Open Innovation in L’Oreal
L’Oreal is a the world’s NO.1 beauty brand that emphasized both internal and external open innovation. However, innovation from both parties may sometimes cause misalignment of interest.
L’Oréal has been the NO.1 beauty group in the world, with promising growth rate at 10% annually global wise, and especially 40% high annual growth in the medium to high end cosmetics sectors. L’Oréal has more than 20 research and innovation centers around the world to always come up with the cutting-edge skincare formula and makeup innovations, as well as engaging new ways to be socially and sustainably accountable.
To stay top of all the competitions, L’Oréal again has long ago started the Open Innovation not just in formulas but also in all types of the innovations ranging from business models changes to disruptive new tech, such as adapting VR, AI into the world of beauty.
Internally, facing L’Oréal’s employees, L’Oréal has the annual NEXT challenge. The NEXT challenge is for each brand in the group to come up with an innovation marketing campaign regardless of any forms without any limitation. The campaign is highly encouraged to test out new or not yet development ways to market the product. The application is finally evaluated approx. 70% on the value of the creativity and 30% of final sales figure, which provides a huge incentive for the employees to really try something new without considering too much pressure of sales turnout. The top three winning brands are award $10,000 prize, and also exclusive training in Tokyo and Paris for the individuals that set them on a faster pace with the corporation. From the NEXT challenge, many innovative projects have come out and was later rolled out group wise, and also brings out the best part of each employees, they no longer just follow what the company asked them to do but would be able to take a little bit of risk to showcase their creativity.
Externally, L’Oréal has started the Open Innovation program, which established lasting connections with beauty & tech startups. Together we want to create a new generation of innovative beauty products, devices and digital services. Now it has formed strategic partnerships with three of the leading incubators global wise, Station F, Founders Factory and Partech Ventures. Most managers assume that only the company employees can make the good choices and best selection and resisted the opportunities to allow many outsiders to influence their idea generation. However, outsiders can actually bring in many different perspectives and disruptive ideas. And there is a fundamental statistical principle is that the more ideas generated, the better the quality of the best one is likely to be. The value of the best idea generally increases with the variability of the ideas received. Up till today, the three partners have already provided numerous innovations that have been rolled out company wise. L’Oréal has also started working with Stanford University on New Venture Competition, to generate best ideas to fuel this beauty giant.
Both L’Oréal’s open innovation internally and externally have reinforced L’Oréal’s leading position in the world of beauty in not only product, but digital innovation, new tech adoptions pioneers, and chased by competitors and brands from other sectors.
However, with both internal and open external innovation at the same time, the incentive system is slightly misaligned. Employees in the L’Oréal group were not fully involved at the initial ideation process of the external innovation party. Many times, employees felt they have been left behind of the fundamental innovation opportunities, and more likely to be told to adopt the new innovation rather than engage in it ahead of time. And just as mentioned before, they perceived themselves to be the beauty expertise in the market, and have accumulated their own experience, networks and resources they used to use. Since the open external innovation’s success does not directly associated with the success of the managers in the company, they felt less incentivized to roll out the new innovation and give up the existing ones.
My suggestion is that to fully incorporate both the internal and external parties throughout the innovation process, stimulate cooperation since the beginning, such as having weekly or monthly meetups of the Group’s employee with the Incubators’ project. Allow the internal party to get ahead of what the Group is going for, be aware of it, and better plan for it, and further execute it willingly and motivated.
 L’Oréal 2017 annual financial statement
 L’Oréal website
 L’Oréal open innovation program at https://www.lorealopeninnovation.com/
 Kevin J. Boudreau and Karim R, Lakhani, How to Manage Outside Innovation, MIT Sloan Management Review, p5
Student comments on Open Innovation in L’Oreal
Ariel, I find your post interesting – it’s so forward-looking for L’Oréal to have launched the NEXT challenge. The way the final competing projects are evaluated upon shows L’Oréal’s determination to uncover really innovative, even disruptive products from its internal platform. The Open Innovation program that invites external startups to participate is even more exciting. I used to associate Open Innovation with Tech and Internet companies, or hardware companies that make cutting-edge technology accessories. Your post shows Open Innovation can be adopted by any industry, and can have some huge impact on the new product ideation process.
Partnership between internal and external parties in the name of innovation is a difficult goals for companies to pursue and Ariel clearly laid out this challenge at L’Oreal in her piece. Ensuring that employees feel engaged in the innovation process and are simply not execution robots is also important to create an environment where individuals are empowered to be creative and not just simply take the ideas of external parties. Collaboration is important in distributed innovation systems. We see that at Instagram for instance the firm’s recognition that consumers wanted ways to get their followers into their lives, resulted in the “stories” feature, but product managers had to be open with users to recognI’ve this opportunity to innovate. For a firm like L’Oreal that has to stay ahead of trends, I ask myself which source of innovation is more important : feedback from consumers, or internal experts who claim to know the needs of their target market ?
This is a very interesting look at the inner workings of a successful incumbent in an industry that is ripe for disruption. Transformative trends in beauty include a shift to DTC, a movement toward diversity and inclusion in beauty lines, and an emphasis on sustainability. Health and Beauty focused incubators and accelerators, such as Seed Beauty – home of ColourPop and Kylie Cosmetics – are helping new brands enter the market. Health and Beauty startups have sprung up at a rapid rate with new entrants such as Glossier, Milk Cosmetics, and StyleSeat changing not only what health and beauty products consumers are purchasing but also how and where they are purchasing them.
