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Avon Products Inc

  1. Speaking introduction for Avon case

Avon Products Inc. is an American based beauty company headquartered in New York. The company is among the leading beauty companies globally with annual revenue of about $ 9 billion. The company concentrates its operations in the lines of fashion, home products and beauty. Common brand names synonymous with the company include Advance Techniques, mark, Skin-So-Soft, Avon Color, Avon Naturals, ANEW and among others. Avon not only manufactures beauty products for women, but also enhances the health and financial stability of women. In matters to do with health, the company has helped women fight breast cancer and its ravaging effects.  The company is active in championing for women’s economic empowerment, and provides numerous job opportunities for women in order to empower them. Most of the company’s products are tailored for women, and hence the need to improve the lives of women.

  1. Overview

Avon primarily engages in the manufacture of beauty and other complimentary products. The company also engages in rigorous marketing of its products in over 135 countries across the world. Avon prides itself with over 6 million representatives worldwide who are directly engaged in moving its products and interacting directly with consumers. The company has established its presence in the U.S., Europe, Asia Pacific, and parts of Africa (“Avon,” 2015). By offering a wide range of products in the sectors fashion, home products and beauty, the company has managed to diversify and hence spread risk. The company’s market segments are based on geographic locations. Major market segments include North America, Latin America, Africa, Middle East, Asia Pacific and Europe. Avon maintains its presence in over 60 countries, United States among them as well as 41 other territories.

Avon Products Inc. is notable especially in the use of direct sales to market its beauty products over the years. Direct sales agents have for long been used in marketing the products to consumers worldwide. The company has over time employed a door-to-door model of sales. The sales agents offer personal assistance to customers about the use of Avon products.  In order to supplement the efforts of the sales agents, the company launched a retail website in 2005 which stocks a wide variety of products. Avon.com, the retail website, avails a range of products to consumers worldwide. The retail website is designed to provide a similar level of personalized customer care service to that provided by live salesperson. In order to achieve this, the retail website has a number of features such as merchandising tools, intelligent site search, navigation tools, and a Celebros salesperson solution.

  1. Timeline

Avon Products Inc., initially known as California Perfume Company, was founded in 1886 by a book salesman known as David H. McConnell. This was after realizing that majority of the female customers preferred perfumes he offered to books. Connell also realized that majority of women stayed at home while their husbands attended work and other duties. Women working outside their homes accounted for a paltry 20 percent of the entire women population. Soon after forming the company, he decided to recruit women as salespersons. Women were at a better position to network with others and sell the products. This greatly increased the sales of the company making its products a huge success. For the first time, women were offered the opportunity to own and manage their own businesses through direct selling of the company’s products. McConnell believed in the power of the people to steer the company forward to great heights. He took various initiatives to ensure all sales representatives and staffs were highly motivated. For example, he provided women with the opportunity to achieving financial freedom, recognized the unique contributions of everyone and established a friendly spirit within the company.

Avon has adapted three different selling strategies of its products since its inception; door-to-door selling strategies, workplace selling and lastly online selling. Historically, Avon has used door-to-door selling to market its products. However, the company rethought this strategy in the 1970s by introducing a brochure that could be left on the doors of homeowners who were out. The brochure included samples of the various products. In 1986, workplace selling was introduced. This involved taking Avon products to the workplace where the customers could access them at their own convenience. In the 1990s, Avon launched the Sales Leadership Program whereby sales representatives could earn extra money through training other salespersons. In 2005, the company went a notch higher by embracing the use of modern technology. Avon utilizes a set of digital tools to make online selling as personalized as possible.

  1. Mission and vision statement

The mission statement of a company defines the organization’s purpose while the vision statement provides future direction of the organization or essentially what the organization seeks to achieve in future. The company’s vision is to develop a unique product mix of beauty and other related products, which surpass those of competitors in terms of value, quality and innovation, and hence become the products of choice among women worldwide. According to its vision statement, Avon Products Inc. seeks “to be the company that best understands and satisfies the product, service and self-fulfillment needs of women-globally” (“Avon,” 2015, p.1). The company seeks to fulfill the needs of women through production of high quality products aimed at women. This is elucidated in its vision statement.

