Core Competency Analysis of LOreal - Case Study Example

Core Competency analysis of L’Oreal

Table of Contents

1. Introduction3

2. Core competencies Theory3

Importance of core competencies and sustainable competitive advantages3

Limitations of Core Competency assessment4

Hamel and Prahalad’s Core Competency Theoretical Framework5

3. Analysis7

Core competencies of Loreal7

5P’s and L’Oreal’s competency strategies13

Weaknesses in the competency framework of L’Oreal14

4. Recommendations16

5. Conclusion17

Reference List19

• 1. Introduction

L’Oreal is one of the world’s largest cosmetics and beauty products firm. The success of the company rests in their superior focus on quality and the specific needs of consumers across diversified regions (Euromonitor, 2012). High quality products, investment in research and development and a wide portfolio of products have been the main competencies of the firm, which has led it towards acquiring strong market goodwill. The famous brands which operate under the flagship of L’Oreal are Maybelline, Garnier, Lacome, Redken etc. the company owns over 23 international brands across 66 nations (Euromonitor, 2012). The prime strategy of the company towards internationalization is seen to be diversification and adaptation. This has facilitated the company to target both high end and cost conscious consumers. The company alters their marketing, pricing and distribution strategies based on the specific regions market conditions. The widespread presence across a number of nations has also aided L’Oreal to exploit region specific competencies, such as low manufacturing costs in China (Euromonitor, 2012). The research study analyses the core strategies of L’Oreal and provides recommendations in terms of overcoming strategic barriers.

• 2. Core competencies Theory
  • Importance of core competencies and sustainable competitive advantages

Core competencies are the resources, skills and specialised abilities possessed by a firm which enables it to survive in the market, earn adequate profits and also counter competition effectively. Companies develop their long term strategies once the core competencies are identified (Kaslow, et al., 2007). Core competencies are the basis for innovation, whereby companies try to identify how they can utilise their abilities in a unique manner so that differential advantages can be delivered to consumers. A firm designs product related strategies and its internal operational strategies on the basis of such core competencies (Slocum, Jackson and Hellriegel, 2008).

The core competencies theory was developed way back in 1990 by two scholars, C. K. Prahald and G. Hamel. The core competencies of an organization were explained by the authors to be the valuable capabilities that deliver the organization with revenue earning capabilities and aids towards countering the competitive forces existing in the market. Such capabilities might either be rare, which other firms might find it difficult to imitate, or they may be common but used strategically so as to deliver unique advantages. However, sustainable competitive advantages are obtained from those key skills which deliver the organization with unique and differential advantages from that of its competitors. Core competencies facilitate enhancing the competitive abilities of the organization (Wiek, Withycombe and Redman, 2011). While evaluating the sustainable core competencies, the following aspects must be taken into consideration. These are essentially:

Relevance- The core competency must be well aligned with the business operations and must aid in attracting customers. If customers cannot be attracted, then competitive advantages cannot be obtained. There might be certain categories of resources which although are valuable, might not be able to deliver the firm with suitable revenue, due to the organizational framework. Such resources are just additional cost burdens (Ljungquist, 2007).

Imitation- The core competencies which deliver an organization with special advantages, over its competitors are classified as non imitable. It is such competencies which provide the organization with long term sustained advantages and secures it with a strong market position (Aral and Weill, 2007).

Breadth of Application- The core competency must facilitate the firm to provide market development opportunities, such as the potential ability to venture into new markets internationally or to develop and upgrade the existing versions of products etc (Cardy and Selvarajan, 2006).

• • Limitations of Core Competency assessment

Although the core competencies framework is considered to be an important theoretical lens for assessing the resources of a firm, the technique also possesses certain limitations. One of the limitations is related to the aspect of identification. Managers many at times fail to recognize core competencies and its extent of usefulness. Also, many at times, managers may give greater importance to those competencies which are actually less useful and cannot give sustained advantages. Hence, the model of core competencies can only be successfully applied when identification of competencies, skills and resources of the organization can be done effectively (Yang, et al., 2006).

