Understanding the Global Context in the Business Environment

This document provides an understanding of the global context in the business environment, with a focus on L'Oreal Company. It includes background information on L'Oreal, analysis of the business scenario, and an evaluation of the competitive environment using Porter's Five Forces model. Subject: Business Environment

Demonstra
tion of an
understand
ing of the

global
context in
the
business

environme
nt
Demonstra
tion of an

understand
ing of the
nature of

organisatio
ns

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Background information on L’Oreal Company...........................................................................1
Background information on the to business environment...........................................................2
Analysis of the business scenario................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business Environment is the total or set of the all internally and externally influences such
as workers, consumer needs and desires, market forces, management, consumers, suppliers,
shareholders, policy activities, technological advancement, social trends, industry dynamics,
economic change, etc. Such factors influence the firm's operation and how an organization
operates direct or indirect (Bourn, 2018). List of these factors affects the climate and condition of
businesses or company organisations. For the better understanding of this concept, L’Oreal
selected and the allocated country is Netherland. Main objective of this report is to expand or
establish their business operations into new market. In order to implement this, company should
done various analysis and they required some tools for effective analysis such as PESTEL for
micro environment analysis and Porter’s five force model for competitive analysis in the market.
MAIN BODY
Background information on L’Oreal Company
L’Oreal is a French personal care company headquartered in Clichy, Hauts-de-Seine,
France with a registered office in Paris. It is the largest skin care company and has produced hair
colour, skincare, sunblock, make-up, fragrance and hair care products in this sector. L’Oreal
founded in 30th July 1909 by Eugene Schueller and they distribute their products in worldwide
range. It is one of the popular brands in cosmetic industry where it has many competitors such as
MAC, Maybelline, Dior, Chanel, Nivea, Estee lauder etc. Legal form of L’Oreal is corporation
where owners retain all the profit and unlimited liability.
L'Oreal is becoming a brand of power in the tough monopolistic market. The
monopolistic competition model defines a market structure that happens when the business has a
lot of rivals but each makes a slightly different product. On the Chinese market, L'Oreal has 13
skin-whitening products, range from makeup removers to facial masks compared to other rivals
like Estee Lauder or SK-2. According to 2019 annual report, revenue of the company was €
29.87 billion, net income for the same duration was 4.35 billion and total assets or equity worth
was € 43.80 billion or € 29.41 billion respectively. Current market share of L’Oreal is 25.8% in
the cosmetic sector and they beat Godrej consumers in urban hair colour race. Godrej has around
24% market share in comparison to others.
1

Background information on the to business environment
The Netherlands is a tiny, coastal nation in Western Europe. In recent decades the
Netherlands has experienced little economic or social hardship with its growth index (Bratton,
2020). Consequently, it is convenient to assume the country faces no problems whatsoever.
Netherland market selected for expansion and establishment of business operations in the new
market. But, before any further implementation, company required to analyse entire business
environment with the help of PESTEL analysis.
An analysis of PESTEL is a term for a method used to define the macro (external)
influences an organization faces. The letters are for Political, Economic, Cultural,
Environmental, and Legal. This analysis helps the L’Oreal to identify potential opportunities in
Netherland and they further formulate strategies in order to expand their operation in this market.
Further discussions are as follow:
Political factor: Those decide with what level state and government policy can impact an
entity or a particular industry. This will also include policy and stability, as well as policies on
investment, tariffs and taxes. One of the distinguishing characteristics of the political system of
the Netherlands is its reunification to the European Union. The EU is a group of approximately
30 European states that gain through favourable exchange, transportation and further regulation.
It becomes opportunity for the L’Oreal Company to expand their business operations in this
market or generate profit.
Economic factor: These factors affect the economy and its efficiency that in turn affects
the company and its competitiveness directly. Interest rates, jobs or rates of unemployment, cost
of raw materials and foreign exchange rates are considerations (Hatch, 2018). The Netherlands
has some of the highest incomes in the world, as a well-developed European economy. But with
unskilled employees earning a decent wage due to the country's high minimum wage staff cuts,
the economy is much more liquid than it would otherwise be. That means that companies and
individuals are able to invest, contributing to a successful cycle of trade. Worldwide Economic
changes impact the Netherlands. The nation is expected to suffer as a big exporter of goods, as
others do. It is the opportunity for the L’Oreal to attract investors to invest on their business, so
managers needs to formulate expansion strategy accordingly.
Social factors: These variables focus on the social climate and recognize patterns that are
emerging. It makes a marketer learn more about the desires and expectations of their clients.
2

