Corporate Strategy - The Body Shop.
Corporate Strategy
BUSM1537 Case Study Paper - The Body Shop
Ford/RMIT Consortium - September 2003
Kendrick Pavey s2102848E
Vijay Jeganathan s2102867A
Andrew Czompo s9401299D
Andrew Lord s2102852J
Lecturer - Tim O'Shannassy
Abstract
The Body Shop (TBS) is an interesting and innovative international organisation. Their focus on core beliefs, press/advertising, management, supplier networks, training and treatment of staff are perhaps best practice. In this paper we will review the external environment, the financials of the business, conduct SWOT analysis and analyse its competitive stance from the Porter Five Forces Model. Our recommendations focus on retaining their core competencies and values, minimising financial risks, and opening up new opportunities in the future. These include mail order as well as the growing male market, and developing a CEO succession plan.
Introduction
The question for many businesses is whether they can operate successfully internationally and maintain integrity in a world of seemingly empty advertising claims. TBS has taken this challenge head-on. By selling only environmentally friendly recyclable or biodegradable products in minimalist packaging, they are practicing what they preach in a clearly identifiable way. Furthermore the way they develop new products by developing operations in third world countries (profits with principles) shows a commitment beyond most others who buy abroad solely for cost reasons. The article implies that they operate a best practice. Analysis will indicate whether this is the case and where any further opportunities lie.
The External Environment
The Hair-care market is fragmented - in 1988 the total size of the UK market was £139M with the top five companies sharing 44%, the others 56%. The Shampoo market was similar - 10-11 brands competed for half the market and 80-90 competed for the other half, with conditioner use growing. These products are highly advertised major brands in magazines and TV, leading to blurring of product lines to create 'new products' - e.g. conditioning shampoo.
The market is segmented by price, target market age, function (health and hygiene, beauty products). Growth is mainly in upmarket product ranges - mainly from women, with men on the rise. Supermarkets also have their own skincare ranges (30% of market) - hair-care is being seen as a 'grocery item' and is sold in family pack sizes. There is also growth in anti-ageing products - minimising affects of wind, sun and polluted air.
In 1986 the soap market peaked and was thought to be declining with bath oil/foam overtaking soap in 1987. Fruity soaps introduced by the Body Shop were imitated and pure fragrance-free brands like Simple and Pears and liquid soap were introduced. The latter had about 5% of the market then.
The Body Shop is one of the few in colour cosmetics. Yves Rocher is main competitor to TBS which has a mail order focus and 1200 Beauty Centres worldwide.
Financial Analysis
Our financial summary (refer Appendix 1) is that there is generally good growth, however there are operational issues associated with the US market that require analysis and resolution.
SWOT Analysis
Introduction
SWOT identifies the risks/opportunities of the position TBS is currently in - refer Appendix 2 for the tabular summary:
Strengths
TBS overall has made good rising profits year over year, despite market forces. Its profitability comes from its leadership, the franchise system (lower cost of expansion for the company), rapid growth for the market for "green" products and the ability for competitors to enter a fragmented market with little direct competition.
TBS's main competitive edge is its people and the way they are selected, trained and empowered to promote their products enthusiastically.
TBS does not advertise. Rather, they depend on "quality of product".
Weaknesses
The Body Shop is a small player in a fragmented market. Their products are easily imitated (although the natural ingredients make it logistically difficult) - in fact most of ideas were copied from existing products and processes elsewhere in the world.
The Managing Director in her bid to promote the company made enemies of prominent organisations that will not assist developing cooperative networks.
In its efforts to enter the mainstream colour cosmetics sector of the market, has the company compromised its ideological stance? How will its loyal consumers regard this act will only unfold in the future. In some ways the Body Shop is trapped in its philosophical ideologies. The other markets sectors are only available by modifying their philosophy. Market wise the client base may age over time and the younger generation may not feel the same affinity towards all that the Body Shop stands for. A good example of this is Laura Ashley who failed to attract younger buyers to her clothes range and hence moved into home wares.
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Staking an almost holy claim on their environmental issues is fraught with danger should they falter - allegations in 1989 regarding claims of 'Not tested on animals' proved difficult but ultimately successful to defend (HREF3) - and they did suffer share price ramifications during this time.
