Running head: CHALLENGES OF EXPANSION IN TO A FOREIGN

LOCATION 1

Challenges of Expansion in to a Foreign Location

Pamela Williams

ECO/561

July 02 , 2018

Jerry King
 CHALLENGES OF EXPANSION IN TO A FOREIGN LOCATION

Challenges of Expansion in to a Foreign Location

The purpose of this assignment is to illustrate what challenges a company may face

when attempting to expand into a new foreign market. This paper is to be a collaboration

of my third week assignment and my sixth week assignment. The purpose of my third week

assignment is to create a research analysis of a business that is a publicly traded company

in the private sector firm owned by its shareholders/stock holders. I have decided to use for

this assignment the company I was formerly employed by, which is L’Oréal USA. L’Oréal

is the largest beauty care company in the world. It began in the early 1900s by a chemist,

Eugene Echueller, that was an entrepreneur by heart. He began his career in the beauty

world with the creation of one of the first dyes that he formulated, manufactured and sold

to Parisian hairdressers. After this invention the founder of the now largest cosmetic

company forged the linked in what is still the DNA of L’Oréal research and innovation in

the services of beauty.

The country I have picked for this assignment is Democratic Republic of Congo

because it does not have a huge beauty and hair care industry. Parsley populated in relation

to its area, the Democratic Republic of the Congo is home to a vast potential of natural

resources and mineral wealth. Its untapped deposits of raw minerals are estimated to be

worth more than US$24 trillion. Despite this, the economy has declined drastically since

the mid-1980s.[4]
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At the time of its independence in 1960, the Democratic Republic of the Congo was

the second most industrialized country in Africa after South Africa. It boasted a thriving

mining sector and its agriculture sector was relatively productive.[4] Since then, corruption,

war and political instability have been a severe detriment to further growth, today leaving

DRC with a GDP per capita among the world's lowest.

“The L’Oréal Group acquired Maybelline in 1996 to begin they journey to

becoming the leading innovation in beauty and haircare worldwide. L’Oréal Group now

owns more than 30 companies worldwide, leading the cosmetics’ industry in face, lips.

eyes and nails. L’Oréal holds five of the top ten spots in the cosmetics’ market. It is the

largest manufacturer of cosmetics’ in the world. Loreals manufactures and sell make-up,

fragrances, skincare and haircare products. Their products are priced for every income from

dollar store retailers to luxury retailers.”

“The key economic indicators and trade statistics, which countries are dominant in

the market, the U.S. market share, the political situation if relevant, the top reasons why

U.S. companies should consider exporting to this country, and other issues that affect trade,

e.g., terrorism, currency devaluations, trade agreements. (www.export.gov, 2018) ”

Economics is comprised of four types of market structures; perfect competition

market, monopoly market structure, monopolistic competition market structure and

oligopoly market structure. “Pure perfect competition is a theoretical market structure in

which the following criteria are met, all firms sell an identical product (the product is a

commodity or homogenous); all firms are price takers (they cannot influence the market
 CHALLENGES OF EXPANSION IN TO A FOREIGN LOCATION

price of their product); market share has no influence on price and buyers.” The monopoly

market structure is characterized by a single seller, selling a unique product in the market.

In the market. In a monopoly market, the seller faces no competition, as he is the sole

seller of goods with no close substitute. The seller enjoys the power of setting the price for

his goods. Monopolistic competition market is a type of imperfect competition such that

many producers sell product that are differentiated from another and hence are not perfect.

A competitive oligopoly is a market that is dominated by only a few large firms. These

firms prefer not to compete via price wars and therefore compete in various other ways,

such as advertising, product differential.

The country that I have chosen for this assignment is the Democratic Republic of

Congo. It is one of the poorest countries in the world, but the largest country in

Francophone Africa, has vast natural resources and spans a surface area of 2.3 million

square kilometers. The following paragraphs gives a brief overview of the DRC in the last

two decades and why it is a struggling economy.

