Avon Products For six years after Andrea Jung became CEO of Avon Products in 1999, revenues for the

Avon Products

For six years after
Andrea Jung became CEO of Avon Products in 1999, revenues for the beauty
products company famous for its direct-sales model grew in excess of 10 percent
a year Profits tripled, making Jung a Wall Street favorite Then in 2005, the
success story started to turn ugly Avon, which derives as much as 70 percent
of its revenues from international markets, mostly in developing nations,
suddenly began losing sales across the globe A ban on direct sales had hurt
its business in China (the Chinese government had accused companies that used a
direct-sales model of engaging in pyramid schemes and of creating “cults”) To
compound matters, economic weakness in eastern Europe, Russia, and Mexico, all
drivers of Avon’s success, stalled growth further The dramatic turn of events
took investors by surprise In May 2005 Jung had told investors that Avon would
exceed Wall Street’s targets for the year By September she was rapidly
backpedaling, and the stock fell 45 percent

With her job on the
line, Jung began to reevaluate Avon’s global strategy Until this point, the
company had expanded primarily by replicating its US strategy and
organization in other countries When it entered a nation, it gave country
managers considerable autonomy All used the Avon brand name and adopted the
direct-sales model that has been the company’s hallmark The result was an army
of 5 million Avon representatives around the world, all independent
contractors, who sold the company’s skin care and makeup products However,
many country managers also set up their own local manufacturing operations and
supply chains, were responsible for local marketing, and developed their own
new products In Jung’s words, “they were the king or queen of every decision”
The result was a lack of consistency in marketing strategy from nation to
nation, extensive duplication of manufacturing operations and supply chains,
and a profusion of new products, many of which were not profitable In Mexico,
for example, the roster of products for sale had ballooned to 13,000 The
company had 15 layers of management, making accountability and communication
problematic There was also a distinct lack of data-driven analysis of
new-product opportunities, with country managers often making decisions based
on their intuition or gut feelings

Jung’s
turnaround strategy involved several elements To help transform Avon, she
hired seasoned managers from well-known global consumer products companies such
as Procter & Gamble and Unilever She flattened the organization to improve
communication, performance visibility, and accountability, reducing the number
of management layers to just eight and laying off 30 percent of managers
Manufacturing was consolidated in a number of regional centers, and supply
chains were rationalized, eliminating duplication and reducing costs by more
than $1 billion a year Rigorous return on investment criteria were introduced
to evaluate product profitability As a consequence, 25 percent of Avon’s
products were discontinued New-product decisions were centralized at Avon’s
headquarters Jung also invested in centralized product development The goal
was to develop and introduce blockbuster new products that could be positioned
as global brands And Jung pushed the company to emphasize its value
proposition in every national market, which could be characterized as high
quality at a low price By 2007 this strategy was starting to yield dividends
The company’s performance improved and growth resumed It didn’t hurt that
Jung, a Chinese-American who speaks Mandarin, was instrumental in persuading
Chinese authorities to rescind the ban on direct sales, allowing Avon to
recruit 400,000 new representatives in China Then in 2008 and 2009 the global
financial crisis hit Jung’s reaction: This was an opportunity for Avon to
expand its business In 2009, Avon ran ads around the world aimed at recruiting
sales representatives In the ads, female sales representatives talked about
working for Avon “I can’t get laid off, I can’t get fired,” is what one said
Phones started to ring off the hook, and Avon was quickly able to expand its
global sales force Jung also instituted an aggressive pricing strategy, while
packaging was redesigned for a more elegant look at no additional cost The
idea was to emphasize the “value for money” that Avon products represented
Media stars were used in ads to help market the company’s products, and Avon
pushed its representatives to use online social networking sites as a medium
for marketing themselves The result of all this was initially good: In the
difficult years of 2008 and 2009, Avon gained global market share and its
financial performance improved However, the company started to stumble again
in 2010 and 2011 The reasons were complex In many of Avon’s important
emerging markets, the company found itself increasingly on the defensive
against rivals such as Procter & Gamble that were building a strong retail
presence there Meanwhile, sales in developed markets spluttered in the face of
persistently slow economic growth To complicate matters, there were reports of
numerous operational mistakes—problems with implementing information systems,
for example—that were costly for the company Avon also came under fire for a
possible violation of the Foreign Corrupt Practices Act when it was revealed
that some executives in China had been paying bribes to local government
officials Under pressure from investors, in December 2011 Andrea Jung
relinquished her CEO role, although she will stay on as chairwoman until at
least 2014

Case Discussion
Questions

1
What strategy was Avon pursuing until the mid-2000s? What
were the advantages of this strategy? What were the disadvantages?

2
What changes did Andrea Jung make in Avon’s strategy
after 2005? What were the benefits of these changes? Can you see any drawbacks?

3
In terms of the framework introduced in this chapter,
what strategy was Avon pursuing by the late 2000s?

4
Do you think that Avon’s problems in 2010 and 2011 were a
result of the changes in its strategy, or were there other reasons for this?

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