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L’oréal: Practical Application Essay

Before analyzing and evaluating the international business activities of the L’Oréal Group, we first provide you a short overview of the firm, in which covers the most essential aspects are covered.

History

In 1907, a young chemist named Eugène Schueller developed the first synthetic hair dyes and sold it to hair salons in Paris under the brand name Auréole. Two years later, he registered his company as Société Française de Teintures Inoffensives pour Cheveux, which later became L’Oréal, a company with a strong focus on research and innovation for beauty products. From that moment until 1984, the company was on the road to greatness as it began to grow rapidly.

The firm reached its peak in the period 1984-2000 and today, the L’Oréal Group markets more than 500 brands, including The Body Shop, Maybelline, Biotherm, Cacharel, Giorgio Armani Perfumes & Cosmetics, Vichy, and Ralph Lauren Fragrances. While the company started off with solely producing hair products, it now offers thousands of different products around the world, varying from make-up to perfumes to skin and hair care products, making it the leader in the global cosmetics market.

Current status

The firm’s total revenues accounted for 19.5 billion dollars in 2010, with net profits being 2.24 billion dollars. With their 66,000 employees and ranking 353 in the Fortune Global 500, the L’Oréal Group is the largest cosmetics and beauty firm in the world. The company became market leader in nearly every country it operates in. Their strong commitment to research and development has greatly contributed to this, as it led to increasingly safe and effective products. Having reached a stable growth rate and worldwide recognition, L’Oréal currently puts increasingly more focus on ethics, social and environmental responsibility. Not only did they win several awards for their environmentally-friendly behavior, they also promote sustainable development.

Mission and goals

L’Oréal’s ambitions concerning sustainability are extremely high, as their aim is to be an exemplary corporate citizen. Furthermore, L’Oréal puts more focus on the reduction of the company’s carbon footprint, waste and greenhouse emissions: their goal is to reduce emissions by 50% over the next five years. Apart from their ideals on sustainability, the corporation also tries to increase sales by attracting more customers globally. They do this by not only targeting certain groups based on income, but also on culture. As stated on their official website, L’Oréal’s mission is as follows:

‘To invent beauty and meet the aspirations of millions of women and men. Its vocation is universal: to offer everyone, all over the world, the best of cosmetics in terms of quality, efficacy and safety, to give everyone access to beauty by offering products in harmony with their needs, culture and expectations. With the opening up of the emerging markets, L’Oréal’s mission is broadening in response to the vast diversity of populations. ’ (L’Oréal official statement)

Under the leadership of current CEO Owen-Jones, L’Oréal tries to maintain its position as one of the world’s top companies, never ceasing to grow and provide the world with continuously innovating products in order to reach its mission: to make beauty universal.

Exam field assignment

The following text extensively covers L’Oréal’s international business activities. Different theories, concepts and analytical tools are applied to the L’Oréal Group. By critical analyzation and evaluation, a solid overview of the firm in terms of globalization can be established.

In order to explain the location-specific advantage of L’Oréal, we compared four international trade theories namely: comparative advantage, factor proportions (H-O theory), Linder’s theory of overlapping demand and Michael Porter’s Diamond model. This comparison can be found in table 1 in the Appendix. Moving on, Porter’s Diamond model best explains L’Oréal’s location-specific advantage. To clarify: we are talking about L’Oréal’s headquarters, which is located near Paris. According to this theory, the reason certain nations have a competitive advantage over others is not because of one source or driver (as is the case with most other theories).

The Diamond model ascribes competitive advantage to four sources. Furthermore, it focuses on the relationships between the sources as they mutually reinforce one another. The Diamond model is exemplified in the existence of industrial districts or clusters. This is also the case for L’Oréal, which is part of the ‘Cosmetic Valley’ located near Paris. Due to L’Oréal being a part of a cluster, we can use Porter’s Diamond model to describe some of the location-specific advantages this provides to the company. First of all, a cluster attracts skilled labor and provides firms with the possibility of faster technological advancements and improved research as firms learn from nearby competitors.

