Company Overview
Estee Lauder is a ‘family issue’ business. That is the pillar upon which this company was found and managed for more than sixty years. That fundamental premise determines also the way this company treats its customers. A ‘family service’ tries to take care of its customers as its own family members. This is why they openly declare on their website that this company puts quality, service and reputation before profit. In a certain sense it acknowledges that importance of community caring and social responsibility a business has toward its clients.
Vision and Mission
The vision of Estee Lauder is of a company that ‘takes care’ of its customers. Estee Lauder does not just sell a product to the market. It offers its clients (and to all its potential customers) a complete care package. As it states in its mission statement, Estee lauders strives to ‘bring the best to everyone they touch’. Just like a family would treat its members. That may seem a ‘romantic’ view for a business company but it has brought to this company some important benefits.
This is confirmed by their vision of a business and its role. Ethics and integrity are the fundamental tenets which form the base for its corporate culture. The company is seriously committed to ethics and integrity internally and externally. The demonstration of this is the fact that for all of its employees, the highest standards of ethics and integrity are a requirement for employment equal to their professional development. The company rule encompasses from the members of the Board of Directors to the lowest hierarchical levels of its staff in every corner of the planet.
Objectives
To fully comprehend the company culture, it would be appropriate to refer to their own description of the goals and objectives they pursue. As a family company committed to work together with other players of the market and the community Estee Lauders strives to:
- Provide customers with innovative cosmetic products with the highest quality possible;
- Delivering ‘outstanding’ service by treating each individual customer as anyone (including company’s owners) would like to be treated;
- Pursue profit but never at the expense of quality, service or reputation;
- Create for the community an environment which fosters personal growth and wellbeing;
- Eliminate the maximum possible waste and reduce inefficiency in order to provide maximum value to the customers;
- Build partnerships with suppliers, retailers and colleagues that is based on trust and fairness;
- Enhance company’s image, prestige and service;
- Be responsible citizens in each community where the company does business;
Under these pillars the company has launched health and beauty related products. It began in the aftermath of the Second World War as a personal effort to provide people with cosmetic products which favored beauty, youth and health. Mrs. Estee lauders lived up to witness the triumphing of her ideas and business model which were not favored by Madison Avenue back at the beginning.
The company is based in New York City, and it covers most of the North American market with comfortable market share. Since the beginning of the 1960’s the company has gone global. It pursued a gradual overseas extension strategy. It began with a branch in the United Kingdom and its colonized territories of Hong Kong. This strategy paid off and nowadays its products are on the local markets of 130 countries. That is truly a global extension that many companies would like to achieve for their business activities.
Currently, there are four basic product lines that Estee Lauder has on the market. For each of them the company is pursuing a separate market strategy. This different market strategy technique has been going on for more than two decades now. The four categories of products are skin care products, fragrances, hair care products and makeup. Under these categories the company has launched several product lines in the past under different brand names. These brand names include, Estee Lauder, Aramis, Clinique, Perspective, American Beauty, Origins, Flirt!, Good Skin, etc. The company’s strategy has been to adapt its branding and products to the local cultural environment.
That is also one of the major challenges for the future this company will have to face. The mission, vision and objectives will continue to be a valued asset for Estee Lauder, but the changing social and cultural conditions of the world accompanied by global financial turmoil will oblige this company to, at least, change part of its strategy. In the coming pages we will develop a detailed analysis of the present situation of the company. We will try to identify the market trends accompanying this industry. One we asses this, we will lay down some recommendations on the possible course of action that this company should take.
External Opportunities and Threats
Industry experts have determined that much of the expected growth for the entire personal products industry is to be expected not in industrialized countries, but in developing countries and emerging markets. There is a constant rising demand from consumers in these emerging markets. Whosesoever will be able to capture the trend and provide what customers want in these markets will ensure great success for his business. The world’s aging population will increase by more than two times in the next three decades. This means that more people will devote time and money to anti-aging products. This rise in age of the world population will not spare even countries with high growth rate like China and India.
In fact, estimates show that by the year 2030 over 70 million people over the world will reach an income level which will put them in condition to be able to purchase cosmetic products. Since the life expectancy gap between men and women is expected to close, the worldwide potential for this industry seems enormous.
