Internationalization to Saudi Arabia (Research Paper Sample)

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L'Oréal Internationalization to Saudi Arabia
L'Oreal is a global leader in the cosmetics industry, with over 100 years experience in beauty products spanning 23 international, diversified, and complementary brands. The firm controls about 52% of the global cosmetics industry, achieving 19.5 billion euros in sales as of 2010. L'Oréal has its headquarters in Paris, France, and maintains operations in 130 countries, employing about 66,600 people. The firm’s product portfolio covers skin care, hair colour, hair care, make-up, and perfumes, besides developing interests in dermatology and pharmaceuticals products. L'Oreal owes much of its success to the execution of an adept internationalization strategy over the years. In this case, changing cosmetic needs and emerging markets make the cosmetic industry a growing one. For L'Oreal, the traditional North American and European markets alongside are already mature, while operations are already in place in emerging markets in the Asia-Pacific and Latin America regions (L'Oreal Annual Report 18-22). As a result, L'Oreal’s prospects for further growth lie substantially in targeting new international destinations in the Middle East and Africa. In 2011, the firm’s finance section noted that these two zones have significant energy and growth potential, representing great opportunities for L'Oreal. Consequently, the firm has established forays in East Africa and the Gulf Coast.
L'Oreal’s Motivation and Benefits for Internationalizing to Saudi Arabia
Saudi Arabia presents another market opportunity for L'Oreal, with a population of 28.08 million and a GDP of $576.8 billion as of 2011 according to the World Bank. The firm stands to benefit from not only the expanded market, but also other advantages of internationalization including resources, talent and labor, and technology (Lundan and Hagedoorn 231). Besides asset-seeking and technology pursuit, Liu (620) argues that internationalizing firms gain through accumulating knowledge and capacity, which may serve as a motivation for L'Oreal to establish operations in Saudi Arabia. In light of the aforementioned benefits, this discussion analyzes the most appropriate approach to L'Oreal’s internationalization in Saudi Arabia based on various internalization theories and concepts.
Internationalization Process
Saudi Arabia Market Selection
Andersen and Buvik (347-363) discuss various approaches to international market selection, highlighting systematic, non-systematic, and relationship strategies. The systematic approach is a structured and formalized decision-making process that trades off various market criteria to make an optimal decision on target markets. An analysis of the ownership, locational, and internationalization advantage (OLI) considerations also helps determine the foreign market selection for L'Oreal. In this case, Pitelis (210-212) explains ownership advantages as those that would benefit the firm through creating monopoly or efficiency. In locational considerations, firms naturally pursue destinations in which the present resources and knowledge can add value to internationalizing firms’ existing resources, knowledge, and, thus, operations. Internationalization advantages refer to the strengths of the choice of modality adopted by a firm expanding into foreign markets. The locational considerations are crucial in selecting the target country as determined by the benefits available in given markets. As noted earlier, the Middle East region offers L'Oreal attractive prospects for growth in market size and spending power. Saudi Arabia is relatively stable and developed in comparison to the neighboring countries fraught with political disturbances. The country’s leadership is undertaking major economic and infrastructural development projects to encourage foreign direct investments and retain multinational national enterprises (The World Bank). These factors translate to an attractive market for L'Oreal cosmetics and a stable environment in which to establish production, distribution, and R&D operations.
The systematic model concurs with various concepts of market discovery that firms may undertake. For instance, firms may undertake exploration, entailing a strategic search and generation of knowledge about a given market. Alternatively, knowledge about a foreign market may arise through exploitation, with the firm’s objective being the pursuit of efficient operations rather than expansion. Here, the discovery of an external market is incidental rather than strategic. Besides exploration and exploitative discoveries, knowledge on foreign markets also follows strategic or operative discoveries. Strategic market discoveries perceive markets as highly significant from a strategic point of view while operative markets perceive markets as less crucial, only related to current operations (Hohenthal, Johanson, and Johanson 666-668). In the case of L'Oreal, the knowledge generated on the Middle East indicates that the firm follows an explorative discovery approach entailing search and analysis of various market factors. Further, the attractive nature of the Saudi market makes the discovery a strategic one, rather than an operative one. The Saudi market provides L'Oreal with the potential to meet its goal of serving one billion customers globally in the next 10-15 years as indicated by the firm’s financial section press releases in 2011 (L'Oreal).
Cultural Considerations, Psychic Distance, and L'Oreal’s Absorptive Capacity
Hitt, Franklin, and Zhu (223) note that national cultures reflect societal values that define behavioral norms, which, in turn, influence institutional operations in the given nations. As a result, nations have differing institutional environments, some being more similar in national cultures when compared to others. This leads to the concept of psychic distance, referring to the extent to which the values and norms of two firms differ owing to their separate national background. Psychic distance entails various components including the degree of cultural affinity, the extent of mutual trust engendered, and the experience of the individuals concerned (Conway and Swift 1399; Dow 52; Swift 182). The psychic distance between a home country and the targeted hosts for investment determines the internationalization strategies and entry modes into the target market, which influence the success achieved from establishing international relations (Child, Ng, and Wong 36-38). In this case, L'Oreal’s country of origin, France, exhibits a large psychic difference from Saudi Arabia, the target market. For instance, a comparison of the two countries along Hofstede’s cultural dimensions reveals that they differ in aspects like individualism, power distance, and masculinity (The Hofstede Center). Overall, France leans towards Western culture and worldviews while Muslim culture heavily influences Saudi Arabian worldviews. This suggests a great cultural distance that L'Oreal faces when targeting the Saudi market.
However, the experience of the individuals involved in interaction moderates the cultural distance. According to Eriksson and Chetty, different firms bear varying experience and absorptive capacities defined as the ability to use existing knowledge and background to establish the value of new information and develop such information creatively (673). The absorptive capacity represents a firm’s experience with dyadic relationships with other firms and foreign customers (Cheng, Johansen, and Boer 1-11). The presence of well-established knowledge networks and absorptive capacity offset the lack of knowledge a firm bears in foreign markets, helping reduce the psychic distance between the firm’s home and target markets. For instance, L'Oreal is an experienced firm in internationalization rather than one in its early stages of internationalization. Further, the firm has already established operations in Gulf Coast Islamic countries, generating sufficient market knowledge to overcome the psychic distance between Saudi Arabia and France. Therefore, Saudi Arabia is an attractive market for L'Oreal to select.
Entry Mode
Firms follow different export behaviours when internationalizing, based on factors such as maturity of the industry and the stage of a firm’s industrialization process (Andersson 851-852). One of the theories describing entry modes into foreign markets is the Uppsala model of internationalization. The theory is closely related to organizational learning, assuming that firms make incremental foreign investment decisions and implementations because of market uncertainty. The Uppsala model describes a stage approach to foreign market entry traced from home markets to the sequential expansion into other countries. Th concept of psychic distance is pivotal in Uppsala model explanations, with firms gradually increasing their international operations through expansion to markets deemed to be psychically near. As the firm gains international experience through learning, it gradually expands into more foreign markets along the dimension of psychic distance (Pedersen 18). Organizational learning is crucial to Uppsala internationalization as it enables the firm to carry out its operations with increasing effectiveness. Such learning occurs through imitation of other firms, incorporation of experienced people or organizations or searching and analyzing information (Forsgren 258-261). Andersson (854-855) argues that the Uppsala model entails objective and experiential learning that helps firms to establish operations in foreign markets with successively greater psychic distance.
An analysis of L'Oreal’s internationalization timeline reveals that the firm has followed the Uppsala model in becoming a global phenomenon. For instance, L'Oreal started in Fra...