  1. What is currently happening at Avon

Avon Products Inc. is currently experiencing the worst performance since inception. In 2015, the company’s first quarter reports indicated a decline in revenue of up to 18 percent. Operating margin went down by 5.7 percent. The company reported earnings per share of $ 0.04 percent (“Avon Press Release,” 2015). The company attributed the decline in performance to currency pressures which resulted from a stronger dollar in terms of other currencies. In the second quarter, Avon reported a net loss of $ 146 million, which is equivalent to a loss of $ 0.33 for each diluted share. In the third quarter, the company reported a decline in total revenue by $ 1.7 billion, or 22 percent. Currency pressures in 2015 were reported as the major factor contributing to the decline in revenues. The company also experienced a decline in the number of active sales representatives in Latin America and North America markets. Net loss for the year was reported as $ 697 million, and adjusted net loss of $ 50 million in the year 2015. The company’s poor performance has negatively affected the stock price. In addition, the management is analyzing various strategic alternatives which include selling out its parent company.

  1. Where is Avon going?

Avon’s future is bleak, following a protracted period of dismal performance and falling share prices.  Avon, known for its direct selling model, could be heading into bankruptcy which may lead to the company being placed under receivership. According to Cimilluca & Mattioli (2015), Avon has considered various strategic alternatives including a sell-out plan of its parent company to a private equity. After failing to find a buyer in 2015, Avon will be forced to sell part of its stake to a private firm in order to avoid bankruptcy. Avon has engaged private-equity firms such as Platinum Equity LLC and Cerberus Capital Management LP in a bid to sell part of its stake to them. Private investment is a common fallback plan to companies experiencing financial difficulties. The company may not be able to raise the required capital from the debt market since it will likely worsen its already bad financial situation. Debt financing is expensive and more so to a struggling financial institution such as Avon Products Inc.

  1. Products and services

Avon Products Inc. concentrates its operations in the manufacture of beauty, home and other related products. Fashion products include jewelry, apparel, watches, footwear, and accessories. Home products include toys, candles, gifts, decorative products, leisure products, children’s products, and other products. Beauty products which form the core products include a wide range of cosmetics, skin care, lipsticks, fragrances, toiletries, anti-aging creams, and among other items. The company also provides nutritional products to customers. The company is distinguished with the introduction of new beauty technologies that revolutionize the beauty industry. The company maintains a robust Research & Development department that is charged with developing new and innovative products. The company has a total of seven R & D facilities in different parts of the world that are charged with improving and developing new products. The following shows the market share of the three product categories.

 

  1. Cosmetics industry issues

The cosmetic industry in the U.S. has recorded tremendous growth over the years. In 2014, a moderate growth was achieved (“Euromonitor International,” 2015). This was attributed to increased employment rates in the U.S. An increase in employment rates increases the consumers’ purchasing power. However as consumers’ purchasing power increases, the demand for beauty and personal care products may be adversely affected as witnessed in 2014. This is because as consumer’s purchasing power increases, majority of them prefer to seek beauty services as opposed to purchasing beauty products. This caused a moderate growth in the beauty industry in 2014. Trends in the beauty industry may also impact the demand of beauty products. According to the Euromonitor International (2015) report, more consumers in 2014 embraced a natural look to wearing makeup. This has been driven by new trends in the social media as well as in the mainstream media. Such trends led to a moderate growth in the beauty industry.

A major issue in the cosmetics industry is high competition from both domestic and international products. There is intense competition in the industry both within the domestic and international markets. Avon competes against numerous other competitors who use the same or different selling strategies such as direct selling, prestige retail channels, internet marketing, mass market retail, and among other distribution methods. Multinational companies in the cosmetics industry which can afford to lure consumers through appealing advertisements have intensified competition in the industry. Another issue in the cosmetics industry is the rise of organic/natural products which have also taken a significant portion of the market share. Lastly, the introduction of products which promise multiple benefits among consumers have also intensified competition in the industry.

