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RESOURCE: www.elcompanies.com
Estée Lauder – 2008
Forest David: Francis Marion University

A. Case Abstract

Estée Lauder (www.elcompanies.com) is a comprehensive business policy and
strategic management case that includes the company’s fiscal year-end June 2007
financial statements, competitor information and more. The case time setting is
the year 2008. Sufficient internal and external data are provided to enable
students to evaluate current strategies and recommend a three-year strategic plan
for the company. Headquartered in New York City, Estée Lauder’s common
stock is publicly traded on the New York Stock Exchange under the ticker symbol
EL.

Estée Lauder produces a diverse line of shampoo, perfumes, lip gloss and other
skin care products. A small sampling of the brand names marketed by Estée
Lauder include: Estée Lauder, Clinique, American Beauty, and Flirt. The
products are sold through various distribution channels, including specialty stores,
department stores, pharmacies, the and Web. Estée Lauder operates in the
Americas, Europe, Middle East, Asia, and Africa. The company has over 28,000
employees and is led by CEO William Lauder whose base pay was over $3.5M in
2007. The firm’s two major competitors are conglomerate giant Procter &
Gamble and L’Oreal.

B. Vision Statement (proposed)

PROPOSE A VISION STATEMENT FOR ESTÉE LAUDER

C. Mission Statement (actual)

PROPOSE A MISSION STATEMENT FOR ESTÉE LAUDER

D. External Audit

Opportunities

1. Weak US Dollar makes US based products more affordable to customers in
Canada and Europe.
2. Interest rates remain low in the US.

Copyright © 2009 Pearson Education

3. Increasing numbers of people are buying products online for convenience,
cost savings, and confidentiality.
4. Men are increasingly becoming more concerned with their looks and
stereotypes of men using skin care products are diminishing.
5. In 2006, China experienced a 15 percent growth in professional skin care
sales.
6. The Hispanic population in the US is rapidly growing.
7. Customers are demanding products not tested on animals and which are
environmentally friendly.
8. Customers are becoming more interested in herbal products that are derived
from natural sources.
9. Aging US population opens new markets for developing skin care products
for the elderly.
10. Many new start up companies with specialty products are created each year.

Threats

1. Consumer complaints and inquires into the use of animal testing for new
products.
2. FDA plans to require cosmetic corporations to add a label stating “the safety
of this product has not been determined.”
3. Many new start up companies with specialty products are created each year.
4. Concerns about the use of aerosols, fluorocarbons and other chemicals in the
production of cosmetic products.
5. Top competitors in the cosmetics industry are diversified with many brand
names and a wide range of products.
6. Products can be purchased at significantly lower cost over the Internet,
harming revenues and traditional distributors.
7. Growing trend among sections of the population for a more natural look and
reduction in their use of make up and related products.
8. Customers tend to be extremely brand loyal.

CPM – Competitive Profile Matrix
* Estimates for Procter & Gamble focused on similar product lines they share with Estée Lauder not the
company as a whole.
Estée Lauder Revlon Procter & Gamble
Critical Success Weight Rating Weighted Rating Weighted Rating Weighted
Factors Score Score Score
Market Share 0.20 4 0.80 4 0.80 3 0.60
Price 0.10 2 0.20 3 0.30 4 0.40
Financial Position 0.20 3 0.60 1 0.20 4 0.80
Product Quality 0.15 4 0.60 2 0.30 2 0.30
Product Lines 0.10 4 0.40 3 0.30 4 0.40
Consumer Loyalty 0.20 4 0.80 3 0.60 2 0.40
Employees 0.05 4 0.20 4 0.20 4 0.20
TOTAL 1.00 3.60 2.70 3.10


External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score
Opportunities
1. Weak US Dollar makes US based products more 0.05 3 0.15
affordable to customers in Canada and Europe.
2. Interest rates remain low in the US. 0.08 3 0.24
3. Increasing numbers of people are buying 0.12 3 0.36
products online for convenience, cost savings,
and confidentiality.
4. Men are increasing becoming more concerned 0.05 4 0.20
with their looks and the stereotypes of men using
skin care products are diminishing.
5. In 2006, China experienced a 15 percent growth 0.05 4 0.20
in professional skin care sales.
6. Hispanic population in the US is rapidly 0.05 3 0.15
growing.
7. Customers are demanding products not tested on 0.03 3 0.09
animals and which are environmentally friendly.
8. Customers are becoming more interested in
herbal products that are derived from natural 0.03 4 0.12
sources.
9. Aging US population opens new markets for 0.05 3 0.15
developing skin care products for the elderly.
10. Many new start up companies with specialty 0.05 2 0.10
products are created each year.
Threats
1. Consumer complaints and inquires into the use
of animal testing for new products. 0.03 3 0.09

