International market analysis for Natura cosmetics

Natura Cosmetics Company was founded in 1969 as a small laboratory and cosmetics shop in Sao Paulo, Brazil by Luis Seabra; and it is the industry leader in the cosmetics, fragrances and personal hygiene market. Natura Company offers a full range of products with solutions for consumers’ various needs, regardless of age. It includes products for the face and body, hair care and treatment products, make-up, fragrances, bath products, sun protection products, oral hygiene products and product lines for children. In 1974, the company decided to follow direct sales operation and the strategy allowed to continue expansion at low to moderate cost. Then it becomes the industry leader in direct sale, surpassing even the giant the Avon Company. In 1982, it started its internationalization process when it arrived in Chile. Six years later, it added the Bolivian market. In 1994, it decided to pursue a new international business and opened in Argentina market. Besides, at the beginning of the 1990s, the company focused on their stakeholders’ relationship, defined its beliefs and values. Thus, a recent annual report indicates that the company’s direct sales in the region will reach a turnover in the order of US$ 500 million in 2012…

In the report, it is analyzed and consulted for the Natura Cosmetic’s international development as well as the relationship strategy, international strategy, learning and innovation, and the company’s portfolio of domestic, regional and international market.

CASE ANALYSIS

Natura

You work as an analyst for a specialist consultancy and have been tasked with producing an assessment of certain aspects of the Natura organization’s international development, as set out in the case study “Natura Cosmetic”.

In your answer to the four tasks set out below you are required to:

evaluate the information contained within the case study provided; and

make reference to relevant theoretical concepts/models derived from the lecture programme and/or your reading of recommended academic texts.

You must not try to access, or include in your assignment, information or analysis drawn from any other resources than those noted above. You are permitted, however, to visit the Natura Company’s website (see case study) in order to familiarize yourself with the company, its operations and products.

Task 1:

In his analysis of companies, that are successful (internationally), Perlmutter identifies:

Effectiveness of an organization’s relationship strategy; and

Learning & innovation

As two key factors. Using examples from the case study; assess to what extent Natura supports Perlmutter’s theory.

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Firstly, Johnson and Scholes (1993:10) state that “Strategy is the direction and scope of an organization over the long term: ideally which matches its resources to the changing environment and in particular its market, customers or clients so as to meet stakeholder expectations.” Stakeholder analysis aims to identify the stakeholders who are affected by the results of the company’s project with the result’s success depending on the cooperation between the stakeholder and the project. It is important to identify all stakeholders for the purpose of identifying their success criteria and turning these into quality goals. It brings out the interests of the stakeholders and compares them to the purpose of the project. It relates each stakeholder to the project at hand, and points out potential conflicts to assign a level of risk or challenges to the project’s success. It also helps identify existing relationships between stakeholders that can be influenced on build corporation and potential partnerships to further champion the effort. And there are three types of stakeholders which available in Natura Cosmetic Co.

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– Internal stakeholders: they include employees and managers. The company has employees and management team effectiveness with driving their company as a big family. The organizational culture of Natura is characterized by its openness, transparency and respect for its stakeholders. The managers always care how to make stakeholders’ interest and satisfy in order to make its operation effectiveness. Middle management is constantly challenged and empowered to assume new projects and loftier goals. Besides, their employees are important internal stakeholders of Southwest with high skills and experiences. They directly work with customers, so the company needs to motivate them. Moreover, the company usually has strategy for new talents who are developed in-house or hired from the outside, creating a diversified group of managers.

Connected stakeholders: shareholders, customers, and suppliers. Shareholders are important because they are directly holding the share and they have voting right in business’s activities. They can buy their share or vote to change Natura’s management if the company is not good in business, or bad treating them, and then it directs influence on their profits and interest in investment. In contrast, if the company is good performance, shareholders will get profits… So, good relationship with shareholders is necessary for Natura to develop their business. Additionally, customers are the most important stakeholders because the company is not operating and survive without them. The company has various of customers as middle and upper class customer segments, both female and male, even children…, and they always make products to satisfy various of customers’ needs. In order to get profits, the company based on customers’ using services, so their services should be high quality to serve, to keep and attract customers. “At the customer’s end, Natura’s products are based on the well-being concept, which refers to the harmonious, pleasant relationship between oneself and one’s body, combined with the concept of rewarding, empathetic relationships with others and with nature”… Thus, the company believes this approach has contributed to strengthening relationships along the value chain. Moreover, in order to serve the customers’ needs, the company has sale force and consultant system. “The relationships with the sales force are carefully maintained and the Natura’s focus on sales allows consultants to place orders at any time and to place more than one order within the same sales cycle…” Additionally, suppliers are one of connected stakeholder to help Natura doing business effectively. Operating in cosmetic market, Natura is required to produce the best quality of products as premium, high-margin cosmetics, personal care products, perfumes, creams or make up… Thus, it needs to have the best quality of ingredients, raw material…, so how to make close relationship with suppliers is important. Beside the self-produced material, the company has produced some products as soap bars, products containing aerosols which are outsourced to a third party. “The company buys its raw materials from diverse suppliers, many of which have been partners with Natura for over 20 years.” So good relationship with suppliers is essential for the company to operate and perform their business.