  1. Avon’s problems

Over the last few years, Avon has faced a number of problems which if not carefully addressed might lead to bankruptcy and subsequently shutting down operations. Since 2004 when the company’s stock was at its highest value, the value has dramatically fallen over the years by more than 90 percent. In 2015, the company’s stock reduced value by 56 percent, and the company recording a market capitalization of about $ 1.8 billion (Cimilluca $ Mattioli, 2015). The woes facing the company come amid a sharp decline in sales over the years. This is further exacerbated by the decline in the number of sales representatives who have abandoned their work in favor of other profitable ventures. Avon solely relies on the efforts of sales representatives to move products to the consumers, or what is popularly known as direct selling. Changes in consumer’s shopping habits have partly contributed to the problem. Currently, consumers are using multiple channels to shop such as retail and online shopping. Avon, on the other hand, has been slow to fully adopt the new trends such as online selling of products.

Avon is currently finding it difficult to find a financier who can help it stabilize its stock. Its debt ratings has gone down significantly, which means that the company can only obtain loans from banks and other lending institutions at stiff terms. The company’s cash reserves have declined significantly complicating the situation further. In 2014, the company reported cash reserves of $ 961 which fell to $ 697 by the end of 2015. In 2014, the company lost a civil suit with the federal government revolving payments of monies abroad. The civil suit cost the company over $ 340 million including the legal fees. This has considerably reduced its cash reserves. The strengthening of the dollar against other currencies also weakened its financial position and continues to be a major threat to the company’s profitability. Avon is particularly impacted by foreign currency fluctuations due to its high presence in foreign countries – the company sells to over 80 foreign markets (Cimilluca $ Mattioli, 2015).

  1. PEST Analysis (Political, Economic, Social, Technological)

The political forces have a significant impact on the operations of Avon Products Inc. These forces include type of government & stability, degree of corruption, regulations or de-regulation, and tax policy. Tax policy has in the past impacted the operations as well as the profitability of the company. In 2015, Brazil introduced an Industrial Production Tax (IPI) which led to a decline in revenue by a margin of 26 percent (“Avon Press Release,” 2015). Various regulations by the government may also have a significant impact on the operations of the company. For instance, all companies are required to comply with SEC regulations and other provisions provided by the law. In 2008, investigators begun to look into alleged violations of the company with regard to the Foreign Corrupt Practices Act (FCPA) of 1977. In 2015, the company was forced to pay a $ 135 million fine in relation to the probe (Serena & Rubin, 2015). Political stability also impacts operations. In countries experiencing wars or political tension, sales may drop affecting the profitability of the company. Avon faces the risk of political stability due to its heavy presence in foreign countries including the Middle East and parts of Africa which experience political turmoil.

The economic factors have had a profound and perverse impact on the operations and profitability of the company. In 2015, Avon’s poor financial performance was partly attributed to weakening of foreign currencies or a strengthening of dollar against foreign currencies. Currency pressures are economic conditions which are beyond the control of the business, and may have negative consequences on the operations of the business. Other factors in the economic environment which impact Avon include economic cycles such as recession and currency translation costs. Foreign currency translation has also negatively affected the revenues of the company. Other economic factors include the stage of business cycle and labor costs. Avon is in the decline stage having been in operation for over 100 years. The company should reinvest in a new brand in order to reverse the declining sales and avoid bankruptcy.

The social factors in the macro environment have a tremendous impact on the operations of the company. The social factors encompass social issues such as population growth rate, lifestyle choices of the consumers and their attitudes towards new trends or cultural changes, education, population health and social mobility. Population growth rate directly impacts sales of all firms. As population increases, the demand for products also increases. The U.S. which is one of the major markets for Avon has witnessed a moderate population increase over the period due to immigration of workers and students. According to the United States Census Bureau (2015), the U.S. population increased by an average of 0.7 percent between 2013 and 2014. Lifestyle choices and consumers attitudes may also impact the company. Statistics indicate that more consumers preferred a natural look to wearing makeup in 2014 (Euromonitor International, 2015). This led to moderate sales increases in the entire cosmetics industry. Such shifts in consumers’ attitudes may negatively affect the sales of the company.

Technological factors that have impacted the company include emerging technologies, technology transfer and research and development activities. Emerging technologies may change the way products are manufactured or alter the distribution system. Avon has already opened up retail websites which supplements the efforts of the sales representatives. The use of e-commerce in reaching consumers has opened new opportunities for the company and increased demand for its products. In 2014, Avon launched the first direct ecommerce site in a bid to revamp sales. The company has entered into partnerships with companies such as PayPal to enable sales representatives to conduct online transactions which include the use of mobile phones. The ecommerce site enables customers to directly engage with the company. Customers can then make orders through the ecommerce site which are delivered by sales representatives (Cameron, 2014).

