analysis of the market trends for the cosmetic industry and develops a strategy using the Five Forces Business Strategy developed by Michael E. Porter. It develops five forces that measure the competitive intensity and attractiveness of the market. It suggests ways, in which the company can apply its core competencies, build and expand its market in the Middle East. 2. Company Background Estée Lauder is a US company based in New York City. It sells cosmetics, perfumes and “skin care products”; its major brands include “Estée Lauder and Clinique”, “Bobby Brown” and “Tom Ford” (Know More, 2010). According to the results of the fiscal third quarter, the company’s net sales was $1.86 billion. This was 10% more than the previous quarter. Net sales increased by about 5% from the previous year. Net earnings of the company in 2010 were $57.5 million, against $27.2 in the year 2009. Its main sales revenue comes from its international business in Asia Pacific region. It also witnessed sales increase in America. 2.1. Target Market Figure 1: Estée Lauder’s Sales Results by Product Category (FAQs.org-a, 2010) Skincare accounts for maximum sales of the company. Skincare sales in Asia Pacific, Europe, Middle East and Africa grew by double digits, while that in America grew by single digit. The company has gained strongly form the sale of products like “Advanced Night Repair Synchronized Recovery Complex” and “Hydrationist Maximum Moisture Creme and Lotion” (FAQs.org-a, 2010). Figure 2: Estée Lauder’s Sales Results by Geographic Region (FAQs.org-b, 2010) 2.2. Results in the Middle East Estée Lauder’s travel retail business improved significantly and resulted in huge sales volumes and growth in profits in Russia and the Middle East. But there were also significant decline in sales in France, Balkans and Benelux. As the Company has a large market in the Middle East, it can look for expanding the market in the region. Thus it is seen that Middle East would be a potential region where it can introduce the anti wrinkle crème. 2.3. Product/Range/Brand Estée Lauder has wide range of brands and products. Some of them are Clinique, Aramis, Lab Series, Prescriptives and Origins. Certain brands are acquired by Estée Lauder, like MAC, Bobby Brown and La Mer. The Company’s perfumes are famous all over the world. These include Tommy Hilfiger, Kiton, Donna Karan, Michael Kors, Missoni, Sean John and Tom Ford. In the year 2004, the Company began to create its own brands and sold them through alternate distribution channels. (Estée Lauder, n.d.). 3. Industry Analysis The global cosmetic industry is a multinational industry which makes transactions worth more than billions of dollars. Human beings have used cosmetics for times immemorial. Among the major industries is L’Oreal which was started in 1909, producing harmless hair colouring products. Then there was the advent of Revlon. These are two most competitive companies. In the west, cosmetics were used mainly by people in their middle ages and were used by upper class of society. By the middle of the 20th century its use had spread to all societies of the world and across all ages. Cosmetic and especially skin care products is growing at a fast pace across the world. There is a tendency of consumers to be drawn towards natural products to ensure a healthy lifestyle. Good health has always been a cause of concern for consumers all over the world. Consequently the demand for adding natural ingredients and additives used in cosmetics has been increasing. Use of synthetic ingredients is also undergoing negative publicity. 3.1. Porter’s Five Forces Analysis In this project Porter’s Five Forces have been used to analyse the cosmetic industry and its competitors. It serves as an important tool to understand the industry structure and its strategic processes. This model is based on the fact that any corporate strategy should be framed according to the opportunities and threats faced by the external environment of the organisation. It says that any corporate strategy should take into account the changing structure of the concerned industry the effects it can have on the existing industry. He has identifies five forces that influence each industry and its market. These forces are the determinants of intensity of competition, its attractiveness in the market and thus the profitability of the industry. Strategy of the organisation should be to alter these competitive forces as an attempt to improve the organisation position. Estée Lauder has been suggested to develop a strategy based on these five forces. The five forces are mentioned as the following: Threat of Substitutes; Threat of New Entrants; Bargaining Power of Suppliers; Bargaining Power of Customers; and Competitive Rivalry between Existing Players Threat of New Entrants: Competition will always be higher if there is possibility of new entrants in the market. They can change the existing determinants of the market, like market share, loyalty of customers and prices. This threat is determined by “economies of scale” i.e. the minimum required size of the organisation for profitable operations. It is even influenced