A succession plan is required for Anita Roddick who is the face of the company. That successor will require similar skills and ideology mindset.
Opportunities
There are several opportunities to consider (refer Recommendations for discussion):
) The growing younger market is health conscious and therefore demands products with this attribute. TBS's strategy is sound and should be continued.
2) Further expansion into the "colour products" is another areas that need to be considered, eg nails.
3) Development of TBS owned raw material facilities both locally and internationally.
4) Analysis, development and ...
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A succession plan is required for Anita Roddick who is the face of the company. That successor will require similar skills and ideology mindset.
Opportunities
There are several opportunities to consider (refer Recommendations for discussion):
) The growing younger market is health conscious and therefore demands products with this attribute. TBS's strategy is sound and should be continued.
2) Further expansion into the "colour products" is another areas that need to be considered, eg nails.
3) Development of TBS owned raw material facilities both locally and internationally.
4) Analysis, development and enhancement of the US market.
5) Strategies to tap into the emerging male cosmetic markets.
6) The development of it's own stand in supermarkets where 30% of products are sold.
7) Mail order sales (case study is not clear whether this exists currently).
Threats
The major immediate threat to the company is its rival Yves Rocher. They produce and market similar products and have over 1200 stores.
The recession is an external threat to TBS although it has performed above average so far despite it.
The company's momentum is centred on the current leadership and the loss of Anita would be devastating.
In summary their business is in a fairly strong position.
Porter Five Forces Model
Appendix 3 includes a summary table of the Porter model, which shows the competing forces of the beauty/cosmetics industry structure. Overall the areas are all moderate to high, however TBS has managed to ameliorate the major contingencies in each area to their advantage.
Threat of New Entrants - Low-moderate: TBS has key alliances with its suppliers, which make it hard to duplicate cost effectively, easily or quickly.
Intensity of Rivalry - High: However TBS's high brand identity, strong knowledge transfer to customers and low fixed cost and switching costs structure assist their triple bottom line.
Bargaining Power of Buyers - Moderate-High: Yet TBS enjoys high customer loyalty driven by value for money, product information, strong brand, and identifiable product differences vs. competitors.
Threat of Substitutes - High: Although customers are prevalent to substitute alternatives, TBS's strategies of as listed above diminish this likelihood significantly.
Bargaining Power of Suppliers - High: TBS's has lowered the bargaining power of suppliers by developing alliances with natural goods suppliers, benefiting the community as well as obtaining the necessary inputs required for their products.
In summary, their strategies have been well crafted to execute their business in a highly competitive field.
Key Success Factors (KSF)
Consideration of KSFs as appropriate to the Hair-care and Beauty markets are as follows:
* Strong recognizable brand required
* Products must work as advertised
* Natural ingredients increasingly highly marketable
* Items easily available to purchase
* A Product line from fingertips to fingernails
* Friendly and informative customer service
* Good press
* Reliable supply of necessary goods
* Value for money products
TBS has most of these attributes, except perhaps somewhat limited distribution compared to products in department stores. Also TBS does not stock nail polish. This may be a deliberate strategic choice as they claim they are not in the beauty market or an issue of availability of natural product alternatives.
Recommendations
Recommendations are as follows:
) Continue their current philosophy of product identification, natural ingredients, staff education, customer service and recycling -The growing younger market is health conscious and environmentally aware and therefore demands products with this attribute. Therefore TBS's strategy is sound and should be continued.
2) Further expand into the "colour products", eg nails - However this is contingent only if it can be done in situ with their core philosophies - marketing to diversity of style rather than beauty.
3) Development of TBS owned raw material facilities both locally and internationally - The question is whether their current resources are sustainable. Investing to ensure supply and management of their own fundamental core goods would assist consistency of supply. However, there are significant fixed cost implications. Also being tied to certain raw materials might stifle creativity/adaptability as new formulations and ingredients are discovered. The long-term business case needs further investigation. In the short term they should continue with their 'profit with principles' philosophy.
4) Review of the US market opportunity - A complete review of the US market and the conditions that have led to the £2M loss is required. Potentially the cultural differences of the US market - high TV watching, mass-market advertising, and svelte packaging are expected norms. Reliance of word-of-mouth is less likely given a more conservative market overall. Perhaps TBS could leverage their community projects to have a higher profile in the press. Additionally, snappier packaging (using an industrial designer) with biodegradable/recyclable materials may attract more interest on the shelf. Cost/benefit analysis of these actions need further review.
