Estee Lauder Companies, Inc

Strategic Management: Case Study

Report

Submitted to:

Miss Farah Zarak

Submitted by:

Muhammad Owais Rana

Abdur Rehman Bakhshi

Muhammad Waqas Ranjha

Jawwad Jahan

Jahanzeb Khan

Khawaja Omer Javed

Dated:

22nd November 2011

Estee Lauder: Introduction

Founded in 1946, this technologically advanced, innovative company has gained a worldwide reputation
for elegance, luxury and superior quality. Estee Lauder Companies, Inc is a U.S manufacturer and
marketer of skin care, cosmetics, hair-care and fragrance products. The company’s headquarters are in
Manhattan, New York City. The company launched with four products under its flagship brand but over
the decades, the business has grown alongside its reputation for elegance and quality. One of the
platforms that Estee Lauder discovered was in 1968, with the launch of Clinique Laboratories Inc and
hence become the first company with a line of products that were allergy tested and 100 percent fragrance
free. The popularity of the products emerging from this group facilitated its easy expansion into countries
across the world. In 1960, the company entered Canada. The next year, it took on Central America, then,
came Australia, France, Germany, Japan and the Soviet Union in 1973. In 1985, Estee Lauder’s sales
surpassed $1 billion which reinstated that its namesake’s special touch, when it came to beauty and self-
care carried with it a universal appeal. In 2000, Estee Lauder Companies began to assert a significant
presence on the Internet. Its internet marketing strategy contributed to the company’s sales surpassing the
$5 billion mark in sales just three years later.

Today, Estee Lauder products are sold in over 130 countries under the brand names that include
Estee Lauder, Tommy Hilfiger, Donna Karan, Michael Kors, Donald Trump, Sean John, Missoni, Daisy
Fuentes Aramis, Clinique, Prescriptives, Lab Series, Origins, MAC, Bobbi Brown, La Mer, Aveda, Jo
Malone, Bumble and Bumble, Darphin, Rodan& Fields, American Beauty, Flirt, Good Skin and Grass
Roots.

This conglomerate has not only become a leader in skin care products, but also in the world of
corporate social responsibility. It is one of the leading and most active sponsors behind The Breast Cancer
Research Foundation, and has also lent its support to such other organizations as the American Heart
Association, Carnegie Hall, the Centre for the Advancement of Women, the Guggenheim Museum,
Mount Sinai Medical Centre, and the Make A Wish Foundation.  Within its own internal operations,
Estee Lauder Companies has also committed itself to encouraging pollution prevention, resource
conservation, waste minimization and recycling practices. Additionally, all products are tested for allergy
and irritancy in clinical trials that do not make use of animals. With a motto of “Bringing the best to
everyone we touch,” it continues to be an industry leader and a trend-setter.
Vision Statement:

“Bringing the best to everyone we touch”

Estee Lauder’s current vision statement is precise, easy to understand and inspiring all together but we
have analyzed that it lacks specification, does not fulfill the purpose of an impressionable vision
statement which requires clearly stating what the company envisions for itself. Moreover, the current
vision statement does not provide a foundation for developing a comprehensive and clear mission
statement which is pivotal to strategic management.

Proposed Vision Statement:

“Attaining complete share of mind and heart of our customers by delivering the promise of ‘forever
young’ leading to market leadership in the cosmetics industry”

In our proposed vision statement, we have clearly stated the three key aspects including claiming to attain
absolute share of mind and heart of Estee Lauder’s valued customers which is reiterated by promising to
deliver the promise that any Estee Lauder product brings with it, of being young forever which will
eventually lead to leadership position in global cosmetics industry

Mission Statement:

We are a family company committed to working together with uncompromising ethics and integrity. We
strive to always:

 Provide customers with innovative cosmetic products of the highest quality.

 Deliver outstanding service by treating each individual as we ourselves would like to be treated.

 Create an environment that fosters personal growth and well being.

 Build partnerships with our suppliers, retailers and colleagues based on fairness and trust.

 Enhance our reputation of image, style and prestige.

 Pursue profit, but never at the expense of quality, service or reputation.

 Eliminate waste and reduce inefficiencies in order to provide maximum value to our customers.

 Be responsible citizens in every community we serve.

