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L'oreal tm case L'oreal tm case Document Transcript

  • Asian Journal of Management Cases http://ajc.sagepub.com L’Oréal Thailand (B) Dominique Turpin Asian Journal of Management Cases 2004; 1; 207 DOI: 10.1177/097282010400100208 The online version of this article can be found at: http://ajc.sagepub.com/cgi/content/abstract/1/2/207 Published by: http://www.sagepublications.com Additional services and information for Asian Journal of Management Cases can be found at: Email Alerts: http://ajc.sagepub.com/cgi/alerts Subscriptions: http://ajc.sagepub.com/subscriptions Reprints: http://www.sagepub.com/journalsReprints.nav Permissions: http://www.sagepub.in/about/permissions.asp Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • ASIAN JOURNAL OF MANAGEMENT CASES, 1(2), 2004SAGE PUBLICATIONS NEW DELHI/THOUSAND OAKS/LONDON L’ORÉAL THAILAND (B)* Dominique Turpin This is the second of a two case series (IMD-5-0612 and IMD-5-0613). The case describes the various actions taken by the management team of L’Oréal Thailand to restore the company’s profitability and competitive position. A video (IMD-5-0612-V) is available to accompany this case series. Keywords: Turnaround, general management, global management, brand marketing, Thailand, Asia, cultural management Although we had been appointed to our respective positions only a few months earlier, the key challenges to be solved were very clear to me and the rest of the management team. We had to quickly turn around the business by tackling three issues simultan- eously: people, finance and marketing. The first priority was to bring the L’Oréal and Lancôme brands into profitability to restart a virtuous spiral for the Thai organization. Once profitable, these brands, which account for 68 per cent of our turnover, would generate the cash needed for future investment in the business and to recreate a win- ning team spirit. Chris Martin, Managing Director L’Oréal Thailand THE PEOPLE ISSUEIn the absence of a human resources manager, Martin decided to act as HR director. Hemobilized his entire Management Committee to greatly speed up the assessment of thetalent in the organization as well as the recruitment process. Within three months, twowork groups had been created in HR—one to specialize in hiring and systems, the other*Professor Dominique Turpin prepared this case as a basis for class discussion rather than to illustrateeither effective or ineffective handling of a business situation. All names and data have been disguised.Copyright © 2003 by IMD—International Institute for Management Development, Lausanne, Switzerland.Not to be used or reproduced without written permission directly from IMD. Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • in training and retention. Another step was to begin career development via inter-divisional transfers, to widen the opportunities available and break down the ‘tribalfiefdoms’ that had been a feature of the previous organization. ‘As a symbolic measure,we also banned our people from using the names Siampar and Thailor!’ Martin added. By 1 July 2000, a new entity—L’Oréal Thailand Ltd—had been officially inaugurated.At the end of the year, Martin took advantage of the dramatic fall in rent triggered by theAsian crisis to relocate the offices to a brand-new, prestigious (but much cheaper) building. ‘We had to decide who was going to make it into the new organization and who wouldnot,’ Martin explained. We quickly identified the key people who were essential to keep the business running, such as the manager in charge of government relations, the head of information tech- nology, the manager of the warehouse, etc. In a single shot and in the nicest possible way, we sought the resignations of all those of whom we had no hope or who did not fit with the L’Oréal culture. We decided to do our utmost to keep all the others, even if we had some doubts about their ability to grow with the business. Then we focused on a group of about six local people who we as a team felt could one day become the leaders of the company. We decided we would not accept the loss of a single one of these high potentials. This was not an easy task at all, because of the message we had sent internally and externally by asking some people to leave. Thailand is an extremely close-knit society and we already had a poor reputation in the job market. The people we decided to keep quickly became overburdened as they had to take over the work of the ones who had left. Unfortunately, several people we very much wanted to retain in important jobs (such as the warehouse manager) decided to quit. But we kept every one of the high potentials, despite some very tough moments when we needed all our persuasive- ness and creativity to motivate people to reject good offers from outside.Martin continued: We also had to revisit the reward system. Pablo and I called it the ‘Cultural Revolution’, an ironic reference to my experience in China in the early nineties when the country was transitioning from Communism to capitalism and needed to balance two systems. We had—on average—a 30 per cent difference in salaries between the Siampar and Thailor people. All the Thailor top managers had a company car, a standard practice at our international competitors such as Unilever and P&G but a benefit that the former local partner in Siampar had adamantly rejected each time it was proposed by L’Oréal. However, we could not immediately give a company car to every executive, nor could we raise salaries by 30 per cent right away. Firstly, we did not have the 208 DOMINIQUE TURPIN Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010 View slide
