Estee and Joseph Lauder had only $50,000 when they started their cosmetics business in 1946, too little to attract any advertising agency to take their account. So instead of advertising, they spent it all on samples that son Leonard carried by taxi to womens charity shows at New York City’s Waldorf Astoria hotel.

Thus was born Estee Lauder Companies’ “tell a woman marketing strategy.”

During his keynote address at Wharton’s CMO summit earlier this fall, Leonard A. Lauder, now company chairman, told the story of how his family-owned business grew into a $4.6 billion multinational company. Lauder’s son William, 42, was appointed the company’s chief operating officer last month, making him the third generation of the family to run the company. Although Estee Lauder Companies went public in 2000, the family still controls more than 90% of its voting shares.

Leonard Lauder, who joined the company in 1958, served as president from 1972 to 1995, leading the company’s growth through new brand launches, acquisitions and international sales. Revenues in 2002 were $4.7 billion, up 6% from the year earlier, continuing more than 50 years of uninterrupted sales growth. The company sells products in more than 130 countries and territories through approximately 13,500 outlets.

As Lauder recounted, the company grew by constantly looking for new markets and by competing with itself with new brands and distribution channels. In addition, its strategy often flew in the face of naysayers, starting with their accountant and lawyer, who begged Estee and Joseph Lauder not to invest in a cosmetics company. The idea of handing out samples, a one- to three-month supply of cosmetics, was similarly derided by their competitors.

”Every one of our competitors said we’d go broke. Now they’re gone,” recalled Lauder, a Wharton graduate. “The idea was right. We believed in the quality of the product & Women liked it and they came back and they came back and they came back.”

But while the founders were bold, they weren’t foolish. Shortly after joining the company in 1958, Leonard passed along a suggestion that the company add nail polish to its products. His mother, with whom he shared an office, shot him down, saying the company was too small to pick a fight with Revlon, an industry giant.

When Great Britain removed its post-World War II austerity rules and allowed imports in 1960, Estee Lauder was one of the first importers to enter, offering its products through Harrod’s department store in London. Critics said the post-war European economies were not strong enough to support frivolities such as cosmetics. But the company correctly guessed that there would be a hunger for small luxuries.

It repeated that success in Asia, with an entry into Hong Kong, and later became the first American cosmetic company to enter the former Soviet Union. It has recently opened operations in Vietnam and China. International sales, which have grown by nearly 10% annually since 1996, represented 39% of the company’s 2001 revenue.

Distribution channels vary according to each country’s custom. In the U.S., the company sells mostly through department stores. In France, it is a mix of department stores and perfumeries. In Germany, it is perfumeries alone. But unlike many other multinational companies, which use different advertising agencies and campaigns for each country, Estee Lauder maintains a single global image for each brand.

The company also grew through ‘self-competition’ establishing brands such as Aramis men’s fragrances in 1964 and Clinique, which would become the Estee Lauder brand’s biggest competitor, in 1968. In 1979 there was Prescriptives (false eyelashes, mascara and makeup) and in 1990 Origins, an offering for those seeking natural ingredients.

”Then we realized our company was really getting too big to be cutting edge in so many things,” Lauder said. Thus, in 1994, the company acquired M.A.C, a trendy line of cosmetics that used transvestite models in its advertising.

”I couldn’t have thought of that myself but they thought of it,” Lauder said. “That’s when I [realized] that it’s not a bad idea to get someone who thinks way out of the box, totally differently than you think, and let them run those companies.”

Of the Estee Lauder Companies’ current 16 brands, all but the original five were the result of acquisitions. “We kept every one of the entrepreneurs in place and they are still managing those companies that they sold to us,” Lauder noted. “In each case, we have given them operational assistance, marketing assistance; we assist the front office and back office. But they’re the boss, and they all compete against each other.”

Each of the divisions has a ‘product engine’ lipstick for M.A.C, fragrance for the flagship Estee Lauder brand on which they focus all of their marketing. Salespeople are trained to pitch other products in the line once they gotten the customer in the door.

The mix of ‘rule maker’ and ‘rule breaker’ product lines has prevented the company from becoming stagnant. In 2001, about one third of its revenue came from products on the market three years or less.

The company limits distribution of most of its products to high-end department stores and freestanding stores. The lone exception is its teenage-oriented line Jane, which is sold in mass merchants including Wal-Mart and Target. It also sells over the Internet through, a joint venture with Chanel and Clarins. “We under-distribute to keep [customers] hungry,” Lauder said. “We always believe that demand must outpace distribution.”

Thus its Bumble and Bumble hair care line is distributed only through a small number of hair salons. As a result, its sales per reseller average $16,500, compared with $1,000 for competitor L’Oreal, which is more widely distributed. “We have multi-brands, multi-channels and multi-national, it’s the multi-multi concept.”

The growth hasn’t come without some missteps. The launching of Clinique in 1968 nearly ruined the company. “We bit off more than we could chew,” Lauder said. “I now understand cash flow. I didn’t then.”

In 2001, the company took a $22 million charge to close 86 underperforming Tommy Hilfiger fragrance shops and revamp in-store displays of its Jane brand. It took another $41 million to revamp its brand organization and supply chain systems.

Lauder said he worries about changing shopping habits that are reducing the importance of department stores. Store traffic is still good “three-quarters of shoppers at regional malls enter through anchor stores. But competition has forced department stores to become super promotional,” he said. “The pricing credibility which was so important for so many years is now in question. They have so destroyed their images that sometimes it is cheaper to shop at Macy’s than Target.”