Research and development helps in the introduction of new products or new and efficient methods of production. A country’s level of technological development also impacts the firms located within. It can be quite expensive to import new technologies in contrast to situations where the technologies are locally available.

  1. Industry demand – cosmetics

Past researches indicate that the cosmetic industry demand is on an upward trend. According to Lopaciuk & Loboda (2013), the world’s cosmetic industry has grown by 4.5 percent on average over the past 20 years. Annual growth rates averaged between 3 and 5.5 percent, showing signs that this growth may be maintained in the long term. Beauty products can be divided depending on brand prestige into mass and premium segment. The mass segment accounted for 72 percent of total global sales and 28 percent for the premium segment. Like other sectors, the beauty industry was negatively affected by the 2008/2009 global recession. Since 2010, the global beauty industry demand has been on a path to recovery. In 2013, the demand for beauty products was driven by the emergence of new markets in Latin America and Asia. Online sales of beauty products have also contributed to a higher demand.

 

Over the recent past, new trends have emerged in the market – the rise in demand of organic beauty products. In 2010, there were only a few manufacturers concentrating on organic products. However with time, majority of the manufacturers have turned into production of natural products. Organic beauty products were at first distributed through small channels such as personal delivery. However currently, the products are being stocked in departmental stores and supermarkets just like other beauty products. The increased concerns among consumers on health safety have made the organic segment the fastest growing in the beauty industry. North America accounted for the largest consumer of organic products in 2013, followed by Europe. The demand in the organic sector has averaged 9.3 percent, and is expected to maintain the growth (“Transparency Market Research,” 2014).

  1. Competitor Assessment – Avon’s closest competitors

Avon is increasingly facing stiff competition from a number of competitors who manufacture similar products. Some of Avon’s strongest competitors in the beauty industry include Kimberly Clark Corp, Revlon (REV), Estee Lauder Cos (EL), Colgate-Palmolive Company (CL), O’real, Unilever PLC, and The Procter & Gamble Company. Avon faces stiff completion in the global market since it markets its products globally. Competition between rival companies in the beauty industry is primarily based on product attributes such as prices, brand recognition, marketing & promotion, innovation, and the availability of the products. Avon’s performance has been declining over the last four years.  On the other hand, some of its competitors’ performance has been on the rise over the same period. Competitors such as L’Oreal and Estee Lauder have recorded tremendous revenue growth of about 9 percent annually. The following graph shows Avon’s stock price performance in 2015 compared to the average of that of competitors.

(“CSIMarket.com,” 2016).

As seen above, Avon’s stock performance has been dismal over the last one year, with the trend continuing into 2016. Competitors have maintained an average stock performance throughout the period while Avon’s stock price has experienced a downward trend especially from April 2015. From January 2015, the company’s stock performance gained significantly in comparison with that of competitors. The share price improvements noted between January and March were attributed to reports that Avon would sell some of its stake to a private-equity company. This increased investors’ optimism that the company would be able to return to its earlier profitability streak which it enjoyed. The optimism was however, short-lived as the sale of part of the stake failed to take place.

  1. Competitor ratio comparison

The following are financial ratios of Avon’s major competitors.

 

 

Estee Lauder Cos O’real

 

Asset Turnover  

1.37

 

0.99

Return on Assets  

14.54

 

1.77

Inventory Turnover 2.20 3.18
Financial Leverage 2.42 0
Asset Turnover  

1.37

 

0.99

Current ratio 1.79 1.75
Quick ratio 1.07 0.99

 

  1. Avon income statement

The following income statement shows Avon’s 4th quarter earnings status as at 30th September 2015.

 

Total Revenue

Cost of revenue

Gross profit

General and administrative expenses

Operating income

Other income

Earnings before interest and tax

Interest expense

Profit before tax

Tax

Net income

 

($)

1,666,900

(652,700)

1,014,200

(991,200)

23,000

14,900

37,900

(30,100)

7,800

704,800

(702,500)

 

Avon’s earnings are below targets set for the year. Revenue decreased by a margin of 21 percent in the third quarter. This can be attributed to a reduction in the number of active representatives and currency pressures experienced by the company in the international market. The decline in sales revenue is also attributed to poor performance of the company’s key markets such as North America. According to the company’s website, fashion and home sales experienced a 19 percent dip in sales while the beauty segment experienced a decline of 17 percent. The decline in sales resulted in poor revenues leading to the company making losses. Other factors which contributed to the performance include currency pressure, higher taxes and government regulations in countries such as Venezuela which negatively affected the company’s revenues. The company needs to adopt new strategies which can reverse the declining sales and ensure the company is profitable again.