Domestic rivalry also improves a firm’s competitiveness, both domestically and internationally, as companies try to be better than their competitors. The number of innovative inputs is also higher in a cluster than in another location. These theoretical advantages of a cluster hold true for L’Oréal. Having so many competitors close by, L’Oréal is continuously developing new products in order to improve the market position and sales of one of its many brands. The continuous innovation of its products and the domestic rivalry are two of the reasons why L’Oréal is currently the global market leader in the cosmetics industry.

Currently intra-industry trade takes place in the cosmetics industry and the main reason for this is that the products in this industry are not homogeneous, but differentiated. Some eye shadow products provide a lighter color than others while some lipsticks have a more exotic color than others. This is the case for all products in the cosmetics industry and there is not a single producer which supplies every type of cosmetic product. Therefore, in order for consumers to try out something new, these products would have to be imported, hence the intra-industry trade. Intra-industry trade is likely to improve in the future, partially due to the increasing availability of the internet and (social) media worldwide. This way, consumers in (for instance) China come into contact with the western culture or other cultures in general and might want to try some of the cosmetic products their favorite actor or athlete is using.

This way more cosmetic products are shipped from Europe or the USA to China. Multinational corporations (MNCs) in the cosmetic industry, such as L’Oréal, also try to increase the intra-industry trade via two ways. First of all MNCs use certain marketing strategies to get people to buy their products as they appear to be better than what local companies have to offer. Secondly, MNCs set up offices or shops in countries where they want to increase their sales or acquire local companies/brands. This way MNCs try to increase brand awareness and create customer loyalty. James Markusen’s take on the New Trade Theory, namely the importance of knowledge capital, explains the fact that MNCs in the cosmetic industry are present in multiple locations in the world.

According to Markusen (2002) the two drivers for international business are learning effects and first mover advantage. Being the first MNC in a new market is especially important in the cosmetic industry as companies then have the opportunity to create and increase brand awareness and develop new cosmetic products based on cultural aspects and consumer’s tastes of that market. Therefore learning effects also play a role in this as MNCs acquire knowledge of the preferences of these markets.

As a cosmetics company, such as L’Oréal, then develops a product based on these preferences and sells it in the designated market, it might try to sell it in other countries as well, thereby increasing intra-industry trade. Finally, MNCs can better utilize economies of scale as they produce and sell their products worldwide, which gives them an edge over domestic cosmetic producers, and thereby enhancing the gains from intra-industry trade.

We now move on to an analysis of the industry globalization drivers in the cosmetics industry and apply these to L’Oréal. First of all there are the market drivers. These drivers are of vital importance as they determine to what extent customer needs are global. L’Oréal’s products can to a certain extent be defined as global, since consumers in most countries have similar needs. This is because the use of cosmetics and beauty products is not restricted to a particular geographical area, as women (and increasingly more men) all over the world are interested in the field of cosmetics. Beauty ideals around the world include big eyes, long lashes and flawless skin. These homogeneous desires result in similar product features being a necessity in most countries, because everyone strives for the same ideal: to be beautiful.

Similar ideas about perfection are shared by various countries and cultures. This would mean that the firm’s marketing is quite transferable. However, it could be argued that global needs are determined by fundamental cultural differences which are unlikely to disappear (Douglas et al., 1991). For example, a tanned skin is considered beautiful in the west, whereas Asian people strive to be as white as possible. Though products such as bronzer and self-tanning spray are sold in high volumes in Europe and the US, they are hardly found in Asia since these products do not meet customer demands in countries like China, India, and Vietnam. As for economic drivers, the nature of the cosmetics industry is based around R&D and marketing. In order to be a strong player in this industry, firms need to produce beauty products which are catered to the preferences of consumers in a certain country.

Because knowledge of these preferences is essential to gain market share, L’Oréal has production plants and offices around the world in order to swiftly notice changes in preferences. Furthermore, each of these cosmetics plants is specialized in a certain product line/brand, which means L’Oréal is utilizing economies of scale as the same products are produced in one place. When it comes to competition, L’Oréal faces many different firms that are specialized in the same field. Because L’Oréal operates in a wide variety of markets, the number of competitors is high. Cosmetics firms such as Shiseido, Rimmel and Gosh, but also brands like Dove and Head & Shoulders (market leader in the shampoo market) form a harmful threat to the company. One of L’Oréal’s major competitors is Procter & Gamble; a firm specialized in the manufacturing of a wide range of consumer goods, such as shampoo. These firms, like L’Oréal, operate globally.

