L’Oreal’s expansion to China

This report will focus on L’Oréal and its expansion to China. It will show how global strategies can open ways to grow new business opportunities.

In the following report, the motives behind L’Oréal’s expansion into China will be identified and discussed. Furthermore, an extensive examination of the external environment will be undertaken using a PESTLE analysis, which will be followed up with a breakdown of the industry sector using the Porter’s Five Forces analysis. Finally, market entry strategies will be identified by undertaking a SWOT analysis.

The report will take a closer look at the Chinese cultural environment, with L’Oréal’s organizational structure described and interpreted, outlining the staffing policies, and identifying potential leadership, motivational and communication issues. Finally, the report will examine special control issues which are of concern to L’Oréal, and potential concerns from the view of the local government and community. Adoptive measures to be undertaken by L’Oréal ensuring long-term, co-operative relationships in China will close the report.

L’Oréal S.A. is a French cosmetics manufacturer, headquartered in Clichy, France, and is currently the world's largest cosmetics manufacturer (Forbes, 2014), followed closely by companies such as “Unilever”, “Procter & Gamble” and “Estée Lauder” (Women's Wear Daily, 2014). However, L’Oréal focus exclusively on beauty and personal care, as opposed to main competitors, Procter & Gamble and Unilever, which are not only involved in beauty and personal care, but also in home care.

The company was founded by a young French chemist, Eugène Schueller. Schueller had already started a small commercial business called “Auréole” in 1907, which produced hair care products (The Telegraph, 2006), purchased by Parisian hairdressers. In 1908, he patented the product and, in 1909, founded his company “Société Française des Teintures Inoffensives pour Cheveux” (L’Oréal, 2014d). In 1939, the company simply became known as L’Oréal (L’Oréal, 2014d).

L’Oréal operates in 130 countries across the globe and has approximately 77,400 employees, with 45 factories and 71 distribution centres (L’Oréal, 2014c). By 1928, the company had established the subsidiary “Monsavon”, and over the coming decades established several others, such as the Brazilian “Faproco” in 1959, “Lancome” in 1964, “Garnier” in 1965 and “Biotherm” in 1970 (L’Oréal, 2014d). By 1963, the L’Oréal Group was listed on the Paris Stock Exchange, and its market capitalization has increased more than 750 times since then.

According to L’Oréal’s annual results release (L’Oréal Finance, 2014a), in 2013 they made an operating profit of €3.875bn, with annual revenue of €22.98bn in consolidated sales.

Today, L’Oréal operate regional research and development centres on 4 continents in order to enable a better understanding of local preferences, thus developing products more suited to the locale. For example, the research centre in China studied Chinese hair types and hair care customs for three years, eventually leading to the development of a range of hair care products designed for Chinese hair based on local preferences and hair care practices (Euromonitor, 2012).

In operations, L’Oréal splits primarily into four divisions: “Professional Products", “Consumer Products", “L’Oréal Luxe” and “Active Cosmetics” (L’Oréal, 2014c).

In order to better meet the requirements of consumers and to grasp local opportunities, L’Oréal is increasingly opening up to the local suppliers by creating regional ecosystems. In Asia, for example, the purchase of local raw materials has soared by 85% in 2 years.

L'Oréal has an extensive range of beauty products and cosmetics, such as colour cosmetics, skin care, hair care, men’s grooming, fragrances and sun care, with some products catered towards specific markets and cultures.

L’Oréal’s “Professional Products”, with its number one brand “Kérastase”, build the luxury hair care segment.

The division “Consumer Products” aims to cater for all corners of the world with their best innovations of cosmetic produce, and the products - colouring, hair care, makeup and skincare - are distributed through mass retailing channels.

“L’Oréal Luxe” products are available not only in cosmetic and department stores, but also in their own-brand boutiques and committed online stores, which built L’Oréal’s luxury division.

The “Active Cosmetics” division focuses on skincare needs, and is the current dermo-cosmetic world leader (L’Oréal, 2014c).

With the acquisition of “The Body Shop” in 2006 (The Independent, 2006), which had a reputation for natural products and ethical values, L’Oréal pledged to incorporate some 21st-century values, “defending the environment, fair trading, and social responsibility” (L’Oréal, 2014c). “The Body Shop” is currently operating in more than 60 countries, with over 2,800 stores. But due to their stance on animal rights, legal aspects impeded “The Body Shop” from establishing itself on the Chinese market.

There are several reasons for companies entering emerging markets. The main reasons being the increased market share and a certainty of increased financial gains. The list below is a non-exhaustive enumeration of reasons why entering an emerging market is a great opportunity for L'Oréal.

