Chapter 2 overview and key concepts

International Corporation Discussion

L'Oreal is the world's leading cosmetic group operating all around the globe in 130 countries with 66,000 employees. It generated 19. 5 billion Euros of sales in 2010 and its tangible and intangible assets amounted to 677.9 million Euros. Its worldwide procurement spend is approximately 1 billion Euros a year. It registered 612 patents in 2010 (L'Oreal Sustainable Development Report 2010: About L'Oreal). The company has a headquarter in New York operating as L'Oreal USA which is a subsidiary of L'Oreal, headquartered in Paris, France (L'Oreal - L'Oreal USA at a glance - Company Overview. 2011). Question 2: In all 130 countries where the company operates, the company's business is predominantly a mix of the secondary and tertiary sector. It caters and comprises to the service industry, where it provides men and women with cosmetics used daily. It acts as a service for external stakeholders, customers. However, L'Oreal also produces cosmetics. Therefore, it is also a part of the secondary sector where it takes raw materials/chemicals and produces their own cosmetic products (Case Study: L'Oreal, 2010, p. 1). The legal system in the 130 countries is either a Common Law system or a Civil Law system (Foreign National Environments: Legal Environments, p. 2). Under Common Law, the law is based on cumulative wisdom of court decisions on individual cases over time (e.g, USA, Great Britain). Under Civil Law, the law is based on codification and detailed listings (e.g. Germany, France). The effect of these two basic legal systems which again differ from country to country is that L'Oreal has to adjust its operations to the different legal requirements in each foreign country on the following issues: Business and trade, labor, workforce, financing of operations, technologies, permitted product ingredients, contracting, taxation, investment, environment issues, litigation etc.). Question 3: For multinational companies, political risk refers to the risk that a host country will make political decisions that will prove to have adverse effects on the multinational's profits and/or goals. Adverse political actions can range from very detrimental, such as widespread destruction due to revolution, to those of a more financial nature, such as: expropriation, confiscation, nationalization, laws preventing the movement of capital etc. (What is political risk?, 2011, p. 1). Political risk in the host country will have a severe impact on L'Oreal due to the basic nature of their products and operations. Cosmetics are considered a luxury good and thus it is one of the businesses that will see a lack of demand in their products in case of a political risk in a host country (see L'Oreal; Case Study 2010, 1). L'Oreal would end up losing a lot of money if they were unprepared for these adverse situations. If I were a political consultant to L'Oreal, I would recommend the following measures to minimize financial risk even before an investment is made: Conduct research on the risk potential of a country either by paying for reports from specialized consulting agencies or do research yourself, using the many free sources available (e.g., U.S. Department of State's background notes on countries). Should L'Oreal decide to enter a given risky country, I would advise: Get a risk insurance against some political risks that would compensate if an adverse event occurred (What is political risk?, 2011, 1-2). In order to do so, contact the Multilateral Investment Guarantee Agency (miga), a subsidiary of the World Bank (Foreign National Environments: Political Environments, p. 1). Question 4: L'Oreal USA has two relevant external stakeholders that are directly engaged with the business organization that the company needs to satisfy. A supplier for glass bottles for fragrances: Pochet (France) and a supplier for packaging: Alcan Packaging Beauty Francois Luscan (Mexico). I was unable to find the name of the raw material supplier(s). Many of their products require a wide range of raw materials. Therefore, L'Oreal directly partners with suppliers that specialize in technical groups such as, polymers, fats, natural products, perfumes, sunscreens, vitamins etc. (Case Study: L'Oreal (2010, p. 1). The company manufactures 94% of their finished products on their owns plants, and subcontracts the remaining 6% to subcontractors (L'Oreal Sustainable Development Report 2007, p. 59). It also merges with other stakeholders and acts as a parent company and the other companies such as body shop merge with them (Case Study: L'Oreal, 2010 ibid). The process of developing a satisfactory relationship with external (international) stakeholders is more difficult for companies operating internally because they must move beyond traditional stakeholder management techniques to partnering techniques that lead to the achievement of common goals (Harrison & St. John (1996, p. 46). Communication problems arising out of different business traditions, lack of communication, cultural differences, growth of external stakeholders might occur and result in unfavorable litigation, negative publicity, and unfavorable regulatory policies. Therefore, supplier assignment and integration into the L'Oreal community are based on the key values: mutual respect, transparency, sharing of information, strong communication and high business standards. To integrate a new supplier or subcontractor, a specialized team follows a structured process called "Welcome on Board" with several formal stages, starting with an analysis of information related to the supplier's financial and technical capacity, structure and geographic location (L'Oreal Sustainable Development Report 2007 ibid). Question 5: The company's commitment to act in an ethical and responsible manner is summarized in a document called "The L'Oreal Spirit" and can be accessed on the company's website. Ethics is at the heart of L'Oreal's commitment towards sustainable growth and consumption. The "L'Oreal Spirit" forms the framework for L'Oreal's policies with regard to corporate governance, environmental stewardship, health and safety, social affairs and diversity, supplier relations, sustainable innovation, corporate consumer responsibility and philanthropy. In addition, there exists a Code of Business Ethics that is available in 43 languages and serves as the reference document for ethics within L'Oreal. It applies to all employees, officers and directors of the group and subsidiaries worldwide. All employees receive their own personal copy. The initial 2007 Code of Business Ethics was updated in 2010 with the help of employees from 22 countries via international working groups in Asia, Europe, North America and Latin America. The Code was then validated by each Country Manager, Human Resources Manager and local counsel to make sure it was applicable locally (L'Oreal Sustainable Development Report 2010: Ethics). It is in the company's best interest to follow its code of conduct when operating in foreign countries because various studies have shown that companies practice good corporate citizenship by spreading best practice among customers and employees, suppliers and business associates -- in areas such as labor, the environment and human rights -- in foreign countries where they operate provide the managerial, technical and financial resources needed to meet social and environmental challenges in these countries and thereby manage to stay competitive (International Chamber of Commerce 1, 5). Question 6: L'Oreal has been a signatory to the United Nations Global Compact since 2003 and is a member of the French network of the Global Compact (Forum des Amis du Pacte Mondial). L'Oreal is committed to supporting and implementing, within its sphere of influence, the ten fundamental principles relating to human rights, labor standards, the environment and the fight against corruption. The company works closely with the following major associations and institutes to advance practices and exchange learning: Anti-Corruption Commission of the International Chamber of Commerce; Global Council on Business Conduct, The Conference Board; Ethics and Compliance Officers Association; International Business Ethics Institute; Institute of Business Ethics; Cercle d'Ethique des Affaires (L'Oreal Sustainable Development Report 2010: UN Compact). Question 7: There are manifold key indicators the company monitors to guide their investment and actions in the future in the following main areas: "Business": Total shareholder return over 20 years, consolidated sales, net profit. "Innovation": Cosmetic and dermatological research. "Production": CO2 emissions, energy, water use, waste and recycling, atmospheric emissions, L'Oreal Buy & Care programme, collaboration with suppliers, health and safety, international standards."Consumption": Responsible advertising, consumer advice. "Talent": Professional training, diversity training, female representation, worldwide profit sharing. "Communities": L'Oreal foundation, L'Oreal-UNESCO 'For Women in Science (see L'Oreal Sustainable Development Report 2010: Performance Summary: Key Indicators).