Strategic Review of L'Oreal External Environment

This essay firstly introduce L’Oreal and their main operations in recent years, and then emphasize to analysis their external environment, such as P.E.S.T analysis, five forces analysis, sector level analysis and product life cycles analysis. And in the end analysis the opportunities and threats which the company faces over next 3-5 years

2. Company and Product Overview

The L’OREAL Group is the world’s largest cosmetics and beauty company and it headquartered in the Paris suburb of Clichy, France. L’OREAL has developed activities in the field of cosmetics, concentrating on hair color, skin care, sun protection, make-up, perfumes and hair care. L’OREAL is active in the dermatological and pharmaceutical fields. L’OREAL is also the top nanotechnology patent-holder in the United States.

（http://en.wikipedia.org/wiki/L%E2%80%99Oreal）

It operates in over 130 countries. It markets 18 brands through two divisions, cosmetics and dermatology. The cosmetics division of L’OREAL has four segments: professional products, consumer products, luxury products and active cosmetics. The dermatology segment includes dermatological and pharmaceutical activities of the company.

L’OREAL got its start in the hair-color business, but the company soon branched out into other cleansing and beauty products. L’OREAL now markets over 500 brands and many thousands of individual products in all sectors of the beauty business: hair color, permanents, styling aids, body and skin care, cleansers and fragrances. They are found in all distribution channels, from hair salons and perfumeries to hyper – and supermarkets, health/beauty outlets, pharmacies and direct mail.

(http://en.wikipedia.org/wiki/L%27Oreal)

3. External environmental analysis

3.1 P.E.S.T Analysis

PEST analysis stands for “Political, Economic, Social, and Technological analysis” and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management.

3.1.1 Political and Legal Forces

The political challenge is that L’Oreal should conform to all the different government leadership styles in various countries it operates within. L’Oreal faced a decline in the dermatology branch led by its Galderma brand due to new legislations governing drugs (Euromonitor, 2005). The EU law affects L’Oreal. L’Oreal is restricted in their use of certain kinds of chemicals, such as Phthalates which is carcinogenic (The Rules Governing Cosmetic Products in the European Union). L’Oreal is obligated to produce safe products that do not contain any harmful substances. Also, legislation for advertising is also affecting L’Oreal. L’Oreal has to follow the rules set by Advertising Standards Authority. For example, advertisements cannot be misleading that over-exaggerating the functions of a product (The Control of Misleading Advertisements Regulations 1988).

Recent policy developments in the European Union (EU), that is the safety of cosmetics is directed standards. Seventh Amendment cosmetics directive finally approved by the European Parliament and the Council of the European Union, It is expected an immediate ban on animal testing products and a total ban on animal testing of cosmetics raw materials, no later than six years to implement the directive.

(Anonymous,http://www.jrc.ec.europa.eu/more_information/download/ecvam2.pdf）

In addition, It needs an immediate ban on new cosmetics sales (of finished products and raw materials) and the experimental animal alternative methods have been tested in ecvam and accept the existence of the ban on the sale of cosmetics, on human health affected to a certain extent. It is thought that L’Oreal should fully understand these policies, and to avoid a violation of these policies and regulations, strictly control chemical products and related banned substances content

3.1.2 Economic Environment Analysis

L’Oreal should adapt to all the different economic environments and problems in all countries it operates in. For example in 2004, L’Oreal was affected by the continued weakness of the dollar and other currencies.

Economic crisis is a bad news for L’Oreal, The world GDP is fall sharply from 2007 to 2009, The economic downturn will be a great chanllege for the development of L’Oreal

“Although the growth last year is below that in 2008 due to the financial crisis, it is fortunate that it still met the target,” said Paolo Gasparrini, president of L’Oreal China, at the 6th China Young Women in Science Fellowship Award Ceremony sponsored by L’Oreal in Beijing Tuesday. In the first three quarters of 2009, L’Oreal’s total gross sales increased 0.7 percent compared to last year, of which growth in Asia, where the Chinese market is a large contributor, totaled 21.2 percent, he said.

