CHAPTER II
VALUE PROPOSITION
2.1 MARKET AND INDUSTRY ANALYSIS
2.1.1 EXTERNAL ENVIRONMENT ANALYSIS
External environment analysis is a concept and tools of an effective strategy that can generate a competitive advantage by identifying external forces that may determine the present and the future of the company (Gandellini, Pezzi & Venanzi, 2012). The external environment of an organization is the factors that affect the company’s ability to function; where some can be manipulated by the company, while others require the organization to make an adjustment (Root, 2017). External environment consists of a general environment and an operating environment. The general environment consists of the economic, political, cultural, technological, natural, demographic and international environment which a company operates; while the operating environment consists of its suppliers, customers, competitors and the public (Nordmeyer, 2017).
While Michail (2014) explained the external analysis consists of Macro environment,
Micro environment and Industry environment. In macro environment, all marketing
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activities are subject to government’s laws and the rules of regulatory agencies.
Marketers are responsible to remain aware of such regulations. Micro environments are closer to the company and its interactions with the target market, customers and competition. Whereas the industry environment includes the company’s characteristics and requirements.
1. VUCA and Disruptive Innovation
VUCA is another example of tools in analysing external environment. The
term VUCA stands for volatility, uncertainty, complexity and ambiguity
(Raghuramapatruni and rao Koshuri, 2017). VUCA are the characteristics
of modern strategic dilemmas which requires a different orientation and a
set of skills. Raghuramapatruni and rao Koshuri (2017) explained each
dimension further:
a. Volatility
The nature, speed, volume, magnitude and dynamics of change. The more
volatile the situation, the harder the competition in the market or relevant
industry.
b. Uncertainty
The lack of predictability of issues and events. The importance of
uncertainty is the capability to seek for opportunities and make judgement
about the future.
c. Complexity
Some information regarding the nature of complexity is available or can be predicted. The complexity growns as the market or industry grow.
Complexity is about the interconnection of one variable to another. The longer the existance, the complex the situation become. d. Ambiguity
The ambiguos trends of an event are not easily interpret due to lot of factors in the environment. Ambiguity is not something that uncontrol, thus the sharpening of ideation and product proposition could somehow eliminate undesired loss from ambigous trends.
VUCA was subsequently adopted by strategic business leaders to describe the chaotic, turbulent, and rapidly changing business environment that has now become the new normal. It has been developed as a means of describing the world and it is becoming increasingly more relevant for how the product describe its work and social environment. VUCA brings both challenge and opportunity (Harsolekar & Munshi, 2017).
Furthermore, globalization has put significant pressure on entrepreneurship across the company levels, requiring rapid decision making, necessary protection of the culture and worldview of the organization, abilities to integrate diversities, and foster collaborative innovation with the speed for the given context. In terms of cosmetic industry, which currently is on the
rise, VUCA analysis will help the business to approach challenges and help
to manage its sustainability. a. Volatility
For cosmetics products, the challenge is unexpected or unstable and may
be of unknown duration. The cosmetics and beauty products industry
continues to rapidly expand due to new global markets. When economic
times are tough, beauty products are among the last goods to be cut from
the budget. As well with the chemistry material of cosmetics is highly
regulated and critical to product performance and claims. For example,
news and stories about make-ups that harms skin and faces might be a
potential threat for cosmetics. There has been news about the use of
mercury for base product for several cheap and poor make-up and
cosmetics. These news and mouth-to-mouth stories might affect
customers to carefully selecting their cosmetics, and people will tend to
buy well-known, reputable and high-quality cosmetics.
b. Uncertainty
The Beauty industry has been going through the ups and downs. Marc
Rey, the President & The CEO of Shiseido Americas, pointed out that
traditional makeup was down 1.3% in 2016. But independent brands
were up 42.7% (Kastenbaum, Forbes, 2017). This indicates that the
growth of independent brands was a reflection of a change in consumer
tastes that everyone in the business has to respond to. Even though
“Agile by Ash” Cosmetic considered as independent brand, but there is
no guarantee that no competitors had this idea before and brought up
with better moves and innovation. There are threats from competitor
which might come up with disruptive innovation without known by
“Agile by Ash”. c. Complexity
The chemistry of cosmetic product is very complex. Ingredients
involved in cosmetics may address several separate purposes. Those
included for fragrance add another level of complexity. “The beauty
industry is becoming increasingly complex. Our instinct is to dislike the
complexity. But we either embrace it, or we’re not going to be around”
said Camillo Pane, CEO of Coty, Inc., a beauty products manufacturer
with operations in over 150 countries (Kastenbaum, Forbes, 2017).
There might be issues about how this product will be sold, in what price,
and the regulations regarding the ingredients. d. Ambiguity
The fourth and the final aspect that beauty industry must confront is
ambiguity, which means that the business landscape presents problems
and dilemmas that cannot be reduced to simple yes or no type of
solutions and problem solving. Furthermore, the reality of beauty
products in terms of manufacturing and the distribution covers
multilayered and multidimensional supply chain that create more
ambiguity. It is common that a single manufacturing selling a same
chemistry material to many other beauty companies by changing the color shades only. In this industry, in order to succeed, the company actually have to be really good by doing continues innovation.
By seeing those volatile, uncertain, complex and ambiguity that is relatively high in the beauty market, thus in order to make the business ready to face those challenge, innovation would be the ultimate strategy that the company should have. While there is certainly lots of price competition for comparable products in e-commerce, whether it is online or in traditional stores, the consumers want unique products and experiences and they will pay for them when they are what the customer wants.
Disruptive is taken from the word disruption, which describes a process whereby a smaller company with limited resources is able to successfully challenge established incumbent businesses (Christensen,
Raynor and McDonald, 2015). Disruptive innovations were technologically straightforward, offering a different package of attributes from those valued by the mainstream market (Gobble, 2016).
