Cosmetics and Steel: How Two Companies Defied Conventional Wisdom by Going Global

Before Stephen J. Kobrin joined Wharton’s management department, he was a brand manager for Procter & Gamble working on the Crest account in Caracas, Venezuela. “One of the great advantages was the distance between Caracas and Cincinnati, P&G’s headquarters,” he told a session on global strategy at the Wharton Global Alumni Forum 2005 earlier this month. “If someone called with a question I couldn’t answer, all I had to say was, ‘It’s a terrible connection and I can’t hear you’ and then hang up.”



Now, Kobrin said, “there is no place to hide, which means there has been a dramatic transformation” in global strategy.



Three panelists who appeared with Kobrin shared their experiences in this transformation. Leonard Lauder is chairman of The Estee Lauder Companies, founded in 1946 by his parents, Estee and Joseph Lauder. The company — one of the world’s best known manufacturers/marketers of skin care, makeup, fragrance and hair care products — has 22,000 employees and annul sales of more than $6 billion.



“It was hard to picture what the world was like in 1958,” Lauder said. “Asia was just emerging from World War II. The phrase ‘Made in Japan’ was a sign of cheapness rather than quality. ‘Made in China’ was almost non-existent except for little magicians’ tricks you could buy in an amusement park. Europe was emerging but England was in the middle of austerity. Imports of cosmetics, for example, were forbidden. The idea of being a multinational company at the time was extraordinary.”



The concepts behind Estee Lauder’s strategy were premium pricing, selected distribution and a single international image, Lauder said. “Premium pricing sounds logical today” — given the proliferation of luxury brands — “but back then, being at the top of the market was unheard of.” Instead, the goal was to sell products as inexpensively as possible. In 1961, however, Estee Lauder launched a face cream in the U.K. advertised by the phrase, “What makes a cream worth 100 guineas?” This positioned the product “as being about 10 times more expensive than anything else on the market. We did that when we entered the German, Swiss and Italian markets, among others. Premium pricing was an essential part of our strategy.”



The company also focused on “very narrow distribution,” Lauder said. “We had just one customer in London when we started — Harrods. France had about 20 to 30 perfumeries. We developed a market share of between 20% and 50% of each individual account, and then took that pattern and expanded it. To this day in the U.S. we have about 52% to 54% market share in our relevant distribution channels. The key words are ‘relevant distribution.’ We didn’t try to go broad; we went as narrow as possible.”



In addition, rather than mold a separate image for each country in which they operated, Estee Lauder concentrated on a single international image. “We didn’t have different ad campaigns in each country, although every one of our competitors did. Our image was the same worldwide,” Lauder said. And “we kept a very low profile. We didn’t boast about how successful we were. For example, after we had become the dominant cosmetic company in Japan, Fortune magazine wanted to do a story on our success. But we were a privately held company and we didn’t need [Wall Street] to be excited about us. I turned it down. I was afraid that if we started to boast, the story would be translated into Japanese and put on the desk of some sumo wrestler chairman of our major competitor. He would read that story and say, ‘Crush them.’ We kept a low profile.”



As for advice for companies seeking a more global presence, Lauder suggested they “don’t take on the whole world at one time. Do it country by country, and take the easier countries first. The last two [expansions] we attempted were France — where there is strong global competition — and Japan, where there is strong local competition.” Another important part of Estee Lauder’s strategy was the multi-brand. “I was enthralled with the concept that GM had — different brands for different economic and demographic groups. Having read recently of GM’s troubles, you might say, ‘Why GM?’ Because at that time it was the greatest industrial company in the world…. I wanted to have individual companies that were freestanding and independent and would compete with each other.”



By 1966, Estee Lauder was getting too big, Lauder said. Such growth, if it continued, would have meant “moving into channels of distribution that didn’t make sense for us.” Company executives asked themselves: If we were a company that wanted to compete with Estee Lauder, how would we do it? The answer was to create their own competition. They bought a company called Clinique, which at the time was Estee Lauder’s biggest competitor. In addition, they created some brands — including men’s brands — and acquired others, such as a small Canadian makeup company called Mac. “We used that to compete against our other existing brands …. At every step we created a competitor for a competitor for a competitor. In some cases there was cannibalism. We can’t help that, but at the end of the day, the total group is so powerful in each channel that we have, that it works superbly well.”



Focusing on Expansion


It would be hard to find two international companies more dissimilar than Estee Lauder and Mittal Steel, yet both of them at different times in their history realized they wouldn’t prosper unless they came up with a global strategy that went against current wisdom in their respective industries.



Aditya Mittal, president and CFO of Mittal Steel and another participant on Kobrin’s panel, said the company in 1989 had less than .05% of the global steel industry. “So how did we grow in an industry characterized by extreme volatility and low growth?” Steel has never operated on a global basis, Mittal noted. “It has been fragmented throughout history. Profits were secondary; production was primary. There was never any shareholder value created. So it was no surprise that steel was written off by many as an industry in terminal decline. Clearly something needed to change.”



