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Avon Products, Inc., originally known as California Perfume Company was founded in 1886 by David H. McConnell, a book salesman who discovered that woman liked to receive a free bottle of perfume when purchasing his products. Shifting his product focus to perfume, he began to sell perfume by going door-to-door, pioneering the direct sales method. In 1914, the company expanded into Canada to become an international manufacturer and marketer of cosmetics, fragrances and toiletry (CFT) related products. In 1939, the company changed its name to Avon Products, Inc., going public in 1946.
Avon utilized the direct sales approach, a method well suited for the economic and society conditions of the 1950's and 1960's, to obtain global market leadership of the cosmetics industry. A position they held into the 1980's. However, Avon experienced difficulty in maintaining this market position as society evolved. As women began to enter the workforce, Avon saw a reduction in the number of women available to sell their product, as well as those available to purchase their product. Also, as the purchasing power of women rose due to their economic improvement, Avon's products were seen as lower quality and yet, to expensive for the lower income women. Additionally, Avon had no brand identify with the youth or male customer segments.
To offset the decline in sales growth, Avon, pursued a diversification strategy to boost its revenues. Unfortunately, this strategy failed and the strategy was abandoned by 1999. Faced with stagnant growth through the 1990's, Avon needed to seek ways to re-engineer their company. In 1997, under the direction of new CEO, Charles Perrin and with help from Andrea Jung, President and Susan Kropf, EVP, Avon implemented several strategy initiatives to revitalize the Avon organization. These mildly effective strategies were part of a $400 million dollar restructuring plan to jump start sales. Money was freed up to develop new products, shorten development time, develop globally wanted products, increase advertising efforts, update its direct sales model, improve company image, implement a e-commerce strategy, develop alternative distribution channels, buy back outstanding shares and increase dividends. These initiatives produced a modest 3% growth in sales.
Andrea Jung replaced Perrin as CEO in late 1999. Jung inherited an organization faced with declining stock prices, sales growth of less than 1.5%, increased competition, a mature market, uninspired products, a sales organization and distribution system badly in need of revamping. Jung, an Avon veteran since 1994, unveiled her strategic plan to address the competitive forces her organization was facing. Under Jung, the Avon vision statement was changed to read;
"Our vision is to be the company that best understands and satisfies the product, service and self-fulfillment needs of women globally. Our dedication to women touches not only beauty, but health, fitness, self-empowerment and financial independence."
Under Jung's guidance, Avon experienced a rejuvenation that has resulted in an increase in sales growth, the number of sales reps, more products and most importantly, an increase in profitability.
Plan Analysis
Market Overview
Industry influences: The industry in which Avon participates is highly fragmented. Multiple distribution, product and sub-product category channels exist making it difficult to monitor pertinent activities. For example, the supermarket channel may lead in the sales of perfumes while the drug store channel may lead in the cosmetics category. Specific sub-categories may be broken down further. The CFT industry is also seeing the influences of new product innovations, making a firm like Avon allocate more funds and research time to stay ahead of the development curve. Organizations like Avon must understand Consumer demographics and how they can be utilized to position your firm's products. This type of marketing can further differentiate a firm from its rivals. Global consumer demand, need and purchasing power differ considerably and a firm needs to stay abreast of regional pressures upon their product offerings.
Competition Summary Chart:
Company Name 2000 Revenues (Overall)
(in billions)
2000 Revenues
(CFT)
(in billions)
Notes
L'Oreal
$10.6
$10.3 Excellent brand image, international, strong presence in Western Europe and the U.S.
500 brands, products in 150 countries. Distributes products in Supermarkets and salons.
Proctor & Gamble
$40.1
$7.3 Excellent brand image, internationally known. 250 brands in 130 countries. Large research budget, numerous manufacturing facilities.
Estee Lauder
$4.4
$4.4 120 countries, distribute two largest cosmetics brands in the U.S. Products available through department stores, specialty stores and internet.
Avon $5.7 $3.5 Largest direct seller of cosmetics in the world.
Intimate Brands
$5.1
$2.4 Large specialty store chain. Numerous outlets, becoming larger player in the CFT industry due to its distribution facilities.
Alberto-Culver
$2.3
$2.2 Largest manufacturer of hair care products. Products sold through Supermarkets, drug stores, discount stores in 120 different countries.
Coty
$1.8
$1.8 Largest manufacturer of perfumes. Privately held, products available in mass market and prestige locations. Products available in 29 countries. Getting stronger internationally.
LVMH
$9.7
$1.7 Leader in luxury products. Experiencing rapid growth and has a very large internet presence.