External stakeholders: competitors (Avon, or other multinational companies), government or social community… All the company must pay tax for government, so they are external stakeholder that the firm should have good relationship. Besides, competitors in the market are so important that the firm needs to focus on to compete in the market and to get strong position in the cosmetics market. Additionally, Natura produces cosmetics products that influence directly on the customers’ health, as results, the company needs focusing on the health community and build strong relationship with each other in order to get more successful in operation business.

All of them are affected directly and indirectly to operations of the company, so focusing on them is very important for the company to achieve success in business because they have sufficient power to influence management’s choice of strategy.

In other side of Natura’s operation business, they also focus on the key factor of learning and innovation. Learning is about work, work is about learning, and both are social. The social world is a rich resource, not a distraction (Brown & Gray, 1995; Stamps, 1997; Wenger, 1996b). According to Lave & Wenger (1991), it is believed that social practice is the primary, generative phenomenon, and learning is one of its characteristics. Thus learning should be analyzed as an integral part of the social practice in which it is occurring. Learning is not simply a transfer of knowledge, but a process of building understanding (Galagan, 1993). In the case of Natura, the company applies both learning and innovation for improving their products and their performance in business, competition in the cosmetic market and international market. It is innovated and developed the products in house on a continuous basis. The company has research and development centre in Brazil and abroad, it acquires patents and technology from universities and R&D centre for innovating and improving their products. It also has the timeline for the creation and commercialization a new product ranges which is from six months to five years, and the timeline depends on the degree of innovation.

Task 2:

Using relevant theoretical models – and with examples from the case study – evaluate the company’s internationalization strategy in the period 1982 – 2005.

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Natura Cosmetics decides to go international market by undertaking field primary research, traveling abroad that leads to explore and understand different markets, trends and strategies internationally. Johanson & Vahlne (1977) defined internationalization as a process in which the companies gradually increase their international involvement. They claimed that internationalization is the product of a series of incremental decisions. In other words, internationalization can be a process by which the companies both increase their awareness of the direct and indirect influences of international transactions on their future establish and conduct transactions with other countries (Beamish, 1990). Then an international strategy is a strategy through which the firm sells its goods or services outside its domestic market (Hill 378). One of the primary reasons for implementing an international strategy is that international markets yield potential new opportunities. Moreover, for internationalization theories, it focuses on internationalization in networks, by which the company has different relationships not only with customers but also with other actions in the environments. According to Hollensen, S. (2007), there are some theories of internationalization as the traditional marketing approach, life cycle concept for international trade, the Uppsala internationalization model and the internationalization cost approach, dunning’s electric approach, the network approach or the difference between cultural distance and psychic distance…

Traditional marketing approach: It focuses on the company’s core competences combined with opportunities in the foreign environment (Penrose, 1959; Prahalad and Hamel, 1990). It leads the company to possess a compensating advantage in order to overcome the cost of foreignness, and then identification of technological and marketing skills are the key elements in successful foreign entry (Kindleberger, 1969; Hymer, 1976).

Life cycle concept of international trade: According to Vernon’s Product Cycle Hypothesis (1966), the companies go through an exporting phase before switching first to market seeking foreign direct investment (FDI), then to cost oriented FDI. The technology and marketing factors combine in order to explain standardization that drives location decisions. This hypothesis is that producers in advanced countries are closer to the markets than producers elsewhere; consequently the first production facilities for these products will be in the advanced countries. For the standardized products, the less developed countries may offer competitive advantages as production locations.

The Uppsala internationalization model: Its model is developed by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977). Based on this model, when the company faces with unknown markets, incomplete information, and being in a state of constant incertitude, the company develops in foreign markets by adopting a process which evolves by increments. The model suggests a sequential pattern of entry into successive foreign markets, coupled with progressive deepening of commitment to each market. According to this model, the company tends to intensify their commitment towards foreign markets as their experience grows, and psychic distance which attempts to conceptualize and measure the cultural distance between countries and markets (Hollensen, S. (2007)).

