L’Oreal’s INDUSTRY ANALYSIS: THE EXTERNAL FACTOR EVALUATION (EFE) MATRIX Assignment | Get Homework Help

Description

This is the 3rd part of a project based on L’Oreal. I am attaching, a completed example of a Starbucks paper and the 1st two parts of the project. Also the instruction to this specific part but here is a summary of it. EFE 1. Choose 6-10 external factors for analysis (total factors will depend on the nature of the industry) 2. Four pages or less (not including chart) 3. Chart must begin the assignment and be on one page only 4. For each factor write a paragraph or two as necessary discussing the nature of the factor, how it will impact the firm, and its importance to the future strategy of the firm (i.e., tell me why you assigned the rating score that you did). 5 Each and every factor included MUST have a citation and be external to the firm…remember, if the firm controls the factor, by definition it is internal and thus should NOT be included in this assignment.

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Business Strategy and Policy

Assignment #3

 

 

 

 

 

 

 

 

 

 

 

L’Oréal’s Porter Five Forces Analysis

Bianey Ibekwe

 

 

L’Oréal’s Porter five forces analysis

 

                                                                          

BARRIERS TO ENTRY

Moderate

                                                       

RIVALRY

Intense

BUYER POWER

High

SUPPLIER POWER

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREAT OF SUBSTITUTES

Low

 

 

 

 

 

 

 

 

Introduction

            L’Oréal is a multinational company originating from France, which specializes in beauty and personal care products. It operates in 130 countries with and employment of 50,000 individuals, 24% of which work in France. 3% of the company’s consolidated sales are invested in research and development, accounting for 2900 of its employees. L’Oréal is currently the leading company in the beauty and cosmetics industry, which makes it hard for it to have forces that might push for its changes in operations and modes of doing business. However, L’Oréal has challenges that can be resolved by profoundly understanding the industry.

Rivalry

The large numbers of competitive companies in the industry pose as one of the elements for the intense rivalry in the industry. The beauty and cosmetics industry have extreme competition levels, with L’Oréal being the industry leader but facing very strong competitors. The global cosmetics industry had a growth of 5.5% in 2018 as compared to 2017. The main products in this market include skincare, hair products, perfumes, makeup, toiletries, oral cosmetics, and deodorants (Shahbendah 2020). In 2018, skincare products were the best performing commodities in the industry. Haircare products accounted for a 21% growth, while makeup was 19%. Skincare products have been forecasted to remain the most profitable commodities in this industry, with a projection of a 20.1 billion US dollar market growth between 2014 and 2019. L’Oreal was the leader of this sector in 2018 with a revenue of 31.2 billion US dollars among the wide variety of competitors, including Unilever, Procter & Gamble, the Estee Lauder Companies, Shiseido, Asia Pacific among so many companies.

Another factor leading to the industry’s intense rivalry is the high product diversity embraced by the companies in the industry. For example, there has been high diversity in the makeup products for a couple of years. Many companies ended up coming up with a wide variety of foundations and concealers, with most of them having 40 to 50 shades ranging from the variations in skin tones present in the USA. Most companies feel that embracing diversity is a collective responsibility of the entire team involved. However, many of the companies inculcate diversity in their operations; the older group of individuals is always left out (Hickman, 2020).

Intense rivalry in the industry also comes along with the problem of differentiation. The primary differentiation challenge in the industry comes about in the packaging of products. It is so hard for companies in the industry to make their products so appealing to their customers. Since the products cannot stand out, it brings about some rivalry because all the players in the game must put some additional effort into winning their consumers. Companies always turn out so creative to be able to lure more market share for their commodities.

Threat of substitutes

            The industry has a low threat when it comes to substitutes. The beauty and cosmetics industry products have been a great need in society, and there is no possibility that individuals will not be interested in these products. People will always require beauty, skincare, and personal care products making the threat for substitution low. Herbal alternatives have been one of the major substitutes for the cosmetic products. However, the global market share for herbal cosmetics is at 6%, which is low due to various challenges. They are chemical-free products produced from roots of plants, flowers, herbs, or even leaves. Herbal cosmetic products do not enjoy a significant market share since there is a need for immense clinical treatments and ease in counterfeit availability (Reportlinker, 2019).