2. FDA plans to enforce cosmetic corporations to
add a label stating “the safety of this product has 0.02 1 0.02
not been determined.”
3. Many new start up companies with specialty 0.05 2 0.10
4. Concerns about the use of aerosols,
fluorocarbons and other chemicals in the 0.03 4 0.12
production of cosmetic products.
5. Top competitors in the cosmetics industry are
diversified with many brand names and a wide 0.10 2 0.20
range of products.
6. Products can be purchased at significantly lower
cost over the Internet cutting into revenues and 0.12 1 0.12
harming traditional distributors.
7. Growing trend among sections of the population
for a more natural look and reduction in their use 0.04 3 0.12
of make up and related products.
8. Customers tend to be extremely brand loyal. 0.05 3 0.15
TOTAL 1.00 2.68


E. Internal Audit

Strengths

1. Wholly owned and operated offices in 43 countries and territories and
products sold in over 135 countries.
2. Test products on animals only when required by law.
3. Estée Lauder operates under numerous brand names including Clinique,
Origins, Bobbi Brown, Flirt! among others.
4. Detailed succession plan in place for Fabrizio Freda to take over as CEO in
March of 2010.
5. The company has global rights to products sold under several name brands
including Tommy Hilfiger, Donna Karan, Missoni, and Sean John.
6. Company continues to purchase interest in start up and established companies
such as Bumble and Bumble Products LLC in June 30, 2007.
7. Revenue has increased 40 percent from $5 billion to $7 billion in the five year
period dating fiscal years 2003-2007.
8. Company specializes in mid-level and upper end cosmetics products; markets
over 9,000 products.

Weaknesses

1. In 1990, 75 nameplate department stores sold Estée Lauder; today that number
is only 17.
2. Stock price has been stuck between $25 and $50 trading range since 1996.
3. Estée Lauder lacks a clear mission and vision statements.
4. Confusing organizational structure; it is unclear whether group presidents
have control over the product lines or geographic areas.
5. Net sales of fragrance products decreased 4 percent to $1.2B as the company
continues to struggle in this segment.
6. Company does not offer enough brand names tailored to lower budget
consumers.
Financial Ratio Analysis (June 2007)
Growth Rates % Estée Lauder Industry SP-500
Sales (Qtr vs year ago qtr) 7.30 8.70 15.30
Net Income (YTD vs YTD) -32.60 22.20 17.50
Net Income (Qtr vs year ago qtr) -32.60 18.40 24.70
Sales (5-Year Annual Avg.) 8.36 10.99 12.35
Net Income (5-Year Annual Avg.) 18.81 13.50 21.79
Dividends (5-Year Annual Avg.) 20.11 12.66 9.47
Price Ratios
Current P/E Ratio 20.8 22.1 22.5
P/E Ratio 5-Year High NA 25.1 20.2
P/E Ratio 5-Year Low NA 15.8 4.3
Price/Sales Ratio 1.17 2.63 2.53
Price/Book Value 6.82 6.98 4.15
Price/Cash Flow Ratio 12.80 16.60 13.70


Profit Margins
Gross Margin 74.8 50.3 36.0
Pre-Tax Margin 9.5 16.7 18.3
Net Profit Margin 6.1 12.2 12.9
5Yr Gross Margin (5-Year Avg.) 74.4 51.2 34.6
5Yr PreTax Margin (5-Year Avg.) 10.2 16.1 16.2
5Yr Net Profit Margin (5-Year Avg.) 6.3 11.0 11.2
Financial Condition
Debt/Equity Ratio 1.19 0.90 1.32
Current Ratio 1.4 0.9 1.2
Quick Ratio 0.9 0.7 1.0
Interest Coverage 14.4 15.6 37.1
Leverage Ratio 3.8 2.9 4.0
Book Value/Share 6.34 16.62 20.17
Investment Returns %
Return On Equity 30.6 30.5 28.4
Return On Assets 10.2 9.3 8.4
Return On Capital 17.0 12.7 11.1
Return On Equity (5-Year Avg.) 23.9 48.9 20.7
Return On Assets (5-Year Avg.) 10.4 10.4 7.0
Return On Capital (5-Year Avg.) 16.3 13.0 9.3
Management Efficiency
Income/Employee 15,242 63,525 112,357
Revenue/Employee 251,021 495,679 954,553
Receivable Turnover 7.0 10.3 14.3
Inventory Turnover 2.0 5.0 9.3
Asset Turnover 1.7 0.8 0.8
Adapted from www.moneycentral.msn.com
Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%)
06/07 19.80 1.34 7.38 6.4
06/06 24.80 1.30 5.05 5.0
06/05 24.20 1.42 5.09 6.5
06/04 24.30 1.97 6.40 6.6
06/03 23.10 1.54 4.28 5.9