5)
Strategies to tap into the emerging male cosmetic markets - Key alliances with surfing/outdoor lifestyle shops may be a first step. These could offer 'after activity' natural aftershaves/crèmes/shampoos to suit the growing male market with a masculine emphasis. Additionally a larger male product selection in TBS stores could follow if successful.
6) The development of it's own stand in supermarkets where 30% of products are sold. However customer service won't model the TBS stores and there may be some resistance given supermarkets have their own product range. Further, customers buying groceries generally are focused on minimising time in this task. For all these reasons this opportunity is not recommended.
7) Development of a mail-order catalogue - given Yves Rocher's success, mail order would appear to be a viable business venture. However it does diminish the hands-on demonstration and some aspects of the customer liaison benefits tied to TBS. Progress with care - may require on-line customer assistance via web cam to work optimally.
8) Develop a leadership succession plan - BTS needs to develop and train suitable candidates to take over Anita's lead at some point in the future. They need to have her ideology, mindset and press savvy.
Conclusions
The Body Shop is a formidable business that has put itself up to be counted against related industries that are less ethical and environmentally responsible. Fundamentally its position has gathered a momentum and empathy from customers who are looking for high quality, value for money goods that are ecologically sustainable. Staying true to this course, with a review of loss making markets and new opportunities in the male cosmetic markets and other fields should ensure their continued profitable performance.
References
HREF 1 - http://www.thebodyshop.com.au - accessed Sept 3, 2003 - The Body Shop Australian Website
HREF 2 - http://www.thebodyshop.com - accessed Sept 3, 2003 - The Body Shop USA Website
HREF 3 - http://www.coursework.info/i/330.html - accessed Sept 5, 2003 - The Body Shop and the Successes and Failures of their strategy
Meyer, R. de Wit, B. (2002) Strategy Process, Content, Context, 2nd Edition, Thomson Learning, London, UK.
Appendix 1 - Financial Analysis
The following financials provide a snapshot of TBS's performance through 1986-1990:
Fig 1 - Turnover vs. Year of Operation - The Body Shop
Fig 1 indicates only around one third of TBS's turnover comes from out of their home country and has had a reasonably steady growth (note 1989.5 was 17 months from Feb 28-Sept) through this period.
Fig 2 - Group Turnover, not including UK and Eire
Fig 2 indicates that outside of home, most markets have grown similarly in percentage from 1989-1990, however the USA market grew ~650% in the same period. There is no clear evidence in the case study to suggest why this is.
Appendix 1 continued...
Fig 3 - Group Profitability, not including UK and Eire
The outstanding feature in Fig 3 when contrasted with Fig 2 is that the USA market has failed to make a profit, even despite the massive increase in turnover in 1990. We speculate that the downturn in the US economy through this time drove the acquisition of liquidated franchises that lost money initially.
Appendix 2 - Strengths, Weaknesses, Opportunities and Threats Analysis (SWOT)
SWOT Analysis
Strengths
High profits
Profit with principle philosophy
Differentiated products
Use of local ingredients where possible
Environmentally conscious consumer and its underlining philosophy
"It arouses enthusiasm, commitment and loyalty more often found in a political movement than a corporation." " Like the flower power in the 1960s"
Franchise system of expansion
Strong press coverage
Charismatic leader
Growing product range
'Against animal testing'
Refilling of bottles and the philosophy of recycling
Selection of managers with the right attitude and values
Cross-cultural international company not an English company
Franchisees have to stock 85% Body Shop products
Low cost start up through the franchise system
Important ingredients are blended in UK
Other ingredients are approved in UK before manufacture (Quality control)
"Trade not Aid" for third world countries
"Our idea of success is the number of people we have employed, how we have educated them and raised their human consciousness, and whether we have enthused them with a breathless enthusiasm"
Vegetable not animal ingredients
Customers pay for product not packaging
The product are formulated with respect for other cultures, the past, the natural world and customer
Private profit for public good - help in the third world
The whole process is seen as self-perpetuating. You put back something for taking something
"Body Shop Education is a process of learning to be a global citizen. And it produces a sense of passion you won't find in a department store"
Information on all the products - how it is made? Where does it come from? What ingredients are used?
