Company Analysis: LOreal Company - Case Study Example

Company Analysis: L’Oreal Company Introduction The company L’Oreal provides beauty products to its s and has covered the same sector for years with over a century of experience in the market. The company has focused on beauty products solely as the business of choice through which they have earned a meaning in their business sense that they have developed a personality for their customers with over the years. According to L’Oreal, beauty is defined as a language that they have developed and accustomed it with quality, efficacy and an ideal of safety through their continuous pursuit to diversify in the beauty fields with satisfaction of the needs of the customers worldwide. The company diversifies beauty in relation to its consideration of beauty as a universal aspect scientific in nature and an ideal earned through commitment. These have created the need for the company to advocate for beauty for all the people. Each year the company targets to earn more customers worldwide with strategic plans that cover a wider coverage with intentions of having billions of customers added to its customer margin each year. The company considers the local cultures too and ensures that they are well coordinated with the product development. The local beauty customs provide the basic approach to product development that the company rely on heavily to create an impact to the customers and lead to an improved approach to customer service. Through its strong connection to values related with passion, constantly evolving innovation, the open-mindedness associated with the business, entrepreneurial spirit and the desire to excel have provided the baseline for ethical practice that the company respect. The research project in relation to its core competencies, its geographical markets, sources of funds, their application in the business, the various international risks associated among many other factors that affect the business. Geographic markets The company boasts its competitive advantage through the circulation of their products in various markets worldwide. They engage the global markets in their approach to marketing that allows them to reach a given threshold on the market. The company has a presence in over 130 countries in the world covering five continents (L’Oreal). These have covered the operations of the company and provided the market needed for the products that the company produces. The company aims at staging close to the customer t provide accessibility and ease of product access. These have allowed the company to achieve its goals and manage to obtain reasonable returns on an annual basis. These have enabled the success of the company in the field in relation to earning a competitive edge that has allowed for their accustomed approach to development and customer satisfaction. The global presence of the company has had a massive impact on its positioning placing it among the top 500 companies in the world at 415 (Rugman, p.167). These have played a major role in building confidence in the customers and creating an outstanding image that the company relies on to facilitate its development. The widening of the company’s presence worldwide and its purchase of subsidiaries create the channel that the company has invested its resources on an annual basis. The acquisition of the US giant in cosmetics Maybelline, Kiehl from United States and Shu uemura provided for the growth of their financial scope propelling the company to a successful advancement into the cosmetics world creating a resonating brand worldwide. Analysis of the capital structure Looking at the balance sheets that the company has, one discovers the sound financial position of the company. In relation to the 2013 financial year, the company indicated a shareholder equity of 71% related to the amount of debt applied. This translates to 561230389 shares taken up on the market by various investments (2014 Annual Results). The capital structure holds minimal debt that provides for the less expense in relation to cost of capital. These also provide for a less capital cost compared to if debt was applied. If debt were applied, the interest rates and other processing fees would play a role in inflating the cost of capital that the company applies providing for the limited profits suffering from the high expenses. The company supports its operations with share capital and limited debt as part of its capital structure. These explain the source of funds that it employs in the management of its operations. Covering this, one discovers that the major source of finding that the company employs is the use of equity rather than debt in the business. There exits other source of funding that the business could employ in its capital structure to fund its businesses and projects though the cost of capital employed affect the ability of the business to employ them. Application of share capital and leverage in a business provides various advantages. Share capital provides a cheap source of funding to the business with limited liability attachment (Babu, p.70). The shares are divided into ordinary shares and preferential shares. These provide the equity that the company needs to finance its projects and operations. Leverage has the advantage of providing immediate funding to the company when in need hence an advantage to the business. The disadvantage of leverage in debts provides liability to the company that affects its performance and attaches a higher cost on the capital. WACC is calculated using the formula below: In the above, Re refers to the cost of equity, Rd cost of debt, E market value that the equity of the firm holds, D the market value of the debt that the company holds, V=E+D is applied while D/V provides the percentage