Components of Mission Statement:

Elements Components Comments

1 Customers Yes

2 Products or Services Yes

3 Markets No

4 Technology No

5 Concern for survival, growth Yes

and profitability

6 Philosophy Yes

7 Self-Concept Yes

8 Concern for public image Yes

9 Concern for employees Yes

Proposed Mission Statement:

 We believe the current mission statement of Estee Lauder Companies is well-crafted and would
rather like to add the following to the existing framework:

 Expand operations to all markets including Africa and become the global cosmetics’
leading brand

 Use cutting-edge herbal/non-herbal technology to cater to every global customer/market

Internal Assessment

Financial Ratios (2006-2007):

Ratios 2006 2007

Liquidity Ratios

Current Ratio 1.51 1.49

Quick Ratio 0.98 0.92

Leverage Ratios

Debt to Total Assets 0.56 0.70

Debt to Equity 1.32 2.42

Long-term Debt to Equity 0.27 0.86

Times Interest Earned 26.25 19.28

Activity Ratios

Inventory Turnover 8.44 8.22

Fixed Assets Turnover 8.53 8

Total Assets Turnover 1.71 1.70

Ratios 2006 2007

Profitability Ratios
Gross Profit Margin 74% 74.98%

Operating Profit Margin 9.6% 10.66%

Net Profit Margin 3.78% 6.38%

Return on Assets 6.45% 10.88%

Return on Equity 15.05% 37.46%

Earnings Per Share $0.00003 $0.007

Growth Ratios

Sales 12.58% 22.57%

Net Income -28.62% 31.31%

 Liquidity ratios of 2007 have decreased compared to 2006 which states that Estee Lauder may
face complications in liquidating its assets, if needed in the short-term.
 Leverage ratios have increased in 2007 compared to 2006 which indicates that Estee Lauder holds
much more financial leverage in terms of debt and equity financing. The debt-to-assets has gone
up to 70% which states that only 30% of the financing is raised by issuing common stock.
 Activity ratios have not observed much change indicating that Estee Lauder needs to work on its
policy framework regarding inventory, purchase of assets so on and so forth.
 Profitability ratios have seen a sharp increase which is a clear indication that Estee Lauder is
much more well in terms of profitability in 2007 than it was in 2006. Moreover, more operating
income means that more projects can be undertaken which is in synchronization with strategic
management processes.
 Positive growth rates indicate the overall performance of Estee Lauder in 2007 which means that
the sales have almost doubled and so has the net income. Excellent growth rates can serve as an
opportunity for Estee Lauder to apply alternative strategies to boost performance.
Existing Organizational Chart

Analysis:

 Not clear whether Estee Lauder uses a traditional functional or some type of divisional structure

 Primarily managed by Lauder family members

 Not clear whether the four group presidents have authority over four product lines or four
geographic regions
Proposed Organizational Chart(s)

Divisional Structure by Product

Divisional Structure by Geographic Region

Market Positioning Map

Analysis:

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After thorough industry and company research, we used the top-to-bottom approach to narrow down two
most important variables, “Product Diversity” and “Global Presence” and plotted them on the axis
respectively. The key feature of a market positioning map is that only key or immediate competitors
should be plotted. It also needs to be kept in mind that the competitors are well-established and hold most
of the market share. Estee Lauder Companies was strategically plotted on the extreme of the second
quadrant indicating, “High Global Presence” and “High Product Diversity”.

Global Operations Map

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Internal Assessment: Strengths

 Estee Lauder currently has 26 brands selling in over 130 countries.

 Each brand has a single global image which is promoted with consistent logos, packaging, and
advertising designed to differentiate it from other brands.

 Estee Lauder was awarded/included in Ten Outstanding Women in Business in the U.S by
business and financial editors in 1967 which contributed largely towards brand-building of the
company.

 Global licenses and globalized operations.

 Defined/numerous/wide channels of distribution

 Manufacturing operations match ISO 14001 standards.

 Early/effective use of internet/technology in 1998 added strength to their sales.

 Excellent promotional strategies:

 Discounts, gifts and free samples with purchases

 Celebrities endorsements

 Advertisements which differentiates their products from others

 Innovation:

 First dermatologist-guided, allergy tested, fragrance-free cosmetics brand

 First major prestige cosmetic firm to offer shopping via internet

 First to introduce consistent brand imagery around the world

 Advertisements which differentiates their products from others.

