Avon Case Study
Organizational Mission
Avon wants to provide everyone with high quality and innovative health and beauty products as well as financial opportunities through sales representatives that are easily obtainable, in many ways, in every part of the world. Avon hopes by bringing these products to everyone everywhere through global markets the company can improve the quality of life for anyone around the world. Corporate Objectives Corporate objectives bring structure to a company’s operations so it will sustain growth, achieve its mission/vision and set the outcome and target for the company to achieve.
Corporate objectives include financial and strategic objectives.
Financial Objectives
Growth in Sales
In 2001 the success of the Goodbye to Breast Cancer lipstick campaign, inventory clearance programs, and the increase of active representatives acquired through the successful implementation of the Sales Leadership program resulted in revenues growing 5% from $5,682 million in 2000 to $5,958 million in 2001. The growth in sales Nas due to the 9% increase in units because of the success of the programs Implemented that are mentioned above. Avon plans to increase sales annually by intuition to recruit Leadership Representatives around the world, utilizing the Internet to help these Representatives sell Avon products more efficiently, and extending the Avon brand to new products and possibly new channels.
Bigger profit margins
Lower sales in Latin America than expected and additional strategic spending on consumer marketing initiatives caused the slight decrease in profits for the 2001.
The drop may have been a lot worse if it was not offset by considerable margin Improvement form the business transformation initiatives. Despite the incredible achievements of the business transformation initiatives, Van’s operating margin went down 20 basis points last year from 16.1% to 15.9%. The benefits from the business transformation will hopefully become more noticeable in 2002 and will free up additional funds to invest in things such as consumer marketing strategies.
Avon has a goal to increase their operating margin by 250 basis points by the end of 2004.
Capital Expenditures
Van’s capital expenditures during 2001 were $155. Million compared with $193.5 million in 2000. Most of these expenditures were used for continued investments on ewe technological information systems, improvements and modernization on existing facilities, investment on improving Internet strategy, and equipment replacement projects.
In 2001 it cost $119.2 million to complete projects under construction and information system projects that took place during the year. Van’s capital expenditure goal is to average $225 annually and be spent on the same expenditures that they have been spent on in the past.
Bigger cash flows
Avon had a significant increase in net cash provided by operating activities in 2001. Net cash totals accumulated to$754.
Million at the end of 2001 compared to $323. 9 million in 2000. The increase is a result of money received from an income tax refund n 2001, higher net income, as well as higher working capital needs in 2000, including the payout of a long-term incentive plan, timing of cash payments, and a larger increase in inventories. Avon already has a very strong cash flow with a single credit rating and their goal is $700 million in net cash flows next year.
Growth in earnings
Earnings per share have been on the increase.
In 2000 earnings per share went up by 11% to $2.09. This double-digit growth is exactly what Avon was hoping for. Cause there was a drop in earnings per share during the 2001 year due to a restructuring charge $0.28 per share in order to put the business transformation Initiatives in play, which are designed to improve operations and streamline Van’s Normalized operations into practice.
This dropped Van’s stock price to $1.79 at the end of 2001 trading year. With the help of the business transformation in place Avon hopes to have a 10% increase in annual earnings per share in the next few years to come.
Inventory Days
Because Avon markets a number of products it is necessary for them to maintain a elatedly high inventory level. The nature of Van’s business, including the number of campaigns conducted annually and the large number of products marketed makes this necessary.
Van’s operations are seasonal with the holiday sales causing a peak in the fourth quarter, which results in a build-up of inventory at the end of the third quarter. Inventory levels are reduced by the end of the fourth quarter after the holiday season is over and sometimes a clearance or sale on items. It is Van’s objective to continue focus on inventory management and get inventory turnover down to 8-10 days.
Strategic Objectives
Superior customer service compared to rivals
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.
Van’s core competence has mainly been through direct selling, knowing this Jung and the management team Implemented a Sales Leadership program in its ten largest markets and provided these markets with 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, which enables them 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 sincere professional advice and service in department sales. Niter geographic coverage than rivals: Van’s management team decided to achieve growth in revenue by expanding its customer base into international markets, while continuing to compete based on their reputation as the leading direct seller of beauty products.
Avon brand products are now recognized all over the world due to the success of their international campaign. The company is in great position to take advantage on growth in new global markets because of the demand for quality products. Avon now has operations in 50 different countries outside of the United States, and continues to reach new markets. Avon has entered into 24 new markets since 1990, including Europe, Russia, China, Latin America, and the Pacific region. International net sales in dollars increased 4% and operating profit increased 7% in 2001.
The sales improvement was result of significant increases in Europe. Excluding the effect of foreign exchange, international sales increased 12% in 2001.
