The synthesis of the external and internal analyses that follow will result in the identification of the best recommendations to deal with above stated key issue.
External Environment Analysis
External Analysis and Strategic Groups
Porter’s 5 forces analysis for the cosmetics industry suggests that the most threatening forces are the rivalry among the existing companies and the substitute products.
The women’s cosmetics market is mature and, to a large extent, saturated; there are many companies with strong brand images offering almost the same range of products. None of them seems to be an obvious leader in the market, but there are a number of key players within it (as shown by Table 1) struggling for market share. The only way for them to increase their profit is to increase expenditures on advertising and promotional offers. Another trend in the cosmetics industry is the mergers and acquisitions in order for companies to dominate the market; for instance, the takeover of Body Shop by L’Oreal (BBC Online, 2006) and Gillette by P&G (keynote.co.uk, 2005).
Nonetheless, cosmetics companies face competition from substitute products as well. By upframing the business idea of Avon and considering it in the beauty industry, then there are several other indirect competitors to consider, like cosmetic surgery, herbal products, fitness & beauty centres, spas and solarium centres.
Thus, Avon is facing fierce competition, both direct by companies like L’Oreal, Body Shop, Estee Lauder, Oriflame, P&G, Unilever and so forth and indirect by the substitute products mentioned above.
In order to provide a more thorough understanding of direct competition, the following mapping was conducted (Diagram 1). The axes that were selected are the diversity of the product portfolio offered by the companies and their degree of forward integration (that is, whether the companies own the distribution system). Price was also taken into account as a factor, but it was rejected, as cosmetics products don’t vary much in terms of prices, therefore no important insights can be excluded. The companies that were close to each other were clustered in strategic groups.
From the above diagram it can be concluded that Avon is competing directly with Boots, Oriflame, Body Shop and Virgin Vie. The characteristics of this strategic group are that companies within it offer a medium variety of products and own the distribution system; the latter can take the form of selling through catalogues (like Oriflame and Avon), selling online (like Avon and Virgin Vie), selling door-to-door (like Avon and Oriflame) or selling through the company’s own stores (like Boots and Body Shop). These companies take advantage of economies of scale in order to produce a variety of products, as well as the market intelligence that the disintermediation implies in order to create relationships with customers. Furthermore, owning the distribution means less distribution costs and less reliance upon stores. The implications of each strategic group are shown in the matrix of the following diagram (Diagram 2).
Even from this analysis, it is obvious that Avon has the opportunity to use its competence in creating customer relationships and move to the strategic group above its current one – where there is no competition – by further diversifying its product offering.
Strategic Clock
In Avon’s strategic group, players follow different generic strategies in order to compete. The following strategy clock is a schematic display of these strategies (Diagram 3).
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Avon and Oriflame implement a differentiation strategy, with high perceived added value offered at medium price. Avon has a distinct advantage over its core competitors as it enjoys lower supply chain costs due to its vertical integration and it offers a high level of interaction with customers.
Body Shop has adopted the image of an ethical cosmetics company, thus targeting a niche market (focused differentiation) though it maintains its presence through high street outlets, adding to the operational cost which is consequently reflected in the added price.
Virgin Vie is at the low cost arrow of the clock, offering products and services of medium value at a low to medium price. The fact that Virgin is not apparent as a company dedicated to producing beauty products affects it perceived value for cosmetics in a negative way.
Boots offers a wide variety of products that are manufactured by them but sold along side all the other major brands. It is seen as a cheaper alternative (no frill strategy) to the costlier brands and is also offered online to increase accessibility.
Internal Environment Analysis
Avon Cosmetics UK has a number of resources which are not unique but uses them in a way that gives the company a competitive advantage over its competitors. Its ‘Avon Lady’ network gives the company the ability to manage customer relationships as there is an Avon Lady for every area that keeps close contact with its customers (Rigby R., 1997). It also gives Avon first hand information about the market trends, whereas its rivals depend on secondary sources. This network gives an added advantage of having an option to pursue other opportunities to increase its product portfolio.
Avon products are only sold directly through the online store, catalogue orders and Avon Ladies. This helps to maintain a ‘good value for money’ image among its customers due to absence of huge investment and running costs of having physical stores.