Another shortcoming in terms of the core competency framework is that, it might not provide the organization with sustained competitive advantages. If the competencies become easily imitable by competitors, they may be considered less useful for the firm leading to loss of competitive advantages. Additionally, core competencies providing competitive advantages might be lost in case of those resources which are easily transferable. A suitable example in this respect is human resource. If skilled employees leave the organization, then the organization may lose its core competencies, hampering their strategic advancement. For instance, it is difficult to imagine Virgin Atlantic without the dynamic leadership of Sir Richard Branson (Mehta and Peters, 2007).

Core competencies themselves cannot deliver advantages. It is essential that suitable systems, technologies and human resource are applied upon it so as to extract the right type of utility. Hence, much support activities are required to be developed around the identified competency (Timmerman, 2009).

• • Hamel and Prahalad’s Core Competency Theoretical Framework

The core competency theory developed by Hamel and Prahalad focuses on specific, integrated and collaborative forms of skills, attitudes and knowledge which provide competitive advantages to a firm (Newbert, 2007). The theory upholds the assumption that organizations should not try to fight off competition, instead they must focus upon the creation of new competitive attributes. The following model has therefore been developed by the two scholars in respect of how organizations develop core competencies in the international business environment. The framework consists of four important criterions based on which a firm is evaluated and their competitive abilities towards growth and internationalisation (Denicolai, Cioccarelli and Zucchella, 2010). They have been discussed as follows:

Fill in the blanks- The firm tries to identify how existing core competencies can be used in the existing markets.

Premier plus ten- The firm deploys new core competencies in the existing markets ensuring that they remain useful for the coming ten years.

White spaces- The firm uses its existing competencies to enter into new markets.

Mega opportunities- New potentials and in new markets are identified. This opens up new and unfamiliar opportunities for the firm (Hoffman, Hoelscher and Sorenson, 2006).

From the framework it is understood that market and product development are the two most important aspects based upon which a firm can develop and strategically utilise its core competencies. In addition, Prahalad and Hamel’s theory also states that an organization should focus on four essential aspects for deriving core competencies, namely; resources, capabilities, competitive advantages and strategies (Agha, Alrubaiee and Jamhour, 2012). The model also suggests that an organization is required to identify core competencies on the basis of three essential aspects, stated as follows:

• Provides the ability to enter new markets
• Contributes towards providing advantages to consumers
• Are difficult for customers to imitate

Mere identification and strategic utilization of core competencies are not enough for long term sustenance. Firms are required to consider the following essential aspect, so as to ensure long term advantages (Agha, Alrubaiee and Jamhour, 2012).

• The duration for which the core competencies can be preserved
• The degree of importance of the core competencies to different stakeholders, specially consumers
• The opportunities which would be closed if the identified competencies are lost
• 3. Analysis
  • Core competencies of Loreal

L’Oreal is the world’s second largest beauty and personal care products manufacturer. In terms of focus, the company is seen to mainly adhere to beauty and personal care products. Hence, their product scope is narrow. Despite this, the company has diversified their products to target different types of consumers ranging from children to the elderly. The company is renowned for their high quality products and their strong innovative capabilities in the field of beauty and personal care products (Euromonitor, 2012). The core competencies of L’Oreal are seen to be based upon the following essential aspects:

Figure 1: Core competencies of L’Oreal

The core competencies of L’Oreal are seen to be mainly centralised around their products. One of the main reasons why L’Oreal has been successful towards developing a diverse product strategy is due to their ardent efforts towards innovation. The elements of core competencies of L’Oreal are assessed using the SWOT framework.

Table 1: SWOT analysis for L’Oreal

Strengths

Weaknesses

Opportunities

Threats

1) Strong innovation

2) Strong portfolio of products

3) Skilled employee support

4) Marketing capabilities

1)Product development in the hair care segment has remained weak

2) Lower emphasis on natural care products

1) Ability to expand into the natural products care segment

2) Ability to develop electronic beauty and personal care gadgets (such as Clarisonic)