Date Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage
06/07 $6.17 0.91 37.4 10.9 NA
06/06 $7.66 0.32 20.0 8.6 NA
06/05 $7.68 0.42 24.2 10.5 NA
06/04 $7.62 0.31 21.8 10.2 NA
06/03 $7.84 0.16 18.3 9.7 NA
Adapted from www.moneycentral.msn.com

Net Worth Analysis (June 2007 in millions)
1. Stockholders’ Equity + Goodwill = 1,200 + 0 $1,200
2. Net income x 5 = $450 x 5= $ 2,250
3. Share price = $40.00/EPS 2.11 =$18.95 x Net Income $450= $ 8,530
4. Number of Shares Outstanding x Share Price = 193 x $40.00 = $ 7,720
Method Average $4,925

WRITE A PARAGRAPH ON THE FINANCIAL STATE OF ESTÉE LAUDER


Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted
Score
Strengths
1. Wholly owned and operated offices in 43 countries and 0.12 4 0.48
territories and sold in over 135 countries.
2. Test products on animals only when required by law. 0.03 4 0.12
3. Estée Lauder operates under numerous brand names
including Clinique, Origins, Bobbi Brown, Flirt! among 0.10 4 0.40
others.
4. Detailed succession plan in place for Fabrizio Freda to 0.05 4 0.20
take over as CEO in March of 2010.
5. The company as global rights to products sold under
several name brands including Tommy Hilfiger, Donna 0.10 4 0.40
Karan, Missoni, and Sean John.
6. Company continues to purchase interest in start up and
established companies such as Bumble and Bumble 0.05 4 0.20
Products LLC in June 30, 2007.
7. Revenue has increased 40 percent from $5 billion to $7
billion in the five year period dating fiscal years 0.15 4 0.60
2003-2007.
8. Company specializes in mid level and upper end 0.05 4 0.20
cosmetics products; markets over 9,000 products.
Weaknesses
1. In 1990, 75 nameplate department stores sold Estée 0.10 2 0.20
Lauder; today that number is only 17.
2. Stock price has been stuck between $25 and $50 trading 0.05 1 0.05
range since 1996.
3. Estée Lauder lacks clear mission and vision statements. 0.05 1 0.05
4. Confusing organizational structure; it is unclear whether
group presidents have control over product lines or 0.05 1 0.05
geographic areas.
5. Net sales of fragrance products decreased 4 percent to 0.05 1 0.05
$1,213B; company continues to struggle in this segment.
6. Company does not offer enough brand names tailored to 0.05 1 0.05
lower budget consumers.
TOTAL 1.00 3.05

F. SWOT Strategies

SO Strategies
1. Expand product offerings in foreign nations (S1, S8, O1).
2. Continue to acquire interest in start up companies (S6, S7, O2, O4, O5).

WO Strategies
1. Continue to expand the respective brand name websites and offer incentives to
customers (W1, W3).
2. Introduce new fragrance products for men and boys (W5, O4).


ST Strategies
1. Offer rebates to customers to compete with black and gray market distributors
(S7, S8, T5, T6).
2. Market new soaps and skin care products that tailor to the natural look (S7,
S8, T7).

WT Strategies
1. Draft new vision and mission statements along with a new clearer corporate
structure to compete with current competition (W3, W4, T3, T5, T6).
2. Create a new line of products tailored to customers on smaller budgets (W6,
T8).

G. SPACE Matrix

FS
Conservative Aggressive
6

5

4

3

2

1

CA IS
-6 -5 -4 -3 -2 -1 1 2 3 4 5 6
-1

-2

-3

-4

-5

-6
Defensive Competitive
ES


Financial Strength (FS) Environmental Stability (ES)
Return on Equity (ROE) 6 Rate of Inflation -3
Leverage 5 Technological Changes -4
Liquidity 5 Price Elasticity of Demand -3
Income/Employee 2 Competitive Pressure -6
Inventory Turnover 2 Barriers to Entry into Market -4

Financial Strength (FS) Average 4.0 Environmental Stability (ES) Average -4.0

Competitive Advantage (CA) Industry Strength (IS)
Market Share -1 Growth Potential 5
Product Quality -1 Financial Stability 3
Customer Loyalty -2 Ease of Entry into Market 4
Technological know-how -1 Resource Utilization 4
Control over Suppliers and Distributors -4 Profit Potential 6

Competitive Advantage (CA) Average -1.8 Industry Strength (IS) Average 4.4

x-axis: 4.4 + -1.8 = 2.6
y-axis: 4.0 + -4.0 = 0.0

H. Grand Strategy Matrix

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I. The Internal-External (IE) Matrix
The IFE Total Weighted Score