Quicker design-to-market times than rivals
In 2002 Avon invested $100 million to construct a state-of-the-art facility for the research and development operations in order to quicken design-to-market times. Ere ability to develop and release new products more quickly than rivals will give Avon the first mover advantage and further associate the name with quality and innovation and hopefully increase the company’s market share in the CUFF industry.
Product innovation will continue to be a key factor of sales growth in the future.
New product lines such as “Avon Wellness” and “Becoming” and the most recent “Anew” Nil attract new consumers, which will also help to increase revenue growth. More attractive product line than rivals: Van’s history as a beauty product distribution only enhances their credibility as a company and quality beauty product distributor. With Van’s ability in research and development they will be able to develop more new products and introduce them to he Avon product line more quickly than rivals.
New products with the symbol of Avon quality and state-of-the-art technology will only increase brand image and hopefully sales while acquiring a more loyal customer base by establishing and providing a more attractive product line. In Van’s vision they stated they wanted to enter into new business lines, a more attractive product line is the easiest and quickest and will be the first step in achieving that particular objective.
Improved e-commerce and Internet sales capabilities than rivals Van’s executives realized the company needed a more efficient method to monomaniac with its independent sales force, because current newsletters and brochures were not keeping up with the demands of the sales force.
Once Jung realized that the Internet was the best choice to transform the relationships between customers, representatives, and Van’s supply chain and marketing operations she decided to incorporate e-commerce into Van’s sales strategy.
The e-commerce sales strategy achieved early success in 2000, with increases of 30% on average when linked to Van’s website. The Internet brings instant global reach, with thousands of reduces and prices that can be updated constantly at anytime. Due to the fact that e-commerce is one of the fastest growing sales places Avon will increase the e-Representatives participation by 37% by 2004 and over $17 million will be spend for Representative support cost Savings. Once the e-commerce was implemented it cut order costs from $0.
90 to $0.30.
Stronger brand name than rivals: Again Van’s history is a big player here because it gives the company credibility and name recognition. Avon continues to strengthen its image of core beauty products and international brand product line. In the past few years the company has made several upgrades in imaging and formulations, packaging, and customer service and the accuracy and speed of order delivery have also been improved. Avon products provide a consistent, high-quality image in every market and include brands such as Anew, Skin-so-soft, Far Away, Rare Gold, Perceive, Avon Color, and Avon Skin Care.
Global brand have continued to grow and account for a substantial percentage of Van’s business, and in 1999 these brands accounted for 51% of the beauty sales core. Van’s development of quality global brands gave them a chance to deliver a insistent beauty image around the world, as well as improve relationships with suppliers and become familiar with the most efficient way to get foreign sales. Stronger global distribution and sales capabilities than rivals: Van’s ability to produce and distribute products in multiple countries enables them to have a significant amount of international sales.
Avon continues to drive their products into new markets and have always been looking for ways in which they can improve their distribution channels. With e-commerce and the implementation of the Sales Leadership program Avon has been able to deliver quality service along with heir high quality products.
These areas continue to be a focus for Avon in terms of sales capabilities and distribution in foreign markets relative to their rivals. Corporate-level Strategies Market Penetration: This is an attempt to find new ways to acquire more market share for the products that already exist.
By expanding aggressively into Eastern Europe, the Middle East, China, and Africa and by coming to the needs of women in Mexico, is one of Van’s biggest market penetration strategies. The Internet objective is another good example of Avon trying to market penetration because it is providing a new channel o sell existing products and gain more market share. Selling its products in retail stores is another good example of market penetration and also the new television commercials make more of the market aware of Avon products.
Market Development
There are two ways Avon uses this approach, when the company wants to develop new markets through existing customers or through geographic regions. Avon has been able to develop new customers by adding new innovative products for teens as Nell as anti-aging and preventative aging cosmetics for the older portion of the market. Developing different products for different complexions and skin tones enervate new markets as well. Van’s strategy to expand globally also helps with mew market development as Avon products reach people it has never encountered before. Avon also had launched an unbecoming campaign aimed at a more affluent group of women with its retail efforts as an attempt to develop a new market through existing customers.
Horizontal Diversification
Avon used this approach when introduced the Anew Retroactive and the Volta Tonics bath products.
The company also developed a couple of new fragrances, Incandescence and Little Black Dress. When Avon introduces new products such as he ones mentioned it helps the company to gain market share.