In the United States alone the age of population is rising fast. In fact, over the next thirty years people aged 65 or more will comprise one fifth of the nation’s population. It is predictable that they will spend more on ageing related cosmetic products. Trends show a culture of using cosmetic products even among the youngsters. There is a rising number of the consumers aged 20 to 30 years which devote much of their income to cosmetic products related to aging prevention. This culture is spreading even among teenagers. Even though in small percentages, they are consistently spending on these age prevention cosmetic products.
But here comes one major problem for Estee Lauder. The company has been forming brands for luxury over the past five or so decades. In relation to prices, its products vary from brand to brand but none of them is above the average market price. They begin from the mid-high to the high levels of market price. It has constantly targeted consumer groups with high income levels. We will discuss in more details this situation in the SWOT analysis.
Companies will be obliged by these new market conditions to devote large sums for investment in their new product development. In addition to that, due to the fierce competition on pricing from megastores like Wal-Mart, they will have to redirect considerable amount of their investment dollars into innovation and technology development which will make them able to cut operating costs. But that would drain the financial resources of Estee Lauders and will negatively influence its cash flow and short-term operating costs. It will also increase its debt assets as the company will probably seek for additional credit from investors. That is a serious external threat for the future.
Another threat coming externally is the fact that due to the changing social and political situation around the world many non-for-profit organizations (NFOs) have been pressuring governments for various reasons. Some of them have asked governments to outlaw the use of animals for testing purposes in the developing of new cosmetic products. This situation has a negative influence on research and development for cosmetic companies (Estee Lauder included). They will have to change their research and development techniques. Here we have to mention the rising fear of chemical components used in the cosmetic products.
In fact, this is not an issue that arose recently. Since the mid 1960’s there have been concerns related to the use of fluorocarbons and aerosols as components of cosmetic products. These concerns have been enhanced now that the environmental issues are on the agenda due to global warming and its negative effects. The fact that these chemical substances are considered to be environmental hazards plays a significantly negative role in their use for cosmetic products. Governments can be obliged by public pressure to ban the use of these chemicals on cosmetic products. An argument for this is the fact that the federal Food and Drug Administration notified cosmetic producers that it will enforce the use of labeling which will include a statement who will inform a customer that is dealing with an untested for safety products which may harm his/her health. That would be enough for a bad marketing image creation.
A final external threat would be the fact of changing flight rules and regulations. The events of September 11, 2001, and the subsequent rising threat of international terrorism, changed the way travel retail business functions. Recent regulations have banned many products from being carried on board during the flight. Many cosmetic products are among these banned products. This security issue for governments raises a big financial issue (better let say problem) for cosmetic products companies. For the fiscal year 2006, Estee Lauder had a significant share of its total sales (7%) comprised by the travel retail business sales. In terms of total operating income, they accounted for almost 20%. Surely these new security regulations will negatively impact sales and operating income for Estee Lauders. But the costs will be higher since the company will be obliged to spend energy and assets in order to pursue new strategies and find new ways to increase sales.
In the SWOT analysis will give some more information related to many of these external threats mentioned.
Competitive profile matrix (CPM)
Another external threat would be that of rising competition. Surely Estee lauders will have to face fierce competition for success in these new developing markets. This can be considered the main external threat for this company. There are many companies in the cosmetic industry worldwide but only eight (including Estee Lauders) are truly global competitors. They are Estee Lauder, Avon, Unilever, Colgate-Palmolive, Alberto-Culver, Revlon, Procter & Gamble and L’Oréal.
In order to have a better picture let us construct a competitive profile matrix in which we will compare them and after that we will analyze its results.
Internal Strengths and Weaknesses
It is interesting to note that the major eight global competitors are divided into two groups of four participants each. The first matrix represents the four companies which are in stronger competition with each other and that dominate the sector. The second matrix represents four ‘minor’ competing firms, nevertheless, growing fast. As we can see, Estee Lauders is one of the four major global firms on this industry. There are only two points that it should improve; it should devote more to research and development and price competitiveness. These can be defined as two important internal weaknesses for the company. As we have explained before, this firm has chosen to target mid-high to high income consumers. It should change this strategy gradually if it wants to gain more market share and customers in the new emerging markets. This is why is has to change certain internal structures and external strategies of which we will discuss below.
Another major weakness for Estee Lauders is its organizational structure. From the organizational diagram one can immediately grasp the problem. Is Estee Lauders a traditional family structure company or a divisional structure? It is managed by two Lauder family members. Directly after the board chairman and CEO there are four presidents who report directly to the CEO. What is unclear is whether these four presidents have authority over the four product lines or the geographical zones the company operates? This is a weakness in view of the long term strategy that Estee Lauders intends to pursue. Clear division of duties and responsibilities would benefit the company.
