Can you read the case I have attached below and answer the questions ?

1. What is the organizational structure of Universal Luxury’s brands and R&D? What are the goals of the brands? What are the goals of R&D? In what ways do the goals of R&D conflict with those of the brands? 2. Does the necessary capacity exist in the R&D center to accept all projects proposed by marketing for the three brands? To answer this question, you will need to create a spreadsheet to compute the demand from marketing for each R&D resource versus the available capacity of each R&D resource. Utilization rates of each resource will be helpful. HINT: Assume 216 days/year; 19 chemists in texture. Assume ancillary chemists can do 3 trials per day. Demand for each R&D resource is based on data in Exhibit 13. Start in the category of SKINCARE. (i) Separately consider demand (#trials/year) for Rio, Queen, and Andanzy for each of innovation, core and variation. This will allow you to develop a composite value for demand of the R&D resource in skincare (#trials/year). (ii) Compute R&D resource capacity (# trials/year) available for skincare. (iii) Compute resource utilization. REPEAT (i)-(iii) for ancillaries; texture; and color. 3.In Question 2, you will find that insufficient R&D capacity exists to meet marketing demand for resources. Moreover, in the following year, marketing has submitted requests that will increase the demand for R&D by 15.4%. How would you respond to the shortage of capacity in the R&D center? What other recommendations do you have to improve firm performance?
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R&D Management at
Universal Luxury Group Perfumes and Cosmetics
Division (A)
02/2006-5260
This case was written by Cyrille Balmes, Research Associate and INSEAD MBA (July 2004), and Manuel
Sosa, Assistant Professor of Technology and Operations Management at INSEAD, as a basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
The information in this case has been obtained from both public sources and company interviews. The
names of the company, brands, products, and people have been disguised.
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PERMISSION.
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“In a fiercely competitive and highly uncertain business climate, we focused our
energy on developing our strategic brands. As a result, we achieved ambitious
goals in terms of increased sales and improved profitability. Our performance
was driven by three key factors – innovation, advertising expenditures, and the
conquest of new markets. In 2004 we will continue to rely on these factors to
maintain our leading position.”
Samuel Klein,
President, Perfumes and Cosmetics Division, Universal Luxury Group
In September 2003, John Peters, financial controller for the R&D center of Universal Luxury
Group, recalled the words of the head of perfumes and cosmetics as he prepared for a meeting
with the VP of marketing of the Rio brand. Three months earlier, Rio – and its sister brands
Queen and Andanzy – had decided what investments they were each willing to make in R&D
to finance its budget for the upcoming year. The impending meeting would determine the
portfolio of products to be developed for Rio over the next year; similar meetings were
scheduled with the VPs of marketing of the two other brands.
Hitherto, the R&D center had risen to the challenge by increasing its productivity to meet the
ever-changing marketing requirements of all three brands. However, Peters suspected it might
not be able to do so this time. For the last three years the total number of R&D projects had
risen 24% annually, while the brands had increased the R&D budget by just 5%. In addition,
each brand had its own strategic requirements: Rio was trying to foster its position in skincare
and makeup, whereas Queen and Andanzy were seeking to enter the skincare category while
consolidating their position in fragrances.
Changes in R&D were also underway as the result of the introduction of its “harmonization
development concept”, which aimed to reduce the time required to develop and test new
products by sharing certain active ingredients across several projects (even from different
brands). Furthermore, productivity gains had uncovered coordination problems within the
department and Peters wondered if organizational changes were needed to address them. How
would the selection of products to be developed in 2004 impact R&D’s ability to meet the
needs of the three brands? How might such a decision reinforce R&D’s capacity to support
the development of new ingredients in the future? These were the questions in his mind as he
pondered whether the R&D department could feasibly take on all the projects required.
The Perfumes and Cosmetics Industry
The luxury cosmetics and toiletry market had been growing for the last couple of years across
all regions and product categories. The premium segment of the industry was dominated by
three major product categories: fragrances (which grouped perfumes and ancillaries),
skincare, and makeup. (Exhibit 1)
Fragrance products were differentiated mainly on their scent. Their success was closely linked
to the impact of the marketing launch and subsequent aggressive advertising. Makeup
products mainly competed on color and texture; a “hit” was typically characterized by the
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right blend of fashion trends and color (also called shades).1 The success of a skincare
product was highly dependent on its innovative nature, how well its claims2 matched
consumer needs, and its ability to maintain a strong marketing presence.
