Question

The Newest Avon Lady—Barbie! Selling Tradition "Ding-dong, Avon calling." With that simple advertising message over the past 112 years, Avon Products built a $4 billion worldwide beauty-products business. Founded in 1886, and incorporated as California Perfume Products in 1916, Avon deployed an army of women to sell its products. These "Avon ladies," 40 million of them over the company's history, met with friends and neighbors in their homes, showed products, took and delivered orders, and earned sales commissions. Through direct selling, Avon bypassed the battle for retail space and attention waged by its competitors in department stores, and later in discount drug stores and supermarkets. Direct selling also offered convenience for the customer, coupled with personal beauty-care advice from a friend. Avon's plan worked well. Most members of its up to 500,000-member U.S. salesforce were homemakers who needed extra money but did not want a full-time job outside the home. They developed client lists of friends and neighbors whom they called on from time to time. Customers could also call them between visits. Recruiting salespeople was easy, and a good salesperson could develop a loyal core of customers who made repeat purchases. Avon paid the salespeople a commission based on their sales, and a successful salesperson could earn an attractive income. Times Change However, during the 1970s and 1980s, the environment changed. First, more women found that they needed to work outside the home. As a result, when Avon ladies rang the doorbell, often no one answered. Second, many Avon ladies decided that they needed more than part-time jobs, and Avon's annual salesforce turnover rates soared to more than 200 percent. Third, because of high salesforce turnover, many Avon customers wanting to see a salesperson could not find one. Fourth, more competitors, such as Amway, Mary Kay Cosmetics, and Tupperware, were competing for the pool of people interested in full- or part-time direct selling jobs. Finally, in addition to all those factors, increasing mobility of the U.S. population meant that both customers and salespeople were moving. This made it difficult for salespeople to establish loyal, stable customer bases. A New Strategy To deal with these issues, in 1988 Avon Products tapped James E. Preston to serve as its chair and chief executive. Preston decided that Avon needed to overhaul its marketing strategy. First, he refocused the company on its core business—selling cosmetics, fragrances, and toiletries—and sold unrelated businesses. Next, he drastically cut prices on Avon products. Finally, he tried a new compensation program called "Leadership" that allowed sales representatives to earn up to 21 percent in bonuses based on the sales of new representatives they recruited. Such multilevel selling is common among direct-sales companies. However, by late 1991, Avon killed the program, arguing that it did not fit Avon's culture. Preston believed that Avon had left as many as ten million former or potential customers stranded. These customers wanted to buy Avon products, but salesforce turnover meant that they did not know how to find a salesperson or order products. Fourteen percent of American women accounted for one-third of Avon's sales. Another 62 percent were fringe customers. These customers viewed Avon positively but did not buy regularly. Another 15 percent of American women were potentially receptive to Avon but were not necessarily interested in dealing with a traditional Avon sales representative. Thus, Preston decided to develop another program he called "Avon Select." The program featured a catalog and toll-free telephone number that allowed direct-mail selling. Avon's research revealed that its median customer was 45 years old and had an average household income of under $30,000. The catalog would reach younger, higher-income customers. Preston believed that, with a catalog, the company could cut the median customer age to 38 and increase average household income to more than $30,000. Avon supported the catalog program by kicking off a national advertising campaign that featured the slogan "Avon—The Smartest Shop in Town." To fund the advertising, the company cut sales commissions and incentives and laid off scores of executives. As you might imagine, all these changes created lots of turmoil at Avon including three different heads of the U.S. operation in a short period. However, Preston vowed to keep pursuing changes. To keep customers, "change we did, change we must, and change we will," Preston asserted. To make good on his promise, he launched a $30 million ad campaign in 1994 with the theme, "Just Another Avon Lady." Market research showed that, despite all Avon's changes, consumers still thought of "Ding-dong" and the Avon lady when asked what they associated with the company. Observers wondered if the use of the term lady in the mid 1990s would cause negative reactions among many women. After all, even Avon had avoided using the term in advertising for 20 years. Between 1992 and 1996, Avon's sales and profits rose slowly but steadily, driven primarily by sales in international markets. Then, in late 1997, Avon announced what might be its most radical change yet. It announced that it would soon test the idea of selling its products through retail stores. Although the company had been using retail stores in some foreign markets for years, this approach would be new to the U.S. market. Preston argued that no matter how great Avon's products were, many customers just weren't interested in buying from Avon ladies in a one-on-one situation. To pacify the company's 440,000 U.S. sales reps, Avon said it would consider giving them a share of the new business either through franchising or referrals from the stores. It also announced that it would cut its product line by 30 percent in order to put its marketing resources behind fewer products, pursue the creation of global brands out of several of its skin care and cosmetics products, and standardize its promotion efforts using the same promotions for its products around the world. Global Reach The value of Avon's global reach and it 2.3 million sales representatives worldwide had not gone unnoticed by other firms wanting to crack international markets. Mattel, Inc. announced in 1997 that it would partner with Avon to allow its salespeople to begin selling its Barbie dolls. In a 1996 test, Avon sold $43 million worth of two versions of Barbie, including more than one million of one version in just two weeks. Andrea Jung, Avon's president of global marketing noted that, "Our powerful distribution channel combined with their powerful brand is a huge opportunity." Companies like Mattel are attracted to direct salesforces like Avon's for several reasons. In international markets, the companies do not have to wait for retailers to build stores if they use a direct salesforce. Further, in many developing economies, being a direct sales rep may be the most attractive job for many women, thus making recruitment easy. However, there are problems. Turnover is often high, and many sales representatives are not really committed to the company. Further, many don't have formal business training or basic skills needed to perform their duties. Although Avon and Mattel limited distribution to the U.S. market initially, they planned to have Avon ladies selling Barbies in China as early as spring 1998. Mattel would introduce an "international Barbie," but she did not look Asian. In an earlier test in Japan, Mattel found that Asian girls preferred the standard American Barbie. Avon also planned to introduce a Barbie-branded line of toiletries and fragrances for girls in the U.S. and abroad. However, in early 1998, the Chinese government threw a monkey wrench into Avon's plans. The government announced that it was banning direct sales throughout the country. Government officials were responding to news reports of bogus sales schemes in which salespeople duped unsuspecting customers into spending their savings on over-priced, inferior goods. Further, officials believed that the direct-selling companies used their sales meetings to start secret societies and sell smuggled or fake goods. The ban prompted protests from the affected companies, like Avon, Mary Kay, and Amway, as well as the U.S. government. In addition, thousands of salespeople rioted in several Chinese cities, protesting the loss of their jobs. By mid-June 1998, however, Avon had successfully negotiated with the Chinese government to restart its business. Avon agreed to operate as a wholesaler, selling its products to retail stores and converting its 75 branch centers into retail outlets. The new arrangement meant that Avon's 50,000 sales representatives would lose their jobs. Despite the obstacles, Avon and other companies are committed to opening the Chinese market. China accounted for only about 1.5 percent of Avon's sales in 1998, but the potential was huge. Most Chinese consumers have little money, no credit cards, no telephones, and no direct way to get merchandise. The most common means of distribution are the China Post Office, hand-delivered door drops, and on-street distribution. There are also few customer lists available that direct-marketing firms can use. However, the Chinese population is developing into a discerning group that prefers quality products that meet their needs. Chinese customers believe that aggressive promotions cheapen a product. They like American-made products that companies promote tastefully. They particularly like cosmetics, jewelry, and entertainment products, especially if they are associated with celebrities. Direct marketers are also learning that they should not view China as a single market. The stereotype of 1.3 billion, low-income people living in rural areas is simply not true. China has the largest urban population in the world. By 2000, savvy marketers realized that the true Chinese market is the 400 million consumers living in a set of urban centers along the Chinese coast. Avon has shown its willingness to make changes and face challenges. Taking Barbie to China is just the latest challenge.