It has a very efficient R&D department which ensures all its products do not contain any animal by-products and also not tested on animals, which differentiates itself from its competitors, as they do not pay so much attention to addressing these issues. The company is also involved with a lot of women organisations and other charities to keep an image of being socially responsible and promoting the idea of women empowerment. The ability to maintain this brand image is in itself a core competency as it strikes a bond with its target market and helps identify themselves with Avon’s organisational values.
Options and Recommendations
The Ansoff Matrix
As already mentioned previously in this report, cosmetics is a highly competitive industry approaching the stage of maturity (keynote.co.uk, 2005). For Avon to remain in profitable territory and increase its market share it has to consider producing new products for its existing markets, increase its market penetration by providing the same kind of products to new markets while at the same time consider producing new kind of products for new markets altogether.
We have identified a number of options which we consider to be the most viable and profitable for Avon UK which consist of both product and market development as illustrated on the Ansoff Matrix above.
Outline of Options
Based on one of its core strengths, its Avon Ladies, Avon could take advantage of what seems to be a profitable opportunity by designing and producing clothing for women.
Another of its significant strengths, its R&D department seems capable of producing baby care products thus increasing is product range and reaching new market segments (young or middle aged mothers).
As will be further illustrated in the following parts of this report, Avon is definitely capable of producing a series of men’s products thus responding to the continuously increasing demand for men’s cosmetics and satisfying the needs of market segment which was not given the appropriate attention in the previous years.
The threat of UK’s ageing population in addition to the increasing popularity of unconventional competitors (e.g. cosmetics surgery) may be overcome by using Avon’s strong R&D department in order to enter the Pharmaceutical industry and produce medical and herbal products, distributing them through its own established network (Avon Ladies).
As the high degree of the cosmetics market fragmentation may prove a significant threat for Avon we consider further diversification imperative for the company’s long term existence. For reasons that will be further analysed in the next part of the report we strongly believe the future for Avon lies in the insurance industry.
Another viable option we believe will add value to the company is establishing and opening Beauty Centres and Salons for both women and men, offering similar services to existing beauty and spa centres and further exposing existing Avon products while increasing brand identity.
Evaluation of Options & Recommended Strategies
Evaluation of Options
Before reaching to any of our recommendations for Avon UK’s future strategy we evaluated each of our final options with the use of a set of criteria we regard as the most important for the suitability, acceptability and feasibility of each strategic option.
As illustrated on the diagram below, suitability was judged in terms of how fit each option is with Avon’s existing competencies, how much it suits its current business idea of “understanding the needs of women” and what type of competitive response is expected (how easy or not it is for competitors to pursue the same line of action).
To judge acceptability, each option was related to stakeholder expectations to determine any possible problems “inappropriateness” it may cause, the degree of risk involved and the level of expected financial returns, whilst feasibility was determined by the required capital employed , the time the product needs to reach the market and start generating sales and other technical-ethical or legal issues/barriers.
The importance of the table above is that it supports our initial recommendations for Avon’s future strategy as they agree to the results indicated from the use of this evaluation tool.
Recommendations
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Recommended Strategy 1: Insurance Sales
We believe the option of Avon selling insurance through its Avon Ladies will be the most profit generating option of those the company should be considering while it does at the same time well-respond to Avon’s key issue (introduction, page 5) at this particular phase.
We do not, however, propose Avon sets up its own insurance company in the short term but suggest it starts by selling insurances for an existing insurance company. Such a partnership should not be difficult for Avon to sign giving its existing distribution network of 160.000 Avon Ladies in the United Kingdom (Avon Official Website, 2006)
The proposed strategy is based upon one of the company’s most important core resources, the Avon Lady, and the experience and “know-how” of direct selling which she possesses.
Additionally, Avon’s large existing customer database will be used to identify customer profiles and recognize potential customers.
Although at first sight it might seem that the recommended strategic option does not fit with the company’s business idea, a closer look at Avon’s mission statement suggests it perfectly fits with the idea of “understanding and responding to women’s needs – globally” as insurance becomes a need for almost every woman at some point of their life, even if it is something as simple as car insurance.