by loyalty of customers, scarcity of resources, whether the existing market leaders have complete access to raw materials. Threat of Substitutes: Threat from substitute products exists due to the presence of alternative products at low prices and which are able to perform equally well. They pose the same problems posed by the new entrants. They are determined by factors like, customer loyalty, customer relationships, performance levels and prices of substitutes. Bargaining Power of Suppliers: Suppliers refer to those sources which provide inputs required in the production of goods and services. Usually suppliers are said to have more bargaining power if they are less in numbers each serving a large portion of the market. Corporate also have to see if there is existence of substitute products or not. Lack of substitute products increases their bargaining power. Other factors include price sensitive customers, ability of customer’s top produce the products, the product is not strategically important to the customers. Bargaining Power of Customers: This refers to how much power can the customers impose on volumes and margins. Customers can have more bargaining power if they purchase in large amounts. The industry comprises of a large number of small suppliers who are operating at high fixed costs. It is also influenced by Government policies and legislation. Customers can also have high cost of switching which increases their bargaining power. Competitive Rivalry between Existing Players: These forces are the main determinants of the present intensity of competition in the market. They are influenced by the existence of many players, mostly of the same size applying similar corporate strategies. Lack of differentiation between the products and their players also creates competition between the present players. This is also influenced by growth of the market and when the costs of exiting from the market are high. 3.1.1. Industry Analysis using Five Forces Tool Threat of New Entrants: Since anti wrinkle creams have been growing in importance since the past few years, there remains a threat of entrance of new companies to begin producing the same products. At present since the market is not saturated with this product and there is existence of demand for the product, Estée Lauder may have to face competition of new entrants in the existing market. Threat of Substitutes: Major substitute for the company are anti wrinkle serums available in the market which serve the same purpose. They are also used for the purpose of maintaining youthfulness. With the entrance of Botox injections attractiveness of the anti wrinkle cream might reduce. But the advantage is that they have side effects, like headaches, nausea and muscle weakness. Bargaining Power of Suppliers: Suppliers for Estée Lauder also supplies to other top cosmetic companies. There is also existence of large number of such players in the market. In this situation they are in a position to increase their power to bargain. With the growth of the cosmetic industry demand for suppliers of ingredients have also increased. As a result they are indirectly increasing the market price if products. Bargaining Power of Customers: Consciousness among people to maintain glamour and beauty is a growing phenomena prevailing among all age groups. With the increase in the number people using these products, their bargaining power has also increased over the time. Now they are in a position to influence product prices and quantities. Competitive Rivalry between Existing Players: Estee Laura faces extreme rivalry from companies like Beiersdorf AG, Ltd Brands Inc, Luxottica Group Spa, Shiseido Co Ltd and VF Corp. (Bloomberg Businessweek, n.d.). Estée Lauder faces stiff competitors from such companies having similar product lines. 3.1.2. Company Analysis 4.1. Resource Based View Barney (1991) has opined that “a firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors”; he has further propounded that “a firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy” (Begemann, 2008, pp.6). Based upon these statements, the Resource Based View (RBV) has been observed to be “a theoretical framework which proclaims that distinct resource combinations of organisations are the source of sustained competitive advantage” (Begemann, 2008, pp.6). The fact that “value-creating competitive advantages derive from distinct resources within the organisation”, has been justified by Das and Teng (2000) who have described the definitive goal of a business organisation as “...value maximisation of a firm through pooling and utilising valuable resources” (Begemann, 2008, pp.6). Grant (1991) has argued that organisations commence “the formulation of their strategy generally with a mission statement which is usually related to the market or the customers a firm wants to serve”; and he has furthered his opinion by elaborating that “in a world where customer preferences are volatile, the identity of customers is changing, and the technologies for serving customer requirements are continually evolving, an externally focussed orientation does not provide a secure foundation for