This article provides a fascinating glimpse into the way L’Oreal has responded to this industry evolution by using open innovation. While the company has done an admirable job of engaging employees and nascent startups, an untapped resource is the company’s customers. While more filtering of ideas may be required, engaging customers in open innovation could widen the top of the beauty giant’s innovation funnel and produce out-of-the-box ideas worth pursuing.
I love this article and think leaning further into the innovation process would benefit L’Oreal. Your point about internal and external parties in competition is spot-on and consistent with what I have observed in other consumer businesses. In setting up an incubator, L’Oreal has joined P&G (Preneur), Unilever (Foundry), and Colgate Palmolive, but I believe the key differentiating element is the buy-in and participation of internal parties. I hope that L’Oreal will continue to foster employee participation in its innovation even as it pursues more external influence.
I like how the essay articulates the tensions between internal and external crowdsourcing at the company and opens the debate on what could be done to align the incentives between the parties. Given that the internal crowdsourcing has a significant economic incentive, I wonder if the solution proposed, by which the employees would be more involved with the initiatives proposed by external parties, would be enough to significantly reduce the tension, or if further incentives should be implemented. Thinking about the latter, and being aware of the existing economic award, a possible initiative could be setting targets related to the number of external initiatives implemented as part of the employees’ bonus or as part of an attractive career path that awards the openness towards collaborative innovation.
Its interesting to think about external(open) vs internal innovation and aligning the organization in the direction that promotes both. Till now I was feeling that open innovation is more suited to companies that are services than products. But this article made me think differently. Brands like L’oreal are highly customer facing and external innovation will definitely add value. One way I can think about reducing the conflict between the two is by identifying problem statements from external innovation and then finding solutions to these problem statements through internal innovation.
Ariel, thank you very much for your essay! Very interesting!
I wonder whether it is possible to expand internal systems driving innovation. As I understand from the essay, currently employees are only engaged in brainstorming marketing campaigns. I would suggest management to create a platform on which employees are also encouraged to come up with ideas covering other topics. The range of involvement should be as broad as possible: from ideas on website improvements to ideas on new product development (for example exploiting new market niche). Driving internal innovation in a broader sense will result in a better pipeline of ideas, higher employee engagement and satisfaction.
The risk you raise of the conflict between internal and external open innovation is very valid. I think It is up to L’Oreal to let external parties affect the healthy culture of innovation that they have, or use this conflict as an opportunity to foster more creativity from within. There are definitely ways they could change the structure around in order to reach healthy dynamics between the two parties. Winners of the NEXT challenge could be the ones leading a team that works with the external consultants/startups/think tanks to launch the next new innovation for an example.
L’Oreal is doing some very innovative things! I enjoyed reading about the NEXT Challenge, which ACTUALLY enables employees to take risks. Social media, a low-cost tool for gathering consumer research and marketing, and the changing perceptions of what beauty is and should be has led to the proliferation of many beauty-related start-up companies doing very innovative things/designing and creating products for a wider base of consumers. I like the de-emphasis of IP and increased focus on speed to market – I think this can make a real difference in driving sales.
To your point about increased cooperation,I wonder if a partnership structure between internal and external parties would be feasible. In such a model, a group of internal employees would select what they thought were good/feasible ideas and would partner with external parties, ultimately becoming a “champion” of the idea. These champions could help re-shape these ideas in order to bring to market and help through the execution process, which could build strong alignment!
Do you see a risk of this strategy being easily replicated across competitors? If all of your competitors were to adopt this, would L’Oreal have a sustainable competitive advantage? Additionally, given the increased use of tech in beauty, will L’Oreal become a quasi tech company in the medium to long-term?
Great article. I like how you choose tackle the conflict between internal and external parties in implementing open innovation. However, I do not think that having weekly and monthly meetings is a comprehensive solution to managing open innovation. To improve the situation at Loreal, you may want to consider the following ideas:
1. Formalize and standardize a process for idea submission, e.g. create a dedicated idea submission portal for both the 2 parties to access. This will bring 2 benefits: (1) improve transparency between the 2 parties in terms of when ideas are formed and where they come from; (2) discourage participants from submitting confidential information through uncontrolled communications vehicles, such as emails or public posts on the company’s website/blogs.[*]
2. Develop stage gates for each idea (from idea formulation to implementation). Loreal should have a dedicated committee comprising of both internal and external parties to review and approve of these ideas before they can proceed to the later stages. This will help the two parties stay on the same page, get real-time update, and foster early involvement from the internal employees.
*Peter von Dyck, “Overcoming the Challenges to Successful Open Innovation,” March 3, 2015,
http://www.innovationmanagement.se/2015/03/03/overcoming-the-challenges-to-successful-open-innovation/, accessed November 18, 2018
Great article Ariel! Really enjoyed reading about the internal and external efforts L’Oreal is undergoing to ensure innovation that captures interest and engagement.
I think you’ve highlighted really well the tensions between having internal and external parties both working towards a common goal with varying expertise and misalignments. However, as you mentioned, allowing for open innovation is one of the smartest things a large company like L’Oreal can do to leverage beauty startups that can bypass bureaucracy and engage in closer discussions with the consumer to create more agile innovation that is faster and gains the first to market advantage. To your question, I think it is important to empower the internal stakeholders to feel that through their challenges they too can be part of a faster, more cutting edge innovation cycle that is more start-up like in nature then what they are traditionally used to.