The internationalization/transaction cost approach: Buckley and Casson (1976) expanded the choice to include licensing as a means of reaching customers abroad, in other words, licensing can reach customers abroad. However, in the perspective the multinational company would usually prefer to internalize transactions via direct equity investment rather than license its capability. The international involves two interdependent decisions as regarding location and mode of control and it is related to transaction cost theory. The internationalization and transaction cost (TC) perspective are both concerned with the minimization of TC and the conditions underlying market failure.

Dunning’s eclectic approach: Dunning (1988) discussed the importance of locational variables in foreign investment decisions. The eclectic means that a full explanation of the transnational activities of the companies needs to draw on several strands of economic theory. According to the model, the propensity of the company to engage itself in international production increases if three conditions if ownership advantages, locational advantages and internationalization advantages are being satisfied.

The network approach: It means the international firm cannot be analyzed as an isolated actor; it has to be viewed in relation to other actors in the international environment. According to Johanson and Mattson, the relationships of the company within a domestic network can be used as connections to other networks in other countries.

The different between cultural distance and psychic distance: According to Hollensen (2007), cultural distance refers to the macro cultural level of a country and is defined as the degree to which cultural values in one country are different from those in another country. And psychic distance is defined as the individual manager’s perception of the differences between the home and the foreign market and it is a highly subjective interpretation of reality.

In the circumstance, Natura goes international through an agreement with an independent distributor in Chile in 1982. Based on traditional marketing approach, the company audits their resources which are core competence and provide distinctive competitive advantages. All the resources of Natura, such as: financial, R&D skills, knowledge, experiences, sales and distribution channel or sale force… are valuable, hard to copy, exploited and they are sources of core competences and competitive advantages in foreign environment. Beside, marketing capability has its greatest impact on the innovative output for the firm that has a strong resources and competences. Natura has strong R&D which means the company with a strong R&D base is the ones with the most to gain from a strong marketing capability. Furthermore, the most important determinant of its performance is the interaction of marketing and R&D capabilities. And R&D is one of the best internal factors which bring opportunities for Natura to do business in new market. For example, the company acquires patents and technology from universities and research centers in Brazil and abroad, and then they focus particular research efforts on skin care products and on the sustainable use of ingredients from Brazil’s biodiversity, launching their product lines. Besides, the employees are responsible for the local operation that means Natura has also strong human resources. Moreover, in the 1990s, the political and macro economic changes in Brazil and other South and Central American countries; and other Latin American countries experience growth rates and try to develop their commercial tines with Brazil, as a result, Natura decides to expand their business internationally. Additionally, following mass advertising, it creates a rising uniform trend in beauty concepts and demands in the region which leads a cultural emphasis on beauty and a better understanding of how to use beauty products. Further, Natura identifies the technology and marketing skills on foreign market, such as in Argentina, the company tries to avoid risk, looks the ways to decrease costs and put advertisements in the major magazines stating, and then they build the good relationship with social pact (suppliers, employees and customers)… Besides, Natura builds brand equity, quickly developing a sizable network of consultants, managing and promoting their productivity as well as mastering logistics and distribution. (CEO, Alessandro Carlucci, quoted in the Harvard Business School case study: “Natura: Global Beaty Made in Brazil”, Sept, 2006).

According to Uppsala model, Johanson and Wiedersheim-Paul (1975) distinguish between four different modes of entering an international market, where the stages represent higher degrees of international involvement or market commitment:

No regular export activities:

Export via independent representatives

Establishment of a foreign sale subsidiary:

Foreign production or manufacturing units:

The enterprises passes from one stage to another as it progressively acquires international experience. The internationalization process evolves between the development and knowledge of foreign markets and the growing commitment of its resources in the market. The Uppsala model is supported by many studies which have shown both small and large enterprises passing through distinct and gradual stages during the development of their international affairs (Johanson and Vahlne, 1990; Oviatt and Phillips-McDougall, 1994).

From the case, during 1970s and 1980s, the Brazilian cosmetics and toiletries market is relatively closed to imports, and competitors are mostly multinational companies who manufactured mass market products locally, but some US based companies face with the instable political and hyperinflation in Brazil. As a result, until the early 1990s, it facilitates the growth of companies as Natura that are developing high quality products for local customers. Through direct sales, franchises or retail channels, Natura is widely known brand in the home market and high reputation. However, the most relevant competitor in the direct sales segment of Natura is Avon, and the company also competes global consumer products giants as Unilever, or Johnson & Johnson… The Brazilian cosmetics and toiletries market is one of the largest and most developed in Latin America, so the company faces with increasing competitive environment. That leads Natura to stimulate their capacity for developing more technological advanced products and products tailored to the requirements of a broad range of consumers. They focus on their product development and marketing strategies as marketing and advertising campaigns, or sales channel, and then they also target products for target consumers.