Johnson & Johnson
$29.1
$1.5 Mainly in the pharmaceutical industry, has deep pockets and becoming a presence in the CFT industry.
Revlon
$1.5
$1.5 Leader in sub-product category of nail polish. Products not available via retail outlets
Mary Kay
$1.2
$1.2 Business model resembles Avon. 200 products. No e-commerce model.
Competition: The CFT industry is saturated with competing firms. Their organizational characteristics differ by product offerings, diversification strategies, distribution methods and business models. Avon, the leading direct marketer in the CFT industry with sales of $5.7 billion dollars in 2000, is only half the size of its largest competitor, L'Oreal who had sales of $10.6 billion dollars in 2000. Trailing industry leader L'Oreal in net sales, Avon needs to understand the competitive market in totality. All the competing forms have resources and certain niches that they can utilize to their competitive advantage, for example, industry leader L'Oreal has enough resources to fight any challenge Avon may provide, Proctor and Gamble and Johnson and Johnson have research dollars and excellent brand name appeal, Intimate Brands has a unique retail distribution setup for their products. Avon needs to focus on their business model and core competency, the Avon sales rep and find ways to further exploit this direct market sales model. The CFT industry is global in nature, is mature and has high barriers for entry. Product development, understanding consumer trends, marketing and distribution are keys to a firm's success. Avon faces severe competition in the CFT industry from firms with long histories, unique market and product appeal, unique product distribution methods. Jung's plan for increasing product innovation and global market expansion will need to be weighed against the expected response from rival firms, market demand and available internal resources.
Avon Financials:
Year Revenues ($ mil.) Net Income ($ mil) Net Profit Margin Cash Flow
($ thousands) Employees
2000 5,714.60 478.4 8.40% 582 43,000
1999 5,289.10 302.4 5.70% 385 40,500
1998 5,212.70 270 5.20% 33,900
1997 5,079.40 338.8 6.70% 34,995
The business re-engineering project that began in 1997 had paid dividends by 2000. Manufacturing and distribution improved during this time period. Reducing the amount of suppliers and utilizing better technology across order processing resulted in Avon seeing an increase in net profits and cash flows. This will allow them to better fund product development and implement the e-commerce solutions that are part of Jung's strategic plan for Avon.
SWOT Analysis:
Strengths
Strong executive management
Recognizable brand name
Large direct sales force
Market leader in direct sales
Global market coverage
Numerous products
Improving R&D
Advertising and Marketing engine Weaknesses
Brand name reputation
Inadequate e-commerce model
Dependence on one sales model
Lack of alternative channel distribution system
Poor material management system
Single line of business
Seasonal sales cycles
To many manual processes
Opportunities
Further global expansion
Development of new products
Expansion into new consumer markets
Increase market share through use of
technologies
Development of alternative product
distribution channels
Threats
Loss of sales to substitute products
Intense market competition
Technological advancements
Increasing product innovations
Political environments and regulatory
pressures
Exchange rates
Shifting buyer preferences
Avon possesses several internal strengths which they have capitalized on to become the world's largest direct seller of cosmetics. Built upon their core competency, the Avon sales rep, Avon continues to utilize this sales model to maintain their market position. The Avon name and brand are internationally known and they offer numerous products to various consumer segments. With more available funds which are allocated to R&D to improve their current and future product lines, Avon can utilize their long marketing and advertising arm to promote their products. Avon does face the battle to improve their overall company image. Avon is looking at developing and improving their distribution systems, including adding an e-commerce solution to their mix of product distribution methods. Depending on international economic and social demands, Avon can grow their sales force through global expansion; expand product lines resulting in increase sales. More sales mean more available funds which can go to implementing better technology to assist in their internal processing. Avon does need to be aware of the competitive forces that could delay their progress. The U.S. market is mature so global expansion is key but Avon must be aware of the economic, political and regulatory influences that stall their growth. Seasonal sales cycles need to be addressed. Overall, Avon is positioned well in the market place. They have a well known brand, more available cash flow, a loyal sales force and many products for purchase. Opportunities exist internationally but they will need to overcome their lack of use of technology, international entry barriers and brand image.
