Arslan Ahmed

University College Birmingham Strategic Report: Avon Company Leadership and Change Management Hp 17 Contents Introduction ..................................................................................................................................... 3 Strategic Audit ................................................................................................................................ 3 Internal Audit .............................................................................................................................. 3 Vision ...................................................................................................................................... 3 Mission.................................................................................................................................... 3 Business Model ....................................................................................................................... 4 Financial Analysis ................................................................................................................... 4 External Audit ............................................................................................................................. 5 Political factors ....................................................................................................................... 5 Economic factors .................................................................................................................... 5 Social factors ........................................................................................................................... 6 Technological factors .............................................................................................................. 6 Legal Factors ........................................................................................................................... 6 Environmental factors ............................................................................................................. 6 SWOT analysis ............................................................................................................................... 7 Strengths ..................................................................................................................................... 7 Weaknesses ................................................................................................................................. 7 Opportunities............................................................................................................................... 8 Threats......................................................................................................................................... 8 Porter’s Generic Strategies ........................................................................................................... 10 Strategic Options ........................................................................................................................... 10 Strategic Selection ........................................................................................................................ 11 Project Implementation Needs ...................................................................................................... 12 Conclusion .................................................................................................................................... 13 Bibliography ................................................................................................................................. 14 Introduction Ever since its inception in 1886, Avon has maintained as its hallmark direct selling through female representatives. Today, Avon sells products in the fashion, beauty and home product categories. Specifically, it sells skincare, fragrances and color cosmetics in the beauty category, which is the highest revenue generating category at present. (TREFIS) The company at 31st December 2016 had 6 million active representatives, those representatives who have contributed to sales proceeds. (AVON PRODUCTS, INC, 2016) Unfortunately despite a three year transformation plan initiated in 2014, stabilization measures, cost saving initiatives and divestment of North American business in 2016, the company could not make a profit. At 2016 end, the world market share of Avon Products, Inc in the beauty segment had declined to 5.14 percent from 11 percent in 2010. (CSIMARKET.COM, 2017). At present the CEO Sheri McCoy is at a stage where she needs to find a way to boost revenues and profits and hence increase the market share of the company so that the shareholder sentiment can become positive. This report will look at the strategic audit of the company particularly the vision, mission, the business model as well as the main financial ratios of the company while also perform a PESTEL analysis followed by a SWOT analysis. Next, some possible solutions will be proposed and it will be seen which solution is the best under the circumstances. Strategic Audit Internal Audit Vision Avon as it calls itself the company for women believes: “Beauty is the journey, empowerment is the destination.” (AVON PRODUCTS INC., 2017) Avon’s vision is to empower women by providing them state of the art beauty products that enhance their self worth while also giving these women economic opportunities. Mission In order to achieve its vision Avon engages in direct selling through a team of representatives. Avon believes in the power of face to face marketing in contributing to customer satisfaction and in realizing the sale. It wants to target three customer segments Upper Mass, Mass and Value and also wishes to focus on top 40 products in the portfolio. (AVON PRODUCTS INC, 2017) Business Model Avon uses a direct selling model which gives the representatives 25 percent commission in realizing a sale. The company currently has a multi level marketing structure which allows the representatives to hire further salespeople if they desire, giving them an opportunity to earn profit on their sales as well as on the sales of the salespeople they hire and supervise. The representatives make use of door to door selling and also brochures for conducting the business. (GEKA, Agnese, 2012). The business model produced in 2015 an exceptional case of a very high achiever Debbie Davis who was able to make a million dollar profit. (GAILLE, Brandon, 2015). Financial Analysis The company’s main financial ratios are shown below: Ratios 2016 2015 2014 Net Profit Margin -2% -19% -5% ROE -13% -107% -134% Operating Margin 6% 