1) Weakening of the economic conditions in nations such as China

2) Increasing competition in the markets

L’Oreal can think outside the box than the regular beauty care firms, enabling the firm to achieve superior market position. The exclusive focus upon beauty care segment has facilitated L’Oreal to diversify their products. This has aided the firm to make targeted investments in advertisement and marketing efforts as well. The company has been able to research and develop high value products mainly due to their highly skilled employees (Telphon, et al., 2013). At L’Oreal, employees are given immense importance and every care is taken to ensure that the workforce remains highly satisfied with the internal environment. The strong employee focus has also delivered the company with reduced turnover and the ability to retain talented employees for a long period of time. Additionally, it is expected that the strong internal capabilities in respect of product development would enable the company to venture into the natural products category as well (C.W Chen, T.H Chen and Lin, 2011). Some of the personal care appliances of the firm such as Clarisonic, have been receiving positive response from the market. Hence, the company may venture into developing more products in the category of personal care appliances (Telphon, et al., 2013). The core competencies of L’Oreal can further be evaluated on the basis of the VRIO framework shown as below:

Table 2: Core competencies analysed based on VRIN (Valuable Rare Imitable Non-substitutable) framework for L’Oreal

Sources of core competency

Valuable

Rare

Imitable

Non-Substitutable

Positive

Negative

Advertising and marketing abilities

Yes

Yes

Yes

Yes

Quality of products

Yes

Yes

No

Yes

Innovation, research and development

Yes

No

Yes

Yes

Price

Yes

No

Yes

No

Employees

Yes

No

Yes

No

Product diversity

Yes

No

Yes

Yes

Customer loyalty

Yes

No

Yes

Yes

Financial position

Yes

No

Yes

Yes

From the carried out VRIN analysis, it can be seen that L’Oreal possess a strong set of competencies which are valuable and non substitutable. However most of these competencies are not rare and can be easily imitated by competitors. This indicates that the competitive advantages position of the company is not very sustainable, making the firm vulnerable to lose to competitors. Hence, it is essential that the firm develops strategic measures to increase rare and valuable competencies so that distinctive advantages can be provided to consumers (Euromonitor, 2012).

The competencies existing for L’Oreal can also be analysed using Prahalad and Hamel’s core competency theoretical framework, shown as follows.

Table 3: Core competency theory in international markets (by Prahalad and Hamel)

Core

competencies

New

Premier plus ten

(Increase product portfolio through strategic Innovation)

Mega opportunities (natural products, personal care appliances)

Existing

Fill in the blanks

(skin care, Cosmetics and personal care products, large number of patents)

Existing

White spaces (personal care appliances)

New

Market

The framework of Prahalad and Hamel is seen to uphold the aspect that core competencies and sustainable advantages are mainly procured through product and market development. In this respect, supporting factors such as the existence of a strong management teams, drive to innovate, financial stability, emphasis on quality and strong marketing capabilities are considered to be important aspects which impact the development of core competitive capabilities and advantages. It is essentially based on such factors that the company was able to expand globally (Keller, Parameswaran and Jacob, 2011).

L’Oreal is seen to focus upon skin care products, upon which the company’s core competencies are seen to be mainly developed. Between the years 2006 and 2011, the company made a number of new launches in respect of their brand Lacome such as Visionaire. Additionally, the China based research institute of L’Oreal stated that since 2011 till 2016, L’Oreal has mainly focused upon improving the quality of their skin care and cosmetic products (Euromonitor, 2012),. The maximum market share for L’Oreal comes from the sales of their skin care products. It is also between this time period that company gained maximum global expansion and its market in a number of nation of the Middle east and Asia were seen to grow (Telphon, et al., 2013).

The tremendous success in the skin care products has provided L’Oreal with sufficient confidence to venture into the area of developing skin care appliances. At present, L’Oreal operates a number of brands in a wide number of nations in respect to cosmetics. In the recent times, the company had acquired the Columbian cosmetic brand, Vogue. The proposed purchase of Urban Decay enables L’Oreal, to target the younger population in North America. Despite a strong market in terms of skin care products, the company is seen to lose their grounds in the hair care segment (Hitt, Ireland and Hoskisson, 2012).

One of the strong core competencies held by L’Oreal is their strong financial stability. The company had been successful at lowering their debt capital ratio from 14.4% in 2009 to 0.3 % in 2010 (Telphon, et al., 2013). Amongst intangible resources, patents are considered to be a highly valuable resource for the company and a source of core competency. The technological patents held by the company are considered to be immensely valuable. L’Oreal currently possesses 612 patents which the company was successful at achieving due to their well developed research and innovation initiatives. Presently, the research studies of the company are oriented towards developing products in the natural skin care and cosmetics segments. Reputation and a strong brand image have been considered to be vital for L’Oreal and the firm and have played a contributing factor in terms of their global expansion and sustainability development. The company specialises both in high end brands as well as targets the mass market by developing economically priced product lines (Simons, 2013).