1. Strengthen the company’s market portfolio
2. Gain access to the local markets and to the local capital
3. Take advantage of where the growth is today and for the foreseeable future
4. Expand the company’s footprint in the skin care and hair care segments
5. L’Oréal would benefit from an expansion in China, as it is expected that by 2016 China will have overtaken the US in regards to purchasing power.
6. Access to the growth opportunities is invaluable for L’Oréal in regards to their comparatively narrow focus.
7. Gain confidence with domestic customers while expanding to an emerging market
8. Meet the customer’s demand for affordable beauty and personal care products
9. The company could utilize the young working age populations of most emerging markets, and keep the retired population from government run workhouses.
10. Currency appreciation may add to the value of doing business in a different country, alongside lower taxation rates on capital
    

By the year 2020, L’Oréal hopes to have achieved a customer base of two billion, up from one billion, and they have made this their key objective (Asia Corporate News Network, 2014). The company has been targeting emerging markets and is well on track. China has the third largest cosmetics trade in the world (see Figure 1), and L’Oréal have found great success here (Pandexa Global Trading, 2014), with increased penetration through both luxury and mass brands.

Figure 1 - Cosmetic Sales Ranking Worldwide (Pandexa Global Trading, 2014)

China is a land of change. Rapid industrialisation, improved education and increasing incomes have contributed to the rising change, meaning the average Chinese consumer has a higher income, and more money to expend. According to a McKinsey report (Atsmon & Magni, 2012, pp. 42-49) the number of so-called “mainstream” consumers (s. Figure 2) will dramatically increase by 2020.

Until a few years ago, a globally operating company had two choices: target the “mainstream” customer, which was represented in 2010 by 6% of households, or target the “value” customer group with a household share of 82% in 2010. The former meant they targeted a relatively small group, and the latter that their products needed to be cheaper. Statistically, the “mainstream” consumer group is to increase to 51% by 2020, representing a market of about 400 million potential customers, while the share of “value” customer is predicted to continually decrease until 2020 to 36%. China provides a target market of approximately 700 million potential customers in both the “value” and the “mainstream” households.

Figure 2 - The share of Chinese household income (Atsmon & Magni, 2012, p. 43)

With the changes in the Chinese consumer’s increasing affordability taken into consideration, L'Oréal is finding optimal conditions to place its mid and lower-tier mass brands, L'Oréal Paris, Garnier, Maybelline and Clarisonic.

Not only that, the Chinese consumer will have a growing amount of income at their disposal; according to the international consulting firm Hafezi Capital the

Demand remains high for foreign products even when they are considered a luxury product within the emerging market. The main reasons are the Foreign Brand attractiveness and representation of financial and consumption power, the potential for inferior products within the domestic market, and/or product uniqueness (Hafezi Capital, 2014).

The consumer group between 18 and 39 is generally well-educated and grew up in a more open environment than their parents (Qiu, 2011). According to Qiu (Qiu, 2011), the average Chinese consumer still does not have a high consumption of personal care products, but there is an increasing potential for growth in this area. As income is rising and shifting, more Chinese consumers will be in the position to spend their discretionary income for non-essential body care products, for example wearing cologne is not very common amongst Chinese men, allowing L’Oréal an opportunity to take advantage of this niche (Qiu, 2011).

The spending pattern of an aging Chinese population is also a very important factor for future planning. Generally speaking, Qiu argues that the consumer generation over 40 is a difficult one, as they grew up during the Cultural Revolution (1966-76) and early stages of the reform era (Qiu, 2011). They usually spend large proportions of their earnings to take care of their children and parents. According to Atsmon and Magni these ‘tendencies will probably be much less apparent in 2020’ (Atsmon & Magni, 2012).

Compared to Western markets, the Chinese market is vastly different. To highlight this, a PESTLE analysis will be undertaken. This will define the environment which L'Oréal is to operate in, while highlighting critical operational factors.

China’s political system is a major factor to be taken into account when entering this market. As one of few socialist countries, it publicly aligns itself with communism.

The "socialist market economy" concept was first recorded in the party statutes, and later in March 1993, was included in the Chinese Constitution. Finally, in March 1999, it was further clarified with constitutional amendments added (Federal Foreign Office of the Federal Republic of Germany, 2014). Despite both human rights violations and socio-political issues, China is deemed politically stable.

Extensive economic and social reforms were announced in November 2013 by the Central Committee of the Communist Party of China. These reforms are to be phased in over time, and fully implemented by 2020. If successful, the financial sector will become liberalised. The role of the market should be bolstered as a result, as will the private sector (Federal Foreign Office of the Federal Republic of Germany, 2014). Additionally, as a partner in the ASEAN Free Trade Area, China has created positive investment conditions.

To understand and evaluate the Chinese social environment, demographic factors are critical. In 2012, the population of China was 1.354 billion (National Bureau of Statistics of China, 2013). The annual population growth rate for that same year was 0.49 % (Statista Inc., 2014) and the unemployment rate was 4.1 %, (National Bureau of Statistics of China, 2013).