Disruptive innovation involves products, services or approaches that transform existing markets or create new ones by trading off raw performance for the sake of simplicity, convenience, affordability and accessibility. The main objective of disruptive innovation is not to bring the best performance, product or service to current customers but, it is to bring lower performance products or services to market by the
introduction of other benefits. Disruptive innovation theory is based on
initial low-cost model but at the same time with performance features
(Gemici and Alpkan, 2015).
King and Baatartogtokh (2015) identified four key elements of the
theory of disruptive innovation:
1. Incumbents are improving along a trajectory of innovation.
In every market there is a distinctly different trajectory of
improvement that innovating companies provide as they introduce new
and improved products.”16 An incumbent business’s improvement
trajectory results from what they call “sustaining innovation”; the year-
by-year improvements that all good companies grind out.
2. The pace of sustaining innovation overshoots customer needs.
Company whose products are squarely positioned on mainstream
customers’ current needs will probably overshoot what those
customers are able to utilize in the future.
3. Incumbents have the capability to respond but fail to exploit it.
Incumbent companies frequently possess the capabilities needed to
succeed, but managers fail to employ them effectively to combat
potential disruptors.
4. Incumbents flounder as a result of the disruption
Performance oversupply opens the door for simpler, less expensive,
and more convenient and almost always disruptive technologies to
enter.
The successful sample of disruptive innovations, as written by King
and Baatartogtokh (2015) are: Amazon.com, Cisco, Dell, department
stores, digital printing, eBay, email, endoscopic surgery, flat panel
displays (Sharp and others), Google, Honda motorcycles, inkjet
printers, Intel microprocessor, Linux, Minicomputers, Oracle, PC,
Sony, Ultrasound, Unmanned aircraft, Wireless telephony, etc.
Disruptive Innovations have the following characteristics, according
to Barahona and Elizondo (2012):
1. Initially there is no demand, the client base is small and may be costly.
2. Initially they are not attractive to the best clients.
3. At some level they exceed the current abilities of traditional clients.
4. They are at a new level of competition.
5. The meaning of quality and improvement are different from those in
the traditional model.
6. They address potential sectors/clients that under the prevailing logic
would not have access to the product or service.
7. Initial profit margins may be small.
In application to the beauty industry, the way technology is influencing
on the way consumers want to live. With all technology, it sees
consumers craving to bring humanity back to an increasingly
impersonal world as well with increasingly impersonal shopping
experience. Thus, the business or the new product that created need to
find ways to simplify the overwhelming complexity and volatility in
the beauty industry. There is a potential of failure of beauty product
can sustain if it does not implement a disruptive innovation, either with
the ingredients of the product, the packaging, or the shopping
experiences.
2. Porter’s Five Forces Analysis
These are the internal factors of the company that has direct impact on the
organizations strategy. They include customers, employees, suppliers,
shareholders, media and competitors. There are three factors to be looked
upon while carrying out the analysis, credible alternative future, improving
the organizational learning and evaluating and developing strategies for
each situation. (Jonhson, Scholes, & Whittington, 2008). To analyse further, it should be considered Porter’s five forces.
Figure 5 Porter's Five Forces Diagram Source: (Jonhson, Scholes, & Whittington, 2008)
The Porter Five forces were developed by Porter to analyze external factors which affect the competitiveness of a product or industry. They include the threat of substitutes, threat of new entry, bargaining power of customers and suppliers as well as intensity of rivalry in the industry (Porter, 2008: 3-7).
These factors will be identified and applied to the cosmetic industry, as follow:
Threat of New Entry: This factor analyzes the ease with which firms
may enter into an industry. Competitive industries are likely to attract
many firms which will strive to capture a market share (Aaker, 2001:
23). This is likely to reduce the overall profitability of firms which are
present in the industry.
Bargaining power of customers: this factor analyzes the power which
consumers have relating to price changes in the industry. This factor
analyzes the power which consumers have in manipulating price
changes due to shifts in demand (Aaker, 2000:102-120).
Bargaining power of suppliers: this factor analyzes the power which
suppliers have regarding making price changes for their products.
Suppliers who have a high bargaining power are able to influence price
changes. (Diller et. Al., 2006: 33-36).
Threat of substitutes: this factor arises when there are similar products
developed by competitors which satisfy the market needs. In order for
suppliers to tackle the challenge of threat of substitutes, they have to
innovate products (Keller, 2003: 595 – 600).
Competitive Rivalry: This force is the major determinant on how
competitive and profitable an industry is.
However, cosmetic industry is very dynamic and requires huge investments in research and development to meet client needs. In addition, the intense competition presently seen in the market especially by large manufacturers such as Avon, Revlon, Clinique, Estee Lauder, LR, Mac, Unilever and others, demand high expenses in marketing and advertising (Kotler &
Pfoertsch, 2006: 63). These are already established global cosmetic brands
which have market goodwill and loyalty, and capturing a fair market share
demands aggressive advertising and innovating unique products. Further
analysis of the cosmetic industry with respect to the Porter Five forces will
be explained below:
FORCES IMPLICATION LEVEL OF THREAT
Threat of New Cosmetic and skin care are competitive LOW Entrants industries and thus attract new entrants to capture market share. These leads to a drop of profitability of the existing companies. The entry barriers of this industry, such as:
High economic of scales by the existing players.
The capital required to establish a manufacturing setup is quite high. But to launch a product, for a small to medium firms just need to order small batch from the manufacturer.
Need to have a strong brand identity. Gaining access to sales channels is moderate level barrier.
Bargaining Increased competition and availability MED powers of buyer of the products have given the buyers of this industry high power. It is possible for consumers to force manufacturers to reduce their product prices through purchasing of their competitors. This a challenge which cosmetic products face across the world.