In the three main regional markets – the US, Western Europe and Asia – growth derived from
different product mixes. In Asia, for example, revenues mainly came from makeup and
skincare products (which represented 80% of the Asian beauty business), whereas in Europe
fragrances remained the main profit driver (Table 1).
In 2003 there were six major global players in the cosmetics industry: Universal Luxury
Group, L’Oreal, Ester Lauder, Clarins, LVMH and Shiseido (Exhibit 2). Market shares had
remained stable over the last two years but competition was intense and was based upon brand
recognition (marketing power) and product innovation (R&D power) (Exhibit 3).
Universal Luxury Group
Universal Luxury Group is an international group of companies principally engaged in the
production and sale of prestigious luxury goods under world-famous brand names. The
company is active in a number of global markets, including food and beverages, fashion and
leather goods, jewelry, and perfumes and cosmetics (Exhibit 4).
The perfumes and cosmetics division manufactured and distributed its products through four
major brands: Rio, Queen, Andanzy and Lienzo. Its product range included fragrances and
derivative-scented products, makeup and beauty (i.e. skincare) treatments.
The 1997-2001 period had seen the company attempt to appeal to a younger, alternative
market, as was apparent from its cosmetic brand acquisitions such as Soft Sugar, Urbanity,
Trust and Truth. However, in the winter of 2002-2003 Universal Luxury Group announced
that it was making a series of divestments to refocus on its “traditional” strategy of marketing
symbolic and exclusive brands.
Its strategic priority was to grow its “star” brands bolstering profitable creativity – such as Rio
and Queen – whilst nurturing its “rising stars” (including Lienzo, Prima Donna and Andi). For
Fernand Hau, CEO, the performance of Universal Luxury Group was the result of its ability to
align its strategic priorities with a flexible organizational structure:
“The results achieved by Universal Luxury Group reflect not only the
effectiveness of its strategy and the strength of its brands, but also the flexibility
and responsiveness of its teams, which continue to operate in a challenging
environment. This performance is a consequence of the priority placed on internal
growth and profitability, the development of our brands around the dual goals of
1
A shade in color cosmetics is a synonym for the color, tone and brightness of the product.
2
A claim represents the selling argument of the product. For example, Rio PURITY claims that it offers “up
to 60% wrinkle reduction after one hour,” and that after one month “80% of the women surveyed noticed a
visibly younger-looking appearance”.
Copyright © 2005 INSEAD, Fontainebleau, France.
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innovation and quality, and the conquest of new markets. It is also the result of
the flexibility of our organization and the talent of those in the Group who have
demonstrated remarkable rigour in executing the Group’s strategy on the ground,
together with their commercial drive and determination in the pursuit of
excellence.”
Fernand Hau
CEO, Universal Luxury Group3
The perfumes and cosmetic division adopted a decentralized organizational structure, giving
each brand full freedom to develop its markets and products while keeping R&D centralized
in order to make savings on product development and encourage cross-pollination of
innovation across brands. In order to retain and grow the exclusivity of its product line and its
longstanding reputation for excellence, the Group put special emphasis on new product
development and researching active ingredients for such development.
The Brands: Rio, Queen, and Andanzy
The marketing department of each independent brand was structured along product lines
(fragrance, skincare, and makeup), and organized as follows:
•
A VP of marketing, responsible for the marketing strategy of the brand across all product
lines.
•
Product line managers (also called marketing directors), managing either the fragrance,
skincare, or makeup line and responsible for generating new sources of profit within each
product line.
•
Group and product managers (depending on seniority), who were seen as project leaders
for the entire product development cycle from concept generation to market launch.
Products took between 12 and 18 months to develop (from idea generation to production and
distribution). Each brand managed product launches according to a three-year plan.
Depending on the brand, the plan was revised either once a year (for Rio and Andanzy), or on
a quarterly basis (for Queen).