formulating long-term strategy” (Kirsch, 2007, pp.3-4). Appended below is the consolidated balance sheet (FY 2007-2008) of Estée Lauder Companies, Inc. (Estée Lauder) – it may be observed that the company has grown by a commendable 21.5 per cent in 2008 as compared to the previous fiscal in terms of its total assets. A close look at the balance sheet will reveal that the personal products giant has grown its assets base significantly in terms of almost every component. The fact that promotional merchandise and inventory had leapt from $855.8 million in 2007 to $987.2 million in 2008 – an increase of more than 15 per cent over a period of just one financial year – suggests that the company had been striving to deepen its penetration into domestic as well as new markets. It is also worthwhile to note that during the same period of time, the company has witnessed a $136.1 million (or 17.79 per cent) hike in its intangible assets (including goodwill). It is quite interesting that despite the stupendous financial growth that it had experienced, the company did not bolster its investments to a great extent. Thus, it is pretty obvious that Estée Lauder has aligned its internal resources quite efficiently that in turn helped the cosmetics behemoth reap huge benefits. Figure 3: Consolidated Balance Sheet of Estée Lauder (2007-2008) (The Estée Lauder Companies, Inc., 2008, pp.77) Over the years Estée Lauder has shown its mettle as a top notch entrepreneurial organisation and currently it boasts of annual sales revenue to the tune of $5 billion. It has been observed that the company is “now one of the world's leading manufacturers and marketers of prestige-line beauty products, with 19 brands sold in more than 130 countries”; and it has also been found that the fundamental growth strategy that it adopted “has been to acquire or create new brands with potential for global development, and bring them under the corporate umbrella while maintaining their entrepreneurial competitiveness” (Stanford Graduate School of Business, 2010). However, it has to be realised that a company of Estée Lauder’s stature can easily manage its internal resources along with a huge volume of global operations largely due to its financial strength as well as a command over the various environmental (social, political, economic, legal, technological) factors that it slowly accumulates over the years. Figure 4: Consolidated Balance Sheet of Estée Lauder (2009-2010) (Source: FAQs.org-c, 2010) The figure appended above illustrates the unaudited consolidated balance sheet of Estée Lauder for the 2009-2010 fiscal. It may be observed that there has been a reduction in promotional merchandise and inventory. At the same time, the goodwill of the firm has not increased significantly. Perhaps the company needs to pay more attention to its assets portfolio in order to identify the ones that are either stressed or non-performing, and eliminate them from its operational framework. 4.2. Relationship Based Analysis Estée Lauder has a remarkable portfolio of 19 brands that are sold in an excess of 130 nations globally. There is no doubt about the fact that the company has to put in sufficient efforts in order to strike a balance among its various resources so that it can achieve balanced operations on a global scale. The company has to undertake commendable promotional activities to target prospective audience in new markets. Moreover, these activities should be strategically focussed because there are equally powerful competitors who dot the global cosmetics landscape with their product lines. Therefore, Estée Lauder cannot compromise in this area. However, the President and CEO of the organisation, Mr. Fabrizio Freda has said “our performance in the past quarter continued to be of high quality, reflecting strong top-line growth, particularly from our international businesses, a streamlined cost structure and improved inventory management” (MarketWatch, Inc., 2010). The company has been proactive in recognising the importance of inventory management which has reduced its operating costs and hence hiked its profitability. It has simultaneously been observed that “all product categories and geographic regions benefited from company-wide efforts to eliminate non-value adding costs, as well as significant improvement in cost of sales from favourable product mix and enhanced inventory management, resulting in substantial improvements in their operating income” (MarketWatch, Inc., 2010). That is company has been concentrating on optimising its profitability and revenue earning capacity has been expressed by Mr. Fabrizio Freda, who has also said “during the quarter, we increased investment spending behind more targeted advertising, merchandising and sampling to enhance competitiveness and accelerate momentum”; he has provided a valuable insight about the company’s strategic focus by adding “for the balance of the fiscal year, we plan to continue these investments well above the prior-year period” (MarketWatch, Inc., 2010). The message is very much clear – Estée Lauder has full knowledge of its position in the premium cosmetics industry and in