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Avon - Case Analysis

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Category: Business

Autor: anton 02 November 2010

Words: 2272 | Pages: 10

Avon

As of November 1999, Avon was experiencing economic troubles. Avon’s growth rate of annual sales was less than 1.5 percent during the greatest economic boom in history. This prompted a transfer in leadership which appointed Andrea Jung as CEO. Since that time, Avon has experienced remarkable growth.

Under the direction of the new CEO, a new strategy was developed to reinvent Avon’s image, improve customer satisfaction, and to increase profit margins and market share. Avon has gained an outstanding reputation as the best direct seller of beauty products. Through the continued efforts and achievements of its sales representatives, Avon is now known worldwide. Avon’s core competence has mainly been its direct selling busniess model. This led Jung and the management team to implement a Sales Leadership program that provided incentives to acquire, train, motivate, and retain the number of active sales representatives it needs to sustain significant growth. Avon also has a representative development program that focuses on the professional training of representatives. This enables the representatives to provide valuable information on Avon brand products. Avon also keeps its superior customer service in other ways of distribution such as the Internet and in the department store sales by having a timely and correct order delivery, one on one information exchange and personalized professional advice.

Forces of Competition

Rivalry among competing sellers in the CFT industry is strong. The creation of innovative products is crucial to success. This industry focuses on continually developing cutting edge products using the latest science and technology. Rivalry is stronger when customer’s costs to switch brands are low. Switching costs in the CFT industry are very low, due to the large amount of different brands of similar products. This cost is due to the higher number of competitors in the CFT industry and their tendency to copy new products in order to stay competitive.

Another Avon objective that aims to alleviate pressures coming from competing sellers includes consists of reinventing their antiquated image. The organization had been a major player in the CFT industry for decades. However, Avon’s management took a reactive approach and failed to evolve with the changing times. Because the CFT industry centers on mage conscious consumers, Jung determined this to be a fatal mistake. The major segment of the CFT market is comprised of women/girls less than 30 years of age. Realizing this, Jung endorsed the Williams sisters. Venus and Serena Williams were popular teen icons that portrayed the image Jung hoped to achieve for Avon; young, powerful, and ambitious.

Avon is highly backward integrated, self-manufacturing many of the items that they sell. This causes the competitive pressures of suppliers to be weak. Avon can get supplies from many parts of the world because they have entered foreign markets and produce products in different countries. A lot of Avon’s supplies such as packaging, may be easily substituted if a supplier raised prices.

Competitive pressures stemming from customer buying power is moderate because switching costs are low and customers have the ability to fulfill their needs by switching brands. Buyers tend to be well informed about Avon’s product prices and costs largely due to the Internet and this puts customers at a position of higher bargaining power. Customers do not pose a threat of integrating backwards, because it would not be easy for women to develop their own make-up, perfume or skin care products. Due to the dirct selling business model, there is an extremely large number of buyers. Losing one will not significantly impact the company’s market share or financial position.

While there is strong competition in the CFT industry, there is a weak threat of new entrants and an even lesser threat of substitute products. The market is comprised of major players who have the ability to invest millions in marketing and R&D. This makes keeping up with innovative products extremely difficult. These organizations also have established relationships with retailers and suppliers and hold a certain amount of leverage within the industry. New company products are viewed as fads and are short lived. Small companies cannot compete in store with the bigger companies for shelf space. To sell products in department stores or specialty store, the product must have a favorable quality image. New firms will have trouble entring the CFT industry due to the high learning curve. Avon would be able to produce products in the same product line for a lot less due to their acquired expertise and experience they have gained by being in the business for over a century. New entrants will have a hard time competing with the prices, advertising, loyalty of customers, and the years of experience that firms like Avon have acquired over the years. Incumbent firms may not pay much attention to a new entry until it survives for a period of time or if they launch an innovative product that needs to be copied under the larger name. As for substitute products, women might switch to different brands of cosmetics but it is doubtful that a replacement short of surgery will substitute cosmetics from a different industry. The only substitute products are similar products from another company within the CFT industry. Because there are no true substitute products from a different industry the threat of substitutes is very weak.

Driving Forces

In order to analyze how the CFT industry is changing and how competition might change over the next 3-5 years it is important to discuss the driving forces relevant in this case. The most important driving force in the CFT industry is the growing use of the internet and emerging new internet technology applications. For example, “Avon improved its web site under Perrin by making it easier for customers to purchase products online and began testing a Web-based ordering system for the company’s sales representatives in Japan.” Most if not all major competitors have also been focusing on the internet as a distribution channel; an example is Estee Luader marketing its products through www.Gloss.com.

Product innovation is also a major driving force in the CFT industry. Avon, as well as its competitors, has been focusing on product innovation to increase their market share. For example, Cover Girl and Max Factor both offered highly popular Outlast and Lipfinity products that contained Permatone, a semipermanent lip color that kept lipstick in place for up to eight hours. New hair care products also benefited from innovations. Products that touted aromatherapy, herbal ingredients, or other natural aspects; products that protected colored or highlighted hair; and products developed to enhance volume and body.

Growing buyer preferences for differentiated products instead of standardized commodity products is also a driving factor within the CFT industry. African American and other consumers with dark complexions had skin care and cosmetics needs that differed substantially from those women of European nationality or descent. Research has proven that anti-aging products that were being marketed were of less importance to women with darker complexions since the higher melanin and oil content found in dark-colored skin naturally discouraged wrinkles. In addition, Asian women demanded different products that would meet their needs, mainly maintaining natural or pale skin tones.