There are social implications and consequences involved if western companies choose to sell their products in China, or outsource production there. It is imperative for success that western companies understand the culture of the Chinese market. In order to attain a level of insurance for success in China, "Guanxi" - meaning ‘relationships’ - is a concept that must be embraced. Connections are vital in China. The level of connections, or networking, that a western company has in China is directly linked to how successfully disputes regarding contractual agreements are resolved. Depending on whether the western company is actually selling products in China or just outsourcing production determines the amount of "Guanxiwang" (social networking) required; selling in China requires a high level of Guanxiwang, outsourcing requires less.

Another value to be considered is "Mianzi". This is a vital agreement which means a western company must not lose face, nor allow the Chinese partners to lose face.

Chinese mentality and behaviour in business have been moulded by its traditional historic culture. A western company must not view China as one single market, due to resilient regional differences. Family security is very important for the Chinese. Workers are driven to constantly find better jobs and opportunities (Prof. Tiehua, 2006).

Recruitment, localisation and retention of staff are now top priority for companies in China. L'Oréal, with 3000 people in China, say that staff turnover in its marketing department is approximately 15%. ‘A lot of fresh graduates leave. We lose almost all we hire in the first three years’, says Daisy Dai, L'Oréal’s human-resources director (The Economist, 2005).

Consequences of these social implications mean that L’Oréal must:

• Provide health cover for its employees, which is aligned with best practice
• Provide financial protection for all employees if unexpected life events, such as incapacity or permanent disability, occur.
• Continuously provide training to employees due to high retention or turnover
• Adapt its company structure according to Chinese culture

China presents great technological opportunities, particularly due to its growing "tech savvy" population (Chen, et al., 2013). The L’Oreal Group has a developed online shopping system on its official website, and also at www.luxurybeauty.com, fitting perfectly with China’s increasing online shopping habits, providing greater opportunities (Switzerland Global Enterprise, 2012).

Taxes for importing cosmetics are a factor to be considered. At present there is:

• Import tariff at 6.5%,
• VAT at 17% equal to home grown companies, and
• Consumption tax at 30% for eleven types of beauty products such as eye and lip make-up preparation.

From a legal point of view, there would be nothing to stop L’Oréal from entering China’s market.

Weather, climate, geographical position, climate change and insurance are all factors that must be assessed. Environmental protection was not a high priority in the past in China, but environmental protection education has recently commenced. In a recent poll of the ‘Top 20 most polluted cities in the world’, China does not feature anymore (Park, 2014).

L’Oréal’s ambition is to:

• Reduce CO2 emissions at their plants and distribution centres by 60%, from a 2005 baseline.
• Reduce their water consumption by 60% per finished product unit, from a 2005 baseline.
• Reduce waste by 60% per finished product unit, from a 2005 baseline.
• Send zero waste to landfill.
• Reduce CO2 emissions from transportation of products by 20 % per finished product unit from a 2011 baseline.

L'Oréal will be operating on the Environmental and Social implications. The issues surrounding environmental protection have become increasingly important in recent years as the implications of under-regulated economic activity are seen today.

The major current environmental issues in China are: air pollution from over-reliance on coal, water shortages, water pollution from untreated wastes, deforestation, a 20% loss of agricultural land since 1949, and desertification. Deforestation has been a major contributor to China’s most significant natural disaster, flooding.

China’s national CO2 emissions are among the highest in the world and increasing annually. The CO2 emissions in 1991 were estimated at 2.4 billion tons. By 2000, that level, according to United Nations (UN) statistics, had increased by 16% to nearly 2.8 billion tons. L’Oréal is taking the necessary measures to address these issues.

Firstly, very stable political conditions and rapid economic growth has made industrial investment in China very attractive to investors. Secondly, positive technological, legal and environmental factors provide a very attractive climate for L'Oréal to situate business in China.

According to the authors of Free Management eBooks  

Whilst understanding the macro-environment is essential for developing a strategy, [after having completed a PESTLE analysis] it only gives half of the picture. To have a thorough understanding of the competitors and the impact they can have on the company there is the need to conduct Porter’s Five Forces Analysis (Team FME, 2013a, p. 7).

Porter’s model is based on the idea that the attractiveness of an industry is determined by the expression of the five main competitive forces:

1. The intensity of competitive rivalry among businesses in the industry;

2. The threat of potential new entrants to the industry;

3. The threat of substitute products;

4. The bargaining power of suppliers; (to business in the industry)

5. The bargaining power of buyers or customers;

The Chinese cosmetics market is highly concentrated, with most major brands, such as “Procter & Gamble”, “Unilever”, “Shiseido”, “Amway”, “Mary Kay”, “Estee Lauder” etc., being represented there. The CR7 index, including the aforementioned companies and L’Oréal, was 45.1% in 2012 (Fung Business Intelligence Centre, 2014, p. 11). Larger companies more often have their own production facilities, as L'Oréal does, which results in high fixed costs. Retailers regularly stock all major brands, resulting in high competition on price. L'Oréal, as market leader, may be in the position to win potential price wars that could result from the competition. However, the degree of rivalry must be assessed as high due to the elevated level of competition.

