GLOBAL BUSINESS PLAN PROJECT PART 2

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Table of Contents Module 1—Identifying Global Business Opportunities 4 Module 2—Analyzing International Competition 5 Potential Competition Competitive Advantages Internal Strategies Module 3—Assessing the Economic-Geographic Environment 6 Geographic Influences Major Products and Industries Current Economic Condition Infrastructure Module 4—Assessing the Social-Cultural Environment 14 Demographic Trends Cultural and Social Business Factors Informal Trade Barriers Ethical Climate of Business Module 5—Assessing the Political-Legal Environment 16 Government and Politics Formal Trade Barriers Political and Legal Influences Module 6—Selecting a Global Company Structure 18 Strategic Planning Entry Modes Organizational Structure Strategic Alliances Module 10—Managing International Financial and Business Risks 24 Economic and Financial Risks Social and Cultural Risks Political and Legal Risks

Module 1—Identifying Global Business Opportunities

Beauty is a language. Beauty is universal. At L’Oréal, our mission is to offer beauty for all. For more than a century we have unceasingly poured our hearts, souls, and minds into providing women and men the most superior variety in skin care, cosmetics, hair care, and so much more. Our passion has driven us into over 130 countries, and it is our next goal to broaden our brand into the largest country in the world; Russia.

Russia is full of potential and opportunities for our industry to prosper. Holding over 11% of the worlds landmass, the largest of any country, natural resources are plentiful. Although Russia has faced recent economic crisis, the cosmetic market has proven to withstand the blows; and despite the ruble devaluation, Russia is currently the largest market for cosmetics in Eastern Europe. The Russian Federation of Industry and Trade recently found that Russia accounts for 50% of cosmetics retail in the region. With the forecasted 6-8% growth by 2018 in the Russian beauty sector we are confident that not only will this be a successful business expansion, that will help carry out L’Oréal’s universalization of beauty through its project for the years to come.

Module 2—Analyzing International Competitors

1. Potential Competitors

The cosmetic industry is made up of various companies that manufacture skincare, hair care, toiletries deodorants, perfumes, make-up, and oral cosmetics. Skincare products, the largest division, make up 36.4% of the total cosmetic market. In 2016 around 985 million U.S. dollars were generated from sales of foundations alone, making it the most profitable segment within the cosmetic category.

Multinational corporations such as Unilever, Proctor&Gamble, and Beiersdorf are the current leaders of the cosmetic market in Russia, as consumers are shown to favor foreign brands. As a rule, the consistency of quality and high reputation gives the foreign market an upper hand. While some of the leading domestic brands such as Barkhatnye Ruchki, Teana, and Kleona do produce competition to overseas manufacturers, the proportion of cosmetic sales in the market still favor foreign producers.

2. Competitive Advantages

Growth is expected in the Russian market for make-up and cosmetics in the medium and mass market price ranges; skin and hair care products are projected to maintain their leading positions. Although Russia has experienced a difficult road rebuilding their economy and government following the collapse of the Soviet Union, the economy now stands as the 7th largest economy in the world. The Russian Government has made a conscious effort to create policies that favor foreign investment, encouraging foreign investors to assist in the growing globalization of Russia. The recent political and economic stability of the economy has brought a large amount of foreign investment to the country.

3. Internal Strategies

Historically, cosmetics have always enthralled the women of Russia. They are always looking to achieve the “perfect look”, making it one of the first goods they will invest in, and the last goods they are willing to sacrifice. Due to the recent decline in the Russian economy, a tendency for consumers to cut back on non-essential products has recently shown a decrease in profit for major cosmetic manufacturers. Market experts predict the future market increases to be less dramatic, with skin care, hair care, make-up, and perfumery showing the highest potential for growth. Experts also believe that there will be an upward trend in the purchasing of expensive premium cosmetic brands, showing favorable circumstances for our luxury brands of L’Oréal.

Module 3—Assessing the Economic-Geographic Environment

1. Geographic Influences

There are many characteristics of Russia that attribute to the uniqueness of its geography. While it is the largest in landmass, taking up 11.5% of the world, the majority of Russia’s land area is virtually inhabited. The geography is very diverse with large forests, mountainous regions, and tundra that cover over 65% of the territory. With this large amount of land area being exposed to continuous or sporadic permafrost accessibility must be considered carefully. Rivers flow from south to north across the northern part of the country making transcontinental water transportation very expensive. This means land transportation is the only option, which can be a very costly medium. The method in which key regions are served is determined by container terminal capacity, the capacity and quality of rail connections, inland transport costs, tariff policy and customer preference.