“The two recent conflicts (the First and Second Congo Wars), which began in

1996, have dramatically reduced national output and government revenue, have increased

external debt, and have resulted in deaths of more than five million people from war, and

associated famine and disease. Malnutrition affects approximately two thirds of the

country's population.[5]
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Agriculture is the mainstay of the economy, accounting for 57.9% of GDP in 1997.

In 1996, agriculture employed 66% of the work force.

Rich in minerals, the Democratic Republic of the Congo has a difficult history of

predatory mineral extraction, which has been at the heart of many struggles within the

country for many decades, but particularly in the 1990s. The economy of the third largest

country in Africa relies heavily on mining. However, much economic activity occurs in

the informal sector and is not reflected in GDP data.[6]

In 2006 Transparency International ranked the Democratic Republic of the Congo

156 out of 163 countries in the Corruption Perception Index, tying Bangladesh, Chad,

and Sudan with a 2.0 rating.[7] President Joseph Kabila established the Commission of

Repression of Economic Crimes upon his ascension to power in 2001.[8]

The conflicts in the DRC were over water, minerals, and other resources. Political

agendas have worsened the economy, as in times of crisis, the elite benefit while the general

populace suffers. This is worsened as a result of corrupt national and international

corporations. The corporations instigate and allow the fighting for resources because they

benefit from it. A large proportion of fatalities in the country are attributed to a lack of

basic services, which is a reflection of the treatment of the citizens of the DRC. The influx

of refugees since the war in 1998 only serves to worsen the issue of poverty. Money of the

taxpayers in the DRC is often misappropriated by the corrupt leaders of the country, who

often use the money to benefit themselves instead of the citizens of the DRC. The DRC is
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consistently rated the lowest on the UN Human Development Index. (The World Bank in

DRC, 2018) ”

The major resource of a Loreal plant is water and this is because it is important for

their products. Having access to it without the risk of conflict would be a concern for the

L’Oréal group. Their public image is also very important to the L’Oréal group, any hint of

corruption could very well ruin their company image. They take pride in the fact that

everyone is treated equally and have established themselves as a leading in diversity in the

workplace.

The market structure that Loreal USA competes in is closely characterized as

monopolistically competitive. There are many sellers in this marker and each selling a

differentiated product. There are barriers to entry but there are very few barriers to the

obstacles or hindrances that make it difficult to enter a given market. These may include

technology challenges, government regulations, patents, start -up cost, education and

licensing requirements Some of the barriers to entry for a company competing in the beauty

world would be:

High research and development cost: When firms spend huge amounts on research

and development, it is often a signal to the new entrants that they have large financial

reserves. To compete, new entrants would also have to match or exceed this level of

spending (Corporate Finance Institute, 2018).

 CHALLENGES OF EXPANSION IN TO A FOREIGN LOCATION

High set up cost: Many of these costs are sunk cost that can not be recovered when

a firm leaves a market such as advertising and marketing costs and other fixed costs

(Corporate Finance Institute, 2018).

Ownership of key resources or raw materials: Having Control over scarce

resources, which other firms could have used, creates a very strong barrier to entry

(Corporate Finance Institute, 2018).

Brand: A strong brand value creates loyalty of customers and hence, discourages

new firms (Corporate Finance Institute, 2018).

Those are a few of the things that would create a barrier for a new company to

compete in a monopolistic competitive market.

“There are four possible market entry strategies:

Exporting to Congolese retailers: Because of a limited industrial base in the DRC,

few finished goods are produced in the DRC. The vast majority of consumer and finished

goods are imported.

Joint-venture: Many sectors require in-depth knowledge or expertise, capital, and

analysis of the market, which only a local partner can provide; entering the Congolese

market through a joint-venture can be beneficial. Businesses should be sure to conduct

thorough due-diligence prior to entering into a joint-venture with a Congolese business

partner.

Green field: opening a new office in the DRC.

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Franchising: opening a franchise of operation in the DRC.”