Strong Average Weak
3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99

Medium IV V VI
The EFE Total 2.0 to 2.99
Weighted Score

Estée Lauder

Low VII VIII IX
1.0 to 1.99

Grow and Build

J. QSPM
Strategic Alternatives
Introduce new Continue to expand
products for non into new geographic
traditional markets
Key Internal Factors Weight customers
Strengths AS TAS AS TAS
1. Wholly owned and operated offices in 43 countries 0.12 2 0.24 4 0.48
and territories and sold in over 135 countries.
2. Test products on animals only when required by
law. 0.03 --- --- --- ---

3. Estée Lauder operates under numerous brand


names including Clinique, Origins, Bobbi Brown, 0.10 3 0.30 2 0.20
Flirt! among others.
4. Detailed succession plan in place for Fabrizio 0.05 --- --- --- ---
Freda to take over as CEO in March of 2010.
5. The company as global rights to products sold
under several name brands including Tommy 0.10 3 0.30 4 0.40
Hilfiger, Donna Karan, Missoni, and Sean John.
6. Company continues to purchase interest in start up
and established companies such as Bumble and 0.05 4 0.20 3 0.15
Bumble Products LLC in June 30, 2007.
7. Revenue has increased 40 percent from $5 billion
to $7 billion in the five year period dating fiscal 0.15 3 0.45 4 0.60
years 2003-2007.
8. Company specializes in mid level and upper end 0.05 4 0.20 3 0.15
cosmetics products; markets over 9,000 products.
Weaknesses
1. In 1990, 75 nameplate department stores sold Estée 0.10 2 0.20 3 0.30
Lauder; today that number is only 17.
2. Stock price has been stuck between $25 and $50 0.05 --- --- --- ---
trading range since 1996.
3. Estée Lauder lacks a clear mission vision 0.05 --- --- --- ---
statements.
4. Confusing organizational structure where it is
unclear weather group presidents have control over 0.05 --- --- --- ---
the product lines or geographic areas.
5. Net sales of fragrance products decreased 4 percent
to $1,213 million as the company continues to 0.05 --- --- --- ---
struggle in this segment.
6. Company does not offer enough brand names 0.05 4 0.20 2 0.10
tailored to lower budget consumers.
SUBTOTAL 1.00 2.09 2.38

Introduce new Continue to expand
products for non into new
traditional geographic
Key External Factors Weight customers markets
Opportunities AS TAS AS TAS
1. Weak US Dollar makes US based products more 0.05 1 0.05 4 0.20
affordable to customers in Canada and Europe.
2. Interest rates remain low in the US. 0.08 2 0.16 4 0.24
3. Increasing numbers of people are buying products
online for convenience, cost savings, and 0.12 3 0.36 1 0.12
confidentiality.
4. Men are increasing becoming more concerned with
their looks and the stereotypes of men using skin care 0.05 4 0.20 1 0.05
products are diminishing.
5. In 2006, China experienced a 15 percent growth in 0.05 2 0.10 4 0.20
professional skin care sales.
6. Hispanic population in the US is rapidly growing. 0.05 1 0.05 4 0.20
7. Customers are demanding products not tested on 0.03 --- --- --- ---
animals and which are environmentally friendly.
8. Customers are becoming more interested in herbal 0.03 3 0.09 1 0.03
products that are derived from natural sources.
9. Aging US population opens new markets for 0.05 --- --- --- ---


developing skin care products for the elderly.
10. Many new start up companies with specialty 0.05 --- --- --- ---
Threats
1. Consumer complaints and inquires into the use of 0.03 --- --- --- ---
animal testing for new products.
2. FDA plans to enforce cosmetic corporations to add a
label stating “the safety of this product has not been 0.02 --- --- --- ---
determined.”
3. Many new start up companies with specialty 0.05 --- --- --- ---
4. Concerns about the use of aerosols, fluorocarbons
and other chemicals in the production of cosmetic 0.03 --- --- --- ---
products.
5. Top competitors in the cosmetics industry are
diversified with many brand names and a wide range 0.10 --- --- --- ---
of products.
6. Products are sold at significantly lower cost over the
Internet cut into revenues and harm traditional 0.12 --- --- --- ---
distributors.
7. Growing trend among sections of the population for a
more natural look and reduction in their use of make 0.04 4 0.16 1 0.04
up and related products.
8. Customers tend to be extremely brand loyal. 0.05 --- --- --- ---
SUBTOTAL 1.17 1.08
SUM TOTAL ATTRACTIVENESS SCORE 3.26 3.46

K. Recommendations

COMMENT ON EXISTING STRATEGY AND MAKE
RECOMMENDATIONS FOR A 3 YEAR STRATEGIC PLAN

M. Epilogue
COMMENT ON ANY FACTORS YOUR RESEARCH SHOWS THAT
OCCURRED AFTER 2007 WHICH WOULD HAVE SHOWN THAT YOUR
RECOMMENDATIONS WERE CORRECT/INCORRECT


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