Threats of If a brand sells their products at higher MED Substitutes prices, or if the products are low quality, then consumers are able to purchase substitutes from many competitors who are present in the market.
Thousands of product varieties, include colors, material, and product line, is the major indicators that make customer switch to other brand. But there are some products that customers loyal to because of various reasons
Bargaining In the cosmetic industry, there are LOW powers of many competitors as has been suppliers discussed. There are many cosmetic products which are developed by both large and small scale manufacturers. There is low differentiation of inputs. Due to huge supply, consumers have the power to influence the market prices as opposed to the suppliers.
Competitive The degree of competition amongst MED Rivalry rivals in the industry is high. Competitors include brands such as international brand as well with the rise of local companies in the market. So supply is greater than the demand. The degree of differentiation is medium. There are minor differences amongst products of different brand. Thus the exit barriers are also medium.
Due to the realization of the importance of self-image, this industry has grown over the years. The industry has high competition, high entry barriers, low supplier power, high customer power and a large number of substitutes. In
order for a firm to enter and be successful in the cosmetic industry, it has to
apply various strategies to ensure that they capture a market share, develop
customer loyalty and achieve long term profitability over the years.
3. Consumer Behavior
Consumer behaviour are defined differently by the theorists and authors
according to the findings or the targets. According to Solomon, consumer
behaviour is the study of the processes involved when an individual or groups
select, purchase, use or dispose products, services, ideas or experiences to
satisfy the needs and desires (Dudovskiy, 2013). While Kotler and Keller state
that consumer behaviour is the study of the ways of buying and disposing of
goods, services, ideas or experiences by the individuals, groups, and
organizations, to satisfy their needs and wants (Dudovskiy, 2013). Schiffman
proposed a different means to consumer behaviour, he stated that it is the
behaviour that consumers display in searching for, purchasing, using,
evaluating, and disposing of products and services that they expect will satisfy
their needs (Dudovskiy, 2013).
a. Five Stage of Buying Decision Process
The five stages framework remains a good way to evaluate the customer’s
buying process. Consumer buying process consists of sequential steps the
consumer follows to arrive at the final buying decisions. This framework
was first introduced by John Dewey in 1910, which then adopted by Philip
Kotler. According to Philip Kotler, the typical buying process involves five stages the consumer passes through, described as under:
Figure 6 Customer Buying Process
i. Problem Recognition:
According to this model, for a customer to buy a product, he must
first be aware of a need. This need can be anything from ‘being
hungry’ to a desire to ‘look good’. Neal & Quester (2006)
observed that this need could be externally stimulated either by
marketing communications or by seeing the product in use.
ii. Information Search:
Next stage is the intensity of which depends on the involvement
level. In a high involvement purchase, customer will seek
guidance from friends & family, marketers and public sources
like magazines. He will also tryout (e.g.: test-drive a car) the
product if possible. By then, a customer will have a shortlist from
which he will buy the product.
iii. Evaluation of Alternatives:
Then followed with the shortlisted products that will be evaluated
against each other and the needs. According to Wilson & Gilligan
(2005), in this stage customers will evaluate each product as a
bundle of attributes with varying abilities. Neal et al. (2004) notice
that factors like brands can weigh-in in this evaluation. By the end
of this stage, the customer would have decided on a particular
product to buy. iv. Purchase Decision:
The fourth stage is the purchase decision whereby the customer
buys the product. It is noted (Vashisht 2005) that unexpected
situational factors might change the decision of the customer in
this stage. For example, if a product the customer planned to buy
is out of stock, he might be forced to buy a different one. Mullin
& Cummins (2008) hypothesize that Sales Promotions can
effectively influence purchase decisions at this stage.
v. Post Purchase Decision:
The final stage is the post purchase behavior whereby the customer
experience different levels of satisfaction while using the product.
Recently, this stage has gained prominence; as modern customers,
who have greater choice than ever before, might not come back for
the product if he/she is not satisfied. It is noted that detailed
instruction manuals and after-sales support can increase customer
satisfaction (Adcock et al. 2001). A notable example is Apple Inc.’s
personal training program called ‘One to One’ for their new
customers (apple.com 2010).
There are as well, factors affecting consumer buying behaviour according to
Riadi (2016) such as individual differences (consumer’s resources, motivation
and involvement, knowledge, attitude, life style and demography),
environmental factors (culture, social class, personal influence, family and
situation) and psychological processes (information-processing, learning,
change of attitude).
4. Online Consumer Buying Behavior
Internet shopping is a phenomenon that is growing rapidly nowadays. The
convenience of online shopping rendering it an emerging trend among
consumers, especially the younger generation. The prevalence of online
shopping has raised the interest of the retailers to focus on this area (Lim, et al.,
2015). One of the advantages of internet is that it enables businesses to reach a
worldwide customer population, so that customers can survey, select, and
purchase products and services from businesses around the world (Vinerean et
al., 2013).
Socio-psychological approaches become prominent in description of the
behaviours of online consumers. Technology, innovation, and adopting or not
adopting of the new products is considered to be a behaviour in the foregoing approaches.
Motivations that lead the consumer to shop online according to
Katawetawaraks & Wang (2011) are:
1. Convenience
Online shopping is available for customers 24 hours a day, 7 days a week.
The consumers themselves can avoid crowds and wailing lines, especially
in holiday shopping. Even after business hours, consumers can ask
questions, get necessary support or assistance.
2. Information
Even though customers rarely have a chance to touch and feel product and
service online before they make decision, online sellers normally provide
more product information that customers can use when purchasing. In
addition to get information from the website, consumers can also benefit
from products’ review by other customers.
