External Environment in Which The Body Shop Operates - Research Paper Example

BUSINESS The Body Shop YOUR ACADEMIC ORGANISATION HERE OTHER RELEVANT INFORMATION HERE 0 Terms of Reference The Body Shop, an upscale retail organisation offering a wide variety of natural ingredient products and animal cruelty-free beauty products, now part of the L’Oreal family of brands, has experienced decreased sales performance in the United Kingdom. As such, this report has been prepared with the utmost expediency for review by individuals within the investment marketplace. So as to fully understand the external environment in which The Body Shop operates, this report offers a strategic analysis for the firm as well as suggesting areas for long-term company improvement. 2.0 Procedure Resources utilised for this project were gathered utilising a wide variety of secondary source materials, including the theoretical professional perspectives in books, journals, and community reports highlighting strategic activities and analyses of reputable firms which recognise the importance of macro-level assessments. Research literature regarding The Body Shop, from a wide variety of community and internal perspectives, was compared to the tangible 2006 The Body Shop Annual Report so as to provide an accurate snapshot of the current state of long-term business strategy within the company. No primary data was gathered for this report in the form of observations or questionnaires due to researcher limitations. 3.0 Executive Summary Because of sales declines in the United Kingdom, The Body Shop must come to understand all of the macro-environmental factors which potentially hinder continued growth and business sustainability. In order to fully address these factors, this section highlights the business environment of The Body Shop, including a detailed PEST analysis which divides the external business forces into four specific environmental categories. This format is designed to assist the reader in understanding how the aforementioned categories directly impact current performance and future longevity at the firm. 3.1 Nature of the Organisation The Body Shop maintains an employee population of just over 7,500 (The Body Shop Annual Report, 2006). The Body Shop UK is a division of The Body Shop International, Plc. owned by the L’Oreal family of brands and experienced a one percent drop in sales from 2005 to 2006 (BSAR, 2006) Though this is not a tremendous sales decline, it does tend to illustrate that the firm is currently losing momentum in its European market. The Body Shop offers products which appeal to the upscale consumer, consisting of naturally inspired ingredients and the company guarantees the quality of its somewhat organic product line. The firm has recently celebrated its 30th year of public stock trading as an organisation operating in the secondary sector under the three-sector model. 3.2 What is a PEST Analysis? The PEST Analysis, an acronym for Political, Economic, Social and Technological, represents the external, macro-level factors which impact business efficiency and forward productivity in terms of overall business strategy. The aforementioned forces have profound effects on the firm’s task environment, which may be directly responsible for sales slippages in its European operating market. Hence, the PEST analysis, according to one notable theorist, is conducted as a rather “broad-brush instrument” to define and measure the effects of the macro, external environment (Channon, 1997: 81). Under the macroeconomic PEST model, offered by Courtney (2002), political forces represent a wide variety of governmental or legal issues facing a firm, including taxation policies, tariff or trade restrictions, environmental laws and even employee-related company obligations. Economic factors include issues such as global currency exchange rates or the rate of macro-level inflation. Social factors tend to include cultural and demographic characteristics of the macroeconomic environment. Technological forces include research and development, potential automations for performance and the overall rate by which technologies evolve in the business environment. These factors must all be considered prior to launching changes in strategic orientation. 3.3 Importance of Organisations McDonald (2004) further offers the importance of an environmental audit (i.e. the PEST analysis) in terms of utilising its research data to determine a more appropriate business positioning in its current industry. For instance, under this definition, recognising that politically-charged forces, such as an unstable government in foreign nation, are impacting global supply chain issues would be a relevant portion of a PEST analysis; prompting change in strategic orientation. Warren (2002) offers a more investor-oriented viewpoint of the PEST analysis by suggesting that shareholders continue to pressure firms to increase return on investment. This creates a need to look beyond internal forces as a means to justify business performance and establish a macro-level, external analysis to understand what exogenous elements are restricting (or supporting) current strategic decisions. Though all of the aforementioned perspectives maintain different variations regarding the importance of conducting PEST analyses, they are all congruent in relation to recognising the importance of the macroeconomic environment to long-term business sustainability or growth. Hence, the PEST analysis is a strategic tool designed to foster positive business decisions based on macro-level trends. 