What brought about that change was a belief at Mittal Steel that the industry needed to operate in a different way — specifically to focus on expansion. “We were the only steel company pursuing a global strategy. My father can recount many examples of steel conferences where he put forward his plan for consolidation and growth, and no one believed it would work. Steel would always be regional, they said.”



When Mittal joined the company in 1997 (which was then LNM Holdings NV), it had revenues of $2.5 billion but no leading position in any market. “We had achieved a global presence but were not yet a global company. We needed to build up real strengths in the markets.” A downturn in the steel industry in 2003, when many companies attempted to exit the business, provided opportunities for expansion. Today, Mittal Steel is the product of a 2004 merger between LNM Holdings and Ispat International — a merger that vaulted the new entity into a position as the largest steelmaker in the world. Mittal Steel had revenues last year of more than $22 billion. It owns and operates steelmaking facilities in 14 countries and employs 164,000 people. It recently bought companies in the U.S., Africa and Europe, and is the first steel company to be allowed to invest in China’s primary steelmaking industry.



How has this growth been achieved? “Most importantly, our global profile enables us to keep better operating margins,” something the steel industry has typically been unable to accomplish, Mittal said. But more specifically, Mittal Steel has relied on a three-part approach. First is creating a global customer base, and thus being better able to predict market trends. Second, the company has a strong manager integration program – an approach that “is unheard of in the steel industry. We have people getting together and talking about how they can improve processes.” Third is global purchasing power.



In addition, says Mittal, the company invested a decade ago in corporate social responsibility by supporting its host communities. In Romania, for example, the company built a large church next to a facility it purchased several years ago. “We sponsor athletic teams, build parks, support schools and hospitals; we do all of this because we want to have a local face in every country in which we operate. More importantly, when we visit another country for an acquisition opportunity, we are considered a familiar [presence]. We are not considered a threat. In an environment where globalism tends to be criticized by some, it is important for entrepreneurs to have a social conscience. A business needs to add value.”



The third panelist, David Li — who was recently appointed chairman of UBS China after serving as managing director of China Merchants Holdings (International) Co. — talked about China’s emergence as a major player, one whose “economic health will be key to the welfare of the global economy.” He attributed China’s “tremendous success” to the “resourcefulness of the Chinese people … and the interest of foreign investors.” Li also noted that Chinese companies are now required to adhere to international accounting and reporting standards in order to continue to attract foreign investment. Progress in this area is “enhancing transparency across the country and improving the domestic regulatory environment.”



Li, who was a professional soccer player in Shaanxi province for four years in the late 1970s, acknowledged that some social problems have been created as a result of economic change. “Unemployment has spiraled, and the gap between rural and urban populations in terms of income and opportunity has widened,” he said. “Agricultural development has failed to keep pace with overall national development.” Progress “in rural areas remains sluggish, with low productivity, which has placed farmers at a disadvantage in the market. Many Chinese still live below the poverty line.” Overall, however, China’s economy “is set for long-term growth,” Li said.



The Promise of Central Europe


In response to a question about the age profile of their respective populations, Lauder noted that “Europe is getting older and older, and smaller and smaller. Asia is getting younger and younger and larger and larger. India is getting younger. The Middle East is getting younger.” According to Mittal, India has one of the largest populations in the world between the ages of 25 and 35. “That is driving change within the country because these people are better educated and more sophisticated” than previous generations.



Kobrin asked the panelists what they worry about the most. “One issue is the consolidation of our retailers,” said Lauder. “Every time there is a consolidation, the only way the company can make the numbers work is by demanding greater returns. ‘Now that we buy twice as much, we want twice as large a discount,’ they say. So consolidation means margins are getting squeezed continually.



“Secondly, the fact that national borders today are no longer as relevant means that certain goods flow easily between countries and create a gray market, or discounting, so that price stability becomes more uneven,” Lauder noted. “That makes a big difference to us because we are in a prestige segment. Also, when discounting starts, the margins on the retailers get squeezed. When retailers’ margins get squeezed, they come to us, saying they are earning less on our products so we have to offer them bigger discounts.”



As for steel, Mittal suggested that two to three larger global companies are needed to reduce volatility in the industry. “So we encourage other steel companies to consolidate,” he said. Asked about his perspectives on emerging markets, Mittal noted that “we are the largest foreign investor — and own the largest steel company — in Poland.” Overall, he added, the company’s experience in Central Europe has been “tremendous. We are impressed with its excellent infrastructure; the work force is equal to any others in terms of discipline, safety and knowledge. Slovakia today produces the most cars per capita in the world. We are extremely bullish on the prospects of this area. It is the future industrial heartland of Europe.”


Lauder agreed. “We like Poland and Central Europe. The Polish workers are superb, as are workers in the Czech Republic and Slovakia. But we don’t manufacture there; we only import and sell.” Nor does the company offer its super premium products in the region, a fact that disturbs Lauder. “We tend to focus in areas with the perceived biggest opportunities — China, Japan, the U.K., etc. I think we are making a mistake in not paying more attention to markets such as Poland, which have a rapidly growing middle class. These markets aren’t getting the attention they deserve.”

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