Business Strategy: Analysis of L'Oréal and Porters Five Forces Model

This article provides an analysis of L'Oréal using PESTLE and SWOT analysis. It also discusses the Porters Five Forces Model and its impact on the company's business strategy.

BUSINESS STRATEGY

Table of Contents
INTRODUCTION...........................................................................................................................1
1.PESTLE analysis of L'Oréal................................................................................................1
2. SWOT analysis of L'Oréal.................................................................................................4
TASK 2............................................................................................................................................5
1. Porters Five Forces Model..................................................................................................5
2. Strategic planning of L'oreal..............................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Business strategy is an action plan to accomplish long term business goals and objective
by maintaining strong competitive edge in the market. This strategy is formulated by top
management which helps in enhancing the overall performance of the company by increasing
market share, performance and profitability.
L'Oréal is one of the leading cosmetic company in the world. It mainly deals in make-up,
skin care products, hair colour, perfume, sun protection, hair styling products. The mission of
L'Oréal is to offer best cosmetic products worldwide with improved quality and efficacy. The
vision of company is to become global organization with increased customer satisfaction and
profitability. Main objective of L'Oréal is to increase quality of products by continuous research
and development which leads to increase in company's growth and market share by 2020.
This project studies the external environment factors like political, economic, social,
technological, legal and environmental which influence the performance and productivity of
L'Oréal. It highlights the strength, weakness, opportunity and threat of L'Oréal which will help
management team to identify internal environmental factors which influence the future
performance of the company. It also aims at identifying major threats to the company and make
necessary action plan to minimize the threat and utilize the opportunity to gain competitive
advantage. This report also includes evaluation of Porter's five force model to analyse the
competition in the market which affect profitability of business and also making strategic plans
and applying model, concept and theories to understand and interpret the working of
organization.
P1.PESTLE analysis of L'Oréal
L'Oréal is a French personal company which was founded in year 1909 by Eugene
Schueller and it is the world's largest cosmetic and beauty product company which is
headquartered in Clichy, France. L'Oréal mainly focuses its production on hair colour, skin care,
sun protection, make-up, perfume, hair care and hair style products. L'Oréal trademark slogan is
“ Because you're worth it”.
L'Oréal is a growing company in industry of cosmetics and skincare and this is full of risk and
challenges because there are many macro-environmental factors like external environment,
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political factors and others which affects the efficiency of the company. External environmental
factors impact and influence the business strategies of the company which hinders the
performance and productivity of the company(Harf, Herman, and Blanco, 2017).
Political factors: Political factors which generally influence working of L'Oréal are government
policy, political stability or instability, trade restrictions, tax policy, import and export
regulations; fiscal policy, labour laws and employment laws; legislation for advertisement which
effect the productivity and profitability of the organization. All these factors affect the business
operations overseas and in different countries as the countries have different government policies
and procedures which influence the company's business. L'Oréal has its headquarter in Paris and
has to adhere to all government policies for effective working of business. L'oreal is working at
the globalized level and has operations all over the world due to which it has to take into
consideration all trade and policies of different countries.
Economic factors: L'Oréal is influenced by economic growth, interest rates, exchange rates,
inflation rates, financial capabilities, disposable income of consumers and GDP. These factors
affect the business operations of the organization. The economic downturn is the crucial
challenge for L'Oréal as so many competitors are present in the market. Change in exchange rate
affect the cost of exporting goods and prices of supply at the time of importing goods. L'Oréal
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Illustration 1: PESTEL Analysis
Source: Pestel Analysis, 2015

takes into consideration all economic environment factors which influence the performance of
the company by reducing the market share and profitability of business(Akhtar, and et.al., 2016).
Social factors: L'Oréal adopts culture and ethical values of the country in which it operates. It
offers great quality products at reasonable price to large number of customers worldwide. It
analyse customer buying trends and expectations from the company to mitigate the needs of the
customers. L'Oréal offers appealing products to all age group and demographics which creates
more demand for the product and enhances productivity of the company. Every country have
different social and ethical behaviour for instance use of certain ingredients in product is an issue
in few country while others are fine with using such ingredients and thus it influences the
business as the company have to modify its products as per the requirement of the society and in
this way it impacts the business of L'oreal. These social and ethical pressures or trends are of key
importance for the performance of L'Oréal.