  • money. Secondly, it is a well-known HR management principle that, in this kind of situation, it is better to spread the wage increase over time than to do it overnight in one single shot. We didn’t want to give our people the sense that they had been ‘ex- ploited’ for years. We explained to the people we wanted to retain that they were our best people and that their hard work and dedication would be well rewarded. A bonus system linked to retention was also put in place to motivate the best talents to stay with us. In the meantime, Pablo Gomez, the Deputy Managing Director in charge of Financeand Operations, worked with Martin, Roberto Shimizu and Alessandra Badini (heads ofthe Consumer and Professional divisions, respectively) to restore cash flow and profit-ability. Gomez commented: It was very soon apparent to me that while our customers paid us only when they felt like it, we were paying our own bills remarkably quickly! Just matching our payments to our suppliers with the length of time it took to get the money from our customers produced a quick and significant improvement in cash flow. That was an easy, quick ‘win’. However, the L’Oréal Paris and Lancôme brands together represented the bulk of our business in Thailand and were the clear priorities of the turnaround. TURNING THE CONSUMER DIVISION AROUNDShimizu recalled: The key issue was to deal with the very large quantities of stock dating from 1996 to 1998 that was obsolete or had expired. We needed to fix it in an orderly and cost- effective way by rethinking our logistics, our inventory management, our sales forecasts and working very closely with retailers. Consequently my priorities became: under- standing the market, getting the right products, communicating more effectively with consumers and getting the right resources to implement the strategy.Understanding the MarketShimizu continued: Three department stores, two major drug stores and five key food chains were con- tributing 70 per cent of my turnover. By listening carefully to our retailers, we were able to design tailor-made strategies for each one of them. L’ORÉAL THAILAND (B) 209 Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010 View slide
  • For example, drug stores needed to create an environment where consumers would find both very rational and highly emotional benefits from beauty products. These large drug stores are generally located close to the foodstore chains, for which price is key. Therefore, these drug stores had to compete with foodstore chains through unique product or merchandizing innovations. For example, Carrefour’s major competitor was clearly Tesco. Consequently, we decided to help Carrefour revamp its beauty space and since Carrefour is a fast implementer, we could help it get an edge over its main competitor. Tesco’s main concern was category management. Since L’Oréal is the leader of the skin care and coloring categories, we could help them better under- stand the emotional value of beauty products. Our competitors—P&G and Unilever— were better at helping them sell commodity products, such as soaps and shampoos. In every retail segment, the business has become so competitive that each player is forced to get business from its closest competitor. In this market, you have strong winners and strong losers. Since the Thai retailing industry was in total flux, we also had to get our priorities right: more professionalism in dealing with retailers, clearer ideas in terms of product positioning and a better understanding of the market to launch the right products with the support of the right communications strategy.Getting the Right Products Consumer research was telling us that we lacked the right products and that our communications were unconvincing. For example, in skin care we did not have good whitening products—they make up 50 per cent of this category. Consumer insights also confirmed that there was too much overlap between the different positioning of our brands. As a result, we immediately clarified the positionings of L’Oréal Paris, Maybelline and Garnier by redefining our pricing strategy. We also dramatically increased the number of stock keeping units (SKUs) in the hair color category. While Sunsilk (Unilever), our major competitor in this segment had only seven SKUs, we increased our SKUs from fifteen to twenty within nine months. The results were immediate. Almost overnight, our shelf space at Watsons (one of the major drug store chains in Bangkok) went up from 50 per cent to 90 per cent. The reason for this success was simple. Consumers in this category are looking for the exact match between the color they have in mind and the offer presented on the shelves. While Sunsilk decided to respond by attacking us on price, we decided to respond by matching their offer but never undercutting them. We also clarified the positioning of our two main brands by targeting Natea at 15 to 35-year-olds and Ex- cellence at consumers over 35. 