3. Available products and service
Consumers may find all kinds of products which might be available only
online from all over the world. Many traditional retailers sells certain
products only available online to reduce their retailing costs or to offer
customers with more choices of sizes, colours, or features. Moreover, online
shopping sometimes offer good payment plans and options for customers.
4. Cost and time efficiency
Online shopping customers are able to get the same product as they buy at
stores at a lower price. Consumers may compare price from different
websites and find the products with lower prices than buying from the local
stores. Since online shopping can be anywhere and anytime, it make
consumer’s life easier because they do not have to stuck in the traffic,
looking for parking spot, waiting in lines in a crowd store. As such,
consumers often find online shops offers convenience which can reduce
their psychological costs.
Different factors which have a significant influence on the consumer when purchasing online is proposed by Hasslinger et al. (2007):
1. Price
On the internet, it is after all the price comparison that interests price-
sensitive consumers, while another category of consumers finding the
uniqueness of products which might be difficult to find offline.
2. Trust
The customer is not able to check the quality of an item, nor is he able to
monitor the safety of the security when revealing personal data. Only by
communicating and maintaining a high level of security and privacy to the
consumer, the result would then have a positive effect on consumer trust
and the intention to buy online.
3. Convenience
Convenience is anything that is intended to save time and frustration, and
can be furthered defined as personal comfort or advantage, the quality of
being suitable to one comfort, purpose or needs, and something that
increases comfort or saves work at a suitable or agreeable time.
The process of making decision are very similar whether the consumer is offline
or online. According to cosmetic industry, the traditional consumer decision
model, consumer purchase decision online are typically the same. It also starts
with need awareness, then information search, alternative evaluations, deciding
to purchase and finally, post-purchasing behaviour as have been explained
above, but with different experience. The elaboration will be explained below:
COSMETIC INDUSTRIES ONLINE COSMETIC STAGES IMPLICATIONS BUYING PROCESS
Problem Since cosmetic trend is on the rise In this social media and Recognition and become daily consumptions, online world, self-image had that is where a consumer aware of become a major thing of a its needs or problem. This become person, especially female. the vital stage in buying decision With the awareness of a process. It is when a person need to become more recognizes that she cannot go beautiful, through the outside her house without a make experience of using up. Then she needs to buy a Instagram, pinterest, cosmetic product. Furthermore, in youtube, etc. Then a person this era, where beauty and self- recognizes how important image had turns become high for she is to have a make-up value of a person. product.
Information At this time the consumer The digital world and online Search compares the brands and products culture has changed the way that are in their evoked set. First, we search information. In customer will find information by terms of online cosmetic themselves by goes to the market buying process, the to seek advice of cosmetic customer tend to search product, secondly, a consumer information through opinion will try to solve the problem by sites. Search engines, blogs asking a friend looking for and vlogs, and generated opinion or reference. Especially content sites. This has cosmetics, information search is become a part of shaping something significant for the customer experience and consumer. the consumer decision journey. Information about almost every product is accessible online.
Evaluation of In the cosmetic industry, there are Whereas in the online, this Alternatives many manufacturers or brands as product tester would never has been discussed. At this stages, been provided in the consumer start evaluates different purchasing journey. Internet cosmetic product with different offers some alternatives, by brands. The choices-set in reading product reviews, cosmetic product may vary from comparison websites and price, color, style, quality, blogs, or even facilitates appearance, brand image, etc. consumer to asking for other Usually this journey applies with opinion and approval in a real product trial (tester) that are online forums. Feedback provided by the brand. from others has always been important to the consumer and is now easily accessible.
Purchase Ultimately, after evaluation of Today the shopping Decision alternatives, the consumer selects environment is switching to a product to buy or decides not to online. The outcome will be buy any product. The shopping stored in the consumer’s experience is very important at memory, meaning that if the this stage and can create results are positive and perception of value and reassure satisfying, a similar process or discourage the customer of her is likely to occur again. choice. Purchase can be fully Online can be more planned, partially planned, or appealing with the ease and unplanned (impulse buying). In quick process when the terms of cosmetic, the offline customer does the purchase store need to be a very appealing, process. for example provide a beauty assistant that can help consumer with tester and consulting of which product that suits the most.
Post- Purchase What happens after the purchase In online world, some Decision has been made, if the product consumers posting their exceeds his expectations the purchase experiences and consumer will be highly satisfied blog or vlog about the result and vice versa. A positive of their purchase and how experience of the product can satisfied they are. In this generate positive word-of-mouth cosmetic online shopping and recommendations from experiences, usually the engaged consumers. In order to do brand offers a feature of that, to avoid the consumer to “related product” to upsell change brand, a cosmetic brand their product. If customer need to have a good customer just bought a face powder, retention program. That can be a then the websites will loyalty program, a bonus package, recommend a foundation or even a discount for the next cream to the customer. purchase. Retargeting marketing is now can be easily done by the brand through online experience.
2.1.2 INTERNAL ENVIRONMENT ANALYSIS
Internal environment analysis includes all elements that are endogenous to the organization, which are influenced to a great extent and totally controlled by it. An internal analysis provides the means to identify the strengths to build on and overcoming weaknesses while formulating strategies. The internal analysis process considers the company own resources; the business the company is in; its objectives, policies, and plans; and how well they were achieved (Tzu & Drucker, 2012).
According to Provan in Waruwu, Sitompul and Manullang (2016), the decisions of the company need to consider internal organizational factors to be important in influencing the strategy formulation process. The focus is on the objective, rational consideration of internal environment strengths (cost advantages, financial resources, distinctive competences, and technological advantages) and weaknesses (obsolete facilities, low profitability, few critical skills, and weak R&D efforts).