From 1982, Natura decides to expand their business internationally that starts in Chile, and expand more in other South, Central American countries, Latin American countries, such as: Mexico, Argentina… Natura uses direct selling and retail network or agents for distribute products in foreign markets. For example, in 2003, the company creates Natura’s house concept that sale representatives could be in touch with the brand and could meet each other, exchange experiences, be trained through speeches and exhibitions, or test our products… Besides, it is the place that can be seen as a middle ground between a pure direct selling model and a store chain. At the same time, the company has to introduce new marketing tools for developing their brand and rising consumers’ awareness. In French market, Natura opens a two storey flagship store in April 2005. The store is designed to be used as a place where Natura’s beliefs and vision can be displayed. However, the store opens that means the company has to adopt a new sales model, and Paris store marked the first time that Natura devotes to the direct sale model, has opened a retail store.

Thus, the Natura’s expansion of international operation still deals with problems and it is difficult to control and manage their operations international markets.

Task 3:

Using relevant theory, argue the case either for or against Natura adopting a mode (or modes) of international market entry that differ(s) from the direct sales/distribution model employed.

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In international market entry, export is the most common mode which is typically used in initial entry and gradually evolves towards foreign based operations. It is organized in a variety of ways that depends on the number and type of intermediaries. In establishing export channels, the company has to decide that functions will be the responsibility of external agents and that will be handled by the company itself. (Hollensen, 2007). In the export mode, companies face two channel options as export directly to customers abroad or export indirectly with the help of an intermediary (Peng and York, 2001). As the direct mode is the most common path to companies internationalization and well-addressed in the extant literature, that focus on indirect means to internationalize. Indirect paths to internationalization are those “whereby small firms are involved in exporting, sourcing or distribution agreements with intermediary companies who manage, on their behalf, the transaction, sale or service with overseas companies” (Fletcher, 2004). And cooperative export involves collaborative agreements with other companies that concerning the performance of exporting functions.

In the case of Natura, the company bases on sale representative and uses 26 different delivery companies as well as the Brazilian postal services to transport products to it representatives. The company is through a nationwide network of 483,000 active sales representatives in Brazil and 36,000 agents in other countries. The agent represents an exporting company and sells to wholesalers and retailers in the importing country. Direct selling is defined as the sale of a consumer product or service, person-to-person, away from a fixed retail location, marketed through independent sales representatives. The sale representatives are also referred to as consultants, distributors or other titles. Natura’s sale representatives are “well trained, autonomous female salespersons with a no exclusivity contract, and the company has relationship with sales forces that mainly comprises “middle class housewives selling to their friends, independent professionals, secretaries and staff personnel at all kinds of companies leveraging their in company contacts and maids selling to colleagues or employers”. Natura concentrates on sales and sales force that “allows consultants to place orders at any time and to place more than one order within the same sales cycle, with the company adapting its logistics and distribution arrangements and costs to meet requirement”. (Natura Cosmetics). Natura uses agents and sale representatives in international market which cover rare geographic areas and have subagents assisting them. And its model is familiar with the local market, customs and conventions then have existing business contacts and employ foreign national. Additionally, the company uses agents that have a direct incentive to sell through wither commission or product margin, however, since the remuneration is tied to sales, it leads to reluctant to devote much time and effort towards developing a market for a new products. Moreover, the company can be lack of control and manage the market feedback and their operation, if the agent is performing well and develops the market it risks being replaced by a subsidiary of the principal. (Hollensen, 2007)

Thus, in the long – term strategy, the company needs to consider any new entry mode decision. For more expansion in foreign market, Natura needs to focus on foreign sales, branch/sales and production subsidiary mode. Although its subsidiary mode is high initial capital for investment, high risk and also taxation problem, it is suitable for the company to full control and manages of their operation and reduces the transport costs. It means that the company will often keep a central marketing function at their home base, but sometimes a local marketing function can be included in the sale subsidiary. When the activities of sales are performed, all foreign orders are channeled through the subsidiary that than sells to their buyers at normal wholesale or retail prices (Hollensen, 2007). Other reason for Natura chooses sale subsidiary is that the company may take advantage of tax in the foreign market where income tax is low. In addition, this mode eliminates the possibility that a national partner gets a free ride, and acquires market knowledge directly as sales subsidiary. And sale subsidiary is the possibility of transferring greater autonomy and responsibility to these submits that is being close to customers. It is also accessed to raw materials and labor as production subsidiary, elimination of duties as production subsidiary and market access as sale subsidiary.

