Systematical comparison of L’Oréal’s Market Entry Strategy

Systematical comparison of L’Oréal’s Market Entry Strategy in Brazil, China and the USA and the company’s performance in these countries.

1 Theory 
1.1 Market Entry Modes 
1.1.1 Acquisition 
1.1.2 Joint Venture 
1.1.3 Subsidiary 
1.1.4 Local Agent 
1.2 Case Application 
1.2.1 Comparison of Market Entry Strategies 
1.2.1.1 Entry Mode in Brazil 
1.2.1.2 Entry Mode in China 
1.2.1.3 Entry Mode in the United States 

1.2.2 Environmental Influences and effect on company performance

Choosing the appropriate way to enter a foreign market is crucial to any multinational corporation. This will set the tone for the success of the firm in the new market. There are several options a business can use to when determine how to enter a new country.

1.1 Market Entry Modes

In the business dictionary, entry modes are defined as “activities associated with bringing a product or service to a targeted market. During the planning stage, a company will consider the barriers to entry, the costs of marketing, sales and delivery, and the expected outcome of entering the market”. 38

There are different approaches existing when “bringing a product or service to the market” that include 39:
• Subsidiary
• Acquisition
• Joint Venture
• License Franchises
• Agent Distributors
• Office
38 (Entry Modes | Meaning from Business Dictionary, 2017)
39 (cf. Hollensen, 2007, p. 167)

The terms will be discussed and explained in the following part of this chapter. Deciding on one of these entry modes strongly depends on how much the company has to spend and moreover, the degree in which they want to be involved in the new market. The chart below shows the correlation between these two factors.

Figure : Investment Cost of Market Entry Strategies 40

In order to build the bridge to the case of L’Oreal within the case application part, specific modes of entry will be defined below.

1.1.1 Acquisition

In an acquisition one organization purchases another established business. By purchasing another company, the firm will gain the assets of the organization and the market share. An organization can also gain additional knowledge about the local environment and additional distribution channels.41 There is a heavy cost involvement of acquistions. Not only does an organization gain the positives of the acquired company, it will also inherit the negatives as well. There is also a very high involvement in acquisitions, so businesses must be aware of the time involved in such a strategy.

40 (cf. Keegan & Green, 2015)
41 (cf. Keegan & Green, 2015)

1.1.2 Joint Venture

A joint venture is a mode in which organizations enters a country in which the partners share ownership of a newly created business identity. In other cases, individual entities retain their individuality and they operate under a joint venture agreement. Both companies share in the risks and the rewards available.42 This mode also allows for synergy creation of both organizations. However, it is also one

of the highest involved and the highest cost of market entry options as per the chart above. Additionally, conflicts can arise between the business involved in the joint venture.

1.1.3 Subsidiary

Subsidiaries involve a company being controlled by another company, typically called a parent company. This parent company owns more than fifty percent of the shares of the subsidiary company. The subsidiary typically acts on behalf of the parent company in the local market. This is great benefit to the foreign company as the firm has relatively no knowledge about local environment (Investopedia.com, 2017).43 When subsidiaries are involved, the parent company loses some control over operations, and like joint ventures there is high cost and high involvement.

42 (cf. Keegan & Green, 2015)
43 (Staff, 2003 | Definition of Subsidiary from Investopedia)

1.1.4 Local Agent

Agents, on the other hand, “work in favor of a company”. They are typically in a contract with the firm. This mode of entry can usually save on cost for human resources and the agent typically posesses the sought aftter knowledge of the market. 44 The one disadvantage of agents however, is the possible lack of loyalty to the organization, as they work on contract. Agents are typically lower cost and lower involvement.

44 (Keegan & Green, 2015)

1.2 Case Application

Since L’Oréal has decided on some of the above explained entries to different markets, the case chapter will further focus on why these specific modes have been selected to the certain country and how successful they’ve been. Looking at the issues illustrated in 2, these possible entry modes can be helpful in understanding a certain environment and market. Here, the focus lies on the countries Brazil, US and China.

1.2.1 Comparison of Market Entry Strategies

When an organization makes a business, decision regarding market entry strategies, sometimes that decision works very well for the company. However, there are times when the first strategy is not the most effective and the firm must alter their approach. Following is an analysis of L’Oreal’s strategy worked for Brazil, China and

the United States.

3.2.1.1 Entry Mode in Brazil

L’Oreal used three different market entry strategies in three different markets:

Brazil was the most promising market for L’Oreal. They created its subsidiary in 1959. They selected this strategy because it was the fast entry speed, able to co-ordinate easily among the different departments, wanted to know the local market a lot which paved the way to adopt the local culture and ethnicity of Brazil. But some problems which L’Oreal faced due to this strategy like high development cost due to set up local research center and to recruit high potential, potential political problems and risks. Since the growth rate for L’Oreal in Brazil was increasing by 10% per year, L’Oreal Brazil had progressively extended the scope of business and later on changed its strategic position and started acquiring the established business.

1.2.1.2 Entry Mode in China

L’Oreal exported the beauty products to China and sold them by using local agents. They did it because there were low development costs, low risk in overseas expansion, able to reach a lot of customers. In contrast, L’Oreal faced a lack of co-ordination, little control over the technology and marketing, lack of proper distribution channel. Although L’Oreal saw a little development in China but it faced a dramatic loss. However, the acquisition of Maybelline gave L’Oreal’s entry into China a big boost.

1.2.1.3 Entry Mode in the United States

After doing an extensive research, L’Oreal aimed to enter in the USA market through the creation of a joint venture in 1954 with Nestle-is a Swiss transnational food and drink company. The reasons to select this strategy are Share the risk, profit/loss, L’Oreal could limit its financial risk as well as its exposure to political

uncertainty. They have used the joint venture experience to learn about the USA market environment. What L’Oreal faced is that about high development cost due to its high number of employees and R&D, a dynamic joint venture partner evolves into a stronger competitor. However, L’Oreal continued this way to enhance the sales for the next 30 years. After gaining knowledge a lot about the market of the USA, L’Oreal decided to change its strategic position in this concerned market for the lucrative potential. L’Oreal decided to expand its market share in the world for cosmetics and acquired some established businesses.

1.2.2 Environmental Influences and effect on company performance

Initially, L’Oreal used three different market entry strategies in three different countries. After a certain time, L’Oreal learned quite a bit about market opportunities, customers’ behavior, competitors (strength and weakness), cultural diversity, threat from environment (PEST), and also strength and weakness of itself. L’Oreal initially created its subsidiary in Brazil due to its social and cultural diversity, joint venture with a Swiss company due to a strong position of competitors in the USA market and local agents in China due to its strict rules and regulations. L’Oreal changed its strategic position and chose the acquisition strategy in the three countries after being able to be in a competitive position in the market. Everything in the world has merits along with its demerits. So, apparently L’Oreal was more or less successful in the three different countries by using three different market entry strategies but after being able in a dominant position, L’Oreal applied similiar strategies in the US, Brazil and China. So, L’Oreal developed as a follower advantage and finally acquired the established business from the three markets and placed itself as a dominant position in the market. Due to the issues L’Oréal faced in earlier stages and the decision on the entry mode of acquisitions, it’s now important to look on how L’Oréal could manage and survive in each market by having the fully ownership. With regards to globalization and the dependend environmental and cultural challenges, they might be able to adapt their strategies in some points.