The process began with a preliminary study by the marketing team (lasting between three
weeks and two months) that formed the basis of the business case enabling the brand to
forecast potential returns on the new product. Once this had been approved by the marketing
team and the executive committee (VP of marketing, director of R&D, VP of sales, and brand
chairman) a product plan would come into effect with an estimated launch date. Accordingly,
the product manager would draw up a brief to develop the product formula and packaging.
After development, pilot testing, and first sample batch production at the R&D center, the
project would enter final validation stage within the brand resulting in the go-ahead for
production ramp-up and product launch.
3
Company annual report.
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Rio
Rio established his fashion house in 1925. Unanimously hailed as the designer who brought a
new spirit to fashion, that same year he created Perfumes Rio. The subsequent development of
the company was closely linked to the fashion industry. Rio’s success was attributed not only
to its mythical fragrance4 but also its skincare expertise and color creation for makeup. In
skincare, Rio’s market differentiator was its “cosmetic touch” and formula innovation. Rio
owed its growth to major investments in research and development which helped it to
innovate and meet women’s most demanding expectations. January 2003 saw the launch of its
new line, Purity, which was designed to revolutionize the skincare market by claiming “up to
60% wrinkle reduction after one hour”. In makeup, Rio was the first to launch Collections, a
series that tied in with the seasonal Rio haute couture collection. The biggest brand of
Universal Luxury Group, Rio contributed over 50% of total sales of the perfumes and
cosmetics division (and was also the most profitable division). Like other brands, over 55% of
revenues came from fragrances with the rest derived equally from skincare and makeup
products (Exhibit 5).
Queen
Queen originally built strong brand equity in the fragrance industry and had expanded into
other cosmetic product lines. Its international fame came from a rich variety of products and
fragrances, a focus on excellence and quality, hand-crafted premium packaging, and careful
control of its distribution network to reinforce the exclusivity and dedication of the brand to
beauty.
“The strategy of the company is quite simple: it is to be above all a fragrance
creator before anything else, but also to bring skincare and makeup at the level of
the market. […] The brand’s DNA is built on new fragrances, the capacity to
identify new active ingredients to use in the fragrance, hand-crafted bottles
portrayed as objets d’art, and a controlled distribution.”
John Schmidt, VP of Marketing, Queen
Since its integration into the Universal Luxury Group in 1994, Queen had aimed to develop
the brand on a global scale while maintaining its exclusivity through quality and the
selectivity of its distribution channels. Simultaneously, it had extended the product range to
skincare and makeup, which soon became new sources of growth, especially in Asia. As a
result, the need for R&D innovation in the skincare and makeup lines had increased over the
last two to three years.
Andanzy
Andanzy was seeking to return to its origins and stay in touch with the original signature of
the brand: “Beauty is more intense when it intrigues.”5 Projects were developed around
4
For example, the Sensual fragrance is still expected to post significant sales growth in its fifth year.
5
Universal Luxury Group annual report and company website.
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Andanzy’s four core values: elegance, audacity, sensuality and intensity, which were closely
linked to its “couture” to ensure coherence between products and brand image.
Recognized for its perfume expertise, in 2000 Andanzy expanded its cosmetics development
by launching the Mirrors line, a range of resolutely modern and feminine makeup, as well as
Sweetline, a new range of skincare products. Like Queen, Andanzy contributed to about 20%
of sales in the perfumes and cosmetics division. The remaining turnover came from younger
brands such as Lienzo.
Product Categories: Skincare, Makeup and Fragrance
Skincare
Skincare products were divided into four sub-categories: anti-aging, whitening, moisturizers
and cleansers. The typical innovation target was to renew the family of products – such as Sun
from Rio, and Waterly from Queen – every three years for the major product lines, and every
two years for stand-alone products such as Smooth from Queen.
Managers in the skincare groups were pushing for more innovative products but sometimes
felt that the R&D center failed to react effectively and come up with new active ingredients
that corresponded to their marketing concepts.
“I believe that we have good R&D but it needs to be more reactive and capitalize
more on its knowledge and know-how. […] With R&D we have access to a lot of
technologies and we need to take advantage of it. However, I sometimes feel that
R&D is a little bit too rigid in adapting or changing a formula to meet our market
requirements.”