Their brands are present in a large number of countries, varying from 40 (Rimmel) up to 160 (P&G). Since L’Oréal operates mostly in the same areas as the firms named earlier, the corporation faces the same main competitors in every environment. Government drivers do affect the firm, though L’Oréal does not face pharmaceuticals, insurance or patent issues (it has 515 patents worldwide) in its global operations. Since the firm operates globally, it faces many different government leadership styles. In 2005, the company faced a decline in the dermatology branch led by its Galderma brand, due to new legislations governing drugs (Euromonitor 2005).

Furthermore, L’Oréal needs to produce harmless substances, and has therefore been prohibited by the European Union to use chemicals such as Phthalates (carcinogenic). Besides these restrictions, the company also has to deal with legislation for advertising. According to the Control of Misleading Advertisements Regulations (1988), ‘advertisements may not be misleading by exaggerating the functions of a product.’ In 2007, L’Oréal faced a lawsuit because the model for their ‘Telescopic’ mascara advertisement was wearing fake eyelashes. Government rules and regulations restrict the firm in its operations and can sometimes work out negatively for the company, as has happened with the ‘Telescopic’ mascara lawsuit.

Having discussed the industry globalization drivers in the previous question, we move onto the strategy levers. An essential lever is major market participation. In 2002, L’Oréal and Nestle announced a joint-venture project. They set up a company under the name ‘Laboratoires INNEOV’, which entered the global market for cosmetic nutritional supplements. In 2003, L’Oréal’s total revenues accounted for 14 billion Euros, the net profit being 1.6 billion. The firm has a 16.8% market share in the cosmetics industry, making it the market leader. 50% of its sales are generated outside Europe. In 2000, annual sales rose by 46% in Japan, resulting in one of L’Oréal’s brands Maybelline becoming the leading mass-market cosmetics brand. According to Dr. Yip (1989), major market participation leads to cost reduction because of increased volume for economies of scale (table 2). Because L’Oréal’s products are globally available and recognized, it enhances customer preference.

Quite a few of the firm’s products can be considered standardized, such as mascaras. This also leads to enhanced customer preference, because consumers have access to familiar products while abroad. Furthermore, it reduces duplication of development efforts (resulting in cost reduction) and improves the quality because of the focus on development. The major drawback of product standardization is that the firm is less responsive to local needs (Yip 1989). There is reduced adaptation to local customer behavior. However, L’Oréal does take into account the diversities of women around the globe. Their strategy includes developing products suitable for women of all ethnicities.

L’Oréal uses uniform marketing for many of their products. The firm has models of all ethnicities to advertise their products, and these advertisements and commercials are shown around the globe. In 2007, the worldwide known actress Penelope Cruz starred in the ‘Telescopic’ mascara advert, which was shown in a wide range of countries all over the world. Uniform marketing significantly reduces design and production costs of marketing programs (Yip 1989). However, the firm also employed the Chinese actress Gong Li in 1996 to advertise their product line in the Asian region.

The firm has the strategic advantage of major market participation, product standardization, and uniform marketing. Because L’Oréal is the global market leader in the cosmetics industry, the firm has a strong competitive position in this dimension. Furthermore, because of the company’s product standardization and uniform marketing, costs can be reduced and quality improved. Though competitors such as Estee Lauder and Shiseido also operate on a global basis, L’Oréal still manages to maintain the largest market share in the industry.

This is mainly due to the fact that the firm continuously introduces innovative products, developed by their 2,000 employees on the Research & Development team. Also, whereas most competitors are specialized in only one field (such as cosmetics), the L’Oréal group sells make-up, hair skin care products, and perfumes. Because of the wide range of products offered, the firm does not rely solely on one market. Based on the previous analyses, it can be concluded that L’Oréal has a very strong competitive position.