210 DOMINIQUE TURPIN Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • Communicating More Effectively with ConsumersShimizu acknowledged: We also found that we did not have a convincing local ambassador. Our image was inconsistent. The local stars we had been using in our commercials were perceived as boring and lacking in self-confidence in comparison with our international ambas- sadors, such as Claudia Schiffer, who in turn were seen as glamorous and talented but totally removed from the realities of Thailand. I know from experience that when we are consistent, consumers tend to reward us, but when we are inconsistent, they punish us! Accordingly, we thought of recruiting a well-known local star who enjoyed widespread respect and credibility for achievements on an international level but who could also demonstrate a commitment to Thailand. Another challenge was our media mix and the financial resources necessary to support our new communications campaign. Back in 1999, our communications budget was spent mainly on promotions (primarily consumer give-aways) and very little on print media. At the beginning of 2000, the competition was still spending almost ten times more than we were. We decided to rethink our media mix and to emphasize print media, invest more in the point-of-sale and reduce consumer promotions. TV was just too costly but we were under-investing in magazines. The print media was very appropriate to explain our technical innovations. We could not get leadership in terms of share of voice on television, but we could get it with print, and we did! The decision to put more emphasis on point-of-sale meant spending more on shelf space and merchandizing. We knew that many Thai consumers made their final pur- chasing decision at the point-of-sale, especially when we had great product innovations. With a new media mix privileging print more than TV, we were also achieving a bal- ance in line with the global L’Oréal communications strategy.Getting the Right ResourcesShimizu continued: Of course, the key issue was the money! With the support of Chris and Pablo, I decided to present our new marketing strategy to Paris and ask for a final subsidy grant from headquarters. After some tough negotiations with headquarters, the CEO and Chair- man, Lindsay Owen-Jones, approved a last and final transfer of BT 50 million.1 Owen- Jones also made it very clear to us that this would be the last gift from Paris and that1 Bt 25=US$ 1; Bt 28= €1. L’ORÉAL THAILAND (B) 211 Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • the money would have to be spent exclusively on communications and commu- nications only! We were also fortunate in being able to recruit a great local ambassador by the name of Areeya Sirisopa, but known to everyone as ‘Pop’. The Thais are very proud people, so using a person from another Asian country would not have been as con- vincing. Moreover, before 1999 L’Oréal products were perceived as foreign while P&G’s and Unilever’s were perceived as local. To compensate for this weakness, I rebalanced my communications budget 50:50 using famous international and local beauty am- bassadors. In our communications we also used the argument that Thai women are highly sophisticated and do understand beauty. This was of course a very well-received argument!Implementation The implementation would not have succeeded without the active involvement of both our people and the retailers. We selected the best elements of our previous sales and marketing teams and recruited additional talents. We went to explain our strategy to every one of our retailers, stressing the extra value that our tailor-made services would bring them. In other words, we tried to make them part of our winning strategy. One of our key strengths against big competitors has also been the flexibility of our organization. Because we are much smaller and focused exclusively on beauty products, we used speed and our image as specialist as key competitive advantages. We were able to move fast in the market with good innovations, adjust our plans and react quickly if necessary. In summary, I would say that the turnaround of the Consumer Division was achieved by three simple principles: listening to the market, bringing the right products and communicating effectively with our target consumers.Turning the Luxury Division AroundMost of the turnaround strategy that had been devised for the Consumer Division alsoapplied to the Luxury Division, headed by Badini. In early 2000 this division represented20 per cent of turnover. Badini explained: My first objective was to get rid of the semi-consignment system. We reduced the stock coverage at the counters from 5.2 months in December 1999 to a more acceptable 2.5 months a year later, and moved our account receivables from 203 to 130 days dur- ing the same period of time. As a result, operational cash flow significantly improved. 212 DOMINIQUE TURPIN Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • However, these efforts took their toll on the operating results. Sales dropped 40 per cent during the first quarter of 2000, followed by another 13 per cent during the sec- ond quarter, before increasing to +33 per cent and 23 per cent in the last two quarters of the year 2000. Since sales of the Luxury Division were concentrated on just two major outlets, it made sense to focus our investments on those two locations first. Working closely with both customers, we brought to Bangkok some designers from Paris and London to help develop the best beauty counters in the country. Our merchandizing is now in line with the top department stores of New York, London, Paris and Tokyo, and the results are there too. Six months after renovation, sales were up 55 per cent in the biggest store and 69 per cent in the second. Coupled with the introduction of product innovations, Lancôme reported a growth rate double that of competitors Estée Lauder and Shiseido. Similar results were also achieved with our Biotherm and Helena Rubin- stein product lines! We completely restructured our fragrance brands to better align them with the limited market size by withdrawing Paloma Picasso and Lanvin and concentrating resources on Ralph Lauren and Armani. Ralph Lauren grew by 8 per cent within a year and remained the most popular fragrance in Thailand. PROFESSIONAL PRODUCTS DIVISIONAlthough the Professional Products Division had not experienced the same disappointingresults as the other two divisions in 1999, it nevertheless clearly benefited from the re-vival of the company. Martin was