Case 2: Making over Avon

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CASE #2: Making Over Avon

As the world’s largest direct seller of cosmetics and beauty-related items, Avon Products wants to continue building its global reach (more than two-thirds of Avon’s sales revenues come from outside North America) and attracting younger customers. To do so, however, Andrea Jung, chairman and CEO, must continually juggle the strategic challenges of guiding this $8 billion company and its worldwide army of over five million independent representatives. Jung was named Avon’s first female CEO in 1999. Since that time, she has overseen some significant strategic initiatives. One of these was the company’s $100 million investment in a state-of-the-art product research facility outside of New York City, which opened in 2005. Avon had always lagged behind its competitors in R&D (research and development), spending less than 1 percent of sales while Esteé Lauder Companies was spending over 1.3 percent of sales and L’Oreal SA about 3 percent of sales. Because this industry is one in which customers continually look for new products that make them look good and that are also good for the skin, R&D is critical. In addition, because Avon is primarily a direct sales company whose representatives pitch new products to customers every two weeks, the importance of investing in new product development becomes even more apparent. Another of Jung’s strategic moves was a revamp of Avon’s stodgy, old-fashioned image through new marketing and advertising. Avon—best known for its troops of mostly middle-aged women selling skin

creams and cosmetics to their neighbors from catalogs—needed a serious overhaul of that dated image. Jung ordered a new design for the company’s all-important sales brochure using heavier, glossier paper that was more visually appealing. She also decided to increase distribution by 6 percent. This meant that sales brochures would now reach an additional one million women every two weeks—a bold strategic move that Jung felt would pay off. Another strategic initiative was the development of a line of cosmetics for women ages 16 to 24. It was the company’s first push into the youth market and a dramatic change from its core customer group, which is age 35 and older. Deborah Fine (who has since left the company) was president of Avon Future, the company division responsible for the line. She said, “We want to capture a younger customer, bring in new reps, and create a new global youth brand.” According to Avon, 17 million young women in the United States spend at least $75 billion a year on beauty and fashion. If Avon could capture part of that spending with appealing products, it had the potential to add significantly to its bottom line. Avon’s new “young” brand, called mark, launched in the summer of 2003. Thousands of career-savvy young women signed on as representatives and have helped propel mark to the number two trend brand in the world. Jung is confident that mark will continue to help the company “pass the makeup brush” to a new generation of Avon customers. The strategic challenge of this product line, obviously, will be to keep mark’s customers and sales force (a notoriously fickle age group) excited and hooked. Despite what appeared to be strategically sound actions, Avon’s sales during 2005 “showed some blemishes.” U.S. revenues sagged, and even the previously strong momentum of sales in overseas markets slowed. Jung’s response: a three-year restructuring program aimed at saving at least $300 million a year. This restructuring involved downsizing (eliminating corporate positions); doubling advertising spending; focusing R&D resources on product innovation in an attempt to make its brands more competitive; simplifying the manufacturing structure; outsourcing some services to low-cost countries; and improving the attractiveness of the representatives’ earnings potential in the United States, Russia, and Brazil. In addition, Avon’s greatest market potential appears to be in China. It was the first company to be granted a direct selling license there and by June 2006 had recruited more than 114,000 representatives. One analyst says, “Avon has a great brand; they’ve got a product lineup that’s appealing.... The model’s not broken. It needs some help.”

Discussion Questions

1. Explain how strategic management and the strategic management process are illustrated in this case.

2. What are some performance measures that Avon’s strategic decision makers might use to evaluate the results of the restructuring initiatives?

3. Andrea Jung is Avon’s first female CEO, which you might find surprising considering that Avon’s target market is overwhelmingly female. Do some research on the number of female CEOs and female board members in U.S. companies. (Check out Catalyst, an organization that researches women’s workplace issues.) Have these numbers changed over time? What conclusions might you draw from these data?

 4. Go to Avon’s Web site [www.avoncompany. com]. What are Avon’s vision and mission? How might these statements affect strategic decisions and actions? Then, check out the company’s products. What is the company’s number one brand globally?