  1. Avon Balance sheet

The following table shows Avon’s quarterly balance sheet for the period ended 30th September 2015, fourth quarter.

Assets

Long-term Assets

Plant, property and equipment

Goodwill

Other Assets

Current Assets

Cash

Receivables

Inventory

Other current assets

Total Assets

Liabilities

Current liabilities

Accounts payable

Short term debt

Total Current liabilities

Long term debt

Minority interest

Other liabilities

Total Liabilities

Stock Holders’ Equity

Common stock

Retained earnings

Capital surplus

Treasury stock

Other

Total Stockholder Equity

$ ‘000’

 

948,300

99,900

340,900

 

548,400

470,300

847,200

480,700

3,774,700

 

 

1,608,300

117,200

1,725,500

2,196,300

13,100

621,300

4,556,200

 

187,900

2,808,600

2,233,400

(4,594,000)

(1,417,400)

(781,500)

 

The above table shows in detail the financial position of Avon in the 4th quarter of the year. It is possible to see that the total liabilities exceed the total assets of the company as at 30th September 2015. This means that there are more claims to the company than it can actually pay using both current and long-term assets. The treasury stock or outstanding shares value is negative indicating the poor performance of the company’s stocks. The company has a substantial amount of long-term debt which may have a negative impact on its operations especially if it is unable to repay the debt. Debt financing may be expensive to the company due to accruals in interest charges. This may have several repercussions on the performance of the company, by eating up the revenues of the company. The high long-term debt financing also makes it difficult for the company to acquire additional financing. The company should concentrate on reducing the high amount of long-term debt.

  1. Avon ratios

Financial ratios give a quick outlook of the financial health of the company. There are different types of ratios which can help in assessing the health of the company. Some of these include: profitability ratios, liquidity ratios, leverage ratios, efficiency ratios and market value ratios. The following table gives Avon’s financial ratios as at 30th December 2015.

Liquidity Ratios

Return on Equity (%)

Quick Ratio

Current Ratio

Return on Assets
Leverage Ratios

Debt/Equity Ratio

Interest Coverage

Efficiency Rations

Total Asset Turnover

Market Value Ratios

Earnings Per Share

Price/Equity Ratio

 

 

0%

0.89

1.38

4.23%

 

8.98

0.76

 

1.48

 

-2.60

1.00

 

The Return on Equity gives the returns that the company makes as per each investment on equity. The company’s ROE is 0 indicating that there were no returns on equity. The quick ratio gives the company’s ability to pay short-term liabilities with liquid assets. A quick ratio of o.89 indicates that Avon may not be able to fully cater to all its short-term liabilities. The current ratio indicates the company’s ability to clear short-term liabilities. Avon’s current ratio of 1.38 indicates that the company can be able to clear short-term financial liabilities and hence it is still in good health. The company has an interest coverage ratio of 0.76. Interest coverage ratio assesses the company’s ability to pay interest on long-term liabilities. The ratio indicates that the company cannot be able to fully cover the expenses. The debt to equity ratio indicates the amount of debt financing. Debt/equity ratio of 8.96 indicates a significant amount of debt financing in Avon. Total asset turnover indicates how fast the company disposes assets through sales. An asset turnover of 1.48 is moderately high. Earnings per share for the company are -2.60 indicating that there were no earnings declared for outstanding shares in the company.  The price to equity ratio is valuation of stock, which is low for the company.

  1. Internal information

Avon is currently under the leadership of Sheri McCOy, who is the CEO director of the company. McCoy joined Avon Products Inc. in 2012. Her major task is to drive growth in the company which is currently facing a decline in sales through development of appropriate growth strategies. Her other responsibilities include helping women become independent by providing an earnings opportunities for them and ensuring that the Avon brand becomes world premier seller of beauty products.