L’Oréal has operations in 130 countries and possesses 42 factories which altogether generate 4.6 billion products on an annual basis. 52.7% of its revenues are made in Europe, 27.6% in North America, and 19.7% in the rest of the world. Because sales are generated from all over the world, it is important to have manufacturing plants around the globe. This way, the firm can easily meet customer demand as it does not need to ship products overseas. An additional advantage is that L’Oréal can cut costs by outsourcing. More importantly, the business improves greatly because of the increased quality of service to its customers. Currently L’Oréal has one factory in Indonesia, but because of the ASEAN market’s high growth rate the firm is building an additional factory.

This factory is expected to start operating by the end of 2011 and the expected outcome of this investment is a thirty percent growth in annual sales. Moreover, the firm expects to attract an additional 50 million customers in Southeast Asia by 2020. Of all units produced at the new manufacturing plants, 75% will be exported. Off shoring the production to Indonesia is very effective, because L’Oréal currently has 20 million consumers in this country. So not only do they save costs, but they can also quickly respond to customer demand. This is one of the firm’s main competitive advantages. Max Factor, one of L’Oréal’s biggest competitors, only entered the Indonesian market recently (April 2011) under the name Procter & Gamble, and is thus a brand people in Indonesia are unfamiliar with.

They still have to earn consumer trust and gain market share, thus L’Oréal is already way ahead of them. And because Max Factor is inexperienced in the Indonesian market, L’Oréal has a competitive advantage with the firm being present in Indonesia since 1979. Because L’Oréal is already a well-known brand in Asia, it is easier to expand its presence. L’Oréal is admired for the effectiveness of its internationalization strategy. Twelve years ago, 95% of all sales were generated in Western Europe, of which 50% in France. Today, only 14% of total revenues are from France. Another option is outsourcing, for example to China. Because L’Oréal is a major company, it should focus mostly on research and development, and outsource processes that could be located anywhere.

Packaging, for example, can be fully outsourced to low-cost countries in Asia. Since L’Oréal has a greater market share in Asia than competitors such as Clinique, Gosh, and Rimmel, a large amount of the units produced do not need to be shipped abroad because of the high demand in Asia. In other words, fewer products need to be exported compared to other firms, whose market share in Asia is quite small. These firms need to ship most of their products to the western countries. Outsourcing also has a downside: opportunistic pricing and shirking are the risks that come along with outsourcing. Poaching is also one of the major drawbacks of outsourcing. The third party could sign an agreement with a competitor such as Shiseido, and pass on confidential information about L’Oréal.

L’Oréal’s main focus is on the cosmetics industry. This field is very suitable for foreign direct investments, because cosmetics are highly demanded goods worldwide. It is therefore a logical step for a cosmetics firm to enter the global markets through foreign direct investments. Low-cost countries are attractive for an FDI because of low corporate tax and income tax rates. Furthermore, the outcome of an FDI is usually the fact that the firm has better control over the operations, and can adapt its product to local needs. From their office in New York, L’Oréal has adapted product lines such as Maybelline for North America. By making foreign direct investments, the firm can create culturally diverse, regional products. FDI in the cosmetics industry can be explained by the production cycle theory of Vernon. Production was first shifted to other countries in Europe, and then more globally to low-cost countries in Asia. This can be seen by the emergence of L’Oréal factories in China, Japan, and Indonesia.

FDI in this industry can also be explained by the internalisation theory of Buckley & Casson, because firm-specific advantages are exploited in foreign countries. L’Oréal’s main advantage is their focus on research and innovation. Because of their strong commitment to research and by investing large amounts of money in innovation in the interest of beauty, L’Oréal is the market leader in the growing cosmetics industry despite the competition. This is further exploited by the establishment of five R&D centers around the globe: two in France, and one in Japan, China, and the USA. Another example of an FDI made by L’Oréal is the company ‘Laboratoires INNEOV’, a 50/50 joint-venture with Nestle.