Technological factors: L'Oréal uses modern technology to increase productivity and efficiency
of the company. L'Oréal has undergone a major transformation in digital technology by using
various social media platforms and making products available on various e-commerce sites like
amazon which help increase the sales and makes it more convenient to buy the product.
Technology change according to demand of customers. It is an inexpensive method which
benefits company in targeting large customer base worldwide. L'Oréal focuses on developing
various application to shop online through their mobile phones and laptops. L'Oréal has launched
a beauty app called “ Make-up Genius” where customers can try on products virtually. These
factors lead to the growth of the Company's business in various forms and thus establish its
impact on the business of L'Oréal.
Legal factors: L'Oréal has to take into consideration all the legalities of the country like
consumer law, labour law, health and safety law, advertisement standards in which it operates.
They must work in accordance with the rules and standard set by the authorities. They follow all
the measures for product safety and labelling. L'Oréal follow rules set by Advertising standard
authority and focus on not to give misleading advertisement or give any false information about
the product. L'Oréal also maintain standards for product safety which ensure no harmful
substances has been used and also conform to all government policy of the countries in which it
operates. People are becoming more vigilant and aware which aids L'Oréal to work in
compliance with all legal stuff of various countries in which it operates to increase operational
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efficiency. All these factors make the company bound by various regulations and procedures and
make the company to follow it for irts functioning in aparticular country and thus establish its
impact on L'Oréal business.
Environmental factors: The main factors which influence business are weather and climate
change, and to work in accordance with environmental policies and procedure. L'Oréal aim at
making 1 billion new customers by year 2020 by producing eco-friendly products and helping
customers making sustainable lifestyle choices(Schaltegger, Lüdeke-Freund, and Hansen, 2016).
L'Oréal focuses on promoting go green method of packaging and promoting positive business
ethics and sustainability to increase working efficiency of business. L'Oréal also launch various
campaigns to bring awareness among people which will help in increase brand image of the
company. L'Oréal has to work in compliance with various environment laws and global standard
for pollution free environment. These factors enable the organization to design its products as in
concern with the environment and nature and however impacts the business of L'Oréal
L'Oréal is one of the leading brand in cosmetic and has made various reforms to increase
productivity of the company keeping in mind all environmental factors. L'oreal has made
sustainable development in cutting down greenhouse gas emission. There are various internal
environment factors which influence the effectiveness and efficiency of the company.
P2. SWOT analysis of L'Oréal
Strength: L'Oréal has a strong brand image and offers wide variety of cosmetic products to its
customers as compared to its competitors which helps company to stand out and attain greater
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Illustration 2: SWOT Analysis
Source: SWOT Analysis, 2015

market share. They provide high quality, safety and affordable products to its customers and also
monitor adverse affect of the product once it is out in the market through its “cosmeto-vigilance
network”. L'Oréal is growing at a faster pace and have international access in 130 countries.
L'Oréal has a barrier to enter into certain countries due to political factors existing in certain
countries. L'Oréal has strong research and development team with dermatologist, cosmetologist
and scientist to bring in improved and innovative products in the market(Wang, 2016). L'Oréal
also aim at launching organic and natural products in the market which are chemical free, eco-
friendly and are not tested on animals. This is the key strength to the company as it directly
affects the existing market trend, meeting the demands of consumers which directly boost up the
profits of the L'Oréal. However, this also increases cost of the company in producing the
chemical free products.
Weakness: The major weakness of L'Oréal is that company faces huge competition from its
rivalry competitors and new entrants in the market. L'Oréal has many sub-divisional
departments, due to the decentralized organizational structure company faces difficulty in
decision making and control which slows down the production of the company which leads to
lesser profitability. With operating in sub divisional departmental structure L'Oréal is highly
effective in the area of its operation and management leading to miscommunication and
mismanagement among the departments.
Opportunity: L'Oréal has a greater opportunity to expand its business by innovating and
developing new products range which attracts more customer and increase profitability of
business. It has an opportunity to tap greater market share by taking advantage of numerous
patent registered by the company. L'Oréal makes products for everyone it does not restrict itself
to just one specific demographic(Filardi, Barros, and Fischmann, 2018).