  1. Current generic strategy for improving Avon

There are three generic strategies that companies can use to improve their performance. These strategies were developed by Michael Porter and include: differentiation, cost leadership and focus. A cost leadership strategy revolves around having a competitive advantage over other companies. A competitive advantage can be achieved in two ways. First, the company can place its products at a lower price compared with those of rivals. As aforementioned, the mass segment accounts for 72 percent of the entire global market. This means that majority of consumers are price sensitive and are likely to respond positively to a price reduction. The problem with this method is that a price reduction may further reduce the revenues of the company especially if it does not generate a high demand of the company’s products.

Second, the company should find ways of reducing production costs. The company can source for new and cheaper source of materials or find new suppliers for its raw materials. With the low production costs, the company can still market its product at the same prices as competitors. The low production costs can enable the company increase its revenue. This would be the best generic strategy to improving its performance.

  1. SWOT Analysis

Strengths

1.      Avon enjoys a strong brand image.

2.      Deep understanding of consumer needs through direct selling.

3.      A well established distribution network in both rural and urban areas.

4.      Development of new products through its R & D department.

5.      High quality products.

Weaknesses

1.      Large number of field representatives quitting their job.

2.      Low field engagement.

3.      Declining sales in key markets such as North America.

4.      Poorly skilled sales representatives in some regions.

5.      Poor marketing and distribution channels.

 

Opportunities

1.      Can enter into joint partnerships and alliances with other companies

2.      Avon can enter into the growing organic market with ease.

3.      Use of online marketing to improve sales

4.      Expansion into new markets by increasing the selling network.

5.      Development of new products differentiated on race and skin color.

Threats

1.      There is intense competition in the beauty industry.

2.      Foreign currency fluctuations which impact revenue.

3.      Competitive advertising and adoption of direct selling method by competitors.

4.      Presence of counterfeit products.

5.      New regulations in the cosmetic industry.

 

  1. Strategies to be implemented by Avon for improved business

Avon needs to implement a number of strategies in order to reverser the declining sales of its beauty products. To start with, the company has opted to implement a brand reinvestment strategy, which is part of an internal growth strategy. Avon brand has been premier in the cosmetic industry for over a century. As such, the brand still holds potential for growth in key markets such as North America and also internationally. Avon should divert more resources in creating positive brand awareness among consumers or strengthening its image. In order to improve its brand image, the company should devote resources towards advertising and promotion in a variety of media. The company should identify a team of employees who should be solely responsible for improving brand awareness. Advertisement and promotional messages should be carried through the mass media as well as the digital media. Strong advertisement and promotional messages can change consumers’ attitudes and hence improve sales.

Due to the critical financial situation the company is currently facing, seeking a strategic partnership will be a good way to overcome the crisis. A strategic partnership will enable the company gain the much needed capital for injection into the business. The company is seeking to enter in a scale joint venture with another company in order gain economies in production and distribution. Currently, Avon is in dire need of high amount of capital to improve business and reverse the declining sales. Worse still, the company may not be able to obtain the much needed capital in form of debt from banks and other financial institutions owing to its poor credit rating. In addition, the company cannot be able to raise capital from selling stock due to poor stock performance and the fact that selling new stock would significantly reduce the value of the current shareholders’ stock. By entering into a strategic partnership, the company will realize a number of benefits. First, it will be able to improve its capital structure. Second, the company will be able to improve sales in the international market. Third, the company will be able to realize value creation which will benefit shareholders through improved value for their shares (Avon, 2015).

Avon also suspended the payment of dividends in 2015 as part of a restructuring strategy. The suspension of the dividend payments’ plan was in line with its alignment process with its poor performance in the previous year. The suspension of the dividends was part of its plans for securing future growth. The proceeds which would have been paid as dividends will be diverted to other critical areas such as debt financing and in offsetting other liabilities the company has accrued over time. By reducing accrued liabilities, the company will be able to improve its credit rating. This will enable it to acquire debt financing at less strict conditions and at lower interest charges since it will be considered as less risky. Reduction of accrued debt will also improve investor confidence which is critical in business.