3.4 Analysis of the impact of the external environment on The Body Shop Supply chain costs appear to significantly plague The Body Shop, due to the firm’s commitment to avoiding animal cruelty and the cost of all-natural ingredients which have been raised with specialised, environmentally-friendly fertilisers. Substitute products are available widely on the consumer market at comparatively cheaper prices, however consumer loyalty appears to have been built effectively by The Body Shop marketing efforts. This mass of substitute products, however, may have macroeconomic repercussions for the company from the social environment. This section highlights all external factors, individually, in the PEST analysis as related to The Body Shop. 3.4.1 Analysis of the impact of the Political external environment Cosmetics companies are usually mandated from the regulatory level to halt animal testing, but still providing products which do not harm various skin varieties. The Body Shop strives, as a measure of business strategy, to create the most natural products available on the consumer market and avoid issues of animal cruelty. Hence, the political environment would appear to create a significant competitive advantage for the firm as other competitors likely struggle with internal operations to appease legal regulations whilst The Body Shop has built its entire reputation on similar objectives. Additionally, the landfill tax, introduced in the UK in 1996, has been an additional operating cost for today’s firms, however The Body Shop abides by these regulations as a matter of business process. From a financial perspective, the political environment is not actually detrimental to the firm’s longevity in its consumer market. However, this could be due to the firm’s small-scale influence and experience in broader Europe. 3.4.2 Analysis of the impact of the Economic external environment Economic changes are largely dependent on the country in which the firm operates, in this case the United Kingdom. Prices set for The Body Shop products are much higher in the United States than in the UK, largely due to the firm’s long-standing consumer loyalty in this region and the nation’s significant volumes of upscale consumers in America. However, in comparison between both Westernised nations, the British currency is valued at over double that of the American dollar, suggesting a very strong economic environment. However, other markets in the UK have been plagued with concerns in recent years, including the elimination of some important public services from local governmental budgets and a trend toward global inflation driven by a wide variety of factors (Schneider, 2007). Inflation involves the increase in various products which tends to leave consumers with much less disposable income. This could account for the small drop in revenues witnessed between 2005 and 2006 at The Body Shop as an outcome of inflation. Though this is a relatively uncontrollable macro-level factor, it is significant to sales volume expectations in the UK market environment. Despite a mildly unstable local economy, no other notable economic factors could be identified which may potentially impact company longevity. 3.4.3 Analysis of the impact of the Social external environment Changes in consumer behaviour are clearly the largest threat to the firm’s success in its industry. Boone & Kurtz (2006) identify that larger, differentiated volumes of market segments are turning toward organically-inspired products and generic beauty products in order to capture perceptions of youth and environmentally-friendly objectives. Based on this professional assessment, this represents significant strengths for The Body Shop as this creates a wider target audience for advertising and marketing to capture broader sales revenues. Additionally, the aforementioned authors indicate that many consumers in the United Kingdom have only recently begun changing to a healthier lifestyle in response to global fitness objectives. These changes include not only the dietary, but relate to issues of skin care and external beauty as well whilst still demanding high quality products (Boone & Kurtz). Hence, the social environment, again, creates significant value for the firm as rather than relying on costly promotional materials to boost sales volumes, changes in the social condition are driving interest in the firm’s products as well. No other significant social forces have been identified which affect firm performance. 3.4.4 Analysis of the impact of the Technological environment The Body Shop is significantly affected by technological changes and evolutions in the cosmetic industry, as the firm relies largely on stringent research and development practices to ensure a superior quality product on the consumer market. Such changes require a vastly-diverse team of trained professionals in regards to chemical composition, laboratory engineers and various research officials routinely involved in testing procedures and branded formulas. In order to coordinate these efforts, available technologies designed to enhance the supply chain (for raw materials consumption) and ensure quality must be identified, developed, and adopted by the firm. Software programs such as ERP and SAP, two large-scale software packages designed to incorporate the majority of business functions into a single application (Longenecker, Moore, Palich & Petty, 2006), are widely available to The Body Shop, offering them significant strategic value. Issues of internal automation (in regards to manufacturing process) could not be located through research, indicating that no issues regarding technological advances or technological improvements capabilities currently plague The Body Shop. The majority of literature on the firm tends to describe non-technological elements when discussing issues with long-term orientation. No additional technological factors were identified with firm productivity. 