Competitive Strength Matrix:
AVON L'Oreal Proctor & Gamble
Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising .20 1 .20 4 .80 3 .60
Product Quality .10 4 .40 4 .40 3 .30
Price Competition .10 3 .30 3 .30 4 .40
Management .10 4 .40 3 .30 3 .30
Financial Position .15 4 .60 3 .45 3 .45
Customer Loyalty .10 4 .40 4 .40 2 .20
Global Expansion .20 4 .80 2 .40 2 .40
Market Share .05 1 .05 4 .20 3 .15
TOTAL 1.00 3.15 3.25 2.80
This chart looks at two of Avon's rivals. L'Oreal and proctor and Gamble are the top two firms in the CFT industry. Comparing Avon against these two market leaders will give us a better idea of how Avon ranks in terms of competitive strength. Weights were assigned based on market importance and each firm was rated based upon their performance in each category. From this analysis you can see that Avon compares favorably on most strengths. Overall, Avon possesses good financial strength, loyal clients, excellent management and product quality but they do need to improve their advertising efforts. Focus more on improving image, better promotional collateral and on products that will help flatten out the seasonal sales cycles to drive revenue increases.
Jung's strategic plans to expand internationally, improve product development, implement more technology into the sales model, reduce inventory time, develop retail distribution outlets and improve operating margins were all items that were addressed in some degree since her promotion to CEO in 1999. The business re-engineering efforts produced additional funds to fund product development resulting in new product line introductions and gaining larger market share. Avon shorten its supplier list, gaining better control and more efficiency in its value chain. Avon has implemented many technology initiatives during time to streamline its manual processes reducing internal costs, improve distribution time and efforts and make additional products available for sale via the web. Avon introduced retail concepts with J.C. Penny and a specialty store concept with the setup of the Avon spa in New York City. Avon undertook efforts to improve their image by increasing their advertising budget to redesign packaging, increase promotional efforts, utilize celebrity endorsements, and include better research. This re-structure of their advertising platform produced modest results but overall, the strategic plan improved Avon's operating margins during this time period.
Recommendations
Avon's response and adherence to Jung's strategic initiatives help Avon realize a business transformation that resulted in better overall performance and increased market exposure. Recommendations for further expansion of these business objectives are as follows:
1. Discontinue expansion into retail stores. Sales of Avon products are driven by the Avon sales force and this is a business model made famous by Avon. Distribution, inventory and logistics systems would need to be adjusted to accommodate a retail distribution system. Expansion efforts would be more costly and better value chain efficiencies can gained through other alternative sales channels, such as the web.
2. Develop products specifically targeted to the young woman's market. (15-25 age range). Avon's historical target audience has been older women but as Avon endeavor's to increase market share they need to focus on alternative audiences for their products. Developing products to address the needs of young woman will increase market share and allow for continued sales of products as these woman mature.
3. Expand globally were current sales model can be effective. Many international markets contain social similarities to the American decades of the 40's - 60's. Family focused with part-time working woman or stay at home Mothers looking for additional income, available products and ease of purchase. China, Russia, and Latin America would be prime targets for Avon.
4. Expand the use of technology within the organization.
A) Supply chain improvements can be gained by implementing an order tracking system that's utilizes a coding system to track, mail, and re-order needed products as products are ordered on-line. This would improve the speed in which can be sent to Avon reps and end-user purchasers.
B) Better integrate Avon's web presence. Combining the Avon.com, youravon.com and others will reduce confusion and web site abandonment. Simply the web site order process and rotate highlighted products and use high resolution for marketing images.
C) Involve Avon Sales reps in e-commerce decision making process. Sales are made to the ultimate customer principally through the direct selling efforts of Avon Reps who purchase products at a discounted rate from the Avon brochure and then sell directly to their enduser customer. If Avon is to develop alternative sales channels, an e-commerce solution needs to be truly integrated into their sales mix. Doing so incorrectly could cannibalize the sales force, cause confusion and bewilderment in its current sales force. Avon should consider training seminars to introduce the benefits of e-commerce to its sales reps. Show methods to getting setup, rollout commission plans and setup a feedback line for capturing market intelligence.
Conclusions
Avon has undertaken a four year business re-engineering process that has produced remarkable results under Andrea Jung. Avon was stagnant and uninspired organization when Jung was promoted to CEO. Her strategic plan was to increase sales and operating margins by initiating several business objectives to stimulate produce development, expand globally, implement technology throughout the organization, reduce, inventory, increase advertising and promotional efforts, increase available opportunities for the Avon rep and find alternative channels for product distribution.
The business re-engineering process managed by Susan Kropf, now COO allowed Avon to realize more available funds to support these objectives. The combined efforts for cost reduction and marketing programs re-energized the Avon organization. Sales growth increased from 1.5% in 1999 to 6% in 2001 and operating profits saw a 7% increase during this time frame. The sales force grew as well and Avon's operating margins grew by 14%, the highest level in ten years.
Overall, Jung did a remarkable job initiating and leading Avon to more profitability. There is still many competitive forces influencing their performance but Avon is much better positioned to grow their market presence.
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