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This report is based on L’Oreal’s new product development strategy and the way they have successfully managed to achieve considerable market shares through consistent R&D efforts. The case continues with an insight into L’Oreal’s innovations that have been a success among the diverse segments of the global market.
L’Oreal has not only followed a comprehensive, long term R&D strategy that has resulted in creating innovative break through products like Fructis, but it has also tried to maintain its balance between R&D and marketing interface.
L’Oreal UK is the Group’s fourth largest subsidiary in Europe and fifth in the world and has been present in the UK for 75 years. Also A significant player in the UK cosmetics market, turnover in 2006 reached £626 million and 67% of women in the UK use one or more L’Oreal product. Approximately 170 million units were produced at the Llantrisant factory in 2006 and nearly 70% of the factory output is exported. overseas Recent investments have included a biological waste water treatment plant and more efficient heating, ventilation and lighting systems.The new distribution centre adjacent to the factory covers an area of over 18,000m2 and can house up to 10 million products and 300 people are employed at the factory. 25% of the permanent staff has worked for L’Oreal for over 20 years. (www.loreal.co.uk)
Innovation is the most crucial stage for a company and it carries significant risk in the context of product failures that might occur right after their launch in the market. The product failure rate can be as low as 30% and as high as 90% in this regard. (Antil, J.1988). The global market is characterised by different taste patterns of consumers. Therefore in the face of rapidly changing consumer tastes, technology and competition, companies should continuously provide the global market with new products that satisfy all segments of the market. This requires systematic Research & Development and innovation by companies in order to create successful products that have a considerable market demand. In the case of L’Oreal, the company has always tried to be innovating through their R&D efforts. The case sites the example of L’Oreal’s Feria range that was exclusively innovated for Asian people. Product innovation is a complex task and it requires careful planning by the company based on the above mentioned factors.
Today the global market is a fiercely competitive environment in which the important target for companies is to capture increasing returns to scale while minimizing / lowering costs of production with great speed and flexibility (Kotabe, 1990). L’Oreal as an international chain tries to achieve these targets through its consistent R&D innovations in order to create products that are marketable throughout all international market.
L’Oreal’s R&D innovation expends about 20% more for new product development as compared to its competitors such as Procter & Gamble and Unilever, occupying number one position in the market.
Why is new innovation so important for a company like L’Oreal
L’Oreal is a well established company in fashion business and in order to maintain its superior standing in the global market, it has to concentrate on the strategies it employs for innovation. The speed at which fashion markets change is very high, with very short product life cycles. Many fashion items have product cycles as short as half a year, or even a few weeks. Consumer’s preferences depend on the season, on the social and cultural environment and on the effects of previous marketing communication for fashion items or substitute products (Mintel, 2005). Responding in a timely way to these changing demands is vital for success. Moreover, without new products, firms will certainly be at a stand still And Research also highlights that early entry of new products can result in competitive advantage and long term market dominance.
The characteristics of the fashion industry require companies to make strategic choices about factors such as quality, speed, technology, price and flexibility: these factors define the positioning of a company (Abell, 1993). Drawing upon the information provided in the case study, it can be suggested that L’Oreal operates in the top end of the fashion market with clear market positioning.
L’Oreal’s targeted market segments can be characterised as fashion trend-setters, and these are the customers in the high and medium segments. They demand products with innovative styles, with top-level quality by scientists and designers that have built the reputation of powerful brands. It should be noticed that firms that operate in the mass segment which targets fashion followers tend to imitate the high performing products of top brands like L’Oreal and therefore the competitive advantage of top brands recedes over time, making product lifecycle short. Given the high quality expected of its products and the short product life cycle prevailing in fashion, L’Oreal has adopted a vertical integration, which afforded it a full control of quality and operations (Erica & Stefania, 2004).
Therefore, innovation is a critical and complex process that has a direct impact on the company’s prestige, which justifies the importance of such developments. Therefore L’Oreal has to come up with such innovations that not only appeal to the various segments of the global market, but also enhance the company’s position once they penetrate the market. hence L’Oreal would have to invest heavily in the launch of new products and be confident about the effectiveness, marketability and practicality of these products..
Moreover, successful innovation is likely to earn L’Oreal a superior market share and turnover, increasing the value of the company. Also, L’Oreal has been a front line of fashion and in order to keep up with the expectations of its consumers, the company has to lay in line new formulas that are carefully researched and tested for their effectiveness. For e.g. when the Japanese people were tired of having black hair and required an alternative to western hair colours due to their poor results, L’Oreal came up with an effective new hair formula that first bleached their hair and then dyed them according to their desirable colour.
Therefore it is clear that in order for a company like L’Oreal, operating in a volatile and turbulent fashion industry, to create a sustainable competitive advantage should have a fast innovative product development cycle. Because L’Oreal tries to grab the maximum market share through the introduction of innovative products that are not only different but also cater to the different segments of the international market.
Problems of managing Innovation and has L’Oreal solved these problems
In order to launch new products successfully, companies like L’Oreal have to spend a great deal of time and energy in research and development. Thinking profitable/effective new ideas and implementing them are the core issues to be addressed and in this regard L’Oreal’s R&D performs the task of coming up with successful innovations while the implementation lies in the hands of how these innovations are marketed. If L’Oreal launches a new product that cannot be marketed effectively, the R&D efforts would be marked as inefficient and useless.
Before launching or marketing any new product locally or internationally, a company has to be sure that its innovation would be differentiated from other products and is based on consumers’ preferences. Such ideas are most likely initiated by marketing and then R&D takes over the task. Once the R&D process is complete, the launch of new product requires the company’s scientists/engineers to observe the market reality and employ different ways of marketing their product. Any negligence in this context would not only result in product failures once they are launched, but would also harm the company’s image.