The threat of new entrants can be considered fairly low due to the strong competition. The leading market position of L’Oreal and its competitors and the business start-up costs could have an impact on the success of new market entrants, coupled with the fact that the market leaders have generated brand loyalty from customers, building successful relationships based on trust. This has enabled them to achieve good financial results. L'Oréal’s total group sales for 2013 were €22.98 billion (L’Oréal, 2014a, p. 12).

Significant entry barriers, like government regulations, patent regulations, cost disadvantages independent of scale or barriers to exit do not exist in China.

Substitute products on the market are rather scarce. In China, some people rely on Traditional Chinese Medicine, which also covers cosmetic products. Herbal and natural products, like Henna, are still quite common. These products are not considered serious threats but result in indirect competition as they are believed to be allergy free, free of harmful chemicals and preservatives.

The Chinese government’s consideration of laws regarding animal testing for cosmetic products might draw producers of natural cosmetics attention to China. For example, Louise Terry, The Body Shop’s spokeswoman, said ‘We have campaigned against animal testing for over 20 years and we look forward to selling our products in China one day.’ (Dayu, 2013) Even though The Body Shop is part of the L'Oréal-Group and therefore cannot be considered a threat, other companies may think upon similar lines and could become future threats.

Overall, the threat of substitutes can be assessed as weak at the moment.

L'Oréal is the biggest cosmetic company in the world. Their negotiating power on the market is of notable significance. They have their own factories not only in China, but also in India, with a total of 42 globally (Fangfang, 2013) to secure their supply-chain. The new factory in Hubei will be the largest production plant in the Asia-Pacific region (Lei, 2013). According to Alexis Perakis-Valat, the Executive Vice-President L'Oréal Asia Pacific L'Oréal is

locally producing almost all of the L'Oreal Paris, Maybelline and Yue-Sai-branded products that we sell in China. By building its largest Asia-Pacific production base in China and moving its Asia-Pacific headquarters to Shanghai in July, the company has shown its confidence in the market in the region (Perakis-Valat, 2013).

As many of L'Oréal’s products are sold through retailers, such as department stores or supermarkets, depending on size, these chains suppliers could be in the position to put pressure on L'Oréal. Close relationships with these chains could provide opportunity to guard against any potential threats.

These factors, with the well-developed online distribution channels that L'Oréal operates through, the threat through the bargaining powers of suppliers can be considered very moderate.

According to new research by Bionsen ‘British women spend up to £40,000 in a lifetime on her hair and £100,000 on cosmetics’ (Sharkey, 2014) and almost half of the women studied will not leave the home without applying make-up or perfume.

The industry sector of global cosmetics is a highly competitive one, involving major international organizations (Procter & Gamble, Shiseido, etc.). The market is becoming even more competitive, with the consumer not only considering the image of the product, but the price. Increasing competition may force market price reductions which results in smaller profit margins and could even cause the loss of market share.

With an increase in consumer knowledge regarding cosmetics in the past 15 years and the fact that consumers can easily switch to a competitor’s product, the buyer’s power has to be considered the strongest threat factor.

According to Michael Porter

the five competitive forces jointly determine the strength of industry competition and profitability. The strongest force (or forces) rules and should be the focal point of any industry analysis and resulting competitive strategy (Porter, 1998, pp. 3-5).

The discussion above clearly shows that L'Oréal’s external environment is displaying great opportunities. L'Oréal, as market leader, should be able to vindicate their position, considering only the ‘rivalry’ factor and the ‘buyer’s power’ factor is evaluated as high. Other factors are not to be underestimated, and the ‘substitute’ factor requires continuous assessment as consumer awareness about natural products may be increasing with the changing Chinese society.

To evaluate internal factors, it is advisable to conduct a SWOT analysis of L'Oréal’s strengths, weaknesses, opportunities and threats to compliment the PESTLE and Porter’s Five Forces analysis. According to Prunckun (Prunckun, 2010, p. 138) the PESTLE analysis ‘could be seen as the macro scene, and SWOT is the micro perspective’. Therefore, a PESTLE and Porter analysis should usually feed into a SWOT analysis. Taking this into account, below is a SWOT analysis for L’Oréal.

• The Executive Vice President of Research and Innovation, Laurent Attal, stated that ‘Research has always been at the heart of L’Oréal's growth, with three major drivers of innovation: active ingredients, formulation, evaluation’ (L’Oréal, 2014f). L’Oréal’s Research & Innovation model is based on three areas (L’Oréal, 2014f): (1) Advanced Research, (2) Applied Research and (3) Development.                                       

• L’Oréal continually concentrates on increasing their market share. To increase market share in hair care and skincare, L’Oréal launched its own line called “L’Oréal Paris” (L’Oréal, 2014a, p. 37).