In observing the geography of the country, climate, combined with consideration of the population density, ideally our company should look to locate on the western side of the country. This will allow access to two of the largest ports in Russia located in the Black Sea Basin, and Baltic basin.

2. Major Products and Industries

Currently Russia consists of the following competitive industries: oil and gas, mining, processing precious stones and metals, aircraft building, aerospace production, weapons and military machinery manufacture, electric engineering, pulp-and-paper production, automotive industry, transport, road and agriculture machinery production, light and foodstuffs industries.

Machinery construction provides all other industries with machinery and equipment and shares almost 30% of the economy, making it the leading industry in Russia. After the United States, Russia is the 2nd largest producer of electric power, they export almost 40% of their primary resource powers. Over 85% of the gas is produced in West Siberia and then exported to the CIS, Baltic States and abroad. Chemical industry provides chemical raw materials mining (apatites and phosphorites, common and potassium salts, sulfur and several other products), basic chemistry and chemistry of organic synthesis. Basic chemistry includes production of mineral fertilizers, chlorine, sodium, sulfuric acid and other products. Chemistry of organic synthesis comprises production of synthetic rubber, plastics, synthetic resins, and chemical fibers. The production of plastic and synthetic resins is located in the Volga region as well as Western Siberia, making essential materials attainable for our company.

Measured on a scale of 0-1, Russia’s human development index(HDI) stands at .804, placing them in the “upper-middle-income” category. HDI is used to assess the development of a country by accounting for things besides than economy alone. This measurement is found by taking average achievement in key dimensions of human development; a long and healthy life, being knowledgeable and having a decent standard of living. From 2012-2014 Russia’s gross national income(GNI) remained virtually the same but has declined in the last couple of years, and currently stands at 22,540 per capita PPP. In April 2017, Russian trade surplus rose to $8 billion, an increase of 21.1% from April of 2016 and below market expectations of a $8.5 billion surplus. Exports rose 20 percent to $26.1 billion and imports went up 19.6 percent to $18.1 billion. Balance of Trade in Russia averaged 9090.01 million USD from 1997 until 2017.

3. Current Economic Conditions

Foreign investment increase combined with Russian entrepreneurs increase in the domestic market has resulted in recent stimulated economic growth. Experts predict the growth to continue towards 8%, an astonishing amount that will favor our investment. Many of the foreign direct investments made by multinational corporations are long term and these companies have seen a bright future for their investments in the Russian economy. Investment has increased by almost 55% since 2007 and it seems the trend will continue for coming years. The Russian Ruble is not freely convertible because of the government’s maintenance of extensive currency control. The current exchange rate from the Russian Ruble to the U.S. Dollar is 1=.017, experiencing a decline from 2013, but a recent upward trend from 2016-2017.

4. Infrastructure

Only the quality of railway infrastructure in Russia comes in at a relatively global high level (31st). All other areas (quality of roads and highways, quality of port infrastructure, quality of air transport infrastructure and quality of electricity supply) need improvement. However, there has been roughly 325 recent projects announced to help aid in the areas that are lacking. These efforts include reorganization of land use, widening labor catchment areas, and previously inaccessible sites have been opened for development. The overall effect of these investments have increased productivity—an important goal for companies currently operating, and those looking to invest in Russia. The conscious effort of improvements means L’Oréal company will have the ongoing potential to reach more and more of the 6.602 million square miles, spreading beauty and self-confidence across every face.

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Module 4—Assessing the Social Cultural Environment

1. Demographic Trends

Population 142,355,415 (July 2016 est.)

Birth rate 11.3 births/1,000 population (2016 est.)

Death rate 13.6 deaths/1,000 population (2016 est.)

Literacy rate Total 99.7% (age 15 can read and write)

Male- 99.7%

Female- 99.6% (2015 est.)

Median age Total- 39.3 years

Male- 36.4 years

Female- 42.3 years (2016 est.)

Ethnic groups Russian 77.7%, Tatar 3.7%, Ukrainian 1.4%, Bashkir 1.1%, Chuvash 1%, Chechen 1%, other 10.2%, unspecified 3.9% (2010 est.)

Obesity rate 26.2% (adult prevalence; 2014 est.)

Religions Russian Orthodox 15-20%, Muslim 10-15%, other Christian 2% (2006 est.)

Languages Russian (official) 85.7%, Tatar 3.2%, Chechen 1%, other 10.1% (2010 est.)

