A corporate growth strategy in which a firm

expands its operation by moving into a different

industry

Many reasons or motives for diversification

Two major types of diversification

◦ Related (concentric) diversification

◦ Unrelated (conglomerate) diversification

Risk reduction and/or spreading

To make use of surplus cash flows

To build shareholder value

To Grow

To more fully utilize existing resources and

capabilities

4

Diversification implies two levels of strategy

1. Business-Level Capabilities/resources to create competitive advantage within each business -low cost - differentiation-focused low cost - focused differentiation- integrated low cost/differentiation

2. Corporate-Level Capabilities/resources needed to create value across businesses

RelatedRelated Diversification Diversification

◦ share activitiesshare activities

◦ transfer core competenciestransfer core competencies

◦ Eg. Kraft foodsEg. Kraft foods

UnrelatedUnrelated Diversification Diversification

◦ More efficiently allocate internal capital More efficiently allocate internal capital

◦ restructurerestructure

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Key Facts and Figures

1st cosmetic group worldwide

1 century of expertise in cosmetics

23 international brands

19.5 billion euros of sales in 2010

130 countries

66,600 employees

612 patents registered in 2010

DIVERSIFICATION STRATEGY“Closely-related” Dermatology

Entering three kinds of industry:

Cosmetics

The Body Shop

COSMETICS INDUSTRYOffering different product lines through four market lines:

Professional Products

COSMETICS INDUSTRY

Consumer Products

COSMETICS INDUSTRYLuxury Products

COSMETICS INDUSTRYActive Cosmetics

THE BODY SHOP

A chain of cosmetic storesspecializing exclusively inhair and skin care products

based on naturalingredients.

Operated a total of 2,550stores in 62 countries

worldwide by the end of2009.

DERMATOLOGY

Galderma Laboratories: ajoint venture with Nestle. It

boasts three of the top 25best-selling drugs.

It specializes in skindiseases and skininfections.

REASONS OF DIVERSIFICATION

1Part of L’Oreal Long TermStrategy

Exploiting RelevantEconomies of Scope2

Strengthening External Growth

3 Meet Consumer Needs

STRATEGIC CHOICE

InternalGrowth

Resources

Asset

ExternalGrowth

Diversification

(M & A)

Alliances

GROWTH STRATEGY“Merger and Acquisition”

Objectives:

Satisfying local needs.

Creating a portfolio of distinctive butcomplementary products and brands.

Quickly acquiring new resources andtechnologies.

Overcoming the entry barriers.

Reaching a critical size for exploiting

economies of scale.

CHARACTERISTICS OF

COMPANIES ACQUIRED

Operating indifferent geographical markets from those inwhich L’oreal is already operating.

The Body Shop: Enters India Easily

Offering products that complete the L’oreal portfoliobrands or products.

ROGER&GALLET: Produces Pharmacy Fragrance

CHARACTERISTICS OF COMPANIES ACQUIREDOperating in geographical markets in which L’oreal intends to

reach leadership position.

Inneov: Number 1 in Spain

Having high technology and compet hL’oreal products.

Vichy: Advanced Skincare Technology

ACQUISITION PREPARATION

FLOWCHARTPreparation

(Gatherinformation)

Decision(Implementation)

FinalPreparation

Similaritieswith L’oreal

Characteristics

What is theObjectives?

IMPLEMENTATION

L’Oreal has acquired more than 25 brands with differentmarket segments (see acquisition timeline).

Each brands contributes a different advantage forL’Oreal long term strategies.

The Body Shop makes L’Oreal distribution broader.

ACQUISITION TIMELINE1990 1995 2000 2005 2010

ProfessionalProducts

ConsumerProducts

LuxuryProducts

ActiveCosmetics

The BodyShop

RISK MITIGATION STRATEGYIncreasing patent rights on its inventions.

Innovation and PatentRebuild the products to get customers’attention.

Patents, R&D Expenditures and Employees at L’Oreal2001 2003 2005 2007 2009

Registered 493 515 529 576 674patents

R&D 432 480 496 560 609expenditures(mill. Euros)

R&D employees 2,743 2,921 2,903 3,095 3,313

MARKETING MITIGATION

Market different product with different target market.

Develop a clear positioning statement as a current market leader.

MARKETING MITIGATION

Try to be the first mover - to gain more market share before other.

PRODUCTS STRATEGY

Collaboration with Channel Partners

Licensee

Hair Salons Mass Market

Retail

Partners

Department

Market Research Agencies

Stores,Perfumeries

Pharmacies,Dermatologists

ALIGNING WITH NATURE’ STRATEGY

Commitment toSustainable Development:

Reducing impact on natural capital.

Responsible sourcing.

Eco-designing new ingredients.

Addressing controversy on ingredients.

Protecting the global system.

Biomethanisation Unit at Libramont Plant:100% Green Energy

-50%

GREENHOUS

E

GAS EMISSION

Target for 2015

-50%

WASTE

GENERATED PER

FINISHED

PRODUCT

Target for 2015

-50%

WATER

CONSUMPTION

PER FINISHED

PRODUCT

NEWEST ACQUISITION:

PACIFIC BIOSCIENCE LABORATORIES

Date of Acquisition: Dec 15th, 2011.

Intermediated by L’Oreal USA (thefranchisee).

Products: Sonic Skin Care Devices(Patented).

Channels: Dermatologists andPrestige Retail.

Main Market: US.Reasons behind Acquisition:

Pacific Bioscience Laboratories’Expertise in Devices.

Size alone does not guarantee firms an advantage.

◦ Coordination required to exploit economies of scale and

scope is not without cost.

◦ Size creates additional challenges and difficulties, including

problems of communication and coordination.

Higher levels of diversification are not incompatible

with high performance -- nor do they necessarily

imply that firms will suffer lower performance levels.

Critical factor in determining success is the level

of management expertise in formulating and

implementing corporate strategy.

◦ More difficult for diversified firms.

◦ Managers of large diversified firms possess a variety of

well-developed mental models that provide them with

powerful understandings of how to manage their firms.