Task 4:

Natura’s production facilities are located in Brazil. Assess whether this decision is correct in terms of strategy and logistic & distribution – given the company’s portfolio of domestic, regional and international markets.

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Natura’s production facilities are located in Brazil that is correct decision in terms of strategy and logistic & distribution for the company’s portfolio of domestic, regional and international market. Based on 12C framework, it is used to identify and evaluate the key strategic challenges that Natura can be faced in foreign market for cosmetic products. The 12C framework includes the issues of culture/consumer behavior, channels, commitment, currency, communication, capacity to pay, caveats, contractual obligations, consumption, choices, concentration and country. The 12C is a tool which is used to identify the constraints when the company enters a new international markets. Each C will individually be used to evaluate the company’s strategies. Then it is the way for Natura find out opportunities and challenges for their decision in term of strategy, logistic and distribution in expanding internationally. In the case of Natura, it is considered the C of country, cultural, commitment and communication.

Firstly, the company’s home base is Brazil which is the largest market in Latin America and the world’s fifth most popular country. Beside, the GDP of Brazil is the world’s tenth-largest economy. So it is an increasingly attractive market for all business and one of the world’s fastest growing economies. And Brazil has also abundant natural resources with 4.6 million hectares of planted forest mainly located in the South. In the case of Natura, it is good for the company production facilities located in Brazil and their raw materials. The company’s main operations are concentrated in an integrated production, logistics and R&D centre situated on the outskirts of Sao Paulo where units for cosmetics, shampoos, consist of four production and fragrances, other facilities include a nursery, restaurant, shop and a sports compound. Besides, the manufacture of some products is outsourced to a third party. Additionally, the manufacture of Natura located in Brazil that has strong and widely network distribution in domestic and international. And the R&D centre is one of the biggest and most advanced of its kind in Latin America, so it is easy for transportation to other neighbor countries. In other words, if the Natura builds manufacture in foreign countries as Argentina or Mexico…, it will deals with the high costs and shipper problems at the present.

Secondly, Natura considers to culture and consumer behavior. Brazil is South America’s most influential cultural and biggest democracies. The changes on political and macroeconomic in Brazil and other South and Central American countries leads to more understanding and emphasis on beauty and know how to use beauty products. . A large of the middle class population mainly involves in professions such as retailing, civil services and other skilled occupations. And Brazilian middle class has a predictable taste for beauty and other luxuries but when going shopping, they has more consciousness of status than middle class North Americans and Europeans with the concept to ordinarily serve others.

Additionally, the economic policies as tax laws have been encouraged toward development of trade and investment. The export oriented industries will be exempted from non- tariff barriers with the purpose to add more incentives to exports, then the import duties have been condensed sharply. These are good things for Nature to export mode and production facilities location in the home base. Besides, some materials for production of Natura’s products are outsourced, so imports of raw materials are exempted from usual tariffs.

Lastly, for communication, it is important for Natura doing business and direct selling their products. At present, technology background is developing and is out-performed other South America and Latin American countries with the telecommunication policies. In Brazil, it is tenth in the number of broadband connection with the fifth largest mobile market in the world, and approximately 40% internet usage is for e-commerce which is expected to grow exponentially in the forthcoming years. Moreover, telephone is taken into account for the higher and the middle-income class. As a result, these are advantages for Natura to take order and selling their product effectively.

However, in the future, the Natura can focus to their expansion and building manufacture in foreign countries as French because “the decision to open in Paris was both rational and an emotional move. France has historically been a source of knowledge and raw material for our products as well as a source of inspiration” (Natura Cosmetic)

CONCLUSION

The report has analyzed and assessed of certain aspects of the Natura Company’s international development, its operations and products. Within the scope of this study, Natura Cosmetic has been a successful example of international market expansion and international development, it has become a leading cosmetics company in international market. However, the company is facing with seriously competitive in the cosmetics field market domestically and internationally. Further, the company should make improvements in its current product lines and the mode of international market entry and decision of strategies. It is necessary for Natura to improve its marketing strategy, advertising and promotion and distribution channels which enables the company to take the best advantage and opportunities of a sustainable competition.