2. Cultural and Social Business Factors

Although the literacy rate of Russia is the highest in the world, a high level of fluency cannot be expected in most cities aside from areas around Moscow and St. Petersburg. A high percentage of the Russian workforce is female, yet there are very, very few women in senior management positions. This situation shows little sign of changing in domestic companies. With the cosmetic industry being a female dominated market, it is our goal with L’Oréal’s expansion to change this historical trend of oppression. Society has also become more concerned with use of organic ingredients, with more than 70% of Russian end-users believing that natural ingredients are more safe and suitable for skin. As a rule, Russian consumers prefer not to compromise on quality of cosmetics. Moreover, Russian consumers are attracted by innovative product designs and packaging. For instance, sprays and serums with dosing gadgets have the highest demand in Russia. On average, Russian males spend about $115 per month on cosmetics, which is more than twice compared to the United States.

Large Russian companies typically function by centralized-decision making process, meaning under one central authority figure who is responsible for making all business decisions with zero-minimal consultation from others. Instead of wasting time going through different mediums and levels in any business, the best decision anyone can make when attempting to make potential deals must ensure they are dealing with the person in charge. In a country where the rule of law has all but broken down, the only thing that can be relied upon in a business context is the strength of the relationships upon which the business is based. Do not underestimate the importance of relationship building – or the time taken in the process.

Alcohol and hard drinking are a traditionally true part of Russian culture. Also, when hosting events, they tend to make even what is thought to be an informal meeting a very lavish affair, with enough food for an army. Entertainment can assist in networking in Russia; a nice meal and a few vodkas can be very helpful in the business world.

3. Informal Trade Barriers

Customs requirements in Russia are often complex and time consuming. Generally, the Russian company is responsible for customs procedures. Austrade in Moscow and Vladivostok can provide advice on customs matters and refer you to specialist Russian customs agents and brokers, if necessary, to clarify specific issues.

Import duties apply to most goods. In addition to general customs requirements, import licenses and product specific approvals are necessary for a wide range of items, including food and beverage products, pharmaceuticals, industrial equipment and more. Pre-shipment technical inspection (at the exporter’s expense) may also sometimes be required.

4. Ethical Climate of Business

While slowly improving, Russia remains an underdeveloped business culture, with poor ethical climate. Western corporations have helped increase awareness, and it is possible to operate in Russia with efficient management and responsible corporate governance. According to the American Chamber of Commerce in Russia, “U.S. companies are making a profound and lasting impact on their Russian employees and business partners, consistently and strongly communicating such key values as law compliance, merit-based compensation, strong business ethics and corporate social responsibility.” Russia is a multi-ethnic, multi-religious and multi-cultural society that is far from harmonious. Although civil rights are enshrined in the Russian constitution, and discrimination is generally illegal, proper enforcement remains problematic. Coupled with prejudice towards certain ethnic and racial groups and the lack of women in senior management, these factors can create serious challenges to any organization that is committed to diversity as ours is.

Module 5—Assessing the Political-Legal Environment

1. Government and Politics

Government bureaucracy, poorly established rule of law, rampant corruption and criminality affect virtually all aspects of Russia’s business environment. Yet in recent decades, Russia has managed to become one of the top three most attractive countries in terms of foreign investment, despite many objectives. In 2011, the Russian leadership set a target for Russia to reach 20th place in the World Bank’s Doing Business rating by 2020. It has also undertaken implementing several of the World Bank’s policy recommendations to improve its rating on the ease of doing business. Russia needs foreign investment, technology and knowledge to implement its large economic projects. The country is in fierce competition with dynamically developing emerging markets such as China and India for foreign investment. Foreign companies are also important political tools for the Russian government in developing Russian relations with Western countries. Therefore, Russia will remain dependent on the help of foreign investors. Under Putin, the business of Russia has completely become politics. International politics is all about power and influence, even if the Russian economy suffers as a result. In fact, while Putin's regime has weathered the economic storm that came about as a result of sanctions. Some of my company’s clients operating in Russia have also noticed increasing regulations over the past few years: they have experienced more unplanned inspections of facilities, abruptly altered labelling requirements, threats of regulatory changes from the regional and federal government, and heightened pressure to hire and manufacture locally. They have also reported receiving threats of fines and increased delays and payments while in customs at the Russian border.

2. Formal Trade Barriers

Russian authorities require product testing and certification as a key element of the product approval process for a variety of products, and only an entity registered and residing in Russia can apply for the necessary documentation for those product approvals. Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. For example, U.S. companies have observed that the procedures associated with Russia’s requirement to have a “supplier’s declaration of conformity” are unnecessarily burdensome. New regulations in the aviation sector could make it more difficult to sell U.S. products in this Russia. For example, Russia developed a global navigation positioning technology called Global Navigation Satellite System (GLONASS) as an alternative to the U.S. Global Positioning System (GPS) system.