succeeding in breaking the old ‘tribe’ mentality betweenthe three divisions. In particular, he had strongly encouraged the sharing of best practicesby running regular meetings between the three teams. Exciting, innovative productshad helped increase the division results by an additional 17 per cent. However, Martinbelieved that most of the difference was due to the strong teams that had been putin place. THE RESULTSNine months after the start of their ‘Cultural Revolution’, Martin and his team wereproud of the results achieved (refer to Exhibits 1 to 3). At the end of 2000 L’Oréal Thailandhad grown by 21 per cent in units and 19 per cent in value. Despite generally flat consumermarkets, the new entity had grown shares of all its strategic brands. After ten years oflosses Thailand would generate positive cash flows and profits for 2001. The strong resultsachieved by L’Oréal and Lancôme, the main engines of the company, supplied the cash L’ORÉAL THAILAND (B) 213 Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • necessary for all new investments in L’Oréal Thailand, which transformed the negativespiral of the 1990s into a positive spiral for the new millennium. There was also a hugechange in organizational capability and morale. By the end of 2000 L’Oréal Thailand hadrecruited more people than would have been necessary merely to replace those whohad resigned, and had rebuilt the teams, greatly reducing the stress caused by under-manning due to the previously high staff turnover. The L’Oréal name was becoming anasset in attracting new talents, since the brand was better known than the old Siamparand Thailor names. Since September 2000 resignations had averaged 4 per cent, even afterthe period of year-end bonus eligibility had passed. Martin concluded: This was an encouraging sign that the reorganization conducted during the spring and summer of 2000 had been effective and had not undermined the spirit of those who were identified as being strong contributors. Even more encouragingly, the quality of new hires began to improve dramatically. We are starting to have real stars in the company, who are ready to develop their careers via inter-divisional transfers and overseas assignments. We were able to launch the fourth division (Active Cosmetics) by mid-2001, with a ‘home-grown’ Thai person transferred from the Professional Products Division as its General Manager. The L’Oréal Group has made several international acquisitions in the last few years and we were able to assimilate their local Thai operations smoothly into L’Oréal Thailand and start to grow them quickly and aggressively. The brands can be separated into two groups: the ‘small and beautiful’ strong niche players with high margins that effectively fund additional investments in ‘the big and the bold’, such as Garnier, which we are expanding rapidly as main engines of growth by adding new categories such as skin care. Thailand is now clearly established as L’Oréal’s most important and strategic market in Southeast Asia. I have moved on to a new assignment now, but I still carefully fol- low their results. The day when a Thai national is named Managing Director will be a moment of great emotion and pride for all of us who made up the 2000 turnaround team.Please address all correspondence to Dominique Turpin, IMD—International Institute for Manage-ment Development, PO Box 915, CH 1001 Lausanne, Switzerland. E-mail Address: dominique.turpin@imd.ch 214 DOMINIQUE TURPIN Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • Exhibit 1 Indicators 1998 1999 2000 2001Inventory cover (days) Consumer products division 153 160 173 99 Luxury products division 101 106 108 139 Professional products division 197 168 196 125 Cosmetic active – – – 100Customer credit cover (days) Consumer products division 84 74 77 76 Luxury products division 154 203 134 69 Professional products division 104 87 76 68 Cosmetic active – – – 47Operational cash flow (Bt million) (261) (103) (62) 32Net equity (Bt million) (140.6) (169.5) (163.8) (21.7)Operating profits (Bt million) (126.5) (120.9) (94.4) 59.9Source: Company information. Exhibit 2 Financial Results (Bt million) 1997 1998 1999 2000 2001Net turnover 900 1,081 1,085 1,283 1,630Other customer allowances 15 23 35 43 46Cost of goods/royalties 300 397 385 469 538Product contribution 585 662 663 772 1,045Advertising, promotion, production 343 385 391 445 527General marketing expenses 31 23 43 30 29Marketing contribution 211 255 229 297 489Operating expenses 235 281 293 333 387Variances/OIE*/Financing (12) (12) 15 28 53Reserve – – – – 31Operating result (12) (14) (78) (64) 18Operational cash flow (376) (261) (103) (62) 32 (Exhibit 2 contd) L’ORÉAL THAILAND (B) 215 Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010
  • (Exhibit 2 contd ) Value End 2001 Change vs 31/12/00 Days End 2001 Change vs 31/12/00Inventories Consumer 122 –23 99 –74 Luxury 38 –1 139 +31 Professional 26 –3 125 –71Total entity 186 –27 118 –38Receivables Consumer 179 –15 76 –1 Luxury 159 –20 69 –65 Professional 46 –2 68 –8Total entity 384 –37 73 –16Source: Company information. *OIE=Other income and expenses Exhibit 3 Brand Presence Brands % Evolution* Outlets Launch % of Entity L’Oréal +30 (%) 1,048 1992 39 (%) Lancôme +32 (%) 31 1950s 17 (%) L’Oréal Professional +30 (%) 1,750 1992 12 (%) Maybelline +12 (%) 741 1995 11 (%) Garnier +20 (%) 1,234 1999 8 (%) Biotherm +23 (%) 12 1997 3 (%) Kerastase +50 (%) 90 1995 3 (%) PCI –14 (%) 20 1960s 3 (%) Helena Rubinstein +27 (%) 6 1999 2 (%) Shu Uemera N.A. 3 2001 1 (%) La Roche Posay N.A. N.A. 2001 1 (%) Source: Company information. *% evolution 2001 vs 2000. 216 DOMINIQUE TURPIN Downloaded from http://ajc.sagepub.com at INST INTEGRATED LRNG IN MAN on January 29, 2010