• In recent years, L’Oréal has placed more emphasis on environmental awareness. By 2020 L’Oréal have pledged that 100% of their products will carry a social and/or an environmental advantage (L’Oréal, 2014a, p. 86).

• To ensure delivery of their products, L’Oréal relies on an efficient supply chain management service. As quality and meeting deadlines are key to success in China, it is vital to have the right supply chain partner. They now use DKHS, a market expansion services group, Asia being their focus point (DKSH, 2014).

• In China, L’Oréal’s hair care has not taken off as planned, losing out to Unilever and P&G. In January 2014, L’Oréal announced the pulling of the Garnier brand from mainland China, the brand accounting for only 1% of L’Oréal’s 2012 sales (Saigol & Waldmeir, 2014) (McDougall, 2014).  This highlighted a significant need to refocus the market strategy.

• With a continual need for innovation, L’Oréal also has very high R&D costs. For example, in a presumed attempt to improve hair care sales in China, they spent three years studying Chinese hair types in order to develop a hair care range specific to the culture (Euromonitor, 2012). The constant investment warrants a high risk of failure.

• The company’s organisational structure by divisions is very much decentralised, with L’Oréal owning an extensive range of brands such as “Essie”, “Urban Decay”, “Maybelline”, “Diesel Fragrance”, “Kiehl’s” and “Biotherm”. Owning so many brands means that L’Oréal rely on third party retailers, and the lack of centralised structure makes the company more difficult to control, with a slower rate of production (Telphon, et al., 2014).

In order to overcome these weaknesses, it might be advisable for L’Oréal to refocus their strategy on marketing skin care products. And in order to reduce R&D costs, they could look for new markets in developing countries so that new R&D ventures are not necessary.

Also, given that it would be incredibly difficult for L’Oréal to ‘centralize’, they could consider organising authority of brands and divisions according to the geography of the company, accelerating production and decision processes (Telphon, et al., 2014).

• The cosmetics industry is going from strength to strength, with a higher customer demand every year. Innovation is an immense opportunity for L'Oréal as products and services expand, with a niche market for organic and natural cosmetics.

• L'Oréal is aware that globally the consumer is attracted to anti-wrinkle products, skin pigmentation products, skincare etc. This is a promising market, expanding constantly as the population ages (Euromonitor, 2012).

• L’Oreal’s advanced research, applied research and product development, enabled the creation of technological successes like Fructis. Each stage has its own unique functions to perform in order to create successful innovations (Moore, 2014).

• L’Oréal Paris recently launched their Makeup Genius app. The app allows the potential consumer to test the products virtually using a smart phone, with realistic results. Consumers from all corners of the world can now try L'Oréal products. The consumer can place an order for the virtually tested product(s) and save time, with no need to leave the home (Reeder, 2014).

• The company is one step ahead of its competitor in market share, thanks to the large patents registered by the company (MBASkool, 2013).

In order to take full advantage of the opportunities, L'Oréal should focus on enhancing and developing existing products in order to gain a bigger market share.

• Competition is rising in emerging markets. Rivalry is becoming more intense with new competitors, but L'Oréal continues excel in terms of expansion, with “Estée Lauder” and “Coty” both targeting China (Euromonitor, 2012). L'Oréal is also facing competition from “Proctor & Gamble” in the skin care market in China.

• Economic adversity has been at the forefront of most business decisions in recent years. The debt crisis in the Euro zone has darkened economic forecasts, while at the same time emerging markets, such as China, are reportedly cooling down (Euromonitor, 2012).

• Fluctuating exchange rates between the Euro and Chinese Yuan may pose a threat with potential loss of profit margin.

Strengths and opportunities outweigh the weaknesses and threats. L'Oréal’s main strength is their constant research and innovation, enabling them to remain the market leader despite strong competition.

Their decentralized divisional organizational structure may be considered their leading weakness. L'Oréal’s ability to capitalize on opportunities may be rewarded with increasing profits and decreasing costs.

L'Oréal should prepare for the threats that the future may hold, threats that every company may face e.g. economic crisis, economic downfall and changes in market demand. All of these threats require continuous monitoring and evaluation. 

China, with a population of almost 1.4 billion people (World Population Review, 2014), is not only the most populated country in the world but the third largest, with an area of 9.6 million km² (Consulate General of The PRC, 2010). Chinese culture spans 4000 years, diversity evident in every corner of the country. The five largest cities are in the east of China and account for more than 100 million people. Although there are 56 different ethnic groups, 91.5% of the population are Han Chinese (World Population Review, 2014) and the official language, although not exclusive, is Mandarin (Consulate General of The PRC, 2010). Officially an atheist country, the culture has been influenced within the past millennium by Taoism, Buddhism and Confucianism.

Exploring China’s culture through Hofstede’s 6-D Model (The Hofstede Centre, 2014) can provide an interesting overview.