Another core competency factor input which has been quite valuable for L’Oreal is their employee base. The company has been able to develop a strong system of operations, indulge in innovation and able to deliver adequate value to customer due to the ardent efforts undertaken by the employees. For this reason, L’Oreal ensures that employees are provided with a congenial environment to function well. The company is also seen to provide exclusive training to employees to ensure their skills are up graded with respect to new technology (Tsaroucha, et al., 2013).

• • 5P’s and L’Oreal’s competency strategies

Price (high competency factor) - In terms of pricing, the firm is seen to manufacture both high end as well as economically priced products so as to enable targeting the mass market. The company operates internationally by following the adaptation policy, whereby different pricing techniques are adopted in diverse location (Pryor, et al., 2007). Market conditions are essentially considered by the company before suitable pricing strategies are implemented.

Product (high competency factor) - The Company mainly specialises in skin care, hair care and cosmetic products. In the recent times, the organization is seen to venture into the personal appliances segment as well.

Place (high competency factor) - L’Oreal operates globally targeting consumers from different ethnic backgrounds. Products of the firm are also diversified based on the particular beauty and personal needs of consumers from different nations. Research and development therefore also becomes highly location centric (Pryor, et al., 2007).

Promotion (high competency factor) - One of the strongest core competencies of L’Oreal is seen to be their marketing and advertising strategies. The company uses a number of product and beauty related concepts for promoting their products. Celebrities and creative concepts are put to use for product promotion. The promotional ventures also act as an effort to provide awareness to the consumers in respect of the company’s products (Pryor, et al., 2007).

Profit (Moderate to high competency factor) - L’Oreal has been successful at earning sufficient profits so as to provide adequate returns to shareholders as well as retain profits for future expansion and growth. However, the future prospects of profitability depend on the firm’s ability to maintain market share.

• • Weaknesses in the competency framework of L’Oreal

Despite strong market presence, the firm’s market share in the recent years was seen to deteriorate. The following figure depicts the fall in the market share of the firm, despite increase rise in sales, indicating that the firm has been facing stiff competition in the market (Rosemann and vom Brocke, 2015).

Figure 2: L’Oreal’s market share compared with its sales

(Source: Euromonitor, 2012)

The fall in the market share was primarily due to deterioration in the sales of hair products of the firm. Additionally, competitors of L’Oreal were seen to develop a number of herbal products which led the firm to lose much market share. However, the diversification of products in the existing categories and venturing into newer markets has facilitated the organization to ensure that their sales remain high. In the year 2008 and 2009, the company was seen to perform well due to the acquisition of Yves Saint Laurent. The acquisition had also helped the firm to beat the general industry growth rates. However, post the year 2009, consumer spending upon luxury products such as beauty care had fallen significantly due to the economic crisis. This reduced the market share of the firm along side of a reduced rate of growth. In the year 2010 and 2011, the beauty care segment mainly witnessed growth in oral care, bath and shower products. L’Oreal has lower presence in these segments (Euromonitor, 2012).

In terms of skin care products as well, the company market share is seen to reduce especially in China and in the Middle East. The strong demand conditions existing for skin care products in the Asian nations are seen to attract a number of retailers. These firms are seen to provide competitive advantages above the offering provided by L’Oreal, such as natural ingredients based products. Also, a number of economically priced skin care products are seen to overtake the products developed by L’Oreal. Brands such as Unilever are seen to overtake L’Oreal and launch a range of salon hair care products. The popularity of Tresemme and Dove in respect of hair care products are seen to overtake the position of L’Oreal hair care products. Western Europe is seen to be the prime market where the sales of L’Oreal in terms of their hair care as well as skin care products was seen to drop (Telphon, et al., 2013).