 Global expansion as a result of strengthening of the U.S dollar.

Internal Assessment: Weaknesses

 Indistinguishable organizational structure

 Lower sales in Fragrance product category. As a result of this, the company is struggling
particularly in American region.

 Most of the power/authority in the company is vested in family members.

 It is not clear whether the four presidents have authority over the four product lines or four
geographic regions thus a questionable line of command exists.

Internal Factor Analysis (IFE)

Analysis:

The overall weighted score of Estee Lauder’s Internal Factor Analysis (IFE) is 2.8 which indicate that the
internal functions/roles are strong at Estee Lauder Inc.
External Assessment

Major Competitors:

 L’Oreal
 Procter & Gamble
 Avon Products
 Unilever
 Alberto-Culver
 Colgate-Palmolive
 Revlon

Competitive Profile Matrix:

Analysis:

Results show that Estee lauder has a relatively better position in market because of its Worldwide
Expansion, Broad-brand Portfolio including licensed agreements with famous products and a Better
Financial Position. L’Oreal, Unilever and P&G are immediate competitors to Estee Lauder because of
similar characteristics.
External Audit

Political, Governmental and Legal Forces

 The company made sure that they licensed some of their global brands like Tommy Hilfiger,
MAC, Bobbi brown, Donna Karan and a few others.

 The company’s manufacturing operations conform to the ISO 14001 standards.

 The Food and Drug Administration of every country requires companies to adhere to rules of
statutory warnings. (E.g. The safety of a particular product should be determined) The company
should instead take safety tests and rely on passing this message onto the customers to win their
confidence.

 There have been restrictions on products that can be carried in-flight.

Economic Forces

 The dollar fluctuations would have an impact over the sales as the company has a global presence
(E.g. Japan, Australia)

 Strengthening of U.S. dollar against the Japanese Yen would have negative impact on Estee
Lauder’s Japanese Operations.

 Price varies from product to product and brand to brand, but tends to be in the mid-high to high
range of the industry hence requiring sustainability of income levels of target audience.

Social, Cultural, Demographic and Environmental Forces

 Opportunities arise from increase in aging population and hence there will be increase in income
from anti-aging products.

 Younger consumers (20-30) & Teens investing in preventive cosmetics.

 Complaints have been received into the use of animals for testing for new products.

 Estimates show that the 70 million people across the globe will reach an income level in the next
20 years that allows purchasing of cosmetic products.
 Emissions of fluorocarbons and other harmful gases has been an environmental threat. The
company must take strict measures to control this.

 The life expectancy of the aging population will continue to improve with difference between
men and women gradually diminishing.

Technological Forces

 Internet (E-commerce)

 Rapid technological changes in Product Development

 Technological efforts in Process Development

Porter’s Five Forces Model

1. Rivalry among competitive firms (HIGH)

With the presence of large and powerful competitors like L’Oreal, P&G, Avon etc who
also have a variety of brands under different price ranges, Estee Lauder needs to
INNOVATE constantly in order to stay ahead of the competition.

2. Potential Entrants (LOW)

Given the size of the market and that of the existing players, it will be extremely difficult
for a new player to enter into the market and emerge as a SERIOUS THREAT to Estee
Lauder or any of the other immediate competitors.

3. Potential Development of Substitutes (LOW)

With a rapidly ageing population around the world especially in the developed markets,
the demand for cosmetics/beauty products is expected to be strong and the threat of
substitutes looks unlikely.
4. Bargaining Power of Suppliers (LOW)
Since Estee Lauder is a billion dollar brand, it is expected that because of the volume of
goods it procures from its suppliers around the world and the numerous number of
suppliers, suppliers have LIMITED bargaining power.

5. Bargaining Power of Customers (HIGH)

Due to the presence of large number of brands who cater to different segments of the
market, consumers can switch easily and inexpensively from one brand to another.

External Audit: Opportunities

 Scope for anti aging products

 Americans over 65 years (1/5th of the population) spend a substantial income on anti
aging products.

 Life expectancy of the aging population will continue to improve.

 Youngsters and teenagers purchase age preventive cosmetic items to battle effects of
aging.

 The world’s aging population increasing over 2.5 times next 40 years à33%à China and
India.