SWOT and SPACE for Estee Lauder
SWOT Analysis
From all the things written above a SWOT analysis is already done.
- Strengths. Surely, the major strength for the company is its branding formation of various brands throughout the world. Estee Lauders excels in marketing as it has contracted several important figures to promote its products. The quality of its products is also a guarantee of success and a major strength factor. Another one is its existing global extension and the network of people involved in this company. People are an important asset for every company if it wants to succeed and at Estee Lauders they have turned this into a strength factor.
- Weaknesses. We have already mentioned that the current organizational structure and line of responsibility is a weakness for the company. Also its devotion to research and development is not in the level a company of this stance should have it.
- Opportunities. The opening of new markets and the becoming of a large number of people as potential consumers gives to this company to further expand its business and consolidate it through certain lines. That is the most important opportunity that this company has for the future. Another opportunity is the network of people Estee lauders has managed to create around the globe. And of course the established brands and customer perception gives the company the opportunity to easily introduce new products in the market.
- Threats. The opening of new markets is an opportunity but for other companies also. This means that competition will rise and it will become fiercer. The actual pricing strategy can narrow the prospect of gaining more customers as reports demonstrate that the majority of people in these emerging markets have quite lower incomes than the actual targeted customer group. The ban on specific chemicals for use in cosmetic product is a major threat to cosmetic production firms. They will have to find substitute products which often are associated with higher costs. The ban on travel business flights for cosmetic products is also another threat since they comprise 20% of the operating income for the company. Nevertheless, the major threat for Estee Lauders remains the fact that it has devoted less attention and efforts to research and development during the last decades.
SPACE Analysis
Innovation is the issue. Companies that innovate in the market tend to have better chances of success that those that do not. We have mentioned the threats Estee Lauders faces. Innovation is that force which can eliminate them, or at least minimize them at the maximum extend. At Estee lauders they understood that it is time to devote more to innovation research. We can clearly understand this from three of the five imperatives that William Lauder laid down before company’s stockholders:
- strengthening of product categories;
- diversification and strengthening of channels of distribution.
The strategic positioning of the firm is completed by two other imperatives which are correlated to the previous ones:
- optimization of the brand portfolio;
- operational and cost excellence.
All this ‘movement’ is done in order to reach the goal of strengthening and expanding more on global markets. Thus, the new strategy for the company is to specialize in certain sectors of the cosmetic industry in order to consolidate its market positioning there. That is to be understood from the optimization of the brand portfolio. Once this position is strengthened, the company will try to get the same results for emerging markets. The entry strategy will be based on cost efficiency.
Notice the difference with the formed ‘tradition’ of targeting high income customers. William Lauder understood that without cost efficiency it is not possible to neither increase the market share nor gain more customers. The company will thus gradually move strategically from a position of a mid to high income people brand (an extreme luxury brand) to a more mid range customers brand. This movement in strategic positioning will be accompanied by retaining the same level of product and service quality. That is the biggest challenge that Estee Lauders will have to face. That is why they need to invest more on innovation.
Recommendations
The first recommendation is the last sentence of the previous paragraph. Estee Lauders needs to invest more in innovation research and development. It has to find new ways of producing existing products or even invent new products to offer to the market. If it fails to do so, it will find itself in a difficult position in the future. But the innovation should not be directed only toward the production lines. It should also encompass the distribution lines. New ways of delivering the products to the designated target customers will improve the company’s efficiency. Especially in emerging markets, new distribution strategies will build the necessary network of people. This situation will help the company establish a comfortable position before competitors do the same.
Another important recommendation is the change this company should do in its organizational design. A restructuring of the actual hierarchy is necessary to improve performance. As mentioned before in this paper, the four managing presidents have no clear responsibilities if they are to supervise the four product lines or geographical areas? A structural reformation should be made to assign each of the manager presidents a product line.
Of course, the strategic decisions will be made by the Board of Directors of the company but autonomy in decision making for routine tasks should be given to them in order to shorten the time for response to situations. The Board of Directors can set up controls which will evaluate the results of these presidents. A new managing board could be formed whose duties would be to do market research and studies globally. This board will coordinate work with the production lines presidents on the specifics of each market.