Barriers to entry

            Most of the new entrants in the industry have barriers, but they end up being counteracted by the exceptional growth of the industry. The obstacles faced here include the expertise and technicality required in manufacturing the products and testing the products to meet the standards. These two processes are quite complicated, and they need topnotch skills and high capital to perform them. Testing products on animals got banned in the industry, which brought about complexity in the operations, making it hard for new entrants. However, the beauty and cosmetic market gradually grows, which ends up neutralizing the adverse intensity of the barriers to entry. Since the harmful effects of the hurdles are neutralized, the threat of new entrants in the industry is just moderate and does not affect other companies.

Buyer power

The cosmetic and beauty industry is full of both global and local brands producing products which are available to consumers. The cost of moving from one commodity brand to another brand is also not very high. However, most buyers prefer brand loyalty due to skin sensitivity, even if the switching costs are not high. The overall factors, although, do not bring a restriction to buyers, making them stick to a specific brand. Most commodities in the industry are of almost similar quality and are offered at nearly the same or more competitive prices. This kind of situation lets buyers have bargaining power in what they want to consume from a wide variety of products. Since buyers have a bargaining power, the cosmetics companies need to keep in mind that buyers can easily switch to any other brand in the market at any time if they feel one specific brand does not suit them enough. This idea of buyer bargaining power guides the companies in production and pricing strategies to maintain their customer share in the market.

Supplier power

            Most suppliers in this industry have low bargaining power since the resources used in the manufacturing of cosmetic products are not scarce, and there are many numbers of suppliers of these raw materials. Such a situation enables the companies to bargain with the most efficient supplier who suits their needs in attaining their objectives. The cosmetic market has immense growth and is characterized by numerous sales; due to this, the suppliers focus on providing high-quality resources to acquire the companies’ supplying contracts. The value of the companies by the suppliers is what makes it possible for international brands to negotiate using a dominant approach. Therefore, suppliers have a low bargaining power because they are highly dependent on the companies because the supply sector has stiff competition and when a company does not get what it wants from one, it just hopes off to another supplier (Pereira de Carvalho, A., & Barbieri, 2012)

Summary

            From Michael Porter’s five forces model, it is evident that the cosmetics and beauty industry has intense rivalry because of the many competitors in the industry supplying commodities that can be easily substituted by other brands. The industry’s intense competition also comes about due to the massive market share growth the industry enjoys. Companies also come up with commodities that are not so highly differentiated, and customers tend to have high bargaining power. They can easily decide to stop using a particular brand if they do not feel it satisfies their needs anymore. Intense rivalry is also possible due to the high levels of diversity in production. For example, L’Oréal diversifies its production by producing different varieties of products, ranging from beauty, makeup, or even perfume.

From Porter’s model, it is also evident that the buyers in the market have a high bargaining power. This force is essential to players in the industry. The manufacturers must have a deep understanding of their buyers since they are the success of the business. Companies will need to find ways of improving their products to instill brand loyalty to their buyers because they are vulnerable, and their loyalty can move to any other brand they feel suits them best. On the other hand, the suppliers have a low power in the industry because of the easy availability of production resources. These three forces are the most effective and vital in the running of the industry. The buyers bargaining power pushes companies to develop their commodities and set prices that are friendly to customers. Then the high-level rivalry also enforces growth in the industry due to high competition that most companies have to deal with in production and profitability. The moderate barriers to entry and low threats of substitutes, on the other hand, are also vital forces in the industry, but they are limited in their effectiveness. The barriers to entry in the market are mainly due to the complexity in production and high capital requirements. These barriers, although, get an offset from the large market growth the industry has, therefore reducing the negative impacts of the barriers to entry.

 

 

References

Shahbendah, M. (2020, January 22). Topic: Cosmetics industry. www.statista.com. https://www.statista.com/topics/3137/cosmetics-industry/

Hickman, J. (2020, January 24). Is the beauty industry as diverse as it should be? Let’s check-in. Well+Good. https://www.wellandgood.com/good-looks/diversity-in-the-beauty-industry/

Reportlinker. (2019, September 30). The global herbal cosmetics market at a CAGR of over 6% during the forecast period. PR Newswire: press release distribution, targeting, monitoring, and marketing. https://www.prnewswire.com/news-releases/the-global-herbal-cosmetics-market-at-a-cagr-of-over-6-during-the-forecast-period-300927718.html

Pereira de Carvalho, A., & Barbieri, J. C. (2012). Innovation and sustainability in the supply chain of a cosmetics company: a case study. Journal of technology management & innovation, 7(2), 144-156.

