Cork Institute of Technology. Bachelor of Business (Honours) (FT & ACCS) - Award. Summer 2007 Business Policy / Strategic Management (Time: 3½ Hours)

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1 Cork Institute of Technology Bachelor of Business (Honours) (FT & ACCS) - Award (NFQ Level 8) Summer 2007 Business Policy / Strategic Management (Time: 3½ Hours) Examiners: Mr. J. Myler Ms. N. O Sullivan Mr. J. Fairhead NOTE Examination is divided into three sections Section A consists of a Case Study with all questions to the Case to be attempted totaling 30 marks. Section B consists of three general questions with TWO Questions 25 marks each to be attempted. Section C consists of MCQs and ALL questions to be attempted special answer sheet provided 20 marks. Avon Products, Inc Section A Avon is the world s largest direct selling organisation and merchandiser of beauty and beauty related products. From corporate offices in New York City, Avon markets product lines to women in 143 countries through 3.9 million independent sales representatives who sell primarily on a door to door or direct selling basis. Avon s product line includes skin care items, makeup fragrances for men and women, toiletries for bath, hair care, personal care, hand and body care, and sun care. It also includes an extensive line of fashion jewellery, apparel, gifts and collectibles. There are approximately 600 items in the product line. Globally, the company s product line is marketed primarily at moderate price points. The marketing strategy emphasises department store quality at discount store prices. Global marketing efforts resulted in a number of highly successful global power brands in the areas of cosmetics, skin care, and fragrance (i.e. products such as Anew, Avon Colour, Avon Solutions, Skin-So-Soft, Avon Naturals and the new global product called MarkTM.

2 History In the late 1800s, David McConnell, a door to door book salesman, had an idea he believed would encourage women to buy his books. Following a common trade practice of the period, he gave prospective customers a gift of perfume to arouse their interest. Before long, he discovered that the perfume was more popular than the books. He formed a new firm, which he called the California Perfume Company. I started in a space scarcely larger than an ordinary kitchen pantry, McConnell noted in My ambition was to manufacture a line of goods superior to any other and take those goods through canvassing agents directly from the laboratory to the consumer. McConnell based his business upon several factors: (1) products sold directly to the consumer, (2) an image of the company that captured the beauty and excitement of the state of California, and (3) a national network of sales agents he had organised during his years as a book seller. In the early 1950s, the sales representatives territories were reduced in size, a strategy that led to a quadrupling of the sales force and increased sales sixfold over the next 12 years. Avon advertisements appeared on tv for the first time during this period. The famous slogan Ding Dong, Avon Calling was first used in In 1960, total sales were $168.2 million, international sales were $11.3 million, and the company consisted of 6,800 employees and 125,000 sales representatives. Sales continued to grow dramatically throughout the 1960s. By 1969, total sales had grown to $676.7 million, international sales were $193.2 million, and the firm had 20,800 employees and over 400,000 sales representatives. Manufacturing plants, distribution centres and sales branches were opened throughout the world as part of an expansion program. Avon s strategy also included making the direct selling system more relevant to the contemporary woman. This strategy meant providing more meaningful career opportunities as well as harnessing technology to make Avon more user friendly for the sales representatives.

3 Competition Competition in the direct selling industry consists of a few large, well established firms and many small organisations that sell about every product imaginable, including toys, cookware, animal food, collectables, plant care products, clothing. In addition to Avon, the dominant company is Mary Kay (cosmetics). Mary Kay s product line includes more than 200 products in 8 categories; facial skin care, colour cosmetics, nail care, body care, sun protection, fragrances, men s skin care and dietary supplements. Mary Kay is a privately held company whose wholesale sales for 2003 were approximately $1.6 billion. Mary Kay Inc., has expanded and is now sold in 34 markets worldwide. For 2003, Avon Products Inc. revenue was $6.88 billion. Several other firms, such as Procter & Gamble Co., Unilever NV, Revlon Inc., Estee Lauder, and France s L Oreal, sell cosmetics and personal care products primarily through department stores and mass merchandisers, and they are considered important competitors in the market place. International Expansion Avon management feels that it is time to reevaluate and map out the long term future of the firm s beauty business on a global level. Senior management realises that the traditional Avon system of door-to-door house calls worked wonderfully in developing nations. The company has direct investment in 53 markets and through distributorships, specially appointed representatives, and licensees in 143 countries. Enormous growth opportunities exist in countries with huge populations such as China, Indonesia and India. Avon s management also sees potential in Poland, Czech Republic, Slovakia and Hungary. In those markets, the retail infrastructure is underdeveloped, especially in the interiors of those countries. The Avon representative provides consumers with an opportunity to buy a wide range of quality products at acceptable prices. In China for example, women are so eager for Avon products that a projected 6 month inventory of lotion sold out in only 2 weeks. The number of people buying from Avon in markets like the United States had been dwindling by 2 to 3% per year for about 12 years.

4 Global Marketing The traditional door to door method, with the Avon lady as the homemakers friend and beauty consultant, made the company the world s largest cosmetics firm and the number one direct seller. However, the approach is viewed as expensive (the sales person gets a 20 to 50% commission), and there are problems associated with hiring, training, managing and motivating the sales force. Avon recently strengthened its traditional direct selling channel through a program called Sales Leadership, a business model designed to attract and retain sales representatives through initiatives focused on business and beauty training. Each representative who signs up for the leadership program gets a percentage of the sales of every representative she recruits and every representative that the recruit herself recruits and so on down through the three generations of Avon representatives. Growth Strategies Upgrading the Avon global image is considered by management to be extremely important. One important element of the image upgrade was the announcement of a global advertising strategy. By consolidating worldwide advertising, Avon management believes it can expand its global presence and communicate a more unified brand image throughout its international markets. In 2000, management increased advertising expenditures by 50% to more than $90 million. In 2003, Avon announced that it was introducing an entirely new beauty business called MarkTM, celebrating young women and the mark they are making in the world. The MarkTM line consists of nearly 300 innovative, first to market and exclusive products in fun, modern packaging. A magalog (combination of magazine plus catalog) called Meetmark is delivered to an initial target audience of 10 million young (16-24 year olds) women every 4 to 6 weeks, and features the MarkTM products, up to the minute trends and inspiring lifestyle stories. To maintain the social spirit of the new brand, marktm representatives and customers are able to connect with each other 24 hours a day at or by telephone at meetmark.

5 Section A Case Questions: Q1. Seeing as the number of people buying from Avon in markets like the US has been declining over a period of time, should Avon concentrate its efforts on international markets? (10 marks) Q2. It appears that the effectiveness of Avon s sales force has waned in recent years as the company grapples with how best to sell cosmetics and jewellery to an increasingly sophisticated customer. How would you advise the company to compete against other mass merchandisers? (10 marks) Q3. Craft a winning strategy for Avon Products Inc., ensuring that it has a good fit with industry, competitive conditions and market opportunities. (10 marks) Section B (Total 30 marks) Attempt TWO questions from this Section Q1. Strategic resources, distinctive capabilities and core competencies are the nuts and bolts of Competitive Advantage. Critically analyse this statement. (25 marks) Q2. Satisfying the subtleties and intricacies of customer demand around the world means that a firm s business varies from country to country and market to market. Discuss. (25 marks) Q3. Because an organisation s culture can exert a powerful influence on the behaviour of all employees, it can strongly affect a company s ability to shift its strategic direction. A problem for a strong culture is that a change in mission, objectives, strategies or policies is not likely to be successful if it is opposition to the accepted culture of the company. (Hunger & Wheelan, 200). Discuss the above statement. (25 marks)

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