STRATEGIC ANALYSES
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Part 1: Introduction and your chosen MNE
Q1. Introduction
Purpose
The purpose of this paper is to assess the entry mode employed by L’Oréal Group holding in its entry into the United States of America, the political environment and the merits and demerits of the mode of entry adopted. The study equally recommends alternative mode of entry (Joint Venture) that the organization should have considered or it should consider in its future internationalization.
Scope and structure
The study is restricted to the entry of L’Oréal in the US market. The study starts with the assessment of the company profile and the political environment in the US, where it extended its operations. The mode of entry it employed is also assessed, merits and demerits presented. Recommendations, conclusions and references are then presented.
Main findings
The study indicates that L’Oréal was founded in 1909. It is involved in the provision of beauty products, including synthetic hair. The organization entered the US through small acquisitions before it directly initiated massive manufacturing and distribution in the country. The political environment in the US is stable. Such stability has resulted in the success of L’Oréal operations in the US. Nevertheless, racial bias in the political scene requires L’Oréal to be very sensitive when designing its marketing communication messages, ensuring that they are neutral.
Through the acquisition, the entity was able to reduce the cost of initial entry. Nevertheless, there were no adequate companies of acquisition, and hence the organization resulted in the direct entry. Direct entry enabled the organization to have full control of its manufacturing and research centres. It also provided the entity with an opportunity to customize its products to better meets the needs of the customers. Nevertheless, direct entry is expensive. A company requires massive resources in international expansion.
Nevertheless, some of the key sources of competitive advantage to the organization is its massive financial capital resources and rapid innovations and hence, it easily mitigated this challenge. Unlike acquisition where it enjoyed already existing distribution outlets of the acquired firm, direct entry implied that it had to establish its distribution outlets. It is recommended that the entity should consider joint ventures in its future internalization processes as they are less cost extensive and speed of entry is high due to fewer regulatory measures the entity has to meet since the joint venture firm in the foreign country may have already fulfilled many of them.
Q2. Company profile
For over one century, L’Oréal has been involved in an adventure in the area of beauty. The organization was founded in 1909 in France. By 1910 the organization had already started showcasing its hairdressing services to the world. Francois Dalle was appointed the chairman and the managing director of L’Oréal in 1957 (L’Oreal 2020). It entered the Brazilian market in 1959. The organization acquired Garner in 1965 (Lorearusa 2020). The organization established the tone on tone hair colour technology in 1990. In the 21st century, the organization has invested heavily in the development of tooth gross (Lorearusa 2020). Over the years, it has grown to emerge, leading multinational companies in the cosmetics industry. The company operations are guided by its values which includes passion, innovation, and a quest for excellence as well as operations through entrepreneurial spirit. The ethical principles of the organization are integrity, respect and courage. The organization is also transparent in its operations. The mission of the organization is that beauty is universal; beauty is a language; beauty is science and beauty is commitment. The core capabilities of the organization are its advancement in hair and cosmetics production technology. The entity is also highly capitalized, something that has enhanced its ability to venture into new markets. In 2019, the organization recorded a total is 4.922 million Deutschmarks in operating profit and a net profit of 3.987.6million Deutschmarks during the same period (L’Oreal 2020). The company’s source of competitive advantage is its rapid technological innovations and huge capitalization
Part 2: Host Country analyses
Q3. Political environment
The current political environment in the US is characterized by a high level of stability. The country is rated high when it comes to political freedom but lower when it comes to civil liberties. There is still significant levels of discrimination against blacks, something that has increased the political tensions (Shellenberg, Harker, & Jafari 2017). Research indicates that Congress in the US is currently more divided than ever. There is increasing differences in the political ideologies of the residents and politicians in the country. The impact of digital media and fake news is also acting to polarize the political stability within the United States of America. There are opportunities and threats that the current political situation in the US creates for L’OReal. For instance, the moderate political stability in the country will increase the chances of profitable operations of the company in the country. Equally, political stability across different states in the country will enable the organization to expand its operations within the US.