1. SWOT Analysis
SWOT Analysis is referred to the analysis of the strategic environment of a
business to scan the internal and external environment of the company as a part
of the strategic planning process of a company (Barnes, 2015). The internal
environmental factors are Strengths (S) and Weakness (W) of the company and
the external factors refers to the Opportunities (O) and Threats (T).A company
with developing its internal strengths should abolish the internal weaknesses and
grab the opportunities to develop the business coming from the external sources
of the business fighting with the threats for the company (Ahmad, 2013).
The overall SWOT analysis of cosmetic and toiletries industry is shown in
(Table 1). a. Strength
Cosmetic industry has emerged as one industry holding huge potential
for further growth. It is contributing to the economic growth of
country. What existed 20 or 30 years ago in cosmetic industry has
totally changed. Cosmetic industry is more mature. Its extensive
development trend is expected to continue well into the coming years.
Average time for breakthrough technology is 3-5 years. Fast
innovation and new retail concepts are keys to this booming industry.
Most of the market leaders have the presence in major markets.
Consumer spending has climbed up and expected to rise. b. Weakness
Cosmetic Industry has several weaknesses to do business. Product
prices are invariable; prices of products keep on changing according to
market trends. Consumers are very price conscious and demand value
for costly products. Promotion budget are getting bigger due to stiff
competition. Moreover, industry is dominated by market leaders which
is already established for couple of decades or even centuries. Due to
lack of distribution network, some international brands have less
presence in the rural market.
c. Oportunity
Aging baby-boomers, who have the high spending power, tend to
spend more on beauty products. Emerging markets that have high
economic growths i.e., Europe, Latin America, and Asia are replacing
the matured and developed western markets. Future growth might have
a big opportunity for local brand, which can afford lower price and
accessibility to the market. Many reputed local brands in the market
have their pulse on the local consumers. Along with the rise of
technology and social media, the promotion of local cosmetic product
would be much easier. d. Threats
China can be both opportunity and threat because it has the high ability
to develop products and compete in global markets. The regulatory
system is complex and not stringent compared to drugs most of the
time new launched products are vulnerable to uncertainty of regulatory
review, especially in Indonesia, a cosmetic product need to have a
BPOM certification. Due to intense competition companies has to
make up on price. Market leaders dominate the cosmetic industry, so
lot of pressure exit on smaller companies in terms of quality and price
of products.
Table 1 SWOT Analysis for Cosmetics Industry Strength Weakness The per capita consumption has The consumption pattern depends increased for cosmetics. on per capita income of The price of the product must be individuals. correlated to the value that Companies are forced to lower consumer perceives. their prices for products, on the The brand image has a very other hand the increased strong relevance with the competition demands for rising business. budget on promotions for their products.
Opportunity Threat It can be a good idea for the Tight competition within the industry to focus on market in a industry. segment wise manner. Market leaders act as threat to Differentiation strategy which others in the industry. highly focus on innovation could Highly regulated industry. Need to be successful. have BPOM certification. Still huge market potential that
comes along with the technology.
2.2. BLUE OCEAN STRATEGY
Blue Ocean Strategy presents a systematic approach where makes the competition irrelevant and outlines principles and tools any organization can use to create and capture their own blue oceans (Kim & Mauborgne, 2005). Red oceans represent all markets and industries in existence, where companies try to outperform their rivals to grab a greater share of existing demand. Blue oceans represent all the markets and industries not in existence today, which is the unknown market space, where the wider potential of market space that is vast, deep and not yet explored, are one opportunity for highly profitable growth (Kim & Mauborgne, 2005). The comparative of Red
Ocean and Blue Ocean are as follow:
Table 2 Comparison of Red Ocean and Blue Ocean
Red Ocean Blue Ocean
Compete in existing market Create a new market
Concern with competition Make competition irrelevant
Focus on existing customers Focus on non-customers
Work with existent demand/ market Create a new demand and market share
share
Deal with value and cost trade-off Don’t use value/cost trade-off
Whole company is aligned with the Company is aligned with the strategy of
strategy of differentiation or low cost differentiation and low cost
The Blue Oceans stand for completely new and undiscovered markets and opportunities with new value creations, new customer bases and no competition.
Demand is created, growth is profitable and rapid, competition is irrelevant, rule of the game are not set, wide deep potential of market space.
With the current technological stage, the business been challange to exceed customer’s expectation of the products and services. The globalization adds a component that facilitates new entrants and low production cost. Thus, it is important to keep up with such conditions to focus on deliver value proposition. One key point of Blue Ocean
Strategy is how to create value and how to make customer comfortable and willing to pay for it. Innovation has a key role on this matter, but not only. It must be aligned with utility, price and cost.
The Blue Ocean Strategy must be done through several actions. The first is by knowing the strategy canvas and action frameworks. The strategy canvas’s purpose is to analyse the current marketplace and understand where the competition is going. The second is to facilitate the focus reorientation from competitors to alternatives and from customers to noncustomers.
The objective is to have a value curve that diverges from competition offering a higher value and using factors where there is no competition or where a lower offering have.
The central diagnostic and action framework used in Blue Ocean Strategy, it serves two purposes:
1. To capture the current state of play in the known market space, which
allows organization to clearly see the factors that the industry competes on,
and where the competition currently invests.
2. To propel organization to action by reorienting focus from competitors to
alternatives and from customers to non-customers of the industry.
The horizontal axis captures the range of factors that products are compete on and invests in, while the vertical axis captures customers’ experience of the industry across these key competing factors. Product performance is plotted against that of the industry as a whole. A strong canvas has focus, divergence as well as a compelling tagline. This trategy canvas is a powerful tool that can be used for several purposes:
1. Drive Innovation using two questions: which are the key market factors
which can be ignored, or re-thought; and what new factors can be created
to open up a new market space?.
2. Set a price: a premium price can only be justified by superior performance.
3. Create a Customer Value Proposition by identifying the product’s real
points of difference on factors valued by the market.