Threat: L'Oréal faces threat of rapid change in consumer preferences which stops them from
buying a particular product and shifts their focus on new product which is more worth their
money. L'Oréal also faces rise in stiff competition by offering same range of products at lower
price and rise in niche global competition with greater international presence which hinders the
performance of the company that leads to inefficiency and lower profit margins. Economic
downturn is a major threat to business where consumers refrain from buying the particular
product.
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TASK 2
1. Porters Five Forces Model
Porters five forces is a model which identify and analyse external competitive forces that
helps an industry to shape it and identify weakness and strength and external competition.
Through this model it can identify that why different industries are sustained at different level of
profitability. Porters identify five forces that measure competition, attractiveness and profitability
of an industry in market. These forces are such as(Santos, Au-Yong-Oliveira and Branco, 2018)
Threats of new entrance: This force of porter's model says that any company doing its business
in the competitive market has to face the problem of new entry. This threat results in making
company to share its profit. Profitable industries that earn high profit attracts new entrants in
same market which harm to profitability of existing industries, unless the entry of new firms can
be made more difficult using barriers by incumbents. These barriers can be such as patent of
technology or methods, government rules, high capital investment required etc. Cosmetic and
skin care industry are competitive industry and L'oreal is growing rapidly and earning high profit
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Il
lustration 3: Porters Five Forces
Source: Porter's Five Forces of competitive
Position Analysis, 2013

in this industry, which attracts to new entrants or competitors to enter in this industry and earn
profit. In this industry the access to required input for manufacturing products is very easy. In
this industry if any other company will come with any advanced technology or product then it is
a threat for L'oreal because it will harm sale of L'oreal. In current market there are many big
brands which are doing brand extension in different field and if a brand who have good brand
image launched its product in cosmetic industry than it is threat for L'oreal. As L'oreal is
performing its business in the most profitable market, it has a huge impact of this threat.
Threats of Substitute: A substitute means a product which uses a different or similar
technology to try to solve the same economic need. People will choose substitute when it
provides better quality, less price or easily available compare to other products. For this industry
ageing is the main reason for that peoples need skin cares. In this industry every brands have
there unique products and price for products some are cheap, some are costly and some are prime
products. So it is a threat for L'oreal that if any product is launched in market which have better
quality or less price with L'oreals products than customers will switch from this brands. Because
where close substitute products exist in a market, it increases likelihood of customers switching
to alternative products. Such as very fewer substitutes are available in market of L'oreals anti
aging products, but if many numbers of substitutes will come in market than this external factor
put its negative effect on L'oreal sales or profit(Cunha, 2017). As in the market of beauty and
skin care products, a range of products are available for the customers, it has a huge impact upon
the business of L'oreal. To reduce impact of this threat the company needs to develop uniqueness
in its product. In addition, by providing effective customer services, it can maintain the customrts
with the company and eliminate or reduce the effect of this threat from company's business.
Bargaining power of Buyer: Bargaining power of customer is the ability of the customers to
put the firm under pressure. If many alternatives are available in market then buyers power
increases. In cosmetic and skin care industry there are numerous of powerful competitors of
L'oreal are present like procter and gamble, dove, maybelline, Mac and other companies that can
cause of higher bargaining power of customer. The usability of products of other companies are
also high and potential customers who are interested to buy cosmetic and skin care products they
have many choices to go or other companies. Every customer present in market have his own
value to the organization and organization have to focus on cost of switching of customer from
one brand to another, or a buyer can increase his bargaining power by resisting buying its
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products if they are available in high price. So because of this threat of bargaining power of
customers L'oreal could face of lack of customers.
Therefore, it can be analysed that L'oreal may have a huge impact of the threat of
consumer's bargain power. Although, by formulating effective strategies and plans for the
company in order to develop customer's loyalty and sustaining them with the business for long
time.
Bargaining power of Supplier: Impact of Bargaining power of supplier depends on how many
suppliers are available in market for each essential input. Power of supplier is increases with
availability of fewer numbers of suppliers in market and most of the companies depends on
supplier than bargaining power of suppliers can increase. An organization have to maintain its
relation with suppliers as well. L'oreal purchase raw material from its suppliers for producing
goods and maintains very good relation. It can put impact on price or cost of product because if
any supplier increase cost or switching to other company then it becomes reason of increasing
cost of product and decreasing profit of company, because of increasing cost of raw material. So
this external factor is a threat for L'oreal that it have to maintain healthy relations with supplier
as well.