The cosmetics segments for L’Oreal have been seen to flourish due to superior quality and affordable pricing strategies. However, strong competition is seen to loom for the firm in the cosmetics segment as well. It is also observed that the research and diversification strategies adopted in the cosmetics segments have been comparatively lower than the initiatives taken in the skin care segment (Telphon, et al., 2013). Also, outside the BRIC nations, product diversification has remained low. The company’s branded products are seen to achieve greater success and market share in North and South America and the Middle East nations. The market share of the high end products of the brand has lower consumer preference in Asia. Maybelline, one of L’Oreal’s sister concerns is seen to overtake it, especially in the segment of colour cosmetics (Euromonitor, 2012). This indicates that a number of sister brands and acquired companies of L’Oreal have been performing well in the cosmetic as well as in the skin care segment, while the products of L’Oreal itself are seen to decline (Telphon, et al., 2013).

Since the company owns a number of brands it essentially operates in a decentralised manner. This makes it difficult for the firm to exercise control. Hence focus on specific problem becomes hard to achieve as different products face different market response and feedback. For instance, the issues and developmental needs oriented with Lacome and Maybelline products are not the same, due to their differentiated products features and offerings. A diversified approach blurs the focus in respect of research and innovation. It has also become hard for the firm to control costs in the skin care segments in terms of making improvement in their product offerings (Rosemann and vom Brocke, 2015). Difficulties in cost reduction have been mainly due to the rapid alterations brought about in government regulations. The exchange rate fluctuations are also making it difficult for the company to adopt the adaptation policies, as L’Oreal does not have manufacturing locations situated in every nation of operation (Telphon, et al., 2013).

• 4. Recommendations

Wicked problems essentially refer to those issues which are difficult or impossible to solve, due to their interconnection with other issues, the burden of the economy, the involvement of other opinions and contradiction with different knowledge backgrounds. The issues existing at L’Oreal have been analysed using the wicked problems theory.

Table 4: Problems analysis at L’Oreal

Key issues

Wicked problems

Reduced innovation in the recent times, leading to loss of competitions

No

Signs of weakness for some products in few markets

No

Falling share in the hair care segment

No

Lack of innovation in personal care appliances segment

No

Weakness in innovation of natural products

No

Difficulty in controlling the strategic sub units, due to rapid diversification and the ownership of a number of brands

No

Difficulties in terms of maintaining pricing strategies due to fluctuations in foreign exchange

No

From the wicked problems matrix, it can be assessed that most of the issues of the firm does not fall in the wicked category. This indicates that the problems can be solved utilising suitable strategies of operation (Sanghi, 2007).

L’Oreal may consider developing worldwide brands and distribution networks, respect of few of their brands, if not all. This would reduce the overall cost of operations by enhancing economies of scale. Also, greater control over the distributional and operational strategies of products can be achieved. However in this respect, the company may try to maintain a diversified promotion strategy (Real, Leal and Roldán, 2006).

The fall in the market share of certain regions such as in Western Europe can be balanced by expanding into newer regions such as Thailand, Vietnam and Saudi Arabia. This would create international brand awareness for the firm. Additionally, such a strategy would also lead to developing new brands for the newly entered markets, keeping in mind the specific needs of consumers. Also, greater number of consumers can be attracted from the new markets, helping the organization to further strengthen their financial capabilities (Leigh, et al., 2007).

L’Oreal requires to strengthen their natural ingredients based products and also the personal care appliances segment. Research and product innovation in this respect is expected to provide the organization with a number of advantages to grow. Also, further development in the hair care products is essential. Brands which were recently acquired such as Vogue, which essentially belongs to the high end category, were seen to be less popular in Asia. L’Oreal may be able to earn profits by launching such brands into the markets of Russia, China and India.

• 5. Conclusion

L’Oreal has been able to grow remarkably across the globe. The core competencies of the firm which include intensive research and development of a wide portfolio of products in the beauty and cosmetics segment have aided the firm to emerge profitably in a number of markets. L’Oreal’s ownership of a number of patents has further enabled it to diversify products. Backed up with strong financial stability and a highly dedicated team of employees, the company has been successful in most of the markets in which they have expanded into. However, in the recent times, decline has been witnessed in terms of the organizations share in hair care products. The firm lacks in developing natural products which is seen to rapidly overtake the international beauty and personal care market. The personal care appliances segment also requires adequate improvement. Suitable adaptation and worldwide diversification strategies may aid the organization to overcome their deteriorating market share. Additionally, the firm has undertaken a number of acquisitions which is expected to enhance its position.

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