G.

Entry Mode
There are mainly four types of entry modes, which are: export, license,
franchise and foreign direct investment. In order to decide which entry mode suit
Sephora the best, the following flow chart was used.

The major problems need to be concerned for export are transportation

costs and trade barriers; including tariffs, quotas and legislations. Although in
Taiwan, there is no other trade barrier other than tariff; due to the nature of
Sephora, that is a cosmetics retailer; export is not a sensible choice.

Neither license nor franchise is applicable. As one of Sephora’ core

competence is its top quality services and well-trained beauty consultants.1
Licensing will, however, raise the fear of losing this core competence. Moreover,
precedence to year 1990 agencies and exclusive licenses were very common in
Taiwan, but since 1992 tariff has dropped from 35% to 10% and taxation for
cosmetics has ceased to exist. Therefore many international cosmetic brands
revoked their agencies and invested back in the form of FDI instead, as it would

1
http://www.sephora.com/university/index.jhtml?searchString=Sephora%20University
To build the most knowledgeable and professional team of product consultants in the beauty industry,
Sephora developed "Science of Sephora." This program ensures that our team is skilled to identify skin
types, have a knowledge of skin physiology, the history of makeup, application techniques, the science
of creating fragrances, and most importantly, how to interact with Sephora's diverse clientele. To
further enhance the education program, Sephora opened the doors to an expanded training facility
“Sephora University” in San Francisco in October 2007.
be more profitable. And in fact, studies clearly show that profits have averagely
increased by 70% after companies have switched their entry mode to FDI. 2
Companies that made this move included Lancô me, Dior, Estee Lauder and
Chanel.3 Chanel even decided to set up a flagship in Taiwan by December 2009.

In theory, franchise will be able to overcome the disadvantages that license

causes. However Sephora is a retailer, franchise will result in a lower profitability
when distribution channels further increase. Also, Sephora does not only sell
product of its own brand. What gives the most value to the brand equity is that it
provides large varieties of products from different brands and the high quality
services that come along with.

The following Country-attractiveness company-competitive strength matrix

can also be a reference of what entry mode we should choose:

Taiwan is a country with high attractiveness as from part C2 Decision of

Country in our report, this can be shown under four aspect: demand, cost, risk
measurement and competitions. Sephora also has high competitive strength,
apart from its core competence, it is very effective in penetrating market, gaining
market share promptly in both developing countries and emerging countries and
therefore should impose the invest/grow strategy, which is FDI.

Foreign direct investment is clearly the solution to all. The next step is to

2
decide whether wholly owned subsidiary (WOS) or joint venture (JV) is
favorable. First, let’s analyze the advantages of WOS.

Advantages of WOS
Firstly, this helps enhance the internalized advantages of Sephora. Its core
competence which is the service quality can be maintained up to standard; a cost
cheaper than JV due to time and resources can also be saved when there are
fewer conflicts and negotiations. Strong control over operations can be ensured
as Sephora is able to oversee distribution in different countries. Setting up WOS
is preferable to JV because it also gives us tight control that might be required for
coordinating a globally dispersed value chain. Management decision can be made
with higher flexibility, where every move can provide maximum benefits to
stakeholders and especially shareholders, as WOS will obtain 100% shares in
profits and market shares without sharing.

All entry modes have their advantages and disadvantages, and trade-offs are
inevitable. However, Sephora still have its own special strength that can be
copied by nobody.

How the competitive strength can deal with the negative sides of using WOS:

There are 3 main obstacles contributed by WOS: a huge investment is involved,

the social and cultural strains from different country boundaries, and a longer
period of time for the establishment of a new oversea market. The best way to
tackle these problems is to take the advantages of the competitive strength of
Sephora- the internalization advantages.
1. Good management decisions
Inovis3, Infor WFM Workbrain4 and Red Prairie5 are employed by
Sephora in supply chain management and workforce management,
which aim at maintaining competitive advantages, improving budget
and forecasting capabilities, and distribution management respectively.
These software systems could provide customized programs to solve the
difficulties that Sephora experienced. These three system providers
have had established for many years and they are proficient of operation
management and supply chain management, as well as workforce
management. By outsourcing these managements, it helps to enhance
3
http://www.inovis.com/news/press/2006/2006051701.jsp
4
http://www.infor.com/company/news/pressroom/pressreleases/infor-wfm-workbrain-sephora/
5
http://www.redprairie.com/news/news_detail.aspx?contentid=657ef2f3-cc34-444f-97dc-
a21db11fed36&type=0&lid=1
 the efficiency of the operating performance, cut cost and maintain
competitive advantages. The outsourcing activities allow Sephora to
concentrate on developing cosmetics expertise and maintaining the high
quality of their staffs.
Also, the management of Sephora is extremely efficient because they can
enter the market in China and Hong Kong within three years. 6 It has
planned to spend US$50 million to open 100 specialty stores in China by
2010 and open 15 new stores in Hong Kong within the next five years.
This efficiency allows Sephora to take the niche from entering the China
market and gaining the market shares more rapidly in this intensively
competitive industry.
2. LVMH as Sephora’s parent
Sephora was acquired by LVMH7, a global leading luxury product group,
since 1997 and has been the subsidiary of the LVMH. With an upward
trend of increasing operating revenue from the exhibit341, and this
gives LVMH an incentive to invest and provide strong financial support
for the growth of Sephora. Moreover, Sephora could make use of the
database and the experience from LVMH. Since LVMH has a large range
of brands spreading all over the world, it has accumulated a huge
amount of database from different brands products and regions. It
would be a very useful tool for Sephora that can help adapt the

preferences of Taiwanese customers.

3. Experience from exploring overseas market

Both Sephora and LVMH have much experience in exploring overseas
market. This time, exploring the market in Taiwan would be easier with

6
http://www.konaxis.net/index.php/20081026172/news/cosmetic-perfumery-hygenic-products-
china/first-sephora-store-to-open-in-hong-kong.html
7
http://www.sephora.hk/index.php?act=viewDoc&docId=12
 the experience curve done by China and Hong Kong markets. Since
Taiwan has similar cultural and historical background, it is easier for
Sephora to collect relevant information from the China and Hong Kong
market that is related to the Taiwan market. Also, there is some degree
of interaction and influence between the multi-media among these three
places so that Sephora can search the local information of Taiwan in a
more accessible way.

Greeenfield or acquisition?
Establishing a WOS in a new market involves a huge financing investment, a more
cost effective way should thus be chosen. Greenfield WOS should be used as the
entry mode because there are fewer direct competitors in Taiwan, no inherit
problems needed to be tackled and more local financing incentives can be gained.