The amount of information it contains is a competitive advantage and a perceived barrier for Body Shop. It creates obstacles for would-be copycats.
They believe in what they do.
The venture into the "beauty products" and colour cosmetics
Strong input into manufacturing and semi processing of its products (25% Local)
Rapid growth over a short period
Weaknesses
Not one of the largest retailers
Picking up new ideas for the product range from rural communities
Quality control is performed in UK
Involvement with other environmental movements
Franchisees in an area are required to take on a community project of their choice.
Does not call its products beauty product, limiting its market somewhat
Does not advertise its products - "Product advertising is unnecessary when a company has build up strong and continuing public image"
The venture into the "beauty products" and colour cosmetics. Is it against its philosophy?
The market for personal care products is fragmented and there are many small players holding segments of the markets. Each product is attracted by its own market sector.
Which sector does the Body Shop occupy? Can it move into the other areas?
Companies are constantly changing to match their products to changing fashion
Group trading loss in the US
Stance against Cosmetic Toiletry and Perfume Association - not many allies.
Cost of reinforcing/defending its principles can be high in resources (time, resource and money)
Opportunities
Opportunities in "beauty products"
Have a shelf in Supermarkets and Chemist. (30% of sales are in supermarkets)
Develop succession plan to Managing Director
Develop alternative raw material facilities like the Jojoba plant farm
Tap the growth in cosmetic products for the male cosmetic market
Tap the growth the Health Conscious younger market sector
Mail order
Threats
Recession in the retail sector
Product easy to duplicate
Survival in a dynamic industry
Many players each occupying their own area and looking at other company's market share
Supermarkets have their own range of products
From other "green" Companies like Yves Rocher who have not entered into the colour cosmetic market
Soap overtaken by Bath oils and foam
Appendix 3 - Porter's Five Forces Model
Force Categories
Force level
. Threat of New Entrants
Low to Moderate
- Switching costs
Moderate
- Capital Requirements
Moderate
- Distribution
High - KSF
- Cost advantages - Access to natural ingredients
High - KSF
2. Rivalry Determinants
Moderate to High
- Industry Growth
Moderate
- Fixed costs
Low to Moderate
- Switching costs
Low to Moderate
- Concentration & Balance
High
- Brand Identity
High - KSF
- Informational complexity
High - KSF
- Diversity of competitors
High
- Exit Barriers
Low
3. Bargaining Power of Buyers
Moderate to High
Bargaining Leverage
- Buyer concentration vs. firm concentration
High
- Buyer Volume
High
- Buyer switching costs relative to firm
High
- Buyer information
Moderate
- Substitute products
High
- Pull through
Moderate
Price Sensitivity
- Price/total purchases
Low
- Product differences
Moderate
- Brand identity
High - KSF
- Impact on quality/performance
Moderate
- Buyer profits
Moderate to High
- Decision maker' incentives
High
4. Threat of substitutes
High
- Price/performance
Moderate to High
- Switching Costs - threat as a result of changing brands
High
- Buyer propensity to substitute
High
5. Bargaining Power of Suppliers
High
- Differentiation of inputs
High
- Switching costs of suppliers and firms in the industry
Moderate
- Supplier concentration
High
Table 1. Porter Five Forces Model
Appendix 3 continued...
Discussion
The first of the five forces to discuss is that of the Threat of New Entrants in the cosmetics industry. Overall, the threat of new entrants on TBS rates as low-moderate in terms of the difficulty for others to enter as competition to TBS (there is otherwise a high risk of entrants generally). The switching costs for a company to pose a threat on TBS are considered moderate in order to establish the natural ingredient supply chains and distribution networks, although they may already have the necessary plant and processing available. TBS has key alliances with its suppliers, which make it hard to duplicate them cost effectively, easily or quickly. Specifically it is not difficult for a new entrant to enter with a new skincare product, however, it is difficult to enter with an environmentally friendly, natural, biodegradable, non-animal product and be consistent throughout the product range and over time. Distribution is a key success factor, and as a new entrant would be high, but perhaps lower for those already in the industry adding a new product to their range, or a new range in its entirety.