Changing family dynamics, educational rates, cultural patterns, shifts in behaviour and lifestyle
changes are factors. Here are the Dutch socio cultural factors that affect the country. Necessarily
the Netherlands, as a member of the European Union has a very transparent view on immigration
(Hendry, 2019). This has led to rapid immigration, in combination with the high standards of
living of the country. A significant feature of Dutch culture is its liberalism. This could be one
reason the nation has had so few problems with immigrants because so accepting are the natural
residents of the nation. Aside from immigration, it is said that the Netherlands is highly
egalitarian in terms of sexuality (proving proud tolerance for the LGBT community) and
sometimes even drug use. So management of L’Oreal need to evaluate all the aspects which can
positively as well as negatively affect the company. They need to take such actions after
evaluating social factors of Netherland for cosmetic industry.
Technological factor: These factors take into account the pace of technological
innovation and growth which may affect a business or industry. Improvements in digital or
mobile technologies, automation and procurement may also be factors. There is also a tendency
to concentrate on advances only in digital technologies but modern ways of production;
manufacturing and even logistics must also be taken into consideration. The Netherlands has
wonderful technical exposure. It covers systems for telecommunications, advanced healthcare
facilities, and construction materials. Not only will the nation everywhere have excellent access
to the technology but thanks to their large revenues, so do its people. Eventually, this exposure to
technology enables the country to continue to evolve over time while retaining a competitive
advantage in current-day business performance. Another fascinating feature of the Technological
Landscape of the Netherlands is the heavy use of social networking sites. Perhaps because of the
outstanding accessibility of the world, its people use social media sites such as Facebook,
WhatsApp, Instagram on a regular basis. This use of social media helps people to keep up-to-
date with the latest news, while also creating a special, efficient consumer touch point for retail
companies. In order to maximise their product awareness, L’Oreal should use social media sites
for promotion and effective marketing.
Environmental factor: Such variables are related to the environmental effects and the
impact of ecological aspects. With CSR (Corporate Sustainability Responsibility) growing in
significance, this dimension is becoming ever more important (Lacey, Howden, Cvitanovic and
Colvin, 2018). Factors involve weather, recycling, carbon emissions, waste management and
3

sustainability. With the climate change problem, this tendency to flooding is even more
scary, one consequence of global warming is increasing sea levels while another is more severe
weather cycles. These two variables could work together to increase risk of devastating floods in
compound. Learning that the Netherlands only extracts a small amount of electricity from
renewable sources could be shocking. The current goal of the country is to produce only 14
percent of its energy from renewable sources, placing it behind many other developing European
countries. In context of L’Oreal, they make sure that they do not affect the environment which
can cause after effects.
Legal factors: An entity must recognize what is lawful and permissible within the
jurisdictions in which it operates. They must also be mindful of any legislative changes, and the
effect this may have on business activities (Nydell, 2018). Factors include labour law, consumer
law, health and safety, international legislation and prohibitions, as well as trade. The
Netherlands has a rather liberal approach to social and economic-cultural problems, as stated
earlier. So why, is this expressed in the personal opinions of individual citizens but it is also
programmed into the regulatory frameworks of the country. Maybe the most prominent example
of liberal Dutch legislation is drug legalization but it is often said that the country has a strongly
progressive position on topics such as abortion, same-sex marriage and assisted suicide. Before
making any strategy for expansion, they should analyse legal factors which is in favour of
L’Oreal Company. They can allocate their operation in this market or maximise their
productivity as well as productivity. Other than above mention factors, there are other factors
which also required considering such as GDP of Netherland is 82,620 crores USD, popular size
in 2020 is approx 17,134,872 people etc.
Growth in population is an increase in the number of people residing in a given place.
Because populations will develop exponentially, the depletion of resources may occur rapidly,
resulting in real environmental issues such as climate change, deforestation and declining
biodiversity. Below mention graph represent the projection of population size of Netherlands
until 2060.
4

Above mention graph shows continues growth in population until 2060 which generate
more opportunity for the country to maximise their supply according to the demand. It is
estimated that, in 2060 total population will going to increase approx 19 million. In 2020, there
are currently around 17 million populations in Netherland country.
Inflation is raising citizens 'living standards, destroying their wealth and hurting growth.
So salaries are controlled to grow with the rate of inflation to prevent the negative effects
(Pillemer and Rothbard, 2018). Inflation is important to generate development, and to reduce
environmental insecurity. Below mention data shows that how inflation rate will rapidly
increases in Netherlands and how it become opportunity for the L’Oreal company when they try
to expand their operations.
5