 70 million people across the globe will reach an income level in the next 20 years.

 Rising demand from emerging and developing markets for personal products industry.

 The Europeans buying pattern was changing from buying skincare products from mall-
based specialty stores to pharmacies. Concentrate on selling skin care products through
pharmacies and through skin care clinics in the Europe
External Audit: Threats

 Top competitors in the cosmetics business

 Currency fluctuation risks

 Consumer complaints and inquiries due to animal testing for new products and many personal
care companies are dropping this form of product testing. The company will loose its brand
image if it receives complaints that it has been using animals to test new products.

 FDA regulations

 Increase in damaging environmental pollutions due to the use of aerosol and fluorocarbons.

 Restrictions on products that can be carried in-flight will affect travel retail business.

 Changes in the distribution policy and a difficult retail environment particularly in fragrance
category.

 The sale of the product is dependant on the disposable income of the consumers, a fall in their
incomes would result to a fall in the sales of the company’s products.

 Competitive pricing at mega stores.

External Factor Evaluation (EFE)

Analysis:

Estee Lauder’s EFE score has been computed as 3.4 which means that Estee Lauder is doing relatively
well in terms of responding towards appropriate threats and opportunities. This could be used as an
effective tool towards implementing alternate strategies which will be discussed in the next section.
Strategy Formulation

SPACE Matrix

By analyzing the available data, we selected the set of variables in each of the four categories, assigned
rating to them and calculated an average score. By adding FS and ES, we get 0.665 at Y axis and by
adding CA and IS, we get 0.85 at X axis.

Recommended Strategies:

 Backward, Forward and Horizontal Integration

 Market penetration
 Market development
 Product development
 Diversification
Boston Consulting Group Matrix (BCG)

Calculations:

Divisions Revenues % Profits % Profits % Market %

(Millions) Revenues (Millions) Share Growth
Rate

Skin Care $2603.875 37% $1947.19 37% 40% +10

Makeup $2744.43 39% $2631.35 50% 80% +15

Fragrance $1337.125 19% $526.2 10% 15% -10

s

Hair Care $351.875 5% $157.381 3% 5% -15

Model:

Recommended Strategies:
Internal-External Matrix (IE)

Calculations:
Total Weighted score of IFE = 2.8 , Total Weighted score of EFE = 3.4

Model:

Recommended Strategies:

 Backward, Forward and Horizontal Integration

 Market penetration
 Market development
 Product development

Grand Strategy Matrix:

Model:

Recommended Strategies:

 Market development
 Market penetration
 Product development
 Forward, Backward and Horizontal integration
 Related diversification
Quantitative Strategic Planning Matrix (QSPM)
Model:
Analysis:

The final group of strategies that we have chosen for Estee Lauder is “Intensive Strategies”.

Conclusion:

Intensive strategies include Market Penetration, Market Development and Product Development. These
strategies will require intensive efforts as Estee Lauder needs to improve its competitive position with
existing products. Intensive Strategies will help Estee Lauder achieve the following long-term
imperatives:

 Optimization of Brand Portfolio

 Strengthening of Product Categories

 Strengthening and Expansion of Global Markets

 Diversification and strengthening of channels of distribution

 Operational and Cost Excellence

Recommendations:
 Rely on the global brand awareness and build it further by endorsing celebrities from the local
markets.

 Have tie-ups with beauty salons, clinics etc to push their brands.

 Using market research, find the brands that have been doing poorly and makes strategies to either
improve it or close its operations. Having an idle brand will add on as a burden to the company.

 Do not have too many brands for the same product category since it will lead to cannibalization.

 Innovation is the key. Identify new customer needs like anti aging products and bring in products
that suit the customers better.

 Focus more on selling over the internet. It would be the best channel to attract the youth with so
much happening over the internet.

 The company should go ahead with the plan of acquiring Murad Inc.

 Introduce new brands that are priced more economically.

 Formulate new strategies for testing.

Strategy Implementation:
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Strategy Evaluation

Strategy-Evaluation Assessment Matrix:

RHESULT:
HHave
ave Major
as the
Continue
Internal
External
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FirmChanges
Progressed present
Occurred in the Firm’s
Strategic
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Strategic
achieving its Stated
Objectives?
NO
NO
YES