The 2nd of Porter's 5 Forces to discuss is that of the Rivalry Determinants. TBS's high brand identity, strong knowledge transfer to customers and low fixed cost and switching costs structure assist their triple bottom line. Overall we rate this force as a moderate to high threat in the industry. The difficulty for the rivalry or competition is to be able to compete with a company, which ironically does not advertise, yet has a very strong customer base that is concerned about the environment and the products they use. The competition's fixed costs would potentially be relatively low to moderate, and similarly switching costs would be seen as relatively low to moderate as well, especially for a company already in a cosmetics type industry. There is a high deterrent in terms of the number and diversity of competitors due to the concentration of natural products (to various extents) already established on the market and now with the advent of natural health care this is becoming more and more difficult. TBS brand identity and ideology is strongly based on nature and the environment, and is seen as a key success factor for them to compete in this aggressive market. The exit barriers for a new entrant are low as there are no binding guarantees or legal implications of ceasing service of these products.
Bargaining Powers of Buyers is the third force in Porter's industry model, which is made up of Bargaining Leverage and Price Sensitivity. TBS enjoys high customer loyalty driven by value for money, product information, strong brand, and identifiable product differences vs. competitors. This is despite moderate to high bargaining power of buyers in this market.
For example, it is cheap and easy for buyers to switch to other cosmetic type products (substitutes) due to the high concentration of alternatives for buyers. There are also a large number of potential customers in this market (everyone needs deodorant after all!), which increases the bargaining leverage for the buyer. Despite conflicting claims, the internet as well as product literature give the buyer the information they need to make an informed decision. However, TBS has the advantage over its competitors from an informational point of view. TBS provides its customers with a holistic education about the products they buy. This arouses enthusiasm, excitement, commitment and loyalty in customers who choose TBS products over alternatives. TBS has therefore made information a key success factor to reduce their risk to the potential of buyers switching to one of the numerous competitive products which essentially may offer the same product benefits but do not stand for the same ethical/environmental values.
The second phase of the Bargaining Power of Buyers is that of the effect of Price Sensitivity on the buyers' decision making process. There are a number of categories to consider, firstly that of price vs. total purchases made by the buyer. TBS has managed this rather successfully via offering a variety of sizes of products. This offers a further buyer advantage in that they can choose to try smaller samples if they like and then graduate to a larger size, without paying for costly packaging. Overall Price vs. Total Purchases is considered a low risk in the industry, as the variation in price is fairly small for comparable goods. However, given TBS has taken the ethical/natural standpoint they have been able to charge a higher price to that of its competitors. Product differences are usually defined by ingredient changes or by packaging and appearance. TBS does not entertain any change in packaging as it goes against its standpoint of an environmentally friendly experience. However its ingredients carry high moral ground, which is where its strong brand identity shines.
The Threat of Substitutes is the fourth of Porter's five forces to be discussed. In this industry due to the high level of rivalry, the threat of substitutes is also very high. The natural health industry is highly competitive, growing strongly and is constantly introducing innovative ways to be healthy. Of a moderate to high risk is that of Price Vs Performance with competitive products. The TBS products may in comparison have a higher price in some areas due to taking the ethical/environmental ground and also in others it may be taking the lower performing product also due to that standpoint. Therefore a substitute may leverage this potential position. Although customers are prevalent to substitute alternatives, TBS's strategies of as listed above diminish this likelihood significantly.
The final of Porter's five forces to be discussed is that of the Bargaining Power of Suppliers. This rates a high threat in the industry if walking the environmental line that TBS has (via set up it's supplier base is to train them and ensure that their supply chain is robust and does not allow the infiltration of products that do not conform to their ethical and environmental standards). In other high volume areas using non-moral ingredients the Bargaining Power of Suppliers may be less as they are treated more as commodities. The threat to TBS is that if the supplier does not want to comply with the set standards after a period of time the switching costs to a new supplier will be moderate, and high if facilities and tooling are also involved. Supplier concentration is generally high, but lower in the wholly natural ingredients sector and lower still if considering all aspects of moral production values. TBS has lowered the bargaining power of suppliers by developing alliances with natural goods suppliers, benefiting the community as well as obtaining the necessary inputs required for their products.