The politics in the United States of America are based on democracy. Democratic government derives its power from the citizen through elections. It does not allow dictatorship. The implication is that when companies such as L’Oréal enter such markets, their operations may not be adversely restricted or stopped by the government. The government must act in a manner that is held to be fair by the people of the US. Equally, the political environment is characterized by a high level of freedom of dressing and personal care. Unlike Muslim dominate countries which highly regulates fashion, including accessories, L’Oréal will enjoy the massive freedom that the US government has offered the citizens. The citizens are allowed to innovate on the types of clothes they wear, hairdos, lipsticks use, and other items they need for personal beauty. This freedom expands the market for goods produced by the organization in the country.
Nevertheless, the isolate political unrests may hinder the success of the organization in some areas. The increasing conflicts between people of colour and the whites will impact on how the organization advertises its products (Schiavi, & Behr 2018). It is a significant threat since if its adverts seem to favour particular group and not the other, the groups that feel ignored may end up boycotting the company’s products and demand its exit from the market (Deng, Ziliang, & Wang, Zeyu 2017). It is thus necessary that the organization promotes its brand within the US in a more sensitive manner to all races.
Part 3: MNE’s strategy in the host country
Q4. Entering new markets
Entry strategy/mode choices
The main entry strategy that L’Oréal has adopted in its entry into the United States of America market has been acquisitions. In 1984, the company appointed an agent in the United States of America that would facilitate the extension of its products in the country. The Agent was taken over by Nestle on behalf of L’Oréal. In the year. The agent was Warner Cosmetics in the United States. In 1988 the organization bought Helena Rubenstein in the US while at the same time acquiring 75% of Pervasion International, an organization engaged in the creation, production as well as the distribution of the audiovisual products (Lorearusa 2020).
Besides acquisitions, the company have also engaged in direct entry into the company by directly starting new plants and operations within the United States of America. Currently, L’Oréal USA has over 11,000 employees. Its operations are headquartered in New York City (Lorearusa 2020). It also opened its second headquartered in New Jersey in 2009. The products it offers to the customers within the US market is then salons, dermatology offices, mass as well as departmental stores. In the United States of America, the company has initiated its manufacturing activities in 5 key facilities. These facilities are located in Florence, North Little Rock, Franklin and Piscataway New Jersey. It also has its operations in Redmond, WA. The organization has established 15 distribution facilities in the country.it has also initiated research facilities in the country.
Entry structure
L’Oréal has adopted internationalization structure in its entry. In its direct entry and acquisitions, the organization has focused on delivering relatively similar products in its international markets. Acquisitions are entry modes through which companies such as L’Oréal gains control of the market. In the wake of globalization, cross border acquisitions have increased in the United States of America. This mode of entry to a market ensures that the products produced by the organization in diverse locations across the globe are largely standardized (Sharma & Blomstermo 2017)
Benefits and pitfalls
As indicated above, the key entry mode choices that the company adopted in its entry into the United States of America is the direct entry and acquisitions. There are diverse benefits and pitfalls that it encountered in the entry to the market using these entry modes
Direct entry
Advantages
Direct entry resulted in high control of the operations of the entity in areas where it directly initiated its operations within the US. For instance, the organization established manufacturing firms, retail outlets and research centres in areas that were not linked with the minor acquisitions it made in the county. Through direct entry, the organization gained full control of its production and retail outlets (Ahi, Baronchelli, G., Kuivalainen, & Piantoni 2017). Equally, it had full control of its management (Sort, & Nielsen 2018). This approach to entry differs significantly from joint ventures where the organization has to share managerial decisions with the acquired firm. Another key advantage the organization gained through direct entry is that it was able to customize its products in a manner that met the expectation of the customers (Sambharya, & Lee 2017). This is not always easy when the MNC decisions have to be made in conjunction with other firms such as in the case of joint ventures where the parties involved may have opposing goals.