3% 6% Current Ratio 134% 107% 143% Cash Ratio 44% 31% 44% The chart below shows the trend lines for each of the ratios: Key Financial ratios 200% 150% 100% 50% 0% 2016 2015 2014 -50% -100% -150% Net Profit Margin ROE Current Ratio Cash Ratio Operating Margin It is clear that the company needs to improve its net profit figures and the issue is that the company has very high expenses as at the operating cost stage the company is seeing positive operating margin ratios. To counter the rising costs the company has in place the transformation plan which has brought cost savings and this is the reason for the net loss figure improving in 2016. External Audit Political factors High taxes by the government can bring the business down as has happened with Brazil which is the market right at the top for Avon. (UTROSKE, Deanna, 2016) Also, political instability can bring down the markets in a region. Now that Avon is planning to enter UK, Brexit can have a negative impact in future. Economic factors The global cosmetics industry of which personal care represents the biggest chunk grew by 4.9% in the year 2015. (STATISTA)The global personal care industry is expected to grow between 3.5 and 4.5 percent in the next five years with the expected market value of the industry reaching US$500 billion by 2020. (KPMG, 2016) It is the trend now that globally people are having more disposable incomes and can spend more on personal care goods. (STATISTA) Meanwhile, the direct selling industry reached $131 billion in sales in 2015 after a five percent annual growth in the last five years. (AVON PRODUCTS INC, 2017) Social factors There is a trend now that even men have become conscious of personal care and have created a demand for such products. Also, the customers now have become inclined towards products that use organic and natural ingredients (SAHOTA, Amarjit) and also such products that they perceive are tailor made for them. For this reason smaller firms who target niche markets have gained success in the recent years. Technological factors A study revealed the shopping behaviors of the customers in UK and found that 81.2 percent said they searched for products in the physical stores but eventually returned online to find the best prices. (STATISTA, 2016) Another study revealed that there was an increase in buying of color cosmetics due to the tutorial videos and the selfie culture prevalent in the digital space. (EUROMONITOR, 2016) If businesses today wish to survive they must have digital presence and form a suitable digital marketing strategy. Legal Factors There can be a lot of legal issues that can surface with direct selling operations according to the various countries’ legal systems. Avon is fulfilling the legal requirements in all the various regions it is operating. Also, it is important to be mindful that there is no copyright infringement or else fines will have to be paid. Environmental factors People are concerned about the environmental effects of the manufacturing industries. In particular, there is concern of animal testing with regards to cosmetics and skin care companies. Avon could be losing customers if the customers think its practices are not environmentally sustainable. SWOT analysis Strengths Innovation Avon’s strength lies in its continuous innovation. It strives to find better products for newer markets. Current product base While innovating, it also has its top 40 products that it keeps in mind which give it 80 percent of its business. (AVON PRODUCTS, INC, 2016) These products have undergone the test of time and are now cash cows or stars for the company. Strong brand name Avon’s brand name has become common in the households over a period of 130 years. The brand has built sufficient equity over the years. Leading Market Share Although the global share of Avon has gone down in the recent years it still has leading market share in eight countries namely Brazil, Mexico, Russia, Philippines, UK, Argentina, Colombia, Turkey, Poland and South Africa. Strong training for new representatives The company has a very strong training program for the new inductees to the representative network. The company ultimately though leaves it onto the representatives to get more sales and customers. Weaknesses Lack of control over expenses The company has seen increasing expenses 2011 onward and hence there has been a net loss consistently until 2016. Declining revenues Both external and internal factors are bringing down the company. There have been rising costs of the company, the rising taxes, currency devaluations and shifting consumer preferences that have brought down the revenues. Lack of supervision of the representatives There has been a rise in the representatives who are leaving the company. It is impossible to really know the reason for these representatives leaving as the company has no supervision over them. Opportunities Shift to premium niche products As customers now want more customized products and are also willing to pay a premium the company could launch new products for specific target markets. As company has a strong R&D and high innovation quotient diversifying would not be a problem. Shift to an omnichannel retail mode As customers are using both physical stores and online stores in equal measure it is a great opportunity for the company to switch to an omnichannel retail mode that makes use of both digital and the physical methods of sale. Physical retail spaces or stores The company can increase its penetration in UK if it were to also to display its products in retail spaces in renowned stores like TESCO, Sainsbury and Aldi. Collaborate with right partners to gain competitive advantages Currently, Avon took a right step to partner with HP to aid in improving the customer experience and to strengthen security for the company. (TREFIS TEAM, 2016) Threats Post Brexit Uncertain Political and Economic Situation The Brexit can serve as a major threat to many businesses including Avon in UK. (TREFIS TEAM, 2016) Strong Competition The biggest threat to the company is the strong competition it is facing both from mega brands as well as recent brands. The mega brands that are giving Avon competition are Estee Lauder, Revlon, Mary Kay Inc, L’OREAL, Unilever and Proctor & Gamble. There are also specific regional brands that are successfully choosing to target millennial and other specific age groups and providing them with customized products. Figure 1 Top nine global beauty brands at the end of 2015 ranked according to their revenues. 