Figure 3 - China, in comparison with Ireland and France (The Hofstede Centre, 2014)

As seen in Hofstede’s model, China scores an 80 in the PDI, implying that unequal treatments are widely accepted resulting in a society very obedient to authority.

Having a very low Individualism score with 20, China can be considered a highly collectivist culture where people mainly act in the interest of a group.

With a score of 66, China proves to be a very masculine society, defined and driven by success, competition and achievement.

The UAI of 30 testifies that the Chinese are quite comfortable with ambiguity, being adaptable and entrepreneurial, which is shown by the majority of Chinese business sizes being small to medium sized and family run.

China generally has a very pragmatic culture, scoring 87, with a strong inclination to frugality and ambition. The long-term orientation in Chinese culture results in a very pragmatic integration of morals and customs adjusting traditions deftly to changed conditions.

A low score of 24 indicates that China is a very reticent society. Unlike indulgent cultures, restrained societies do not put much emphasis on their spare time and control the satisfaction of their demands.

Suppliers in China often pirate the products or produce extra quantities that are, over a period of time, transferred for sale elsewhere. They produce products for competitors despite non-competition clauses in purchasing agreements. This may pose a problem for L’Oréal in regards to loss of sales.

For L’Oréal to be successful in China, strong, lasting relationships must be built not only with the central government, but with local governments as well.

The initial move to China has been smooth, however in the last year there has been significant evidence to suggest that the powers in China have been targeting multinational companies amid the economic slowdown, including L’Oréal rival, “Johnson & Johnson”, the accusations spanning price fixing, ‘monopolistic behaviour’ , and  minimum pricing. It seems that China is favouring national business, and tensions are on the rise (Cendrowski, 2014).

‘Good distribution channels give L'Oreal a platform to sell its products without adding too much to cost.’ (Bloomberg, 2014)

According to Biotech Services China, distribution in China is one of the most notorious challenges that face multi-national companies. They can be difficult to manage, as they have their own ideas in regards to fairness, honour and integrity relating to business agreements (Biotech Services China, n.d.). Distributors can offer to register trademarks, and with the signed affidavits in hand continue to register these trademarks in their own name, this potentially going unnoticed for years at a time (Björkstén & Hägglund, 2010, p. 168).

There will be no shortage of distributors for L’Oréal to work with, however managing and directing this aspect of business will be challenging compared to other markets.

There is a challenge of attracting and retaining skilled staff in China. As stated in section 2.6, L’Oréal struggles to retain graduate staff, with the marketing department losing almost all skilled staff in their first three years. Paolo Gasparrini, the former head of L’Oréal in China once stated: ‘To find good people in China is not easy. Technically and in administration they are very good. But in marketing—a crucial discipline—there are just a few people with short experience and everyone is competing for them’ (The Economist, 2005).

Considering the high level of turnover in China, L’Oreal should balance between skilled labour and unskilled labour (The Economist, 2005).

Figures 4 and 5 demonstrate that the organizational structure of L’Oréal is not clearly definable as a functional, divisional or metric structure.

L’Oréal’s organisational structure is a mixture of divisional and functional structures. The company is structured as such considering the functions of work, as well as divisions, which can be seen from the functional aspects through titles such as CIO, Finance & Administration, Operations, etc. However, the divisional structure can clearly be recognised through the structuration by country divisions e.g. Americas, Europe, Asia, etc., and by product divisions, such as Luxury Products, Consumer Products, etc.

Figure 4 - Divisional Organization Structure

The organizational structure of L’Oréal is therefore a rather sophisticated one, which is due to its worldwide influence, and the fact that L’Oréal is a well-established organization (Telphon, et al., 2014, pp. 18-19).

Figure 5 - Functional Organization Structure

‘L’Oréal achieves organizational structure through combining both functional and divisional structures to ensure efficiency throughout the world’ (Telphon, et al., 2014, p. 19).

This combined structure was chosen to utilise the advantages that both functional and divisional structures offer. The functional structure leads to specialisation as each profession is divided into different sections, resulting in increased levels of productivity in the work environment. Another advantage observed in the functional structure is that all the employees working within a department are experts in their field, which is beneficial for coordination at branch level (Pujari, 2014).

Although the decentralized divisional structure may be considered as a weakness as discussed in section 4.2. it has the advantage of specialisation in products as well as in countries and markets.

Diversity is one of the founding values at L’Oréal and is assumed to be one of their keys to success as this is considered to promote creativity and a better appreciation of the consumer’s desires, enabling L’Oréal to create products that meet the customer’s demands (L’Oréal, 2010).

Generally the orientation of L’Oréal’s Human Resource strategy is international and therefore requires cross-cultural competencies. L’Oréal seeks to attract people with the desire to work on global markets, in international environments and different countries, considering this essential for career development. On a managerial level, L’Oréal’s managers are moved to new locations every 3-4 years, resulting in more diverse backgrounds in terms of culture, job skills, professional experience and experience of different brands (Morrison, 2009). To have highly diverse teams from various cultures is seen as an important company asset, as the rate of generating new ideas in such teams is much higher than in homogenous teams (Aycan, et al., 2014).

