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When cosmetics giant Estée Lauder decided to play big in social media, it took a serious gamble: its efforts were funded through its budget for traditional advertising. "Print media is effective, and it was 'how things were always done' at Estée Lauder," says Wharton finance professor David Wessels. "There was also an infrastructure in place to protect traditional advertising. Convincing management that it made sense to borrow from that core business to test something new took courage."
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And that courage is currently being rewarded. Lauder's MAC brand has 2.4 million Facebook fans — more than any other cosmetic company. Some of the how-to videos on the firm's YouTube channel have been viewed over half a million times. Group president John Demsey notes that the acquisition of Smashbox Cosmetics earlier this year was made in part to leverage "Smashbox's expertise in digital and social media to advance its current capabilities, an important and growing competency for the company."
Wessels, who teaches in Wharton Executive Education's Integrating Finance and Strategy for Value Creation, says Estée Lauder's social media strategy makes the case for building a corporate portfolio. "When you're considering a new business, you want to stay consistent with your core competencies. You may have many potential opportunities, but just because they're good businesses doesn't mean you should be in them. This is especially true if that business fights against what you're trying to accomplish. In a tough economy, the tension between doing what you're good at — what you've always done — and trying something new is especially acute."
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Estée Lauder's Online President Dennis McEniry says getting involved in and creating online communities made sense for the company, because friends and social groups are the "number one influence" on purchasing decisions. With so many of their customers using social media, it was also a smart way to reach them. But it wasn't a sure thing. Venturing into online territory with brand-specific strategies might engage the target audience, but would they become buyers?
Ultimately, it's a judgment call. Wessels tells participants in the Integrating Finance program, "The decision you're weighing is one of valuation. Will creating a portfolio, expanding your existing business, create more value? There are a lot of companies that won't touch the core business, but you need to consider whether that 'protectionist' strategy is really adding value."
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At Estée Lauder, traditional print advertising was doing well, but it couldn't be made much better. "Companies in this position often drive more investment into that established business; it's a natural default. But your strategy shouldn't be about the individual business. Creating a portfolio of businesses that support one another, as print advertising and social media do, can ultimately change the game for you," says Wessels. The co-author of Valuation: Measuring and Managing the Value of Companies stresses, "Managing value isn't simply about maintaining what you're already doing. It might seem counterintuitive to borrow from what's working to fund what might work, but it can be your best move."
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