The expected level of returns from undertaking this option is regarded quite high while the initial outlay is relatively low. There is no need for Avon to acquire a significant level of additional property to host its services while it may save a huge amount of training costs, giving the Avon Ladies our already experienced and high-skilled direct sellers. However, additional Avon ladies will probably need to be recruited to serve new markets.
It does not seem like any of the core competitors (presented previously, p.9) might follow the same path and introduce insurance services. The only core competitor that has a resource similar to that of Avon’s direct sellers is Oriflame (direct-selling, though less reach than Avon).
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Recommended Strategy 2: Enter the Men’s Market
Our second recommendation suggests Avon should increase its target market to include the continuously growing men’s market and produce a product line specifically for this market segment.
The difference in the process of producing a men’s product from that of a woman’s is rather minor and does not suggest any significant changes in the way the R&D and production departments function. After all, a men’s product can be thought of as a product for a woman with a different kind of skin and odour. Therefore, the largest challenge for Avon is to brand men’s products effectively as the product itself does not require much differentiation.
Men’s products can be sold through Avon’s existing network by the Avon Ladies and through the internet, from the company’s website. The products can still be sold to women on behalf of their men, or as gifts etc.
Time to market is regarded relatively short while demand for this kind of product already exists. The level of capital employed will also be at low levels as the company already possesses all necessary resources although it needs to place a strong advertising campaign early on.
With the level of risk involved in introducing men’s products being low and manageable, this particular option seems a good chance to increase market penetration as an effort to respond to the intense competition for women’s cosmetics.
Even in the unlikely event that it all goes wrong and for some unforeseen reason Avon does not manage to generate a satisfactory level of sales for its new products the damage to the company’s reputation and brand image will not be of relative importance and, moreover, the Avon’s capital loss from the project will be minor, for the reasons explained above.
Conclusion
The UK cosmetics industry seems to be currently suffering intense competition mainly emanating from a) consolidation (as a prevailing trend) and b) new entrants (as the largest threat the past 5 year). In addition, the increasing popularity of unconventional cosmetics (cosmetic surgery, spa & solarium centres) suggests the future market for traditional beauty care companies might start declining therefore posing a further threat to the long term existence of their businesses.
As one of the major players in the cosmetics industry, Avon UK is in need to react to the environmental changes to avoid losing business from competitors (both direct and indirect) and to grasp any opportunities that may occur in the near future.
Avon UK would be able to maintain and possibly increase its profitability by increasing its product portfolio to cater new market opportunities. Of all the options considered within the scope of this report, given the time restrictions and the trade-off that applies to the way Avon uses its scarce resources, we recommend opening up to the Men’s market and selling insurances as the two most profitable and feasible options the company should implement at this particular point.
APPENDICES
APPENDIX A:
PORTER’S 5 FORCES
APPENDIX B:
SWOT ANALYSIS
REFERENCES
Avon.com (2005), “Avon 2005 Annual Report” at http://www.avoncompany.com/investor/annualreport/pdf/avp05areditorial.pdf, (accessed: 13 May 2006)
Avon.com (2005), “Student Pack – 2005” at http://www.avon.uk.com/PRSuite/cafe/download.jsp, (accessed: 13 May 2006)
Avon Official Website (2006) at http://www.avon.com, (accessed: 13 May 2006)
BBC Online (2006), “Body Shop agrees L'Oreal takeover” at http://news.bbc.co.uk/1/hi/business/4815776.stm, (accessed: 13 May 2006)
Keynote.co.uk (2005), “Cosmetics and Fragrances” at http://www.keynote.co.uk/CnIsapi.dll?fld=X&alias=kn2k1&uni=50127&SetUserType=1&jump=&collapseLevel=0&fromPage=StatAZ&AutoShowFirstRecord=1&search=SY%20=%2011-1561-45722&Browser=NETSCAPE, (accessed: 13 May 2006).
Global Market Information Database (2006), “Top companies by market share” at http://www.gmid.euromonitor.com/HitList.aspx, (accessed: 13 May 2006).
Rigby Rhymer (1997), “Cut out the middleman”, Management Today: 98.
The Porter’s 5 Forces analysis can be found in Appendix A, p.20
Appendix B: Swot Analysis, p.21
“To be the company that best understands and satisfies the product service and self-fulfilment needs of women – globally” (Avon Student Pack, 2005, p.2)