in debt. Tc represents the corporate tax rate applicable to the business. Considering the 2014 annual results for L’Oreal, the following results yielded. International risks Any businesses that engage on the international standards expose themselves to various trade and business risks that expand from an increased competition to increased risks related to foreign exchange. These risks spread further to the contracts that the company makes with its other business associates requiring the presence of good advisers to propel the business towards its objectives. The various regulation frameworks in the international market require following promptly for survival and success in a foreign market. Contravening these would lead to disqualification of operations in the particular country. These explain the need to ensure that all businesses understand the implications of taking their business to the international status before proceeding. Increased competition The international markets expose L’orela to the real world with many competitors having products already established in those local markets. The success of any business in the international platform is the ability of the company to produce outstanding products that beat the competitors. The excessive companies vying for the international markets have led to the adoption of the competition policy (Utton, p.3). The policy is aimed at creating sanity in the business and allowing for the improved operational relations between companies. The development of the competition has relied heavily on the needs of the markets and the ability of the companies to satisfy them with quest to improve the chances of success for the company. The success of L’Oreal on the market and competition has involved the improvement of products and the acquisition of some competitors that posed a risk. These paved way for the company to enjoy a wide area of coverage hence successful performance. Contracts in foreign markets The move to open business in the international markets comes with the need for the business to embrace the contract systems and mode of operations of the markets. These allow for their prevention of legal challenges. The need to educate staff more on the contract regulations in the new country proves vital. Regulatory frameworks in the market The regulatory framework is related to the contracts in some sense. The need to understand the international environment proves vital with the essence to consider all regulations and their implications to the business. A piece of regulation that may not favor the company provides the need for the company to find ways of coping while that which favor the company give it the ability to succeed in the market. Considering the level of success that L’Oreal has, the company performs an extensive research into the markets before considering them on their international markets list. Foreign exchange risks One of the major problems that many companies that move into the international markets face is the foreign exchange challenge. The need to settle on a single currency to apply on the international markets has proven true based on the growing nature and expansion of the various markets. The need to have foreign exchange understood provides the company with a challenge. The operations of the company and the width of their international span provide for the currencies they need to understand. L’Oreal has its headquarters in France a country that uses a different currency as compared to eth dollar or euro. The company trades in all these markets and therefore proves the need to ensure the challenge is prevented from affecting the performance of the company. These affect the profits of the company and increase the expenses. Management of international risks The company L’Oreal has developed various approaches to handling these challenges described above. Through their astute approach to business, the company has managed to remain competitive in the market and on an upward performance despite the slight decline in profits in the previous financial year compared to 2013. The approaches prove evident in the approaches the government employs that include the following: One of the major aspects that L’Oreal has aimed to deal with is the increased competition in the international markets providing beauty products. The company identifies possible threat competitors and aims at acquiring them or focusing on research and development to develop new products. A good example on this is the purchase of Maybelline, Kiehl and Shu Uemura that proved tough competitors to the company over the years. The company eliminated fierce competitors to its advantage. In relation to contracts and other regulations, the company L’orela has hired able employees with good skills in managing their jobs. These provide the basic approach to research those results into the acquisition of information that may prove useful to the company. The application of lawyers in its advisory team provides the company with a set out structure that would prove challenging to collapse. On the other hand, the major challenge that L’Oreal has faced stems from the foreign exchange costs that translate to operational costs. The decline in sales from the obtained 4.7% during the first quarter of 2013 compared with the results obtained in 2014 at 1.5% (zacks Equity Research). The decline in sales and performance stem from the failure of the company to protect itself from international foreign exchange costs. A difficult operating environment coupled with the foreign exchange challenges affect the company. The company is also trying to fight the foreign exchange challenges from the application of various currency uses that provides a common ground for its currency needs. These provide the element of currency