  1. Possible options for Avon

A diversification strategy can also improve performance of Avon. Currently, the company concentrates in the production of beauty products targeted specifically for women. The company can diversify its products line to include beauty products for men. In the recent period, there has been a higher demand for beauty products targeted at men. According to a Euromonitor International (2014) report, certain regions such as China recorded over 20 percent increase in demand of beauty products for men. The production of beauty products for men remains an unexploited niche in the market which the company can take advantage of. The increase in demand for beauty products for men is driven by the changing attitudes among men. Currently, men too have realized the need for proper grooming. Majority of beauty products in the market are target at women, and hence the company can easily take over the market with regard to beauty products for men.

Avon Products Inc. can also increase its presence in overseas markets. This would be part of an internal growth strategy. Currently, Avon has a limited geographical coverage with operations in areas such as North America, Latin America, parts of Africa, Middle East, Asia Pacific and Europe. The company can expand operations in more overseas market in order to increase its market share. This will translate to higher sales for the company. For instance, the company can expand operations in the East, Central and West African region where it maintains limited coverage. Expanding into new markets can lead to improved sales and higher revenues.

Functional strategies can also help the firm reduce costs. For instance, improving the supply chain can help reduce operational costs. The supply chain can be improved by ensuring efficiency between suppliers of materials and the firm’s productions processes to avoid waste and delays in the production process. The company can also reduce operational costs by employing economies of scale during production and ordering of materials. Purchasing materials in bulk can enable the company obtain good quantity discount.

  1. Team 1 – Recommendations – option 1 and 2

Avon Products Inc. should enter into a strategic alliance in order to reverse the poor performance recorded over the recent period. A strategic alliance is the best option for the company since it is currently facing a financial crisis, with limited sources of obtaining debt finance. Strategic alliances involve entering into a long-term cooperation with other firms with the aim of mutual economic benefit. Strategic alliances are advantageous in that they can enable the company reduce political risk, financial risk, gain access to new markets, or develop new production capabilities. The second option for Avon should be a diversification strategy. Related diversification can enable the company expand its operations and attract a new customer base. Diversification can enable the company achieve economies of scope, eliminate threats of substitutes, increase entry barriers and gain a bargaining advantage with respect to customers and suppliers.

  1. Recommended options showing NPV and IRR

A strategic alliance will inject initial capital of $225,000. The following table shows the expected cash inflow over a period of four years. Given a rate of 12 percent and a present value of $ 1, the present values of cash flow would be as follows:

Year 1 2 3 4
Cash inflow $95,000 $80,000 $60,000 $55,000
Present value of $1 at 12% 0.893 0.797 0.712 0.636
Present values $84,835 $63,760 $42,720 $34,980

 

The net present value is given by $(226,295 – 225000) = $1,295. Since the net present value is positive, the project may be beneficial to the company.

A diversification strategy will require an initial capital of $243,000. The strategy is expected to give a return of $50,000 every month for a period of one year. With a return of 12% per annum, the strategy will give a net present value of ($562,754 – $ 243,000) = $319,754. This option also appears attractive.

The internal rate of return for the strategic alliance can be given by:

(95,000)/(1 +12%) + (80,000)/(1 + 12%)2 + (60,000)/(1 + 12%)3 + (55,000)/(1 + 12)4 – 225,000 = 0

The internal rate of return for the diversification strategy can be given by:

(50,000)/(1.12) + (50,000)/(1.12)2 + (50,000)/(1.12)3 + (50,000)/(1.12)4 … (50,000)/(1.12)12

References

Avon Press Release. (2015). About Avon. Retrieved from: http://media.avoncompany.com/2015-  11-04-Avon-Reports-Third-Quarter-2015-Results

Avon. (2015). About Avon. Retrieved from: http://www.avoncompany.com/aboutavon/index.html.

Cameron, N. (2014, Aug. 14). Avon ahead of digital shares secrets to online success. CMO.

Cimilluca, D., & Mattioli, D. (2015, Sept. 10). Avon Looks for an Outside Investor. The Wall      Street Journal.

CSIMarket.com. (2015). Avon Product Inc Stock Performance. Retrieved from:             http://csimarket.com/stocks/compet_glance.php?code=AVP

Euromonitor International. (2015). Beauty and Personal Care in the U.S. Retrived from:             http://www.euromonitor.com/beauty-and-personal-care-in-the-us/report

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Unit Five-Employment Regulation (EXCEL)

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