Table 3 Grid of the Four Action in BOS
Eliminate Raise
Which of the factors that industry Which factors should be raised takes for granted should be well above the industry’s eliminated? standards?
Reduce Create
Which factors should be reduced Which factors should be created well below the industry’s standard? that the industry has never offered?
The action framework of the Grid of the Four Actions in Blue Ocean Strategy is needed to create a new value curve and break the trade-off between differentiation and low cost. The first two questions will develop an insight into how to drop cost structure.
The second two questions will help to lift customer value and create new demand. The action framework is to answer these four questions:
1. Which of the factors that industry takes for granted should be eliminated?
2. Which factors should be reduced well below the industry’s standard?
3. Which factors should be raised well above the industry’s standard?
4. Which factors should be created that industry has never offered?
Therefore, the proposed Blue Ocean Strategy Canvas fo “Agile by Ash” Cosmetic
could be seen below:
Raise Reduce Eliminate Create 6
5
4 Agile Cosmetic 3 Local Brand
2 Global Brand
1
0 Brand Image Quality Product Price Customization Variants Competing Factors
Figure 7 Proposed Strategy Canvas for Agile by Ash Cosmetic
According to the strategy canvas, it shows that “Agile by Ash” Cosmetic need to
maintain the brand image above other local cosmetics brand, since the brand owned by
a public figure. The next competing factors that “Agile by Ash” cosmetic need to raise
is the product quality because the competition within cosmetic industry is quite high.
While to do operational efficiency, “Agile by Ash” Cosmetic should select the product
variants, thus the company is doing product innovation to create a multifunction
product that comes from a same material formulation but can be used for any product
line and available in wide color availability.
For the eliminate part, “Agile by Ash” Cosmetic should concern competitive pricing in order to compete with the local brand in the market. Furthermore, as the competitive edge of the product, “Agile by Ash” Cosmetic need to create the customization feature to be the unique selling point of this product.
2.3 BUSINESS MODEL CANVAS (BMC)
BMC is a simple graphical template describing nine essential components: Customer segments, value propositions, channels, customer relationships, revenue streams, resources, activities, partnerships, and costs (Greenwald, 2012). BMC is a business model describes the rationale of how an organization creates, delivers and captures value (Coes, 2014).
One of the major purposes of the BMC is the communicability of business models. It is a tool for designing and visualizing business models, which makes the communicability much easier and standardized (Coes, 2014). Business Model Canvas allows business model to be simple, relevant and intuitively understandable, while not oversimplifying the complexities of how enterprises function (Qastharin, 2016).
The nine building blocks of the Business Model Canvas (Qastharin, 2016):
1. Value Proposition: The bundle of products and services that create value
for a specific customer segment. Value may be quantitative (e.g., price,
speed of service) or qualitative (e.g., design, customer experience). The
value proposition is designed to serve customers; if the value proposition
is not meeting the customer needs, a company will not survive for long,
which makes the customer the most important factor to a company (Coes,
2014).
The value proposed for “Agile by Ash” cosmetics to the customer is that
they are given a free will to choose any product they feel like they want to,
without any prohibitions. Customers are free to choose between products,
such as doing color mixing and matching, and choosing the combination
over the product categories. The value proposition comes with the mass
costumization, beauty complete pack, personalization package product
bundling.
To sharpen the value preposition, the result of the Focus Group Discussion
(FGD) and online survey later on would help to define what really matters
for the customer, which capture their expectation of the products, including
material, colors, texture, long-lasting, and many more..
2. Customer Segments: The different groups of people or organizations an
enterprise aims to reach and serve. To make a customer segment, a decision
in size, variety and type of customers must be made; by adjusting
characteristics to a particular type of customers, a segment can be created
(Coes, 2014).
When creating customer segments, it has to decide whether he serves the
business-to-consumer market or the business-to-business market – or
perhaps the business-to-government market (Pedersen, 2014). There are as
well, steps and strategies in choosing customer segments (Rachman, 2016).
a. Segmentation; identifying the market where potential segment are
developed.
b. Market Target; evaluating each segment’ attraction.
c. Positioning; choose the most promising segment.
It is expected the business to keeping up with several focus segment;
Middle-affluent and affluent. The “Agile by Ash” target market are women
with the age range from mid 20s and above which thrive for beauty. The
customer also considered as social media and internet savvy person.
3. Channels: How a company communicates with and reaches its customer
segments to deliver a Value Proposition. Communication, distribution and
sales channels comprise a company’s interface with customers. Channels
can be direct or indirect, owned or partner channels. In this channel, the
way of communication, sales strategy and distribution must be adjusted to
create a good customer awareness about the proposed value (Coes, 2014).
Channels are divided into three parts (Pedersen, 2014):
a. Distribution channels: the way value propositions reach the customer
segments.
b. Sales channels: the most profitable way to sell the value propositions
to the customer segments.
c. Communication channels: how value propositions are communicated
to the customer segments.
“Agile by Ash” will connect with the customer segments online, which is
through website and social media, which is considered as happening,
simple and convenient way for customers. The payment itself is made
through online payment and via banking. The brand will also maintain a
relationship although an order has been finished to receive feedbacks and
testimonials to build customer trust. These channels will be the focus, not
only to enchance the marketing communication but also as tools to get the
rapid access from the customer to the brand.
4. Customer Relationships: Customer relationship is also a link between the
value proposition and customer segment (Coes, 2014). This is the types of
relationships a company establishes with specific customer segments. The
aim of this relationship is to sell more products or services by improving
customer loyalty and finding and introducing new customers. Customer
relationship can be built by customer services, trust and credibility, reviews
and ratings (Pedersen, 2014).