(http://msn.huanqiu.com/bizchina/2010-01/700911.html)

3.1.3 Social Environment Analysis

The culture of countries in which a business operates can be of particular importance. The culture of a country consists of the values, attitudes and beliefs of its people. (David Campbell, George Stonehouse and Bill Houston: 119). For example, with modern standard of living continues to improve and the level education get higher and higher, the social increasingly recognize the external image, and people are increasingly focusing on the image appearance, the demand of quality and effectiveness of cosmetic and related skin care products become higher and higher.

3.14 Technological Environment Analysis

Changes in technology affect the products available to consumers and business, the quality of the products and their functionality. (David Campbell, George Stonehouse and Bill Houston. 124).

Today’s society is constantly changing, technology updates means that the product updates, cosmetic update speed, short product life cycles, a cosmetics market, we should immediately prepare for the next period. As the technology develops, people can be more channels to purchase products, business and customer contacts more and more ordinary. So technology is the enterprise competitive advantage.

Along with the development of science and technology， the latest scientific and technological achievements and advanced technologies rapidly apply in cosmetics industries, particularly biotechnology, nanometer technology, information technology, electronics technology, which provide a lot of opportunities for the development of cosmetics industry. L’Oreal has strong research and development (R&D) capability, According to new technological development, the company registered 529 patents related to cosmetics and dermatology in 2005.

(http://dbic.datamonitor.com/companies/company )

3.2 Five Forces Analysis

According to Porter’s five forces which determine the nature of competition within an industry. The five forces are:

The threat of new entrants to the industry;

The threat of substitute products;

The power of buyers or customers;

The power of suppliers; (to business in the industry)

Rivalry among businesses in the industry.

Force 1: It is thought that because cosmetic industry needs products quality inspection for safety, and large investments which including technology and a great deal of capital, it is difficult to enter the cosmetic industry. However, at present, there is few entrants can threat L’OREAL.

Force 2: By reason of many personal cosmetics may contain a series of potentially toxic compounds, including artificial membrane. One research found cosmetics containing some spices and xylene which easily lead to the abortion of pregnant women. Many facial cream are also contain compounds which similar with the role of female hormones. So the threat of substitutes is using pure natural products.

Force 3: According to a survey commissioned by New Woman magazine and published in April 2006, the average woman is estimated to spend a staggering £182,528 on beauty products between the ages of 18 and 80. 5,000 women were questioned, (Anonymous, http://www.keynote.co.uk/kn2k1) eight in ten of whom said they wore make-up every day and almost half of whom admitted that they would not leave the house without it. So the power of buyers is very strong, which is very favorable to L’OREAL.

Force 4: L’OREAL products were sold in many large department stores or supermarkets. The suppliers are all have strong bargaining power. So L’Oréal should develop a close partnership with suppliers, in order to sell products better.

Force 5: The global cosmetics business is intensely competitive, with a few big corporations and a large number of small companies vying for market share. The company competes against global companies such as Avon, Estée Lauder, Procter & Gamble, Revlon, and a number of smaller companies as well. Of late, those bigger companies sharpened their focus on the market of beauty and personal care products. Increased competition may lead L’Oréal to price reductions, reduced profit margins and loss of market share.

3.3 Strategic Space/Group Analysis

A business can rarely confine its analysis to the level of the industry and markets in which it operates. It must also pay particular attention to its closest competitors who are known as its strategic group.

PRICE

BRANDING INTENSITY

LOW

HIGH

LOW

HIGH

Estée Lauder

Avon

Revlon

P & G

L’Oréal

From the strategy groups above, it is obviously that L’Oréal has a high branding intensity and medium price, therefore compare with other competitor L’Oréal has competitive advantage.

3.4 Life Cycles Analysis

Generally speaking, cosmetic products are in the maturity period of the product life cycle. In this period users tend to saturation and users repeat purchase reliance. In competitive condition competitor fight to maintain market share, but it is difficulty in gaining market share. All competitors emphasis on low cost (efficiency). L’Oréal should pay attention to the quality of products and improve the packing, in order to keep old customers and attract new customers.

