MBA

Estee Lauder Companies, IncStrategic Management: Case Study Report

Submitted to:Dr. Amal Asfour

Submitted by:Eng. Dalia El-Sheikh

Date:29th March 2012Introduction Manufacturers and marketers Skin care, makeup, fragrance and hair care products Estee lauder companies came in front in 1946 By Estee lauder and her husband Joseph lauder. Estee lauder companies has 26 brands Selling products in over 130 countries and territories Employs over 22000 people worldwide.

Vision Statement:Bringing the best to everyone we touchEstee Lauders current vision statement is vague, lacks the company's specification (products/services), has no time frame, 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. But it's easy to understand and inspiring all together.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 industryIn our proposed vision statement, we have clearly stated the three key aspects including claiming to attain absolute share of mind and heart of Estee Lauders 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 & colleagues based on fairness & 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: ElementsComponentsComments

1CustomersYes

2Products or ServicesYes

3MarketsNo

4TechnologyNo

5Concern for survival, growth and profitabilityYes

6PhilosophyYes

7Self-ConceptYes

8Concern for public imageYes

9Concern for employeesYes

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 AssessmentFinancial Ratios (2006-2007):Ratios20062007

Liquidity Ratios

Current Ratio1.511.49

Quick Ratio0.980.92

Leverage Ratios

Debt to Total Assets0.560.70

Debt to Equity1.322.42

Long-term Debt to Equity0.270.86

Times Interest Earned26.2519.28

Activity Ratios

Inventory Turnover8.448.22

Fixed Assets Turnover8.538

Total Assets Turnover1.711.70

Profitability Ratios

Gross Profit Margin 74% 74.98%

Operating Profit Margin 9.6% 10.66%

Net Profit Margin 3.78% 6.38%

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.

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

Internal AuditStrengths 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.

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 Lauders Internal Factor Analysis (IFE) is 2.8 which indicate that the internal functions/roles are strong at Estee Lauder Inc.

External AssessmentPolitical, 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 companys 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 Lauders 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

Porters Five Forces Model 1. Rivalry among competitive firms (HIGH) With the presence of large and powerful competitors like LOreal, 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.

Major Competitors: LOreal Procter & Gamble Avon Products Unilever Alberto-Culver Colgate-Palmolive Revlon Competitive Profile Matrix (CPM)

CommentEstee Lauders 3.17 score represent that it is competing aggressively with its competitors in the domestic and global markets and its rank is the 1st among its competitors.

External AuditOpportunities 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 worlds aging population increasing over 2.5 times next 40 years 33% 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

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 lose 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 dependent on the disposable income of the consumers, a fall in their incomes would result to a fall in the sales of the companys products. Competitive pricing at mega stores.

External Factor Evaluation (EFE)

Analysis:Estee Lauders 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.

Estee Lauder's Long Term Objectives Innovative cosmetic products of the highest qualities. Deliver outstanding service. 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 Eliminate waste and reduce inefficiencies Be responsible citizen in every community we serve.

Strategy FormulationSPACE Matrix

AnalysisBy 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:DivisionsRevenues (Millions)% RevenuesProfits (Millions)% Profits% Market Share% Growth Rate

Skin Care$2603.87537%$1947.1937%40%+10

Makeup$2744.4339%$2631.3550%80%+15

Fragrances$1337.12519%$526.210%15%-10

Hair Care$351.8755%$157.3813%5%-15

Model:

Recommended Strategies:

Internal-External Matrix (IE)Calculations:Total Weighted score of IFE = 2.8 , Total Weighted score of EFE = 3.4Model:

Recommended Strategies: Backward, Forward and Horizontal Integration Market penetration Market development Product development

Grand Strategy MatrixModel:

Recommend 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.While the contingency strategies group (Strategy B) is "Integration Strategies".

ConclusionIntensive 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.