Following Jean-Paul Agon’s words

today, we live and work in an increasingly diverse world, a world of individuals with different cultural and ethnic backgrounds, unique styles, perspectives, values and beliefs. A diverse workforce in all functions and levels enhances our creativity and our understanding of consumers and allows us to develop and market products that are relevant to their wants and needs (L’Oréal, 2010, p. 3).

L’Oréal’s staffing policy for top-level manager in China is of a diverse nature, which is evident from the positions and functions in the top-management-level at L’Oréal, China. L’Oréal’s focus on the emerging Asian markets, which have greater scope for growth than the mature markets of Western Europe and North America, proves it essential for staff to have multi-diverse management teams.

According to Terence Jackson (Jackson, 1998), classic western motivational theories do not work in typical Chinese culture due to the individualistic nature of the models, and China being more loyal to a group focus. As can be seen in figure 3, section 5.1, China scores very high in Hofstede’s PDI. However recent studies are claiming change, some stating that China now is on par with the US, scoring approximately 40 on the scale (King-Metters & Metters, 2008). Previously, it had been assumed that the Chinese workforce was motivated by money. Now change seems evident, with the desire to be part of a team, and obtain benefits such as training and days off.

The Western world does not always acknowledge the cultural shift in China. L’Oréal have launched a new programme called “L’Oréal and Me”, with an aim of increasing the relationships between management and the employees, giving the employees more control over their career and development within the company (Palomeres, 2014). L’Oréal could use this technique as continued motivation for their Chinese workforce. According to L’Oréal’s website (L’Oréal, 2014b), they are ranked in the global top 20 for leadership development. Their aim is to coach, develop and reward success, nurturing talent, looking at the long term view of the company’s success.

China has a collectivist culture that emphasises commitments between individuals and organizations. The Chinese obey group values and initiatives. Hierarchy is important. Top managers of small groups are backed up by the collectivist culture.

Chinese management systems consist of authorities that are centralized in directive and hierarchical structures as a result of the high power distance and paternalistic culture.

China has a bureaucratic and arbitrary organizational culture. The manager has complete power, meaning he cannot be challenged by a subordinate who will not defend themselves against power abuse. The manager makes the important decisions, while the staff do not feel comfortable with decision-making. Chinese leaders would rarely consult a knowledgeable subordinate, which can cause of lot of difficulties and leads to project failure.

For the hierarchy management organization, information is power. Communication of valuable information is meticulously protected, and is considered a personal asset to maintain power.

The Chinese are a secretive society, expressing themselves indirectly and ambiguously, unlike Europeans, who would be accustomed to direct and explicit communication. In China, people would be expected to read between the lines in a discussion. Indirect communication is more diplomatic. This is crucial in order to avoid losing face in public and maintaining manager power, as it cannot be challenged by an individual of lower rank.

The Chinese would generally make decisions based on comparison, expert management judgement, and instinct, even for the most critical problem. Therefore, the decision-making actions are quick and involve minimal participants.

However, in the West, decisions would be made based on investigation and logical knowledge gathered through impartial qualitative and quantitative processes (Lu & Heng, 2014).

The best possible approach to the issues listed above is adaptation, as it involves less time to manage than other strategies.The adaptation process should start at recruitment level, by ensuring that the potential candidate has knowledge of the local language, culture and the type of communication problems which employees might face in the Chinese work environment (MSG, 2013).

To educate and train managers to face these possible communication problems, L’Oréal has put in place a special management development programme for 6 to 18 months (depending on the country) to ensure a successful career within the company. L’Oréal’s Management Trainee Programme helps young managers to learn about L’Oréal’s various posts and work environment (L’Oréal, 2014e).

The special control issues L’Oréal face in China include:

• High Labour costs
• Air Pollution

As mentioned in section 6.4, L’Oréal struggle to retain graduates. When the graduates leave the organisation, this results in higher training and human resource costs, with immense quality control troubles (Beamish, 2014).

One way of retaining graduates is to offer one year graduate programmes (‘Management Trainee Scheme’ as L’Oreal calls them), such as supply chain, and commerce & marketing (L’Oréal UK, 2014), potentially reducing HR costs and improving the quality of the workforce.

Around two-thirds of Earth’s greenhouse gases are a consequence of burning of coal and petroleum. With the Chinese economy expanding, the country now burns more coal than Japan, Europe and the USA combined (Spire Research and Consulting, 2007).

In 2003, L’Oreal unveiled a scheme to combat the effects of pollution on skin and hair (Spire Research and Consulting, 2007).

L’Oréal’s operations in China represent a windfall for the host country as well as the local community in terms of employment and economic growth with the local partners. Nevertheless, the company’s operations can cause accidents, structural deficiency, provoke dangerous consequences and affect the locals. The local community may endure damage to their natural resources, and face disease. The host country and the local community may have concerns about health, safety, and the security of the public and it is the responsibility of the authorities to mitigate or prevent those risks from the business operations.