3. Political and Legal Influences

Social Society Collective

Government Democracy

Economy Globally integrated market

Law Code/Civil

Corruption Index Score 29 out of 100 (2016)

Property Rights(IPRI) 4.6/ 91 out of 128 Globabally

Intellectual Property Rights Customer-focused and is strict with regard to manufacturers, sellers and retailers

Module 6—Selecting a Global Company Structure

1. Strategic Planning

Our goal at L’Oréal is to win the trust and confidence of men and women by offering the all citizens of Russia the best of cosmetic innovation in terms of quality, efficacy, and safety. In doing so we hope to meet the diversity of beauty needs and desires, as well as the need for diversity in the workplace as well. We intend to provide hair-care, skin-care, make-up, and perfumery products that will enhance well-being while supporting local communities.

2. Entry Modes

Many experts insist that any international business intending to enter the Russian Federation market must first solve the riddle of the Russian market. Through means of strategic planning, cultural and economic research, and careful consideration and analysis we will initially export, with hopes to have our own manufacturing plant in Moscow within the next 10 years. We will be being building our company’s service network immediately to gain strong competitive advantage, while attempting to rely on local suppliers as much as possible.

3. Organizational Structure

In keeping with traditional Russian business culture, we will have a centralized business strategy, opening a representative office to initiate strengthen agreements with retailers and other potential importers. In doing so, we can ensure that our mission, vision, and goals for not only the business, but also the employees will be achieved in the most effective way possible. To improve L’Oréal’s market visibility, we will offer exclusive cosmetic products and employ qualified agents/distributors in the market. Price continues to be the most competitive factor which could limit export opportunities.

4. Strategic Alliance

We intend on having a strategic alliance with three of the major cosmetic distributors in Russia; L’Etoile, Ile de Beaute, and Rive Gauche. By using these we will effectively extend our network to better serve consumers, and hopefully shift preferences towards luxury goods. Hyper/supermarkets, specialty cosmetic stores, and drug stores will be the target places for our goods to be introduced. Distribution channels for cosmetics are Internet shops, a small number of pharmacies and a few specialized beauty shop chains that focus on organic and natural cosmetics.

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Module 10—Managing International Financial and Business Risks

1. Economic and Financial Risks

The economic risk of low oil prices in Russia is compounded by risks arising from the country’s foreign policies and internal politics. The actions of Russia’s nationalist government in its ongoing conflict with Ukraine and the resulting economic sanctions imposed by the West are raising the odds of default. And yet, while markets are rightly fearful, Russia needs western capital and is willing to pay dearly for it. Consequently, the unstable value of the Ruble is a risk factor despite their actions.

2. Social and Cultural Risks

Market insiders have noticed that the shift to lower-priced beauty products is a forced necessity rather than a preferred choice for Russian consumers, who tend to be reluctant to shift to inexpensive brands. On the side of employment and diversity, human rights issues, and the issue of male domination in the workplace could potentially pose a risk, as in the United States we are equal opportunity and encourage diversity in the workplace.

3. Political and Legal Risks

Russia is notoriously corrupt, with a democracy still developing after years of political turmoil following the decimation of the Soviet Union. The continued aggression in Ukraine and Syria and interference in the 2016 U.S. elections have raised tensions with the United States and its allies. Targeted U.S. and European economic sanctions instituted in 2014 remain firmly in place and are not expected to be lifted for the foreseeable future. Restrictions on offshore, Arctic and shale oil and gas, the financial sector and the defense industry continue.

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Market value forecast for cosmetics in Russia from 2010 to 2016 (in billion Russian rubles)

Works Cited

· http://www.globalports.com/globalports/about-us/our-industry-overview/container-market/key-russian-gateways

· http://2016.export.gov/russia/doingbusinessinrussia/index.asp

· https://www.statista.com/topics/1008/cosmetics-industry/

· http://www.bplans.com/international_travel_agency_business_plan/executive_summary_fc.php?CMP=AFC-entrepreneur_com&affiliate=entrepreneur_com#ixzz0tmD3ig1d

· https://ces.hse.ru/data/2012/09/19/1244835979/Markevich_Mikhailova_final_edit.pdf

· https://www.alliedmarketresearch.com/cosmetics-market

· http://www.worldbusinessculture.com/country-profiles/russia/

· https://globaledge.msu.edu/countries/russia

· https://www.export.gov/article?id=Russia-Market-Challenges