order to augment the same, the multinational giant is trying to rout its weaknesses so that it may put its assets, tangible as well as intangible, to their optimal use with the aim to maximise profits and value. Estée Lauder had reported that “turning to the Middle East, our brands are being introduced into the most fashionable venues” and further expressed in its 2008 annual report that “sales in the Middle East were up 22% in fiscal year 2008” (The Estée Lauder Companies, Inc., 2008, pp.18). In the light of the company’s recent strategies as has been expressed by its CEO, it may be comprehended that the company has healthy prospects to flourish further in the booming markets of the Middle East. 3.1.3. Conclusion During the course of the research it has been observed that Estée Lauder is a global cosmetic giant that has made its presence felt in over 130 countries through a strong portfolio of 19 premium brands. The company has realised the importance of asset management and in turn has adopted a resource based view to take major decisions pertaining to advertising, investments, merchandising, etc. The main focus has been on the enhancement of competitiveness; and the company also aims at accelerating its momentum in the highly volatile cosmetics industry, wherein customers’ preferences change very fast and the number of potential rivals is also very high. Owing to its shift in strategic perspective the company has witnessed significant top-line growth, mainly in terms of its international businesses. Furthermore, the company has benefitted hugely due to a more efficient cost structure coupled with a superior inventory management. The company has achieved healthy results in almost all product groups as well as geographic regions. These may be attributed to the efforts that it has made in order to do away with non-value adding expenses while trying to improve its earnings through effective product mix as well as improved inventory management system. Taken together, these have helped Estée Lauder achieve sizeable progress in terms of operating income. 3.1.4. Recommendations It has been found that Estée Lauder is putting in significant efforts to optimise its revenue earning capacity as well as profitability through a range of strategically focussed activities in terms of various functional areas such as advertising, inventory management, investment, etc. However, the following set of recommendations may be proposed to the cosmetics giant: 1) The advertising strategies aimed at targeting the audience in the Middle East should be more focussed on the socio-cultural facets of these countries because of the obvious differences that exist between them and the Western markets; 2) The company may identify its opportunities in terms of brand differentiation so that it may offer specialised products that can address the harsh weather conditions prevalent in the Middle East; and 3) It should further develop its inventory management systems so that its operating income continues to increase on a continual basis. References 1. Begemann, F. 2008. CO-BRANDING AS A BRAND STRATEGY – AN ANALYSIS FROM THE RESOURCE-BASED VIEW. Diploma Thesis. GRIN Verlag. 2. Bloomberg Businessweek. No Date. ‘EL COMPETITORS’. Available at: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=EL:US [Accessed on July 12, 2010]. 3. Estee Lauder. No Date. THE ESTEE LAUDER COMPANIES INC. FAMILY OF BRANDS. Available at http://www.elcompanies.com/our_brands/our_brands.asp [Accessed on July 12, 2010]. 4. FAQ.org-a. April 27, 2010. RESULTS BY PRODUCT CATEGORY. Available at: http://www.faqs.org/sec-filings/100427/ESTEE-LAUDER-COMPANIES-INC_8-K/a10-8728_2ex99d1.htm [Accessed on July 12, 2010]. 5. FAQs.org-b. April 27, 2010. RESULTS BY GEOGRAPHIC REGION. Available at: http://www.faqs.org/sec-filings/100427/ESTEE-LAUDER-COMPANIES-INC_8-K/a10-8728_2ex99d1.htm [Accessed on July 12, 2010]. 6. FAQs-c.org. April 27, 2010. CONDENSED CONSOLIDATED BALANCE SHEETS. [Online]. Available at: http://www.faqs.org/sec-filings/100427/ESTEE-LAUDER-COMPANIES-INC_8-K/a10-8728_2ex99d1.htm [Accessed on July 12, 2010]. 7. Kirsch, K. 2007. CRITICALLY REVIEW HOW THE RESOURCE-BASED VIEW HAS DEVELOPED OUR UNDERSTANDING OF STRATEGY. Scholarly Paper. GRIN Verlag. 8. Know More. No Date. ESTEE LAUDER. Available at: http://www.knowmore.org/wiki/index.php?title=Estee_Lauder [Accessed on July 12, 2010]. 9. MarketWatch, Inc. April 27, 2010. ESTÉE LAUDER COMPANIES THIRD QUARTER EARNINGS DOUBLE; DRIVEN BY 10% SALES GROWTH AND STRATEGIC SAVINGS INITIATIVES. Press Release. [Online]. Available at: http://www.marketwatch.com/story/estee-lauder-companies-third-quarter-earnings-double-driven-by-10-sales-growth-and-strategic-savings-initiatives-2010-04-27 [Accessed on July 12, 2010]. 10. Stanford Graduate School of Business. 2010. A FAMILY AFFAIR AT THE ESTÉE LAUDER COMPANIES. [Online]. Available at: http://www.gsb.stanford.edu/news/headlines/vftt_lauder.shtml [Accessed on July 12, 2010]. 11. The Estée Lauder Companies, Inc. 2008. 2008 ANNUAL REPORT. [Pdf]. Available at: http://www.annualreports.com/HostedData/AnnualReports/PDF/el2008.pdf [Accessed on July 12, 2010]. Read More