This firm focuses on the European market and currently operates in Germany, Belgium, Spain, France, and Portugal. Dunning’s eclectic paradigm closely resembles the internalisation theory, as it also focuses on exploiting firm-specific advantages. However, this paradigm also concentrates on location. As a result of 515 patents registered by L’Oréal, the firm has greater market share than any of their competitors in the world. Because of these patents, top of the line products are strictly under L’Oréal’s brands, which leads consumers only to them since their cosmetics are not found in any other brand.

Every year, nineteen billion dollar is spent on cosmetics worldwide. The cosmetics market was developed in 1910, and has continuously grown ever since. L’Oréal entered the market in 1909 in France. In 1912, the firm expanded to Austria, Italy and Holland, and by the end of 1920 they had extended to fourteen more countries, such as Brazil, Peru, the United States, the Soviet Union and Bolivia. In 1936, L’Oréal’s products were also made available in Belgium and Denmark, and later expanded to Argentina, Algeria and the United Kingdom. Today, the firm operates in 130 countries. The eclectic paradigm of Dunning is most relevant as it basically consists of the internalisation theory plus an added aspect: location. Vernon’s production cycle theory is not preferred because it is only applicable to firms that make FDI’s solely in low-cost countries. Cosmetics firms need to make foreign direct investments in order to enter new markets, gain knowledge, spread risk, and increase market share.

The criteria used for the ranking are based on GDP, economic growth and emerging markets or developed countries. GDP is an indicator used to measure the standard living of a country. It is a critical measure as L’Oréal’s products are considered luxury goods: if a country’s GDP is low, the market for these types of goods is not big, which makes it unprofitable for L’Oréal to invest. As for economic growth; a high economic growth rate is likely to result in a rapid growth in sales. And finally; emerging markets and developed countries. It is very interesting for L’Oréal to invest in an emerging market since this market usually has a high economic growth rate.

However, developed markets are less interesting as there are many and possibly even stronger competitors active in these markets. Besides, it is very unlikely that L’Oréal has not yet entered these developed markets. In order to establish a ranking of the five most interesting and the five least interesting countries, one more criteria must be applied. The reason for this is that a country which scores very high on the GDP-ranking or the economic growth is not guaranteed to immediately lead to an increase in the firm’s total sales. This also depends on the type of customers in the market.

Therefore, a weight factor based on the sex ratio in a certain country is assigned. Countries with more females than males are given a 200% weight factor, whereas countries that are dominated by men are assigned a 100% weight factor. Taking all these criteria into consideration (of which the results can be found in the appendix as tables 3, 4 and 5), the following overall ranking has been established: Five most interesting countries| Five least interesting countries

GDP and economic growth are real numbers and can help investors make relevant and fair decisions| More women in a particular country do not necessarily lead to higher profits than in a male-dominated nation| Gives an impression of the country’s economy| Does not take into consideration the culture|

Moving on to ethical dilemmas, a (social) issue that nearly every cosmetics company needs to deal with, is animal testing. Companies active in the field of cosmetics usually test their products on animals to ensure that they are harmless to humans. Even though animal testing may seem unethical, if a human dies from using a product from L’Oréal’s line, this would cause major problems for the firm. Deontology is in this case the most appropriate moral philosophy theory, as L’Oréal believes in the immorality of testing cosmetics on animals. The firm came up with the following solution, and has been acting accordingly ever since:

“L’Oréal voluntarily stopped using animal testing for the evaluation of its entire range of finished cosmetic products in 1989. It was possible to do this due to the considerable time and effort we have invested for over two decades, including developments of databases on ingredient toxicity profiles and the results of a large-scale programme carried out over several years to develop appropriate in vitro methods such as Episkin.’’ (Official L’Oréal statement 2010)

Though this is a very time-consuming and expensive way of testing, L’Oréal believes to act socially responsible doing this, all the while maintaining its market leadership position. Abandoning animal testing also has a positive effect on the firm’s image, and attracts more customers. Furthermore, following L’Oréal’s example, other companies are now also reconsidering their testing policies, which might eradicate animal testing in the entire cosmetics industry. The next issue is an environmental one. Since L’Oréal is a cosmetics company, it needs to work with chemicals. These chemicals can lead to health and environmental issues, and an accident in one of L’Oréal’s factories can have a major effect on the local area.