Key Success Factors

The CFT industry has several key success factors, the most important being brand image. The CFT market is saturated with products; therefore if a company’s image is not strong it will not be able to hold on to its customers who will immediately look into substitute producers.

Another key success factor in the CFT industry is cost. The producer has to analyze its position in the market and price its products appropriately. A company such as LVMH can price its products high and market them through limited channels at a high price and achieve excellent sales. Procter and Gamble on the other hand distributes its products through discount stores, supermarkets and drug stores. Clientele of these stores generally don’t buy makeup for example at Neimann Markus, therefore P & G prices its products appropriately.

Without product innovation capabilities, a CFT company will surely lose market share. For example skin care products are constantly being improved and new substances are discovered to have effects on the skin. Large CFT companies not only capitalize on this information, many times they are the ones who make these discoveries by funding extensive research projects.

Global market coverage and sufficient financial resources are essential to supporting extensive advertising. Sufficient financial resources are necessary to take on any sort of expansion, whether it is local, national or international.

The distribution network is another important success factor. An appropriate distribution network is necessary to get the product to the final consumer efficiently and effectively. Some companies may need an extensive distribution network while others may be successful with a limited distribution network. Companies that market highly differentiated products tend to be very successful with these limited distribution networks.

Financial Performance

Since Andrea Jung was promoted to CEO in 1999, Avon’s operating profits have increased in North America and in most international markets (exhibit 1). The European market has been one of the most successful. Sales between 1996 and 2002 have grown by 55% annually.

Susan Kropf reconfigured the value chain thereby cutting costs of non-value adding areas. In 2003 $225 million was saved and in 2004, $400 million was saved. This business process redesign enabled Andrea Jung to increase spending for R&D by more than 50% and advertising by more than 50%. The new business process management also improved efficiency in ordering from an order fill rate of 68% in 2000 to an order fill rate of 90% in 2004.

Overall since Andrea Jung has taken over as CEO of Avon, sales have increased over 10% annually, order efficiency has increased, and the sales force of Avon Representatives has increased 2-3% with a growth in earnings of 25-30%.

Competitive Strategy

Andrea Jung’s vision of what she wanted to accomplish as CEO of Avon included a strategy to; improve brand image, introduce new products, increase use of the internet as a channel of distribution, provide greater incentives and opportunities for the sales force, reduce unnecessary costs in the value chain, and continue to expand into global markets.

Between 2000 and 2002 Avon’s brand image index increased by 25 points. (Exhibit 2) That is considerably more than L’Oreal, the industry leader or Mary Kay, a company with a similar business model. This increase is partially attributed to Andrea Jung’s “Let’s Talk” advertising campaign where she signed tennis stars Serena and Venus Williams to endorse Avon products and also by updating the catalog format and product package design.

Product innovation was a large part of Jung’s strategy for Avon. In fact, in 1999 she challenged Avon’s R&D team to develop a new product within two years. In less than one year Avon introduced Anew Retroactive, an anti-aging skin cream. It achieved record sales for Avon and led to the development of other successful lines of business. For example, Avon Wellness products exceeded sales estimates by 300%. The new improved product development process has reduced breakthrough innovation frequency from every three years in 2000 to every two years in 2004 and average product development time from 88 weeks in 2000 to 50 weeks in 2004.

With the growing popularity of the internet as an outlet of commerce, Jung was compelled to implement internet sales into her strategy. Realizing that the “Avon Lady” is the distinctive core competency for Avon, Jung incorporated the use of Avon representatives at Avon.com. Within the first 9 months, almost 12,000 of Avon’s 500,000 sales representatives paid $15 per month to be eRepresentitives. ERepresentatives receive 20-25% commission on internet orders sent directly to the customer and 30-50% on internet orders the representative personally delivers.

Global expansion was a key component to Jung’s strategy. In China the number of Avon outlets grew from 3,463 in 2000 to 6000 in 2004. Furthermore, global brands represented 11% of Avon’s sales in 1993 and 70% in 2000. In Central and Eastern Europe alone, Avon sales grew 55% between 1996 and 2000.

Avon’s market position is unique. The company’s market research shows that their primary customers are working-class and middle-class. Therefore, according to this information and analysis using a strategic group map (exhibit 3), it is apparent that Avon is strongly positioned in their market.

Recommendations

Based on demographic data, China holds 20% of the world’s population. This represents a vast market of which Avon has only begun to cover. Avon should continue to focus on the expansion of retail outlet sales in China. Also, because the only sales in China are generated through retail outlets, Avon should further develop their Beauty Advisors training.

Europe should also be a continued focus for Avon. Industry leader, L’Oreal’s attributes 50% of their total sales to the European market. Avon has had a successful growth rate in Europe but only 23% of the total 2003 sales came from Europe. There is still room to expand in this market.

Based on one of the industry’s key success factors, product innovation, Avon should focus even more resources on R&D especially in the areas of anti-aging products and teen products. Because 23 million teenagers have an average weekly disposable income of $85, Avon should continue with innovative teen marketing such as the current “mark” brand but also work on products for problem teen skin.

Being ahead of the industry in introducing new products combined with the company’s already strong market position could further improve Avon’s brand equity and therefore revenues. In particular, Avon should continue to integrate sales representative into all aspects of sales. This is Avon’s own key success factor and what sets them apart from their competitors.

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