Product Diversification
iris strategy includes all efforts made by Avon to compete for new customers and it is often teamed up with certain advertising and market operations to make sure the target market group is aware to the new products. This would include Van’s new products for different skin types and tones as well as the teen and preventative aging products. New colors of foundations and new additives for different complexions as Nell as self tanners, face bronzes, face washing cloths, vitamins and aroma therapy tat oils and lotions are all new products that may be used in attempt to find some new customers.
All of the marketing projects launched in the past four to five years such as the new “Avon” product line are ways in which Avon has tried to gain sales through new product diversification. Horizontal Integration: Avon was utilizing this strategy when it merged with Paramus Stern, Tiffany & Company, Giorgio Beverly Hills and with its most recent alliance formation with Matter. Merging with or acquiring competitors in the same industry has many benefits such as increased technology, more market share, and expertise in unknown areas of the industry. The alliance with Matter is a blending of Van’s sales expertise Ninth Mantel’s high quality products resulting in reduced costs.
Easiness Level Strategy Ere term business concerns to the managerial approaches for a single business to incorporate and out perform its competitors.
The corporate strategy Van’s management team chose to implement is the focus-differentiation strategy. Avon has focused on high quality beauty products as well as superior customer service in the global markets and although it has a wide variety of products they all hold the Avon name keeping it associated with high quality. Avon customers tend to have more disposable income than the average making it possible for them to purchase the higher priced Avon products.
External Analysis
Opportunities
Expand product line: Sales concerning men fragrances increased by 18% from 1996 to 2002. According to the Beresford market research concerning the market for men cosmetic products, this market grew on average by 7% within the last six years. Avon stated in its mission that it is focused on products for women globally and they may want to think about entering the market for men as well.
For example the market for shaving reduces would not only create new customer but also offers Avon a chance to improve their corporate strategy of product diversification. Avon could also look into baby products since they already have a large market for all types of women why not make it convenient for mothers to purchase skin products for their babies at the same time they purchase cosmetics for themselves.
Avon definitely has the ability to expand their product line it is Just a matter to capitalizing on that opportunity Retail chain stores: In order for Avon to reach more customers the company should implement a way of Argentina its customer by using more retail stores such as J Penny that still follow the direct selling approach, but offer the consumer the opportunity to purchase the products of Avon conveniently at a shopping mall. Additionally this could be combined with the sales leadership approach to increase sale and to offer the sales representatives a new way of selling.
By offering incentives to sales representatives Avon would probably see a bigger profit from such retail chains. US department-store sales: Department store sales of cosmetics totaled $7.
1 billion in 2001. The entire CUFF industry sales increased 2% from the 2001 level. Avon should try to make some beneficial alliances with some department stores that could result in a high increase in sales and reach people it may have never been available to before.
If Avon could put their highest quality products in department stores such as Nordstrom, Nine Marcus, Lord and Taylor and Bloodiness’s they could appeal the upper as well as the upper middle classes of America and Europe. Avon can expand to these department stores with their highly regarded global brands re-establishing their Innovative and quality image as a company.
International Markets: Ere most difficult thing to figure out when entering international markets is to realize Nat countries will best fit the companies’ products.
If Avon can venture into new international markets and can continue to keep strong sales increases then they are huge success. Avon can reach this goal without competing vigorously because it has already established high quality global brands and has been able to begin entry to a number of different countries. As long as Avon recognizes the particular demand for each market they will be able to profit from each different international market. Van’s new alliance with Matter enables Avon to penetrate foreign markets with speed and cost benefits, again making this goal even easier for Avon to achieve.
Technology
Avon spends millions of dollars on research and development every year.
This helps Avon keep its products new, innovative and up to date with other rivals and competition. Technology continues to be new and emerging and Avon has done well in keeping up with the latest trends in their particular industry as well as develops its own state-of-the-art products giving the company a more prestigious name in the cosmetic industry.
Customer satisfaction
Avon has been able to keep a strong customer base for decades. This has been achievable through their superior product quality and customer service. Avon has kept a focus on what the customers want and have continued to deliver it to them throughout the life of the company. Van’s business transformation initiatives were due to complaints by which Avon acted on and began packaging all products in a new modern look as well as distribution them more efficiently in effort to keep customer satisfaction high.
Avon was ranked number four in “Most Admired Soap and Cosmetic Industry of 2002”, in Fortune magazine and has been in the top four for he past three years, Avon achieved this ranking not only because of their quick turnaround but because of their commitment to their customers. Threats: Foreign economic and currency issues: Every company will want to research countries thoroughly before entering their markets. Countries that possess corrupt politics and unstable economies will probably not be worth the risk of entering. A lot of South American countries struggle Ninth this problem. A good example of this threat is when Argentina’s peso was devastated in 2001 due to adverse reaction in the geographic region and the country’s unstable economic situation.
