Management Report 1 – Environmental Audit
INTRODUCTION
L’Oreal being the market leader in the cosmetic industry consists of 27 international brands with operations in 130 countries (L’Oreal, 2011a). In the year 2011, the company recorded sale of 20.3 billion Euros (L’Oreal, 2011a).
This assignment would consider both the internal and external environment and would help to identify the affect of both the environment on L’Oreal’s current and future strategy.
It is important for the organisations to carefully analyse and evaluate the internal and external environment in order to identify and explore different factors and elements which directly influence the performance and growth of the organisation (Stacey, 2007). Hence internal and external environmental audit is one of the most important elements of the overall strategic management of any organisation (Williamson, Cooke, Jenkins, &Moreton, 2012). For this reason there are different strategic tools and methods which are employed by the organisations. Some of these tools include; SWOT analysis, PESTLE analysis, value chain analysis, porters five forces analysis, and many others (Hitt, Ireland, &Hoskisson, 2012).
In order to evaluate and assess the environment of L’Oreal, both internal and external environments of L’Oreal are separately analysed below:
Internal Business Environment
The evaluation of the internal business environment of any organisation allows the management to identify and evaluate the internal competencies and resources (George, 2012). It is important to keep in consideration the internal competencies and resources while formulating any strategy as it allows the organisation to make decisions on the basis of the available skills, competencies, and resources (Freeman, 2010).
Core Competencies of L’Oreal:
Some of the core competencies of L’Oreal are as follows
- Quality
- Innovation
- Research and development
VRIO Analysis:
The resulting strengths and weaknesses of the company are as follow:
- Strengths of L’Oreal
The primary strength of the company; L’Oreal, is its ability to provide the customers with innovative products in the cosmetics industry. By providing the Research and Development department with 3.5 percent of sales i.e. 721 million Euros (L’Oreal, 2011), the company is able to identify and develop innovative product to fulfil the requirement of its customers. By its extensive research activities, L’Oreal gives its customers the best product in the market. This research and development has helped the company to gain such position in the cosmetic industry (L’Oreal, n.d.).
The company not only provides its customers with cosmetic products, but L’Oreal is also active in dermatological and pharmaceutical fields as well. This has allowed the company to diversify into different markets with extensive product lines that could help its customers to remain satisfied with the company’s products.
With its operations in over 130 countries, L’Oreal frequently provides its customers with the products without any delays. This is another reason due to which the company has dedicated and committed customers over the years (L’Oreal, 2011a).
- Weakness of L’Oreal
The major weakness of this cosmetic company is its decentralised organisational structure. Due to such structure, the company has many divisions and further sub-divisions that eventually lead to the loss of control and authority in the company. Decentralised organisational structure for such gigantic company eventually reduces the company’s productivity and performance.
With such an extensive budget for advertisement and promotion of the company’s product, it was observed that the image of the company’s product was quite different than the real image of the company. Such differences in international marketing strategy could lead to loss of customers and negative perception of individuals and customers regarding the brand which might eventually lead to the loss of customers.
External Business Environment
It is also essential for the organisations to carefully evaluate and explore the external business environment before coming up with any new strategy or decision (Hussey, 2012). The external environment evaluates the factors that the company cannot control as such factors are uncontrollable (David, 2001).However, the organisations can control the influence or effect of these external factors on the growth and performance of the organisation by coming up with well thought and well executed strategies (Hill & Jones, 2007).
The external environment audit of L’Oreal is as follows:
PESTLE Analysis:
Political and Legal:
With its operations in various countries, L’Oreal is constantly being presented with challenges due to continuous change in legislations and government leadership styles. Despite the fact that L’Oreal is the leader in the cosmetic industry, the company is bound to follow the rules of the country. One such example is regarding the regulations set by Advertisement Standard Authority. According to this rule, the advertisement should not mislead the customers to purchase the products offered by L’Oreal (Campbell, 2012). Along with such rules, the company is barred to use certain chemicals to ensure that the products are safe and do not contain any harmful material.
Economic:
Economic crisis is certainly the worst situation for L’Oreal. Due to the economic crisis in 2007-2009 sharp decline in the purchase of cosmetics offered was observed in the market. Unemployment in UK is another major concern for L’Oreal as it was observed that in 2012 the unemployment rate in Britain was 8.4 percent (Allen and Mead, 2012).
Socio-Cultural:
Meeting the needs of the customers with innovative products in such competitive industry is yet another major concern for the company. It has been observed that women are in search of innovative cosmetic products that could meet their requirement along with high quality.
Technological:
The changing and advancing technologies have resulted in putting extra pressure on the cosmetic companies to constantly come up with high quality and innovative products.
Environmental:
Porter’s Five Forces Model:
Threat of new entrants:
Threat of new entrants in cosmetic industry is quite high because of the high profitability and increasing demand (Demeter Group, 2012). In order to manage this factor, the company has started operating in several countries to reduce such threat.
Threat of substitute products
Being in such a market, the threat of substitute product is quite high. Other companies in the market are providing its customers with pure natural products (Demeter Group, 2012). In order to reduce such force, the company has always relied upon it R&D department to look for products to meet the requirement of customers with high quality.