Peter Bayley
Skincare Marketing Director, Rio
There was some frustration at Queen as a number of its projects got delayed during the year
by “crash programs” sponsored by Rio, as the larger brand and main contributor to the R&D
budget. As one of the Queen’s skincare managers explained:
“We know that Rio has the biggest turnover and we understand that they have the
priority in terms of R&D resources and technologies. But this prioritization by
R&D affects our execution. Once or twice a year our projects get delayed by
changes in the Rio schedule and priority. For example, the efficacy test of one of
our products that was supposed to be launched in January got delayed by a Rio
project whose launch date was moved from April to January. This delay created a
financial risk for the company as we had to print the claims on the packaging
before knowing the results of the efficacy test.”
Marketing managers recognized that they needed to improve the volume and timing of new
requirements for products already under development, particularly when developing products
for new markets (e.g., Asia) whose requirements were more uncertain, as Peter Bayley
illustrated:
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“While working on a new product for the Asian market, a lack of communication
between the Global Marketing Team and the local market concerning the color of
packaging made us change it at the last moment. This change had an impact on
the stability of the product and we were forced to postpone the launch for several
weeks.”
Makeup
The makeup product line was organized across three segments: face, eyes and lips. Product
launches were evenly distributed across the year with four special events or collections in
January, March, August and October. Each collection comprised a different mix of products
(for face, eyes and lips) and shades (approximately 15) unique to each brand and makeup
artist. In addition, brands often launched a couple of specific products during the year. For
example, the Earth collection (March 2003 collection for Queen) incorporated nine new
specific products and 26 new shades. Over the years, makeup had become the entry point to
the brand for new customers. Brands sustained their growth by launching new products in
each segment every year.
The main challenges associated with makeup were: the emergence of new products on the
market combining makeup and skincare properties; coordination with R&D in the absence of
any single project coordinator within R&D to monitor and follow the development of each
project; and the need to manage the high renewal rate of the product lines. For example,
Queen typically launched an average of 120 new products every year, with 350 products in
catalogue. This triggered trade-off decisions between which products to invest in, to hold, or
to remove from the shelves.
Fragrance
The fragrance product line was organized by product type (such as cologne or eau de toilette),
and target segment (such as female or male). Growth was sustained by new product launches
and extensions to ancillaries which followed a similar, though simpler, development process
to skincare products. Queen, for example, had begun to market a major product every year
whereas hitherto it had launched a new fragrance every four years.
From the brand’s viewpoint, the major constraint on fragrance development was the
toxicology testing conducted by R&D – regulations kept changing and tests were becoming
more expensive and time-consuming, as Fabio Rene, Queen’s fragrance marketing director,
explained:
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“What’s really important for us are all the toxicology tests. The regulation is
changing and we have a lot of old fragrances to bring into conformity […] When
you compare what fragrance accounts for in terms of turnover for each brand,
toxicology tests should be a major service from the R&D department.”
Fabio Rene, Fragrance Marketing Director, Queen
The R&D Center
Universal Luxury Group began to invest in research and development in the 1980s. Soon after
the acquisition of Queen and Andanzy, it centralized its R&D capabilities to reduce costs and
create synergies between the research teams.
In the last three years the R&D center had significantly improved its productivity. While the
budget allocated to R&D had increased by only 5% in that period, the number of projects had
increased by over 24% annually. Improvements resulted mainly from increases in nominal
productivity and synergies between projects.
The R&D center was involved in pure research, product development, and had an advisory
role on regulation (Exhibit 5). Over 85% of its product development activities were dedicated
to skincare and makeup development (Exhibit 5). In order to meet marketing’s demand for
flexibility and responsiveness, R&D had developed a network of partnerships with research
institutions and suppliers in order to broaden its access to new technologies.
The R&D center’s budget was split between 85% fixed costs and 15% variable costs, the
latter consisting primarily of temporary workers and outsourcing of product tests such as
toxicology and efficacy. The budget was financed by Rio, Queen and Andanzy, which
contributed about 60%, 23%, and 17% respectively.
Organization
The R&D center employed 300 research and technical staff. Its flat organizational structure
had gradually evolved during its consolidation. R&D was composed of 12 departments
including four research departments, four expert and test facilities, two support and functional
departments, one formulation and development department (84 people), and one pilot and
technical …
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