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 19 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