In the global industry, one strong and unique value proposed by The Body
Shop to embrace its customer by its slogan: Nature’s way to beautiful,
which elevate the nature for beauty product. A high brand value and brand
image viewed by customers as a socially responsible company due to its
engagement in local charities and many philanthropic activities. Research
shows that even 64% of The Body Shop loyal shoppers are ready to pay
more for an ethical product (Zhang, 2014).
Taken example of one successful customer relation that try to build by Kat
von D beauty. When Kate von D collaborated with Debenhams to launch
the cosmetic beauty brand in United Kingdom took place, the words spread
out to the fans creating crowd in the store to meet the lady herself. Kat
personally met thousands of fans during the launching (HuffingtonPost,
2016).
Whereas, to improve the customer loyalty and engagement, the website
will have equipped with a tracking features and live chat. Customers may
track their products after ordered and is being sent by couriers, so that the
customer may predict the estimated time arriving of their ordered products.
The application enable the customer to mix and match several types of
product as a bundle pack that suits to their needs, by then the customer will
have their own customize cosmetic series. Whereas the livechat features
can enable the customer to chat and consult directly to their beauty personal
asisstant.
The customer relationship will be based on the data from current
purchasing behavior of customer. To build the tight relationship, it need to
exercise the customer repeatance purchasing of cosmetic brand both in
Indonesia (domestic) also international.
5. Key Resources: The most important assets required to make business
model work. These resources allow an enterprise to create and offer a value
proposition, reach markets, maintain relationships with customer
segments, and earn revenues. Resources are needed to create, communicate
and deliver the value proposition. So, for every business, different
resources are needed (Coes, 2014). Key resources can be physical,
financial, intellectual, or human. They can be owned or leased by the
enterprise or acquired from key partners. To identify the key resources it is
important to know what key resources are need to create and maintain value
propositions, channels, customer relationships and revenue streams
(Pedersen, 2014).
In the global cosmetics industry, example of key resources is using the
strong image of celebrity as one of key resources is Kat von D beauty, a
cosmetic brand owned by Hollywood’s celebrity. Katherine von
Drachenberg (Kat Von D) is today known as the most famous tattooist,
starred in LA Ink and Miami Ink, released her own books and now owns
her own makeup range Kat Von D beauty. Kat Von D beauty has highlights
value proposition in their cosmetic brand selling in global market as she
become the key resources of the brand. Kat Von D has gained a head start
when it came to building up her audience. With herself has a huge fan base
with 5.1 million Instagramers, 1.95 million tweeters, 7 million youtubers
and 2.8K facebook followers. (HuffingtonPost, 2016).
For “Agile by Ash” Cosmetics, the resources expected on this business are
as follows:
- Brand Owner: the brand is owned by the Indonesia’s top celebrity
herself, Ashanty Hermansyah, which will become a good value of the
brand.
- Physical resources: workshop for storage, packaging, and ordering.
- Intellectual resources: partnerships with marketplace, website for online
purchasing, and social media account.
- Human resources: sales employees, digital media developer, research
and development team, management team.
- Financial resources: gathered from capital and revenues generated.
6. Key Activities: The most important things a company must do to make its
business model work. They are the actions that are required to create and
offer a value proposition, reach markets, maintain customer relationships
and earn revenues. Activities of companies to create value are production,
problem solving and network activities (Coes, 2014). To identify the key
resources it is important to know what key activities are need to perform,
in order to create and maintain value propositions, channels, customer
relationships and revenue streams.
Kylie Cosmetics, founded by the famous celebrity Kylie Jenner, uses
distinct social media platforms and exposing its brand and products
through famous social media platforms like Facebook, Twitter, Snapchat,
Instagram, and YouTube. The activities Kylie has been doing all the time
is to attract major traffic to her cosmetic line; and proven to cause it to sell
out in just minutes of her site launching new and improved products. Kylie
Jenner’s youthfulness and social media savviness has created a special
bound with her audience (Anagf23, 2016).
Same with “Agile by Ash” Cosmetic, the activities that expect to do are
launching new products, as well as doing offline campaign. The brand also
expects to launch the product and doing campaigns strategically by making
use of national holidays which has to do with women, care and treatment.
7. Key Partnerships: The network of suppliers and partners that make the
business model work. The building block key partners is essential for the
value creation in business models because the network partners
complement the company resources (Coes, 2014). There are four different
types of partnerships (Pedersen, 2014):
a. Strategic Alliances: between non-competitors.
b. Co-opetition: cooperation between competitors.
c. Joint Ventures: where both partners have a share in the venture.
d. Buyer-Supplier: traditional vertical relationships between business and
its suppliers.
One of the example of partnership is between Kat von D beauty and
Sephora a retail store that have their own cosmetics line, based in United
State. Since 2008 Kat von D has product sell in Sephora. The brand had
launched four red lipsticks, which almost immediately sold out. With
partnership with Kat von D, by then Sephora create product with ‘touch’
of Kat von D. This success led to an expanded line inspired by the inks and
pigments Kat uses in her lipstick collection. Sephora now has over 350
products including lipsticks, brushes, and eyeshadow and contour palettes.
The brand sells the products on the Kat von D Beauty website and in retail
store. It’s almost exclusively sold at Sephora. In countries where there are
no Sephora locations, it’s available at Debenhams (Cheryl Wischhover for
Racked, 2017).
Meanwhile, for “Agile by Ash” cosmetics. The company already have the
key partner in production and sales chain: manufacturer, supplier, and
distributors. Furthermore, the company are also expecting to form
partnerships with fellow public figures, beauty and cosmetics
communities, as well as beauty and fashion bloggers and vloggers. This
partnership are expected to deliver to the customers.
8. Revenue Streams: The cash a company generates from each customer
segment. The revenue stream is started by a transaction of value which is
paid for with money (Coes, 2014). Following are the types of revenue
streams (Pedersen, 2014): traditional sales of products and services,
advertising, affiliate marketing, subscriptions, consumer data sales,
licensing, renting and leasing, usage rates and brokerage fees.