Questions:

3.1 With the help of the CAGE framework, discuss the challenges and opportunities that Avon is likely to encounter in entering the Chinese market. [15]

3.2 With the help of Porter’s Five Forces framework, analyse the chances of Avon’s succeeding in going global/ international market and provide recommendations to the company executives. [15]

Answer 1

3.1 CAGE Framework ( Cultural, Administrative, Geographic, Economic) is used to evaluate the international business opportunities. Avon faces the challenges and opportunities in entering Chinese market as it cannot follow the direct selling sales structure like in other market areas. The CAGE analysis can explain it as below :-

Cultural - The Chinese customers located in urban areas are open to buy international and American products but they do not prefer the aggressive promotion and marketing associated with cosmetics or personal use products. There is a preference to buy international products which are associated with celebrities and globally popular. The rural consumers have preference for domestically produced products and do not have the patterns of buying expensive international products for personal and daily use. Avon has a challenge as it is developed with focus on urban customers who are educated and have purchasing capacity.

Administrative - The challenges include the ban on direct selling networks in the country as those are not associated with selling quality products and legal means of doing business. Avon has to build support for its business in China and need to establish the distribution network with help of wholesalers, distributors and retailers who can promote its products and benefits to local users.

Geographic - There is awareness about American products in some market segments and by doing top of the line promotions the brand can increase awareness and popularity of the brand. As there is preference of locally manufactured products in local customers and rural populations, it can establish manufacturing operations to benefit from the opportunities and resources available locally.

Economic - The economy is growing and there are lot of foreign brands selling in the market with values and benefits to the customers who prefer quality and genuine products with differentiation over locally available products.

Overcoming the challenges and availing the opportunities the brand can establish its business in the Chinese market which has a demand for foreign products and growth potential.

3.2 Porter's five forces framework include the forces of Threat of new entrants, Bargaining power of suppliers, Bargaining of Buyers, Threats of substitute products, Competition rivalries.

Threat of New Entrants - Threat of new entrants exists as in the global business there is increasing demand and scope of growth in emerging markets. It will require the brand to innovate product range with differentiation and benefits as well as market using new trends.

Bargaining power of Suppliers - The suppliers have bargaining power in global markets as demand for the products increase and brands need to develop their international business. The brand can develop long term supplier base and efficient supply chain to deal with this force and develop long term supplier relationships based on common goals .

Bargaining power of Buyers - This force exists as there is demand in the global markets and there are ample options available. The brand needs to provide differentiation, provide customer experience to distinguish its products and services , invest in marketing to build awareness and expand customer base.

Threat of Substitute products - The brand faces a threat of substitute products and needs to developed differentiation and customer relationships to retain its customer base. It needs to invest in marketing, innovation, research and development and connect with customers using new trends and technologies.

Competition rivalries - With increasing business growth and demand, the competition will affect the company business which it needs to deal with building its brand, expanding its business, forming more long term relationships and markets .

The brand needs to target different customer segments as per their preferences and have a flexible approach and strategy as per different market and customer needs.