1. L'OREAL 2.Unilever 3.Procter & Gamble 4.Estee Lauder 5.Shiseido 6.Beiersdorf 7.Johnson & Johnson 8.Chanel 9.Avon Products Inc. Source: Allbrands.net. http://www.adbrands.net/sectors/sector_personalcare.htm Porter’s Generic Strategies Source: Mindtools.com, https://www.mindtools.com/pages/article/newSTR_82.htm The above grid shows there are three ways of achieving competitive advantage. One is through cost leadership which means that you produce at lower costs as compared to your competitors or that you sell at lower prices than your competitors. The second differentiation strategy aims to create products and services that have unique features and elements which convince the customers that you are better than your competitors. The third strategy which is subdivided into cost and differentiation focus believes in selling specialized products to niche target markets. According to these three strategies, below are mentioned four strategic options. Strategic Options There are four strategic options Sheri McCoy can consider to increase revenue and thereby market share: A. Focus strategy-Avon can go into renting retail store spaces in notable stores like TESCO, Aldi and Sainsbury. This will allow those customers who prefer to be in the presence of other brands while buying have access to Avon. Not all customers prefer to buy beauty products at home or at their workplaces. Also, the 51.8 percent customers in UK who wish to B. Cost leadership strategy-The Company can induct and train more representatives in UK to increase the reach to its customers. It can offer higher commissions to the representatives while also eliminating the non-core items from the portfolio the way the company is doing in USA following the partnering with Cerberus Capital Management. (TERLEP, Sharon, 2017) C. Differentiation strategy-The Company can offer customized products which make use of organic and natural ingredients and find specific target markets to target through the digital media. The digital media campaigns will make use of representative members of the target population who will discuss how the new product or products have helped them. They will also be made to visit colleges, universities and public places to set up stalls and engage in providing trials while also partaking in brand activation practices. D. Differentiation focus strategy-The Company can launch health and supplements the way the New Avon LLC in USA wishes to do in the coming years. Strategic Selection Strategy Acceptability Suitability Accessibility Low-company has Low-the strategy A. Retail store Low-Currently firmly may not be well or space direct selling and believed is focus of Avon for past 130 years understood. formation in direct selling. B. Increase representati ve strength in UK along with their commission and decrease portfolio size. High-as New Avon LLC has accepted higher commissions and reduction in portfolio; so would AVP. High-the strategy High-the strategy targets the current will be clear to strength of the understand. company, its representative network. C. Develop new organic and natural products for specific target markets found Mediumunwillingness to new product development. High-the strategy targets the current trends in the market. Feasibility Low-presently if Avon was to venture into retail store format it will have to forge strong partnerships. Also the costs can be quite high. Highimplementation will be easy and there will be no significant cost increases. Medium-the Medium-there will company may not be high R&D understand the costs. shift to natural and organic products. online. D. Venture into health and supplement s product category High-the board will be willing to accept as New Avon LLC is also doing this. High-it is right way forward in expanding the portfolio. Medium-the employees and managers may not understand the shift. Low-it will require significant capital investments. The highlighted strategy B should be selected as it is ranked high on all counts. Project Implementation Needs In order to see if the project will be successful we need to look at the force field model for the strategy we wish to adopt: The company’s BOD can be convinced to take similar steps as New Avon LLC Managers who oversee certain failed products will not want to let go of them The company’s management also wishes to change as it wants to see improvement in revenues and profits. Company may not wish to spend more to train new representatives The company also believes that focus should be on the top forty products in the portfolio as they contribute 80 percent to the revenue. Managers may be unwilling to increase the commissions offered to the representatives Company realizes the there needs to be a way to motivate active representatives to perform better and increasing commission is a good option. Employees will fear that reduction in portfolio will mean further downsizing Source: Change Management Coach, http://www.change-management-coach.com/force-fieldanalysis.html The above diagram shows that at present the opposing and the proposing forces need to be unbalanced in favor of the proposing forces so that there is a shift from the status quo. For that to happen, the BOD will have to give full support to change, create a sense of urgency around change so that the employees and management feel that the change is really necessary; after having convinced they will have to make sure the transition to change is as smooth as possible. During this stage, it will be necessary to have a lot of meetings and conferences to explain what is needed. Finally, once the change is in place there should be effort to maintain it. At this stage the management should conduct internal audits to know if the changes are well in place. Conclusion It was discussed to increase its market share Avon has four strategies: new retail store formation or space formation in existing stores; increase in the number of representatives and commission percentage in UK along with reduction in portfolio size; new product development using natural, organic constituents and marketing those to specific consumer segments found on the social media; and finally venture into health and supplements product category. It was discussed that increase in the number of representatives along with the commission percentage and decrease in portfolio size is the most suitable, acceptable, accessible and feasible under the circumstances. This strategy can be implemented only if the BOD is fully convinced and also motivates the management and the employees to take part in the change. Bibliography AVON. History. [online]. [Accessed 16 Apr 2017]. Available from World Wide Web: AVON PRODUCTS INC. 2017. Avoncompany.com. [online]. [Accessed 17 Apr 2017]. 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