In the year ending of 2017, Loreal was the 1st cosmetics’ group worldwide. They

had worldwide sales of 26.02 billion Euros of sales. Among the top 20 beauty care

companies it held the number 1. Loreal Paris, 5. Urban Decay, 6. Maybelline New York,

10. Lancôme, 17. Giorgio Armani. That is five spots in the top 20 beauty care companies

in the world. It owned 34 brands at the end of 2017. The operating profits for 2017 was

4.68 billion euros. The Loreal group employed 82,600 people worldwide and they also had

498 patents registered in 2017.

“L’Oréal has been the leading in the beauty world in skincare, fragrances, nail and

makeup. Trends among the celebrities such as the Kardashian has made contouring poplar

among the young women, which encouraged the group to create their own contouring

shades. Also, the 24-hour wear make, which Loreal has several product lines in eye, face

and lip. They continue to lead the market in lip and nail(Williams,2017).”

There are always new employment opportunities at L’Oréal when they create a new

product or buy another company. One of their top sellers is the 24-hour lip color and it is

steadily increasing in demand. L’Oréal wanted to keep up with the heavy demand, so they

had to buy three more new lines. This also create jobs, so more employees had to be hired.

The gross domestic product(GDP) of a country is a very important economic indicator, that

determines the market value of the total goods and services produced and offered by a coun

try within a year and serving as one of the indicators of a country’s’ economic state. The
 CHALLENGES OF EXPANSION IN TO A FOREIGN LOCATION

real GDP of a country is defined as its gross domestic product adjusted for

inflation(Williams,2017).

“The Democratic Republic of the Congo’s (DRC) rich endowment of natural

resources, large population, and strategic location in Central Africa make it a potentially

rewarding market for U.S. companies. However, the DRC’s commercial and investment

climate remains extremely challenging.

A weak manufacturing sector, porous borders, and weak links between the capital,

the periphery, and between the regions, have rendered the DRC an import-based

economy. Low-cost consumer goods and foodstuffs smuggled into DRC from Angola and

Zambia have undercut local production and resulted in large-scale capital flight

(www.export.gov, 2018) . “

Top five reasons to export to the DRC:

1. The DRC’s GDP recorded steady growth of above 6 percent on an annual basis for three
years, from 2013-2015, and remained close to level in 2016, despite a significant
economic downturn, helping to engender a growing consumer class;

2. The Congolese hold a high opinion of U.S. products and services, particularly in terms of
the quality to price ratio;

3. The DRC is undertaking multibillion dollar programs to rehabilitate various sectors,

including agriculture, energy, construction, basic infrastructure, and transportation;

4. The DRC Government is working to improve the business climate and is looking to
facilitate foreign trade and investment;

5. The DRC possesses one of the largest natural resource deposits on earth.
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The growth rate of the United States compared to countries like Russia and China

is expected to continue to grow in the coming years. L’Oréal continues to grow in the

United States and worldwide(Williams,2017).

The L’Oréal Group has spending millions building a company that is world renown

for being built on diversity and integrity. To make a decision to built in a country that like

those quality would not be beneficial to the Loreal Group.

As a whole it would benefit DRC because it could possible bring employment to a

land that economy is suffering. But because of the conflict and the corruption, finding the

right people to go into the DRC and train the people in that area would be hard. A few

years ago the company asked for volunteers to go into Mexico and help set a plant up. They

paid the employees that would go hazard pay, those employees were gone for three months.

They few them home once a month to see their families.

The resources are there and the United States , China and a few other countries that

have L’Oréal plants already have trade tariffs with DRC , but this would be a different

economy than the L’Oréal is used to. As L’Oréal Group continues to expand that could

potentially be an future in the DRC for them.

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References

Corporate Finance Institute. (2018). types of Barriers to Entry. Retrieved from

http://www.corpratefinanceinstitute.com

www.export.gov. (2018). Congo, Democratic Republic-Market Entry Strategy. Retrieved from

http://www.export.gov

L’Oréal. (2017). Financial Calendar. Retrieved from http://www.loreal-finance.com/eng/calender

L’Oréal. (2017). L’Oréal. Retrieved from http://www.loreal.com/group

Williams, P. Research Analysis for Business. (2017). Academic Paper. Retrieved from University

of Phoenix

The World Bank in DRC. (2018). Retrieved from http://www.worldbank.org