Impact of this threat can be reduced or eliminated by the company, if it starts producing
the raw material required by the business along with its products top be provided to its
customers. Further, by chosing some specific suppliers for getting raw materials, their power of
bargaining for price can be eliminated.
Competitive Rivalry: Competitive rivalry means identifying capability of competitors in
market. An organization having an understanding of industry rivalry means having knowledge
about marketing and how competitors product are distinguished and what technology or
strategies are used in market for competition. Various company's competitiveness like Mac,
procter and gamble, Maybelline etc. push L'oreal in to more elevated amount of rivalry in the
current business. These contenders attempt to increase more market shares by keeping
implement various strategies. L'oreal needs to enhance non stop quality for every product to
survive in this industry. Marketing and technology of competitors are also effect sales of
organization. To obtain market shares L'oreal have to enhance its market and innovation(Sinha
and Sheth 2018).
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Due to working in the most profitable market and performing business at global level, the
L'oreal contains a huge impact of competitive rivalry. In this regard, managers of the company
needs to formulate more effective strategies and plans for it in context to facing a huge amount
of competition in the market.
2. Strategic planning of L'oreal
Summary: L'oreal is cosmetic and skin care public sector company which founded in 1909 by
Eugene Schueller and CEO of L'oreal is Jean Paul Agon. It was registered in Paris. L'oreal
produces cosmetics in the largest quantity in the world, many other products also manufactured
by L'oreal like hair care products, skin care, sun protection, perfumes and others(Gjorevska,
2015).
Mission:“Beauty for All”, our mission is to offering the best innovative cosmetics in terms of
quality and efficacy to men and woman.
Vision: To become a global organization by enhancing customer satisfaction and productivity.
Objective:
 To win confidence and trust of new customers.
 To increase its customers 50% till 2020.
 L'oreal targets for 2020 to reduce green house gases by 50% emission.
Market research:
For the purpose of performing effective market research helps in improving the ability of
L'oreal in sustaining in the market for long time. For this purpose, following models can be used:
Porter's five forces model
Forces Impact Justification
Threats of new entry high Due to performing business
into a higher profitable market,
there is higher possibility of
huge new competitors to be
enter into the market.
Threats of substitute High Availability of wide range of
beauty products in the market.
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Consumer's bargain power High Due to availability of huge
amount of substitute products.
Supplier's bargain power Moderate There is Availability of a range
of suppliers, along with it,
company also produces raw
materials for itself.
Competitive revelary High Availability of strong
marketing strategies and plans
for maintaining effective
relationship with customers.
PESTLE
Factors Negative impact Positive impact
Political  Due to high range of change
in the political parties in the
country, business may needs
to change its policies of the
company as per changes
made by parties.
 It may have impact on
efficiency of the working of
company due to frequent
change in the policies.
 If political parties develops
their rules and plans in
favour of overall industry, it
would help company in
growing rapidly.
Economical  In case of inflation, value of
overall business may reduce
that will not be in the control
of company.
 Growing economy helps
company in improving its
profit generation capacity
Social  If culture of society seems
against company's product,
 In case, culture of using
more beauty care products
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it would have a negative
impact over L'oreals sales.
increases, it will help in
generating profit for the
company and achieving its
targets.
Technological  rapid change in technology
increases need of more
professionals within the
company that would
increase cost of L'oreal.
 With the use of latest
technology, company can
increase its overall cost of
working and efficiency as
well.
Legal  Implementation of a huge
range of laws results in
increasing cost and
workings of company.
 Application of various laws
helps in elimination of
improper, illegal and
unethical working of
L'oreal.
Environmental  Natural calamities may
result in increasing chances
of suffering loss by the firm.
 Environment may lead in
increasing the demand of
beauty care product in the
market that may help in
increasing sales of company.
SWOT Analysis
Strengths
 Brand equity.
 Huge number of loyal customers.
Weaknesses
 Higher amount of competitors.
 Rapid increase in cost of company.