The power of buyers
The power of buyers is low as different cosmetic companies are charging high prices from the customers. The buyers are bound to purchase the product at the prices being offered by the cosmetic companies. Along with this there is a huge market of cosmetic buyers hence resulting in low bargaining power of buyers (Demeter Group, 2012).
The power of suppliers
The power of suppliers in the cosmetic industry is quite high due to which L’Oreal has close relationship with its suppliers so that the company can provide the customers with the products at the right time and place (Demeter Group, 2012).
Competition in the industry
There is huge competition in the cosmetic industry. Many large organizations and small organizations are looking to take control over the market with their products. L’Oreal faces cut-throat competition from companies such as Avon, Estée Lauder, Procter & Gamble, Revlon, along with some other small companies trying to enhance their market share (Demeter Group, 2012).
The resulting opportunities and threats are as follow:
- Opportunities
It has been observed that L’Oreal focuses on mainly women. By shifting its focus from the female segment to male, the company would be able to attract both the genders which would eventually lead to increase in sales and revenues along with enhanced customer’s satisfaction level.
One major opportunity for L’Oreal is to take over of its competitors in the market. It was observed that during the recessionary period most of competitors were unable to provide the customers with what they want. By taking over such competitors, L’Oreal would be able to reach mass audience at the same time and this would allow the company to expand in new niches. The exploring and expansion in new such niches would allow the company to understand the needs of the customers, thus, leading to total customer satisfaction and loyalty to the brand.
- Threats
The major threat for L’Oreal is the increasing competition in the industry. With the increase in purchase of cosmetic products, more and more companies are entering the cosmetic industry with innovative and creative ideas to attract the customers (The Beauty Company, 2012; Barbalova, 2011), which eventually leads the market share of L’Oreal to decline. With such attractive and eye-catching cosmetic products, women are shifting from L’Oreal to other cosmetic brands in the market. Uncertain economic conditions are yet another major threat for the L’Oreal. As the company operates in 130 countries, economic downturn can lead the company loss of customers and revenue. One such example was the recessionary period in 2008 and 2009.
Critical Evaluation of L’Oreal’s Strategic Position
The cosmetic company; L’Oreal, has positioned itself as high-end brand in the cosmetic industry. With such positioning of the company, the target market of the company is women of the upper middle class. In order to attract its target market, the company has always relied upon its ability to provide such customers with innovative products along with its ability to attract customers through advertisement. To remain ahead of others in the cosmetic industry, the company started a joint venture with Nestle. This strategic move of the company would allow it to gain acceptability in the new niche markets it aims to target (Macedo-Soares and da Silva, 2012).
Through constant use of research and innovation, the company aims to meet the expectations of the customers by providing them with tailor-made beauty products (L’Oreal, n.d.). Research and innovation are not the only factors that makes the company compete successfully in the cosmetic industry, but its strategies to maintain and protect the environment also helps the company to attract the customers in the market. The company has reduced its water consumption level by 23 percent and has developed future plans to find creative and efficient solutions for sustainable environment (L’Oreal, 2011a).
Recommendations and Conclusion
The company has enabled itself to provide its customers with innovative and creative cosmetic products. These products offered by the company are only one of its kind due to which the company enjoys leadership in such industry. Despite the threats and weaknesses, the company has some great opportunities that could help the company to further expand its market along with the audience which would eventually lead to higher profits and revenues. The company should continue providing high quality and innovative products and at the same time should diversify into related segments and markets.
List of References
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Barbalova, I. (2011). Global beauty and personal care: the year in review and winning strategies for the future. Euromonitor International. Available from http://www.in-cosmetics.com/RXUK/RXUK_InCosmetics/documents/IC11_EuromonitorInt_GlobalBeautyAndPersonalCare.pdf [Accessed 13 February 2013]
Campbell, D. (2012). Cosmetic treatment industry faces tough regulation over grubby tactics. The Guardian. Available from http://www.guardian.co.uk/lifeandstyle/2012/dec/31/cosmetic-industry-regulation [Accessed 22 February 2013]
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L’Oreal. (2011a). Annual Report 2011.Available from http://www.loreal.com/_en/_ww/html/company/pdf/LOREAL_RA2011_HD_27032012_EN.pdf [Accessed 13 February 2013]
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L’Oreal. (n.d.) Here comes the science bit: a review by L’Oreal of skin science and what’s to come. Mintel. Available from http://www.loreal.co.uk/_en/_gb/PDF/Here_Comes_the_Science_Bit,_Skin_Science_Report_from_L'Oreal_and_Mintel.pdf [Accessed 13 February 2013]
Macedo-Soares, T., and da Silva, B. (2012). Assessing the strategy of firms that compete globally in alliances in the cosmetics industry: the case of L’Oreal in Latin America. Corporate Ownership and Control, vol. 9, no. 4, pp. 19-29.
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The Beauty Company. (2012). TBC Beauty facts, figures, and trends.Available from http://www.thebeautycompany.co/downloads/Beyer_BeautyNumbers.pdf [Accessed 13 February 2013]
Williamson, D., Cooke, P., Jenkins, W., &Moreton, K. M. M. (2012). Strategic management and business analysis. New York: Routledge.