4.0 Conclusion Quite unanticipated, it appears that The Body Shop’s current strategic decision-making is not largely impacted as much by the external environment as it is from a more microeconomic perspective. Issues of internal staffing, marketing objectives and other internal tangibles appear to erode overall productivity for the company in far greater proportion than the macro-level environment. Clearly, consumer attitudes and changes in the social condition have created increased opportunities for advertising and promotional activities, simply through capitalising on the human desire for health, beauty and environmentally-friendly initiatives. As the majority of cash for this firm comes in the form of consumer sales revenues, The Body Shop appears to be working toward creating quality relationships with its customers by providing products which, by design, enhance consumer lifestyle. The economic environment, under the PEST analysis model, was much more difficult to categorise as quantitative statistics which may have illustrated median incomes per region were unavailable as relevant to this research project. However, a strong UK currency and what might be considered only temporary (short-term) fluctuations in housing and employment in the UK do not appear to have radically impacted the company’s sales expectations. For the most part, it appears that the macroeconomic environment for The Body Shop is relatively stable and predictable, allowing firm leadership significant flexibility when determining new potential market opportunities in the local region. Despite any internal struggles, it seems The Body Shop is well aware of the external environment and has made positive subsequent decisions designed to remain competitive in the face of potential political, economic, social or technological factors which might develop to hinder efficiency. 5.0 Recommendations Siegel (2005) suggests that consumer behaviour patterns become more and more difficult to predict in an evolving, contemporary society. Essentially, the author indicates that what is considered socially acceptable and trendy today could be obsolete tomorrow. This may be indicative of a consumer trend that is becoming more fickle and difficult to cater toward, thus there is the potential opportunity that the most viable external factor for The Body Shop today could become tomorrow’s liability. Hence, it is suggested that the leadership team at the firm maintain an adequate marketing and marketing research division which can remain responsive of changes in observed (or quantitatively validated) consumer behaviours. Should the firm recognise that the demand for the firm’s upscale (and expensive) products declines, the firm must be equipped to utilise clever marketing theory and appropriate marketing tactics to reinforce these values to a changing consumer marketplace. Additionally, despite the fact that the United Kingdom maintains a very stable political system (i.e. free of spontaneous national riots or social protest), this is not necessarily an indication of future business environments. The company must consider whether its current activities (from raw materials acquisition all the way to final product delivery) could be sustained long-term in the event of a developing unstable political environment. For instance, existing raw materials suppliers may suddenly become unavailable due to changing administrative policies or the provision of unfair, foreign tariffs. It would seem that The Body Shop, although a very subjective statement, is used to operating under complacency in environments where political stability is a business given. Hence, The Body Shop must maintain careful awareness of any foreign-inspired political trends which may affect cost or the ability to acquire necessary materials for manufacture and distribution. Though it would be hard-pressed to suggest that The Body Shop requires significant changes to its current strategic methodology, based on sizeable growth increases since the firm’s inception, clearly the firm must be proactive when assessing potential threats from the macroeconomic environment. Currently, consumer trends and political trends are creating a large amount of value for The Body Shop, but this is merely a positive outcome of a set of factors which are largely uncontrollable for the firm. Shifts in these trends may create both economic and consumer-related issues in the future, however with the appropriate PEST analyses being conducted as a strategic business failsafe, the firm is in a cash position currently that can weather a few minor external storms should they develop. By in large, The Body Shop is well on its way to being a firm worthy of benchmarking for its approach to strategic analysis and to understanding the macroeconomic business environment. 6.0 References Boone, L. & Kurtz, D. (2006). Contemporary Marketing. 12th ed. United Kingdom, Thomson South-Western. Channon, Derek F. (1997). The Blackwell Encyclopedic Dictionary of Strategic Management. Oxford, Blackwell Publishers: 81. Courtney, Roger. (2002). Strategic Management for Voluntary Non-profit Organizations: Routledge Studies in the Management of Voluntary and Non-profit Organizations. London, Routledge. Longenecker, J., Moore, C., Petty, J. & Palich, L.E. (2006). Small Business Management. 13th ed. United Kingdom, Thomson South-Western. McDonald, Malcolm. (2004). Market Segmentation: How to Do it, How to Profit From It. Amsterdam, Boston Elsevier Publishing. Schneider, Anne C. (2007). International Economics. 2nd ed. United Kingdom, Thomson South-Western. Siegel, Carolyn F. (2006). Internet Marketing: Foundations and Applications. 2nd ed. Houghton Mifflin Company. The Body Shop Annual Report. (2006). ‘The Body Shop International, PLC Annual Reports and Accounts’. Retrieved 2 Mar 2008 from http://www.thebodyshopinternational.com/NR/rdonlyres/A675B0BD-0195-4FF2-BD6C1B5C351108ED/0/CLIENT81152203562022_lg2006AnnualReport.pdf Warren, Kim. (2002). Competitive Strategy Dynamics. Chichester, John Wiley & Sons, Ltd. Read More