Disadvantages
There are multiple demerits that L’Oréal faced through its direct entry within many states in the United States of America. For instance, direct entry requires that an organization have massive financial and non-financial resources to invest in the project (Stephen, Joshua & Robert 2016). The high financial requirement limits large scale expansion of operations related to this entry. The second challenge the organization faced is cultural diversity. The United States of America is a culturally diverse environment (Musah, Acquah, & Yusif 2019). Consequently, the employees from the parent country have to find ways of aligning their perspectives with those of the individuals they find in the foreign market. Finally, direct entry is slow. Initially, the entity had engaged agents in the US to distribute purpose (Salomon, & Wu 2016). When it directly entered the country, it had to engage in direct manufacturing. Acquiring the right certifications in a new market and it takes a longer time than in acquisitions.
Acquisition
Advantages
Through acquisitions in its entry in the US, L’Oréal w was able to enhance its market share fast. Unlike in its later direct entries, acquisitions do not require extremely high financial capital. Equally, through acquisition, the organization acquired already established distribution outlets. This significantly enhanced its profitability and performance in the market (Sungyuan, & Ussahawanitichakit, 2016). Another key merit that the organization acquired through acquisition is that it was also in a position to exploit the already existing technologies of the acquired firm (Schellenberg 2017). Cultural competence of the employees in the acquired firm enhanced the success of the firm in the market. Finally, acquisitions bring financial and non-financial resources on board. It brought employees who were already experienced on board.
Disadvantages
Acquisitions resulted in some challenges in the organization. For instance, when the entity introduced its operations in the US, it had to bring on board employees from other areas. This led to the crash of cultures (Surdu, & Mellahi 2016). Equally, when an organization acquired an existing firm. The management in the acquired firm is retained in some cases. In this case, the management of the acquired firm and the acquiring firm acts in unison. Lack of shared goals may limit the success of the firms in the market (Rialp, & Dimitratos 2016). Poor pricing of the acquired firms has also led to some losses for some firms. L’Oréal did not record profitability as fast as it expected in its accusations. Valuation of acquisitions is not an easy task.
Alternative actions
Based on the entry mode that was undertaken by L’Oréal, I would recommend that in the future, they also consider joint ventures in the future. A joint venture would involve partnering with another firm in the target market, and working together, sharing profits and tasks (Reinmoeller, & Ansari 2016). There are multiple advantages that L’Oréal would realize from such an approach to market entry. For instance, the organization will not need expensive capital in this mode of entry since the capital requirements are shared. Between the acquired and the acquiring firm (Stoian, Rialp, & Dimitratos 2016). Equally, the joint venture firm already existing in the market has already established its brand and distribution outlets, something that L’Oréal would take advantage of in its operations.
Part 4: Conclusion (100)
Q5. Key findings and significance
The above assessment of L’Oréal internationalization process has shed some light on the diverse strategies that entities such as L’Oréal employ in their international; entry, their merits and demerits. In particular, an extension of operations to the US by L’Oréal was done largely through limited acquisitions in the US in earlier years followed by massive direct entry. Through direct entry, it has gained massive control of its production and research processes as well as distribution in the United States of America. The findings indicate that in the future, the organization may also benefit from joint ventures in its international expansion, including enhanced access to unique talent and financial resources from the firms it would be engaging in the joint venture.
List of References
Ahi, A., Baronchelli, G., Kuivalainen, O., & Piantoni, M. 2017, ‘International Market Entry: How Do Small and Medium-Sized Enterprises Make Decisions’? Journal of International Marketing, 25(1), pp. 1-21.
Deng, Z., & Wang, Z. 2017, ‘Early-Mover Advantages at Cross-Border Business-to-Business E-Commerce Portals,’ Journal of Business Research, 69 (2), pp. 6002–6011.
L’Oreal 2020, Investors and shareholders. Viewed from https://www.loreal-finance.com/eng
Lorearusa 2020. L’Oreal USA facts and figures. Viewed from https://www.lorealusa.com/group/discover-l’or%C3%A9al-usa/l%E2%80%99or%C3%A9al-usa-facts-and-figures
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