Opportunities
 Entry into new market.
 Capturing huge amount of market.
Threats
 Threats of new entry.
 Threats of availability of higher range
competitiors.
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Strategic Formulation of L'oreal: Strategic formulation is an essential process of organization
which provide a framework and methods for achieving its target and goals. This process is done
in steps such as
Corporate Level Strategy: In this level outline of framework is designed according to what
organization want to achieve and at what point it wants to stable. In order to ensure quality of its
products L'oreal have to more focus on its innovations, reputation, price performance ratio and
marketing techniques. In this level L'oreal company will framework that it want to become
global organization and to satisfy more customers by providing the best quality. For this L'oreal
have to update its knowledge that what changes are going to happen in current market and how
L'oreal can differentiate its product from competitors. To achieve vision and mission L'oreal will
improve its technology and quality by doing marketing research that how it can identify need of
consumers(Harf and Herman 2016).
Business Level Strategy: In this level of strategy formulation strategy, methods are identifies to
compete in market. In this those methods are design which will be used for compete in market
and which will implemented in this plan. The mission of L'oreal is to offer the best products to
all. To achieve this mission L'oreal have to used latest methods such as price discrimination it
means provide a product in less price to competitors. L'oreal can set products according to new
trends and reach as possible a big target group. L'oreal always need to come up with new
products and innovation by adapting new trends and maintaining good quality at same price
level.
Functional Level Strategy: This level focuses on that how L'oreal will grow by defining daily
actions. In this level expansion of product is decided that which product company wants to
expand. L'oreal want to become a globalize brand so in this level L'oreal will make plan that
where it wants to expand its products and how it will grow there. If L'oreal want to expand its
business in Asia (Thailand), and during expansion it does not use traditional trading way for
expanding. Then this become a crisis for this and to solve this issue L'oreal have to make a
different strategy to expand its business and grow in that market. L'oreal can get help of
government by making changes in companies trading policy for easily entrance in market of new
retailer platforms. After making changes in trading policy according to Thailand's policy it
becomes easy for L'oreal to trade with Thailand and setup its market there. L'oreal Have its
customers all over the world but price segmentation is high of this company. To reach more
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customers should have to established lower and middle range product as well(Hamschmidt,
2017).
Strategy Implementation & Evaluation: Strategy implementation and evaluation is the process
in which whole framework is converted in practical form. In this level a framework various
different strategies which are designed by L'oreal will be applied in real market. To make L'oreal
a global brand, price discrimination or producing innovative products and other strategies are
framed these all will follow and applied in real market. This is the level where a plan is
implemented as well as evaluated and controlled by L'oreal. In this stage an organization is
developing which have potential of carrying out strategy successfully. Then strategy is creating
which encouraging policies. Program and best policies are designed by organization for constant
improvement in strategy. L'oreal linking reward structure to accomplish its results. This reward
structure helps to achieve goal designed by L'oreal. To control the strategy L'oreal used strategic
leadership. After implementing all strategies it will be identified by L'oreal that what is gap
between expectation of organization and actual achievement and according to that changes are
made in plan if needed. By this evaluation process it also identifies by L'oreal that customers of
this are satisfied with this product or not. Strategy implementation and formulation process is last
step of any strategic plan. A strategic plan is completed in this step.
CONCLUSION
From the above study it has been summarized that an organization is affected by various factors.
External as well as internal factors influenced market in different ways. In the above study
Political, economical, social, technological, environmental and legal factors are discussed that
how they affect L'oreals productivity and profitability. Internal factors also affect organization
positively and negatively. In the above study Strength, weakness, opportunity and threats are
discussed that how they put there impact on L'oreal. A strategic plan is discussed in above study
in which a strategy is designed to increase productivity and profitability of L'oreal and how it is
implemented in market and controlled by using leading strategies. This report is covered a basic
synopsis of L'oreal that how it is affected by other factors and how it can control those factors
and increased its efficiency and customer loyalty.
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REFERENCES
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Schaltegger, S., Lüdeke-Freund, F. and Hansen, E.G., 2016. Business models for sustainability:
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ONLINE
SWOT Analysis. 2015. [ONLINE] available through <http://www.quickmba.com/strategy/swot/>
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analysis>
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