According to cultural relativism, L’Oréal, which is extremely active in western countries, needs to adapt to locally accepted practices. In this case the firm must guarantee a safe and environmentally-friendly workforce. To ensure this, L’Oréal uses underground storages which are strictly monitored for leakage. For the storage of other liquid chemicals, the firm utilizes above ground tanks with concrete containment. In order to minimize the effects of major accidents, with regard to the storage of chemicals or flammable gases, L’Oréal developed sites with fire protection and perimeter isolation. By doing this, the firm is considered a role model to Europe. Though these precautionary measures are expensive, they minimize the negative effect on the image of the firm if an accident were to happen.

L’Oréal’s current strategy is ‘Global Branding’. Their main focus is to reach potential customers all over the world with regards to different cultures and incomes. In order to achieve this feat, the company aims to be more flexible and to increase its investments both in R&D and marketing. The emerging market we selected is China. The main reason for this is because of the first 27 emerging markets on the Emerging Markets Index (Mastercard 2008) are Chinese markets, including Shanghai, Beijing and Xiamen. Even though L’Oréal already owns a factory in China, it should look to further expand in this country because of its sheer size and because it could serve as an additional supply point for other Asian countries. Furthermore, although China is dominated by males, the country’s huge population still accounts for millions of females, and therefore it has a major cosmetics market in which L’Oréal should invest as much as possible.

Moreover, beauty has become an essential part of the Asian culture, resulting in Asian women spending large amounts of money on beauty products and cosmetic surgeries. The strategy that L’Oréal currently uses can be applied to this market. The only adjustment the firm needs to make is that it must gain a better understanding of the culture, use this knowledge and integrate it in their products. The opportunities and threats arising from this market make a perfect match with the firm’s strengths and weaknesses. First, we take a look at the opportunities: L’Oréal has high research and advertising costs because of its major investments in R&D and marketing.

To counter this, they can minimize production costs by setting up a facility in China and hiring employees with low labour costs. The threats that may occur from this emerging market are poor infrastructure, decreased quality, and poor regulations. However, because L’Oréal’s global facilities, they are already familiar with these issues and therefore it is believed that these will not encounter any problem. Nevertheless, L’Oréal’s competitors might be a harmful threat, although it is believed that the company can deal with this effectively due to its brand being well-known in Asia. This results in consumers choosing L’Oréal’s products over its competitor’s, as the consumers opt for a brand they are already familiar with.

Having analyzed L’Oréal’s portfolio, we now recap the company’s international business activities. L’Oréal currently operates in 130 countries and regions, and counting. The firm has been expanding through the many brands and patents it markets. Although its products may be considered global, L’Oréal has been adapting its product lines to specific regions. This results in their products being culturally diverse. L’Oréal’s activities altogether have resulted in the firm being global market leader in the cosmetics industry with a 16.8% market share. Furthermore, in order to prevent any damage to its reputation, L’Oréal has pre-emptively dealt with several social and environmental issues by carrying out policies that deal with issues such as ethics and sustainability.

Being ranked one of the world’s most ethical and sustainable companies is a big step towards reaching their goal of being an exemplary corporate citizen. As already implemented in the current status of L’Oréal, the company values ‘the environment’ as a crucial stakeholder. It is unnecessary to alter its current portfolio as it already includes many activities that are beneficial for the environment. L’Oréal is known to be highly involved with the environment and their ambitions concerning sustainability are excessively high. Part of the company’s policy is to reduce waste, emissions and other harmful threats for the environment.

The firm wishes to acquire global support from all nations and encourages others to follow their footsteps, in order to minimize environmental damage. Another relevant stakeholder would be L’Oréal’s customers, as they are directly affected by any decision the firm makes. We believe that both current and potential customers would want the firm to maintain its current portfolio. To a customer, the most vital aspect of a product or service is to meet the customer’s needs. The cosmetics industry targets the need to ‘feel more beautiful’. However, customers from different regions and cultures have different perceptions of beauty. It is desired for L’Oréal to maintain its present portfolio because the company strives to adapt its product lines and brands to meet customer preferences.


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