           

Perform an External Factor Evaluation Matrix on your chosen corporation.  The critical thing to remember about this analysis is that you should develop a thorough understanding of the factors chosen.  Because of the importance of factor knowledge, you should acquire a minimum of five external sources of information regarding the factors that you choose. Your analysis should include a chart similar to the one attached to this document.

 

Parameters:

 

EFE

  • Choose 6-10 external factors for analysis (total factors will depend on the nature of the industry)
  • Four pages or less (not including chart)
  • Chart must begin the assignment and be on one page only
  • Double spaced
  • Typed
  • For each factor write a paragraph or two as necessary discussing the nature of the factor, how it will impact the firm, and its importance to the future strategy of the firm (i.e., tell me why you assigned the rating score that you did).
  • Each and every factor included MUST have a citation and be external to the firm…remember, if the firm controls the factor, by definition it is internal and thus should NOT be included in this assignment.

 

Due Date: Uploaded to Canvas, Saturday, June 27th (3 weeks)

 

 

INDUSTRY ANALYSIS: THE EXTERNAL FACTOR EVALUATION (EFE) MATRIX

An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Illustrated in Table 1, the EFE Matrix can be developed in five steps:

 

  1. List key external factors as identified in the external-audit process. Include a total of from eight to ten factors, including both opportunities and threats affecting the firm and its industry. List the opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever possible.

 

  1. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm’s industry. Opportunities often receive higher weights than threats, but threats too can receive high weights if they are especially severe or threatening. Appropriate weights can be determined by comparing successful with                                             unsuccessful competitors or by discussing the factor and reaching a group consensus. The sum of all weights assigned to the factors must equal 1.0.

 

  1. Assign a 1-to-4 rating to each key external factor to indicate how effectively the firm’s current strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are based on effectiveness of the firm’s strategies. Ratings are, thus, company based, whereas the weights in Step 2 are industry based. It is important to note that both threats and opportunities can receive a 1, 2, 3, or 4.

 

  1. Multiply each factor’s weight by its rating to determine a weighted score.

 

  1. Sum the weighted scores for each variable to determine the total weighted score for the organization.

 

Regardless of the number of key opportunities and threats included in an EFE

Matrix, the highest possible total weighted score for an organization is 4.0 and the lowest possible total weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that an organization is responding in an outstanding way to existing opportunities and threats in its industry. In other words, the firm’s strategies effectively take advantage of existing opportunities and minimize the potential adverse effect of external threats. A total score of 1.0 indicates that the firm’s strategies are not capitalizing on opportunities or avoiding external threats.

 

An example of an EFE Matrix is provided in Table 1 for UST, Inc., the manufacturer of Skoal and Copenhagen smokeless tobacco. Note that the Clinton administration was considered to be the most important factor affecting this industry, as indicated by the weight of 0.20. UST was not pursuing strategies that effectively capitalize on this opportunity, as indicated by the rating of 1.01. The total weighted score of 2.10 indicates that UST is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats. It is important to note here that a thorough understanding of the factors being used in the EFE Matrix is more important than the actual weights and ratings assigned.

 

 

 

External Factor Evaluation Matrix (EFE)

 US Tobacco

KEY EXTERNAL FACTORS WEIGHT RATING WEIGHTED SCORE
Opportunities  
1. Global markets are

practically untapped by

smokeless tobacco

market

.15 1 .15
2. Increased demand

caused by public

banning of  smoking

.05 3 .15
3. Astronomical Internet

advertising growth

.05 1 .05
4. Pinkerton is leader in

discount tobacco market

.15 4 .60
5. More social pressure to

quit smoking, thus

leading users to switch

to alternatives

.10 3 .30
 
Threats  
1. Legislation against the

tobacco industry

.10 2 .20
2. Production limits on

tobacco increases

resource competition

.05 3 .15
3. Smokeless tobacco

market is concentrated

in southeast region of

United States

.05 2 .10
4. Bad media exposure

from the FDA

.10 2 .20
5. Clinton administration .20 1 .20
TOTAL 1.00   2.10

 

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