It has been observed that, inflation rate was 2.5% in 2018 which is reduces and remain at
1.71% in 2020. Estimation of inflation rate in 2024 will going to increase and reached at 2.01%.
In 2018 the Netherlands retained its status as the world's sixth largest FDI user and started
attacking the UK as Europe's biggest FDI destinations. FDI returns to the Netherlands increased
last year to USD 69.6 billion, up from USD 58.2 billion in 2017, against the backdrop of a
general downturn in investment worldwide (UNCTAD 2019 World Investment Report). Total
stocks of FDI stood at USD 1.67 trillion, down from USD 1.69 trillion a year earlier but around
183.4 percent of GDP in the world. The major spending countries are Luxembourg (15.1% of
total stocks), the United States (13.2%), UK (11.6%) and Germany (8.4%).
The great majority of investments are dedicated to financial and insurance companies (43.3
per cent), accompanied by the nuclear industry and foodservice production (Söderlund and Borg,
2018).
Analysis of the business scenario
Porter's Five Forces is a method to examine the competitive atmosphere of an organization.
The quantity and strength of the market competitors of a company, possible new entrants to the
market, suppliers, consumers and alternative goods affect the competitiveness of a business. This
6

model is used to evaluate the business opportunities and make organization able to get
competitive advantage. All the aspects of Porter’s five force model are as follow:
Rivalry firms (High): Government policies and legislation will influence the level of
competition within the sector, which can have a long-term negative effect on this company,
which decreases the competitiveness of the business. In order to minimise the competition,
L’Oreal need to focus on quality enhancement or improve marketing channels to distribute their
products by use of latest technology and innovation.
Threads of entrance (Low): The significant entrance is for the quality, pricing and
marketing barriers that can be resolved in many different ways with the obstacles. Owing to
high-quality goods, competitive costs and significant marketing tools, new companies are also
often easy to join the industries. The covers ladies, Avon, Revlon etc. are the major rivals of
L'Oreal. The biggest drawback to L'Oreal is that their goods are luxuries that could be affected
by an economic recession but they can be multinational and operate locally. This can also impact
their method of supply. L'Oreal does not have any huge risk for new entrance because in the
cosmetic industry, there are huge competitors so surviving in the market become difficult for
new entrance.
Threats of substitute (Low): Substitute goods threat applies to production in other sectors
(Sun, Cegielski, Jia and Hall, 2018). There are a range of chemicals in shampoo and other bath
and body products which are terrifying when a product market is influenced by the price shift of
a replacement product. Basically threads of substitute are low because in the market, there are
very less substitute products available for the anti-aging cream. Lack of availability of substitute
goods becomes opportunity for the company.
Bargaining power of suppliers (Low): Suppliers are the company that offers the industry
with materials and other goods. If distributors have a wide range of bargaining power then the
business gets less interest. This has a high performance when not distinguished by many
consumers and few dominators availability. Highly regarded products (Switching cost
Substitution products are not available on the market place. Suppliers do not have ability to done
bargaining with L’Oreal and they do not face lot of threats from suppliers.
Bargaining power of buyers (High): In this competitive analysis, L’Oreal customers has
high bargaining power because in the market there are huge brands available which provide
quality products along with goods customer services. So company need to maintain their
7

uniqueness along with customers focused approach because in the cosmetic industry there are
huge competitors which affect the company (World Health Organization, 2019). If consumers
are less pricing sensitive, then prices will increase and consumers they will still purchase the
product. L'Oreal is influenced positively by inelastic demand. No one company appears to have
bargaining power as there are large numbers of clients. Small flexibility in negotiation benefits
L'Oreal Paris.
CONCLUSION
From the above observation it has been concluded that, during the process of business
expansion in the new market. It is very essential for the organizations to done several analyses
before implementing their plans into executions. By using PESTEL or Porter’s five force model,
business able to evaluate micro environment factors which affect the business operations and
further their profitability. In addition, with the help of competitive analysis managers able to
evaluate the positive or negative impact and then further formulate strategies accordingly.
Netherland is the good allocation country for L’Oreal to expand their business operations. In the
current business environment, there are several factors which affect the organization such as
population size, GDP, unemployment rate, inflation rate etc.
8

REFERENCES
Books & Journals
Bourn, D., 2018. The global engineer. In Understanding Global Skills for 21st Century
Professions (pp. 201-219). Palgrave Macmillan, Cham.
Bratton, J. ed., 2020. Organizational leadership. SAGE Publications Limited.
Hatch, M.J., 2018. Organization theory: Modern, symbolic, and postmodern perspectives.
Oxford university press.
Hendry, J., 2019. Understanding japanese society. Routledge.
Lacey, J., Howden, M., Cvitanovic, C. and Colvin, R.M., 2018. Understanding and managing
trust at the climate science–policy interface. Nature Climate Change. 8(1). pp.22-28.
Nydell, M. K., 2018. Understanding Arabs: A guide for modern times. Hachette UK.
Pillemer, J. and Rothbard, N. P., 2018. Friends without benefits: Understanding the dark sides of
workplace friendship. Academy of Management Review. 43(4). pp.635-660.
Söderlund, J. and Borg, E., 2018. Liminality in management and organization studies: Process,
position and place. International Journal of Management Reviews. 20(4). pp.880-902.
Sun, S., Cegielski, C. G., Jia, L. and Hall, D. J., 2018. Understanding the factors affecting the
organizational adoption of big data. Journal of Computer Information System. 58(3).
pp.193-203.
World Health Organization, 2019. Global status report on alcohol and health 2018. World
Health Organization.
9