Five Forces

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Chapter Two – Closing Case: Five Forces in the Beauty Products Industry

In the beauty product industry incumbents such as L’Oreal, Nivea, Shiseido, Elizabeth Arden, and Max Factor are leaders of the industry. Incumbents have remarkably long staying power in this industry. Their support comes from the richer, aging baby boomers in developed economies and an increasingly more influent middle class in emerging economies. The industry leader L’Oreal was founded in 1909 and other companies were founded soon after in 1911. The time in the industry has allowed them to develop loyal customers and brand recognition which is the reason for their long staying power. Incumbents may have long staying power in the industry however there are changes that will affect the industry that they must be aware of. The following sections will highlight three major changes that affect this industry. The beauty industry has been growing at approximately 7% a year. The growth of the industry has made room for new entrants. The number of new entrants that have emerged is a major change affecting the industry. New entrants are motivated to enter an industry because of the lucrative above-average returns some incumbents earn. New entrants overcome entry barriers by entering as luxury or high end brands such as Chanel or Dior. In return incumbents react by emphasizing how unique their products are. For example, L’Oreal advertised how many patents they filed. The second change is in consumer behavior. This helps retail chains gain bargaining power at the expense of department stores. Department stores have high selling costs and sales are declining while retail stores are experiencing the opposite. They only deal with a handful of big suppliers and combining the change in consumer behavior, a low cost approach is the most effective and profitable for the industry incumbents. The third major change comes from areas outside the “radar screen”. Traditional Beauty products are...
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