For companies like L’Oreal which continue to thrive on innovation because good ties between marketing and R&D to perform their activities during the process of launching innovative products in the global market.
However, reality appears a bit complex because studies have shown that R&D and marketing tend to have different perceptions and interpretations of the characteristics of a new product, particularly in terms of its technical innovation and the extent to which it affects the established consumption patterns. In reality, marketing perceives a more critical role of a new product for positioning in a market segment than R&D. Also marketing perceives a higher degree of customization of individual products than R&D. Wang and von Tunzelmann (1997)
However, the need for long-term innovation always exists and the scientists need to be given some independence to design new formulas that are not unveiled unless desired.
The different views of innovation-marketing are influenced by their different personality, cultural background, time orientation, ambiguity, tolerance and level of detail of language used (Griffin and Hauser, 1996). Therefore for companies like L’Oreal the innovation-marketing interface needs to be managed in such a way that it satisfies both the needs of innovation as well as marketing.
According to a study conducted by Wang in 1997 the innovation and marketing functions were found to have collaborated in accomplishing tasks in three areas.
* Conceptual development, identifying and evaluating relevant information
* Strategic development, market positioning and product differentiation
* Implementation, Internal and external communication.
For L’Oreal these three functions are an important consideration in the process of innovation without which innovations might involve a high degree of risk, resulting in product failures. Once the concept for new product is developed through thorough research, L’Oreal focuses on identifying its target market segments for effective market positioning followed by laying a much greater emphasis on differentiating its products from its competitors like Procter & Gamble and Unilever. Therefore it has to maintain a careful balance between creative innovation-marketing.
An important link also exists between the innovation-marketing management. For instance, a strong mismatch between what is desired by customers and what is developed by L’Oreal would reduce the company’s ability to predict market response to its new product. This would result in a reduced level of confidence on the effectiveness of marketing (Shankar, 1999). Therefore, in this context, a clear understanding of customer needs would be helpful in determining a company’s innovation timing. This means that by effective management of innovation and marketing interfaces, firms can come up with better strategies both in terms of resource allocation and entry timing.
It has been seen that most companies that spend great deal of time and effort on innovation to come up with new ideas, have created such products that resulted in a technological break-through, captivating a huge market share.
In case of L’Oreal, the company has been spending a lot on its innovation department, (spending about 20% greater than its competitors’).
L’Oreal employs 2500 chemists, biologists, pharmacists and the company’s R&D aims to deliver 2000 new ideas to its marketers in order to launch 2000 new products annually. It not only has to develop successful ideas, but also find a perfect marketing strategy that addresses the target markets for the new products, their positioning, sales, market share and profit goals at initial stages. It therefore tries to maintain the balance between creative innovation – marketing.
The company not only analyzes the marketability of its new products but also tests its effectiveness through its careful innovation process. For e.g. when the marketers desired a fruit based shampoo for the European market, L’Oreal’s R&D took over the task and it took the company 10 years to come up with Fructis, which captured L’Oreal a 28% share in the European market alone. This was, in fact, a result of the long term R&D efforts of the company and L’Oreal tries to follow a three-level strategy for efficient management of innovation to marketing interface. Also the company launched a sun lotion exclusively for children, the Ambre Solaire Children’s Sun Lotion, which took three years for its launch and development. Therefore L’Oreal has tried to solve most of the problems resulting from an imbalanced innovation-marketing interface and needs to lay a greater emphasis on satisfying the individual needs of innovation and marketing respectively. It needs to continue by having a clear focus of the technological innovations and fashion trends.
L’Oreal takes on the new product development screening task during its innovation phase when the company evaluates ideas generated from its own advanced research and whatever is being done externally (outside the company). L’Oreal makes sure that in order to boost the excitement of its products among consumers it needs to evaluate the effectiveness of its new formulas and offer a clear benefit to the consumers in order to get it accepted by the masses. It was this new product development screening process that resulted in the launch of Ambre Solaire children’s sun lotion by L’Oreal after three years of full research, thus, coming up with a formula that offered maximum protection to children’s delicate skin that instilled the confidence of their parents in the new product.
L’Oreal has tried to launch its products which are characterized by these thorough screening processes, and it has succeeded to a considerable extent. However, during the screening process L’Oreal also needs to make sure that its new product developments are consistent with the company’s objectives, that they are feasible in terms of product design and are suitable for the identified target markets.
After analysing this case in great detail, both in terms of marketing literature and practical application, it can be undersood that global companies like L’Oreal have to keep in line with the technological changes as they bring about marked product or process design transformations. Innovation plays a significant role in this regard, without which any new formula/idea is unable to be processed into a tangible new product. This requires professional scientists/engineers to be hired by companies and L’Oreal expends a great deal on hiring such professionals who can come up with effective, innovative and marketable ideas.
The need to respond quickly to the dynamic global market forces requires companies to integrate rapidly to the perceptions and needs of both product developers and potential consumers Therefore, in today’s fierce global competition, it is tough to differentiate. products and companies are required to have sufficient knowledge about their target markets/segments locally as well as internationally. Therefore product screening is another important process that needs to be carried out by companies in order to have a closer look at competitive products and evaluate their own product demand and L’Oreal seems to stand out in this regard as it employs professionals who carefully monitor competitors’ products in great detail.
All this needs to be synchronized with an effective marketing strategy that is in balance with innovation functions of the company, which eventually builds up new product’s image in the various targeted segments, hence, boosting the company’s prestige. It is not easy to gain customer satisfaction without long term effort.
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