improvement and protect the company and its sales. The global presence of the company creates a need to have various approaches to the foreign exchange challenge including those that might aid in provision of a simplified system of currency use. According to the group-consolidated financials, the currency provided a net change in the consolidation of currency effect of -0.2%. In these the currency fluctuation covered -5.1% the impact transferred t sales in a -3.5% (Half Year Financial results, p.2). Other risks that may exist to the company include transaction risks, economic risks and those related to translation that may affect the company in relation to performance. Management of currency challenges The application of the approaches that the company has employed in sustaining the economic stability of the company has influenced the company’s performance. The company has featured a number of options to cover the currency challenge. These include the following: The company has invested heavily in research to develop various means of approaching the different currency challenges and other company needs. The research has yielded reports that indicate to the company possible challenges and hence providing a proactive approach to it. The company involved a provision on the income statement that aided in the application of the currency management procedures. Like provision for bad debts in accounts, provision for currency fluctuations caters for the uncertainties in currency fluctuations. The company has employed the strict measures of managing the currency through the management of the sales and purchases. The company employs the purchase of supplies in the currency of the supplier’s country. The currency fluctuations in the company for the year 2012 affected the sales for the year with 6.7% in currency fluctuations (First Half 2012 Sales, p.1). The company employs a conservative approach that allows edging each financial year that allows for the development of purchase contracts or those related to sales prior to through contracts or the management of options. The company employs the development of budgets that cover operations that stem from each subsidiary (Registration Document 2011, p.22). Budgeting allows for prior identification of the various challenges and financial needs to provide for the reduction of the effect that they could cause. Other risks that the company has managed to deal with include the transaction, economic and translation risks. In transactions, the management means led to the growth of sales that has provided the company with the necessary revenue contribution to its success. 11.2 billion Euros in revenues was registered over the year 2012 from the transactions. The management of the transactions involves the management of employees from the hiring stage to the application stage. Development of procedures allows for the management of the transactions. On the economic approach, the company has ensured it invests in countries with a strong economy. These have provided for the management of the performance of the company over the years. The company manages this risk by ensuring it hires qualified employees that understand the risks aiding in eliminating the effects that they cause to the company’s performance. The company employs systematic procedures in managing their operations and transactions hence providing for the provision of positive results (Chang, 45). The company manages the risk by the planning aspect to prevent rushed decisions. Planning is evident through the development of budgets for operations, the provision of the necessary accountability tools to ensure the plans, and budgets remain followed to prevent failure. In conclusion, the company has taken preventive measures in ensuring that they have successful results in relation to performance despite the harsh economic operating climate that many markets provide. The company has provided for the various risks including the foreign exchange risks, transaction risk, economic risks and translation risks. The company has employed adequate budgeting measures to deal with any financial management needs that may arise a hamper their operations. In this respect, the company has managed to keep operating and profitable in turbulent times and in different markets on the international scene. Works Cited 2014 Annual Results, L’Oreal 2014 Annual Results February 2015. Viewed on April 9, 2015 from http://www.loreal-finance.com/eng/news-release/2014-annual-results-992.htm Babu, Ramesh. Financial Services in India. Concept Publishing Company. 2005. Chang, James. Business Process Management Systems: Strategy and Implementation. CRC Press. 2005. First Half 2012 Sales, L’Oreal, Pinx: LRLCY L’Oreal SA ADR Quarterly Report July 2012. Viewed on April 9, 2015 from http://quote.morningstar.com/stock-filing/Quarterly-Report/2012/6/30/t.aspx?t=PINX:LRLCY&ft=&d=f8343e7499effddafc738741dfec87fb Half Year Financial Report, L’Oreal Half Year Financial Report at June 30, 2014. Viewed on April 09, 2015 from http://www.loreal-finance.com/_docs/us/half_year_report_2014/RFS_2014_EN-2.pdf Registration Document 2011, L’Oreal; LRLCY L’Oreal SA ADR Annual Report 2011. Viewed on April 9, 2015 from http://quote.morningstar.com/stock-filing/Annual-Report/2011/12/31/t.aspx?t=PINX:LRLCY&ft=&d=291b37b99242394d2dacae4b4b30ae8e Rugman, Alan. The Regional Multinationals: MNEs and Global Strategic Management. Cambridge University Press. 2005. Utton, Michael. International Competition Policy: Maintaining Open Markets in the Global Economy. Edward Elgar Publishing. 2006 Zack’s Equity Research. L’Oreal Posts Soft Sales in 1H14 on adverse Currency Impact. Viewed on April 09, 2015 from http://www.zacks.com/stock/news/142390/loreal-posts-soft-sales-in-1h14-on-adverse-currency-impact Read More