Case Study: Avon Products, Inc Strategy Formulation and Implementation Ms.

Wanda Manning March 09, 2007 Case Study: Avon Products, Inc.: The Personal Care Industry Avon has been in the personal care business for well over 100 years. However, the increasingly rapid rate of change in the industry, due to advances in technology, changes in lifestyles, and globalization, means that strategies that were successful in previous decades are not necessarily so today. Avon was and continues to be well known for its direct selling model, but new strategies were essential so that the company could continue to prosper. This paper will discuss and argue whether the Avon Products, Inc. grand strategy under the leadership of Andrea Jung is properly focused and directed. First Argument: Avons Strategy is properly Focused and Directed The grand strategies that Jung has put in place for Avon are meeting with the strategic vision of Avon. The strategic objectives that Jung proposed are cl...... In assessing the future critical strategic decisions facing Avon Products Inc. certain issues must be addressed: 1. Should we seek company growth through market development strategies, expanding into the retail industry, or continue doing business by means of direct selling and kiosk retailing centers. 2. Should we expand our line of premium quality products that would be sold in Avons spa service, or continue focusing on quality products at affordable prices. 3. Should we provide greater emphasis towards online retailing, with a focus on a more trendy products (Generation Y) and possibly fragmenting our image, or continue seeking the satisfaction of our core customers (seniors and Generation X) Clearly, decreasing single digit sales growth (1% from 1998 to 1999) during an economic boom has made Avons distribution system its number one strategic priority. With Avons senior citizen base getting older, and the baby-boomer generation dissatisfied with their direct selling method, there is a need to analyze their sales methods. Strategic decision two provides for those baby-boomers, with their high level of net worth, through the possible means of a high-end products and services through growing spa service, or wellness center. The last strategic decision relates to Avons lack of a well-developed online retail store. With 73 million people in the U.S. comprising the neglected, but technology rich Generation Y market, Avon has the possibility or reaching the largest teen population in history. In a highly competitive industry comprised of slow growth (2.8% from 1995-99), such strategic decisions will be required of Avon to compete in the 21st century.

The External Environment Even in the highly competitive world of personal-care industry, many opportunities exist. In terms of the macro environment, a few major demographic clusters remain that have been neglected. The African American population already comprises the largest ethnic group in the U.S, and has an expected growth rate of 11% annually. They are fond of high quality products, especially in the hair care, and are willing to spend more for it. The fasted growing segment now belongs to Latin Americans, who are expected to see a 27% growth rate in the coming decade. Their tendency to towards promotion and acculturation will provide a great opportunity for those willing to fill it. Generation Y comprises the 2nd largest market when based on age. Low cost products tailored to their unique, fashionable need are a key success factor. Technological advances in online retailing have already changed the face of how companies do business. Retail online sales are expected to increase 140% during 1999, and the key success factors for business has been convenient navigation and greater price discounts. Despite low growth, there still lie opportunities within the task environment of personal care products. Consistent growth, while somewhat low, has long been stable. This provides for more consistent earning even during recessions. High growth is expected in the industry for numerous products: hair colorants, selftanning products, and deodorants. The instability of foreign currency has provided one of the greatest economic threats to global companies who derive much of their sales overseas. Uncertain how the new Euro will affect European sales, as well as highly volatile Far East currency, profit margins are less predictable. The industry itself has seen younger, less established companies gravitate towards the Internet, thus leaving behind many of the larger retailers. Due to the ease of entry within the industry, many less mobile companies have had to readjust their marketing strategies. Despite such threats, the personal care industry has future potential. Serious substitute products are non-existent, the emphasis for a younger look provides for continual growth. And while there are few barriers to entry, brand identity is of vital importance to highly loyal customers. But, competition is fierce in the industry, leading to a decreasing growth rate for many companies. Differentiation through brand imaging is a key success factor. Avons direct selling strategy has been in large part due to the fear of being unable to gain ample space on retailers shelves, maybe the biggest success factor in the retail industry. Through welltrained and highly motivated sales representatives Avon has been able to compete in the industry since 1916.

The Internal Environment With more personal products than anyone, Avons greatest strength is its high brand name recognition. This has enabled them to maintain a global presence in 137 countries throughout the world. Direct selling has been their primary means of distribution, requiring high levels of internal relations with their well-trained representatives. Close interaction with their customer base has led to loyal followers, especially with senior citizens. Having served them so well in the past, Avons use of direct selling has left them with little variety in distribution. This, in turn, has made them unable to efficiently tap into new markets. Rumors of retail expansion have also led to moral problems within their sales representatives, who are responsible for 95% of their sales. With so little distribution variation, large amount of capital would be needed to expand, thus leaving them prone to high debt and takeover possibilities. The inability to establish an adequate online retail site for many of the same reasons has left many potential customers alienated. Avon has recently been unable to maintain its past competitively relevant advantage over its competition. Unfortunately, their use of human resources is not rare, as seen by the Mary-Kay Company, and thus imitable. This has led to average profitability over that past few years. Competitive factors in the industry have squeezed profit margins, and new strategic decisions are required to find new distinctive competencies they can exploit. As seen in Avons financial ratio analysis (Appendix 5), Avon has seen improvement from 1999 to 2000. Liquidity has been a problem, having seen their ration below 1 as of 1999 (more current liabilities than current assets). Year 2000 saw this rate rise to above 1, but has left little margin for error. While company activity has remained constant, their overall debt ratio is above 1, thus signaling a highly leveraged company. Profitability is on the rise, slightly, in terms of Return on Sales and Assets. Return on Equity has increased dramatically, due in large part a profitable 2000 in which earnings were retained. With industry competition increasing, and internal sales stagnant, Avon must make some key strategic decisions in order to keep up with its past competitive advantage.