Regarding infrastructure and equipment safety, the company needs to ensure that the business operates without harming the locals, keeping any hazardous substances or equipment from being exposed to the community, such as the dangerous goods on public roads. Hazardous materials safety is paramount. Disposal of dangerous raw materials and waste needs to be controlled by the company to ensure it does not pose any threat to the public, for example disease through water borne toxins. Environmental and natural resource issues should be continuously monitored as changes to the soil, water and natural resources due to the operations could be detrimental to the natural environment and carry serious repercussions to the livelihood of the locale.

Another consideration is a higher volume of traffic passing through the area. Accidents may occur due to constructions or heavy load equipment on the road, potentially harming the community and creating a bad reputation for the company.

In order for L’Oréal to enter China as an emerging market with a unique and dynamic culture, it is vital that these risks are delicately managed. If they are ignored or bypassed, it may lead to conflict with the local community or the host country. The operations can be affected, failing to run smoothly, thus damaging the company’s reputation (FIRST for Sustainability, n.d.).

For L’Oréal to ensure a long-term co-operative relationship there must be mutual trust, and a combination of cooperation, coordination and collaboration. Trust is a key measure of business-to-business relationships that L’Oréal can adopt, as trust enables co-operative behaviour, promotes improved relationships, reduces harmful conflict and allows effective response in a crisis (Doney & Cannon, 1997), both parties acting in the best interest of the business. Trust requires risk (Cowles, 1997), uncertainty, interdependence and choice as essential conditions (Doney & Cannon, 1997) to establish a long term co-operative relationship.

Along with trust, there must be a combination of cooperation, coordination and collaboration. This behaviour is defined as a comprehensive work to bring resources to a necessary relationship in order to achieve efficient operations in harmony with the objectives of the parties (Humphries & Wilding, 2003). With low trust and a low combination of cooperative, coordinative and collaborative behaviour, there is no chance to ensure a long term cooperative relationship as the atmosphere will promote defence and protectiveness. These ideas are shown below in Figure 6 below suggests that there is likely to be a correlation between these factors (Wilding, 2010).

Figure 6 - Multiplying the benefits: C3 behaviour and trust (Wilding, 2010)

The relationship between a combination of cooperative, coordinative and collaborative behaviour and trust provides a dynamic business environment, within which both parties can seek increasing rewards and a long-term cooperative relationship (Doney & Cannon, 1997).

Therefore, it is clear that L’Oréal can plausibly enter the emerging market of China, as there is a significant demand for the wide variety of produce and brands they produce. As discretionary income increases in China, L’Oréal is set to profit more than ever before. Also, the company would largely benefit from increased market share and a certainty of enhanced financial gains, while strengthening their market portfolio. With L’Oréal promoting the creation of regional eco-systems in Asia through the purchase of local raw materials, they have supported a boost in economic growth. The continual regional research and development demonstrate a willingness to increase their understanding of local preferences, going as far as developing a hair care range specific to Chinese hair type.

Having conducted a PESTEL analysis, it is clear that the conditions for the company are more than favourable with little risk economically and politically, although it is noteworthy that political tensions have been on the rise throughout 2014, with the country seemingly favouring national business. Sociological factors in China are a challenge, yet one that L’Oréal have acknowledged, having regard for the importance placed on family values, honour and ‘keeping face’. The Hofstede model provides a valuable insight as to what is to be expected in the work environment.

While facing threats, such as market rivalry and subsequent buyer power, L’Oréal has many strengths and opportunities which outweigh these risks and propel them forward.

Although there is no shortage of distributors, suppliers and work force in China, they can be notoriously difficult to manage, from the theft of trademarks and the pirating of goods, to a difficulty to retain staff for more than three years. This is an important consideration for the future of the company, and L’Oréal has started a programme called ‘L’Oréal and me’, with the intention of increasing employee relations with management, giving them more control over career development while keeping the future of the company in mind. This is a direct example of the company’s functional organisational structure, a complex and sophisticated structure, which actively promotes diversity in culture, skills and experience across brands, developing highly diverse teams. Motivational and communication systems are consistently being developed and addressed, in order to develop and view the long- term success of the company.

With China having the third largest cosmetic trade in the world, L’Oréal has already triumphed through both luxury and mass brands. Given the company’s intensive local R&D focus, and the importance they place on cultural issues, L’Oréal has been well received, both politically and by consumers. They should continually assess and address potential government and community concerns, which is conducive to remaining in a favourable position.

The weaknesses and threats facing the company should not be taken lightly, however they are not of major significance. Using a sophisticated functional organisational structure that balances most aspects of the business, L’Oréal seems to be in control of current and future operations. Hence, it is clear that L’Oréal has successfully entered China’s emerging market.

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