Rivals and competition
Ere cosmetic industry is very large with numerous competitors.
There is always a threat of losing sales to similar products. Every company in the industry fight for high market shares and are always trying to come out with new innovative products that Nil in turn result in name recognition and increased sales.
Avon has to be aware of the CUFF industry in terms of what products are popular, what their competition is developing and their marketing schemes. Falling behind on trends and awareness of competition will only cause Avon to fade away and lose customers, sales, and money. High operating costs: In order for Avon to stay competitive in its industry it must continue spend millions on research and development and although the products that result from this research and development and spent money benefit the company it continues to be huge cost.
It is almost impossible for the company to cut costs in research and development so Avon must attempt to find other areas in which costs can be reduced or eliminated and although Avon has been able to find ways to do such things in the past they are beginning to run out of places to cut cost. High operating costs can cut inconsiderably into profits and can eliminate equity in the company and drive down stock prices. Recession/ national economy: Every industry is affected by the general state of the economy.
No industry can feel zero effects due to turns in the cycle of the economy because so many aspects are interrelated. During periods of a recession Avon will feel the impact not only in sales but also with suppliers, employees and will also notice their competition experiencing the same difficulties. The economy in general may be seen as a threat to every industry in periods of economic downturn and recession.
Changing tastes and trends: lust like every other industry the tastes of consumers change. Trends in cosmetics change constantly with seasons and fashion trends.
Avon must constantly be aware of new trends in fashion and be able to forecast what the new season may bring in terms of colors, and what new products may be introduced. For example Avon could run specials on their “Skin-so-soft” insect repellent in April along with introducing new, improved, or Just redesigned sun screens, self tanners, and extra moisturizing lotions and creams for the upcoming summer season as well as have new remission and advertising introducing their latest colors for the upcoming season.
Competitive Analysis Rivalry within the industry
STRONG Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability: Milliner and Procter ; Gamble dominate the world market in the CUFF industry sales and they are highly competitive and mature corporations. Huge corporations who dominate the market make it more difficult for smaller companies in the same industry to gain market share and they are also able to mass produce at lower costs which in turn allows them to offer lower rises compared to competitors.
Rivalry is usually stronger when demand for the product is growing slowly: At the current time growth rates are low in the domestic population and household formations, because of this it will be harder for CUFF companies to acquire substantial sales gains. The slower a demand for the product is growing the more companies have to compete with another for sales and market share. Rivalry is stronger when customer’s costs to switch brands are low: Switching costs in the CUFF industry are very low, due to the endless amount of different brands of similar products. This cost is due to the higher number of competitors in the CUFF industry and their tendency to mimic and copy new products in order to stay competitive. This minimizes the cost of switching to customers down to pennies.
New Entrants
Warises of entry:
Economies of scale: This particular barrier is weak for new small companies wanting to enter the CUFF industry because they would not have to enter on a scale larger than the amount of risk they can reasonably accept. New competitors will not be able to keep up with others in the industry in areas such as advertising, marketing and striation, financing, research and development.
Cost and resource disadvantages independent of size: Existing firms in the CUFF industry such as Avon will have a lot of resource and cost advantages over any potential entrant. Van’s advantages would include product innovation acquired by the big investment in the research and development division, a grade A credit history along with a strong cash flow, the high quality associated with Avon brand products, and the leverage created by larger market share will allow Avon to have lower borrowing rates.
Avon has lots of experience with suppliers and know who has the est. quality for the best price, something the competition may only acquire through research and experience.
Learning and experience curve effects: New firms entering the CUFF industry are way behind according to this barrier also. 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. Rand preferences and customer loyalty: This barrier would be another problem for new entrants because having a quality brand with a strong customer base and loyalty is always a crucial competitive advantage. Company’s such as Avon that have a strong brand name will automatically receive higher market share and create opportunities for additional growth along with the ability to fluctuate prices on their products.
A new entrant with no loyalty from consumers or name recognition will find it hard to compete with Avon as well as other big players in the CUFF industry. Capital Requirements: Entering the CUFF industry may cost a pretty penny for new entry firms.
Finding suppliers, research and development for products, finding a sales force and a marketing scheme to establish clientele all can add up to a significant amount of money. These costs are even excluding start up costs and losses that may be incurred.
Access to distribution channels
New entry firms may see several problems here unless they have already dumped a substantial amount of money into marketing and are beginning to be recognized in the industry. Wholesalers may be reluctant to pick up a product with no buyer recognition. Retail distribution may have to be set up from scratch, or existing retailers may need convincing to give away shelf space to the new entry and allow it an ample amount of time to sell.
