Method

Information was collected both from on-line resources (see webography) and an interview with a marketing manager at L’OREAL.The interview method used is that of the “long interview” which is designed to maximize the value of the informant’s time through the use of an open-ended questionnaire.

Background

L’OREAL has been active for over one century in the beauty and cosmetics markets, ranging from sunscreens to high end perfumes. It is the number one company in its sector.  Its mission is “to offer populations all around the world, products attuned to their needs, their cultures and their aspirations” (L’OREAL annual report 2009).

L’OREAL dynamically manages a portfolio of circa 25 brands.

Brand Positioning

L’OREAL has products for various categories of consumers, both mass, medium and high end. The pricing strategy is based on consumers’ perception of value (mass + prestige = Mass-tige market).

L’OREAL sells cosmetics through various channels from department stores to professionals in the industry.

L’OREAL spends 3.5% of its revenues on R&D.

L’OREAL’s portfolio management is inseparable from its brand positioning strategy. Chailan (2010) sees 3 main attributes to L’OREAL’s brand positioning strategy:

·         Radicalization: Brand multiplication makes it necessary for each brand to emerge with its own DNA, and to render brands completely discriminatory from each other.

·         Arbitration: dynamic and balanced network of complementary brands

·         Expansion matrix: globalization strategy, innovation attribution

R&D is centralized at L’OREAL, which induces high economies of scope but conflict may arise when attributing innovation to brands.

New Product Launch

A 4-step process that is applied both for extensions of existing product lines (not innovation, but rejuvenation) as well as for genuine innovations.

Phase 1: Qualitative sounding

A market research articulated around an unfinished product and specifically designed for the consumers to enrich the content. The following techniques might be used:

-          Mood boards

-          Image projections

-          Blank packaging – name only

-          No name, packaging only

Usually carried out on a target group of 50 to 100 people. Consumers are stimulated to provide as much feedback / feelings and potential upgrade to the product.

Extensive use of verbatims: to figure out a first sketch of communication strategy / story telling as well as product and image improvement potential.

Such process is conducted locally in a few “typical markets”. Feedback is centralized with a Paris-based product development team.

Initiatives may come from the head office or from local branches. As our informant put it:

“In l’Oreal’s culture, marketers at all level of the organization, and all premises are stimulated to make things move. Ideas are generated on a continuous basis.”

Phase 2: Quantitative study

Any product entering phase 2 will generate costs to the tune of 10 times more than phase 1’s related costs. Therefore, whether a product makes it the phase 2 is a strategic decision.  

-          R&D was consulted on the feasibility

-          Manufacturing has provided insight on the Cost of good sold pertaining to such products. Such costs are bearable

-          The production tools currently available can deal with mass production of such product

In phase 2, market research firms are recruited to conduct a thorough analysis (circa 1000 people sample) of product feedback and purchase intention. As a result, the product may still evolve, depending on customer feedback.

Such research leads to results to purchase intentions vis-à-vis a statistical norm for the sector. Such norm is calibrated on a much larger sample, stemming from a database that is constantly enriched by the market research firm.

When the candidate product shows below –norm result, the product idea is abandoned. When the candidate product’s quantitative results are at the norm, normally the experiment would not be pursued, unless this product represents a reasonable substitute to a slow-mover product of L’Oreal’s spectrum (“dog”).

When the product is beyond the norm, normally the product enters phase 3.

Phase 3: Global feedback

All l’Oreal local office around the world (at the exception of such offices where the head office or local management decides not to pursue for local reasons – such as regulation, lack of appetite, barriers to entry) are requested to conduct a local market appetite assessment.

Local marketers normally have a thorough understanding of their local market.  Therefore, in some instances, previous similar product experience, locally internal available data and internal salespeople feedback are considered sufficient to size the opportunity.

Sizing the opportunity means to determine a product’s potential in terms of units over a particular horizon.

Some local markets are considered as good trendsetting benchmarks. Therefore, market research is very often conducted locally in such markets.

At the end of phase 3, all local offices grant their local finance people the numbers necessary to size of the opportunity in monetary terms.

Phase 4: Go / No Go decision based on NPV calculations

Local finance people use all assumptions provided my marketers to calculate the NPV of the investment and future cash flows.

Such NPV is then communicated to the head office, who in turn, sums up all numbers communicated by the local units, brings in the cost of development, manufacturing, transportation and overheads.

The final decision to launch the product is based on such comprehensive calculation.

New product launch decision and portfolio management

Portfolio Balance:

Radical brand positioning, and brand portfolio arbitration enables L’OREAL to avoid cannibalization. Each brand has an identified DNA and “technological furlow” (Chailan, 2010).

Each brand has a very precise furrow, which means that others can’t encroach on it

(Chailan, 2010).

Differentiation and competitive advantage

·         Adding targets

One of today’s big criteria when launching a product is to research adding targets; the limit is linked to the point where adding a product no longer adds targets, but involves destructive competition between brands.

·         Economic limit in terms of efficiency and the risk of ultra-segmentation.

Strategic fit

Product portfolio management is closely linked to the company’s strategy. A good strategy aims at obtaining a sustainable competitive advantage.

·         L’Oreal’s competitive advantage lies in its proximity to consumers.

·         L’Oreal is concerned with moments of truth.

Product Deletion Decision

Decision to exit a product is NPV-based as well.

Mathematical models are used to assess the collateral damage of removing a product. Such modeling is outsourced to big consulting firms who have recognized proprietary models.

Many variables are incorporated in the model, such as competitive positioning, relevance of (internal) substitutes, bargaining power towards, etc.

As explained by our informant, the findings should typically enable the company to answer the following questions:

·         How will my competitors’ market share increase? Sometimes it is better to keep a slow mover so that the global market share – across all products does not suffer.

·         Are there any barriers to entry for competitor in this segment? That is, is my share of voice so big that there is little threat to be attacked on this product? Sometimes it is good to keep a slow mover because there is, and can be no competition.