4. Opportunity and threat analysis over next 3-5 years

4.1 Opportunities

It is thought that L’Oréal faces the following opportunities and threats, these main changes will influence the company’s planning over the next 3-5years.

First of all, it is thought that the opportunity of L’OREAL is aging population. The most developed countries are already highly aging society, aged 60 or older in the proportion of the population is above 15%, and for example the percentage of the US population who are over 55 years is forecast to increase from 20% in 2007 to 33% in 2027.

(Anonymous, http://dbic.datamonitor.com/companies/company ) This is likely to increase demand for anti-aging products. L’OREAL successfully launched many anti-aging products in 2007, including RevitaLift Double Lifting, Collagen Filler, and Lancome’s Renergie Morpholift. As aging baby boomers attempt to preserve their looks through anti-aging products, L’OREAL will not be short of opportunities.

The second opportunity is proposed acquisition of Body Shop. As the rapidly growing of personal care products market, demand for the products is rising as consumers shift to products which are safer and more eco-friendly. The natural personal care products market is expected to grow at an annual rate of 12% a year, to reach an estimated $1 billion in 2010.

(Anonymous, http://dbic.datamonitor.com/companies/company) The proposed acquisition of the UK-based Body Shop International, a company founded by Anita Roddick that uses primarily organically-derived ingredients, would allow L’OREAL to capitalize on the growing demand for natural personal care products.

Thirdly, the growth of India and China. L’OREAL could offset weak performance in Western Europe by expanding its presence in fast-growing markets such as India and China. The company already has a presence in these two countries, whose economies are forecasted to grow at a high rate in the coming years. In 2007, the company’s sales in China grew by 27% while sales in India expanded by 46%.

(Anonymous,http://dbic.datamonitor.com/companies/company)Further expansion in China and India may help L’OREAL overcome sluggish growth in Western Europe.

4.2 Threats

However，it is thought that there are three main threats which will influence L’OREAL.

Firstly, Economic crisis is a bad news for L’Oreal, The economic downturn will be a great chanllege for the development of L’Oreal

The secondly, the competition is intense in the market. The global cosmetics business is intensely competitive, with a few big corporations and a large number of small companies vying for market share. The company competes against global companies such as Revlon, Estee Lauder and Procter & Gamble, (Anonymous, http://dbic.datamonitor.com/companies/company ) in addition to a number of smaller companies. Recently, some big companies have sharpened their focus on beauty and personal care products market, as well as emerging markets. Increased competition could result in price reductions, reduced profit margins and loss of market share.

The third one are new regulations. Several consumer protection groups are voicing concerns over the presence of harmful chemical ingredients in cosmetic products. A recent study showed that about one-third of cosmetic products contain known carcinogens.

(http://dbic.datamonitor.com/companies/company ) Due to increasing public pressure, in US the Food and Drug Administration (FDA) is expected to impose stringent quality norms on cosmetic products.

(Anonymous, http://dbic.datamonitor.com/companies/company ) New regulations may delay the launch of new products and result in higher product development expenditure, not to mention the possible effects of the adverse publicity generated by the new regulations.

The last one is counterfeiting. The counterfeiting of popular cosmetic products has increased in recent years. Increasing sales of counterfeit products negatively impact the company’s sale. Low quality counterfeits also reduce consumer confidence in the products of a company. More important, the company’s key differentiator, exclusivity, is damaged by counterfeiting operations. Widespread counterfeits reduce the exclusiveness of the company’s brands. Counterfeit products not only deprive the company of revenues, but also dilute the reputation of the brand.

5. Conclusion

According the discuss above, it is conclusion that among L’Oréal’s external environment, it is thought that the competition of cosmetic and fragrance market become more and more drastic, especially faced with strong competitors, and it is thought that there are opportunities and threats to L’Oréal, the company should take advantage of these opportunities and to etain its status as the leader of cosmetic and fragrance industry.

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