One of the most successful cosmetic brand in terms of profitability is Estee
Lauder, a manufacturer of cosmetic products, founded in 1946 by Mrs.
Estee Lauder. Estee Lauder had vigorous revenue & profitability in last
2010. Its net earnings for fiscal year 2010 got through $478 million while
Net sales were $7.8 billion. (Rind, 2010).
In “Agile by Ash” Cosmetic project, the company generate revenue
streams through direct selling products, and increasing the revenue streams
by endorsements and promotions. This way the company will also be able
to build brand awareness. The payment method used are through
partnerships with online trading sites and via banking.
9. Cost Structure: All costs incurred to operate a business model. This cost
structure can be characterized depending on the business model as cost-
driven, value-driven, fixed costs and variable costs (Coes, 2014). There are
two general types of business model cost structure (Pedersen, 2014):
a. Cost-driven: Cost-driven business models have an intensive focus on
minimizing costs wherever possible in order to offer customers the
lowest possible prices. The structures are usually based on low-price
Value Propositions, automated processes, and outsourcing.
b. Value-driven: Value-driven business models focus heavily on creating
maximum value and low costs are not a big concern. These structures
are usually based on high-price Value Propositions and personalized
customer interactions.
One cosmetic brand that owned by Estee Lauder cosmetics, MAC, varies
in use a performance and meets the needs of specific market of women with
its products. However, ever since MAC reached the top, MAC Cosmetics
is a world renowned cosmetics company. The company’s unique and well-
known brand image has created a strong celebrity following. In addition,
the brand receive a vast amount of the word of mouth endorsements from
professional make-up artists. Their prides itself in creating high quality,
fashion forward products that are cruelty free while providing consumers with the experience of being attended to by highly trained makeup professionals; making it products are mostly luxurious and high valued personally for its customers (FashionZone, 2014).
While, in this business, the cost structures expected are the initial investments and operational costs. The initial investments are assets and capital, while the operational costs are costs for operating costs daily.
The proposed Business Model Canvas for “Agile by Ash” Cosmetic can be seen as figure below:
• R&D • Online • High quality • Suppliers • Product personal product beauty • Local launching, • Multi- assistance • Middle-to- manufac selling and functional • Loyalty up turers campaign product program • 20-40 years • Laboratory • Customi- old testing zation • Young and • Social media purchasing dynamic promotions through • Social media woman • Endorsers • Employees online • Online • Founder channel marketplace • Beuaty shop
Project cost and Operation Direct sales of the product marketing cost expenses
Figure 8 Business Model Canvas of existing Ashanty Beauty Cosmetics
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2.3.1. OMNI-CHANNEL STRATEGY FOR COSMETIC PRODUCT
By definition, omni-channel is a integrated approach to commerce that provides customer a complete experience across online and offline channels. The omni-channel extends from physical store to online platform such as e-commerce marketplaces, online website, retail store-fronts, social media, retargeting, and everything in between.
The modern technology that enables people to communicate instantly and interconnection with one to another through internet causes industry in the big challanges. Harvard Business Review reports that of 46,000 surveyed shoppers worldwide, 73% shopped on more than one channel (only 7% shopped online-only, and 20% shopped in-store-only). Findings showed that they spent 4% more on average every time they visited a store and 10% more online in comparison to single-channel shoppers. And when they did research online in advance, they spent 13% more in-store.
According to James Rowell “With consumer and technology sophistication, the models for internet shopping are changing at an increasing pace. Other drivers for these changes include the demise of some traditional retailing sectors and similarly the popularity of purchasing online, e.g. electronics, computing and photographic equipment. These have alerted other retailers to the need to change or develop their proposition in the retail sector” (Rowell, 2013)
Omni-channel retailing involves seamlessly integrating the customer experience across all interaction channels – in store, on the web, and on mobile devices. As customers use almost every available buying channel, companies need to be omni-present. The
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buying process is no longer predictable. It is dynamic, driven by increasing internet and mobile use, and it has more ”touch points” than ever.
Customers also expect a personalized shopping experience – in both their private and work lives, online and in stores. Innovative shopping facilities and excellent customer services are becoming standards, while brand loyalty is decreasing. A 2013 survey revealed that nearly 75% of consumers would switch brands if offered real time discounts and promotions on smartphones in real time while shopping in a physical store (White Paper, 2014). Various business models and an eco-system of partners have to be integrated.
It is clear that return on marketing spend, the ever changing payment solution landscape, and increased supply chain complexity are the main three areas of concern.
These three areas have a large impact on the customer conversion rate as they all impact the customer’s purchase decisions (Deloitte AB, 2015).
Beauty products purveyor Sephora is expanding its “Beauty TIP Workshop” concept, opening its first Canadian store in a move that signals the chain’s ongoing commitment to building innovating digital experiences in-store. Beauty TIP Workshop is essentially both a store and showroom, allowing customers to purchase cosmetics from diverse brands like Bite Beauty to Tom Ford as well as receive custom skincare tips and access digital beauty tutorials.
According to GCI Magazine, the expanded Beauty Studio in the new Toronto store offers complimentary makeovers designed by Sephora in collaboration with Pantone
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Color IQ touchscreens, which provide recommendations on foundation, concealer, and more. And on the perfume side, Sephora has reportedly installed touchscreen
“Fragrance IQ” to allow shoppers to digitally search and browse fragrances.
With these updates aimed at blending the digital and the physical, it appears that
Sephora is trying to follow the advice given to many “traditional” retailers in the mobile age: Revitalize the physical store concept with digital tactics. Sephora being omnichannel is not about simply bringing tablets and technology into a retail store it really is imagining the physical retail store to continue to evolve experience for the customers.