AmorePacific From Local to Global Beauty I.

Company Overview Amore Pacific was established in 1945 as Pacific Chemical Industries, and releases its first branded product, named Melody Cream, in 1948. The company was incorporated in 1959, and listed its shares in Korea Stock Exchange, then changed its name to AmorePacific Corporation in 1993. Amore already achieved a leadership position in the Korean market when it took the fateful decision, of initiating door-to-door sales in the mid 1960s. Amore has special sales person called Amore Ladies who sell its products door-to-door to customers. Amore Pasific refocused on comestics by the mid 1990s at corporate level. Amore Pasific launched what turned out to be three megabrands atr higher price points than it had previously targeted, resturcturing brand management as well as its brand portfolio, realigned longstanding distribution relationshipm, and generally moved to upgrade firm infrastructure. Amore Pasific reported 3,300 employees and sales of 1,272 billion KRW (Korean Won). Its four-fifths of sales generated from cosmetics and toiletries, placing the company among the top 30 worldwide. Amore Pasific had 30% of Korean market share for cosmetics. What become problem are although Amore Pasifics share of Korean market had reached record levels and its operating margins of 15%+, its sales fell by 5% from 2003 to 2004, and its operating income by 7%. Amore Pasifics vision is to becomeing one of the top -10 cosmetics companies in the world, and need to accomplished their target by 2015 with $4billion sales , and $ 1,2 billion from outside Korea.

Product Portfolio

II. Problems Problem have arisen with following issues: 1. The Korean economy began to weaken in late 2002 and caused the Korean beauty products market to contract in 2003 and 2004. 2. Door-to-door networks came under particularly heavy pressure and risky 3. Korean market had stagnated at 10%-15% in volume terms and 25-30% in value terms 4. Korean distribution system remained complex and hard to penetrate: Global companies such as LOreal and P&G began to introduce high-end products with their refined brand images through department stores. 5. Although the company began exporting face powder to coty in France, small scale shipment to Ethiopia and Thailand , established sales branches in New York, and built local subsidiaries in France and China , none of these attempts made a significant outcome. Besides competition, there were plenty of reasons to look further to overseas market. A growing interest in oriental beauty and health in Western countries, rapid growth of emerging economies including China, and Korean wave in Asian market opened the door for expansion. But even after a series of initial efforts, Amorepacific was far less recognized in the foreign market. Could AmorePacific fulfill its vision of becoming one of the top-10 cosmetics companies in the world, with $4 billion in sales by 2015, $1.2 billion from outside Korea?

III. Analysis of Business Situation a. Task Environment based on Porters Five Forces 1. Threat of New Entrants The cosmetic industry has a low threat of new entrants. This is due to several factors. The huge costs of entry. Developing unique cosmetic products requires a lot of resources both in terms of research and development and the actual manufacturing process. Few middle and small scale firms have access to the funds and expertise required to perform this effectively. The huge competition present in the industry. In addition to the huge competitors such as Loreal S.A (France), The Procter & Gamble Co. (US), Unilever,PLC (UK), Shiseido Co. Ltd (Japan) and Estee Lauder Companies, Inc (US) , who have a large market share. Moreover there are many other small scale competitors who also have

a small market share and who reduce the overall profitability of firms in the industry. 2. Rivalry among existing firms (High) There are several existing competitors which are a leading firms from outside Korea, and sucessfully attracted 13% of Korean market share. The main competitor for Amore Pasific are L'Oral (10% market share), P&G (9%), Estee Lauder (4%), Unilever (8%), and Shiseido (3%). Each competitor served various target market with mass and specified products to customers with product differentiation. To continue to build scale, most major competitors followed similar strategies built around brand extensions, new product launches acquisitions, brand marketing, and global expansion. 3. Threat of substitute products or services There is a high threat of substitute products. The substitute of product will be trigger since customer more price sensitive. If company sell their products at higher prices, or if the products are of low quality, then consumers are able to purchase substitutes from the many competitors who are present in the market environment 4. Bargaining power of buyers Company has a high bargaining power of customers since customer are price conscious. This is due to the increase competition and availability of cosmetic products from a variety of manufacturers. Since these products have high substitutes, then it is possible for consumers to force manufacturers to reduce their product prices through purchasing those of their competitors. 5. Bargaining power of suppliers Company has a low bargaining power of suppliers since the condition of company has differentiated product and substitute product are available.

IV. Company Situation Analysis a. SWOT Analysis Strength AmorePasific has prestige brands with outstanding competitiveness such as Hera and Sulwhasoo (S1) AmorePasific built its dominance in the door-to-door channel and has own IT-system of it (S2) Weakness Limited availability of key ingredient such as Green tea (W1) Low brand equity in Western area France (W2)

 AmorePacific manufactured all its product itself (S3) AmorePasific implemented streamline operations with ERP, Six Sigma, TQM and IT outsourcing with IBM ( S4) Company had pioneered massmedia advertising (S5) Already have many subsidiraries in international market such as china, LA, New york, France (S6) The R&D Centre was well organized and developed (S7) Modernization of management, infrastructure, and HR (S8) Mixing a holistic identity that merges Eastern and Western inspiration (S9) Opportunity Threats Big opportunity in beauty Intense competition from other product market (O1) players. (T1) Personal care market was The complexity of distribution forecast growth, faster than system in Korean market. (T2) global GDP (O2) The complexity of government bureaucracy in Korea. (T3) In Asian market, familiarity with Asian skin care needs (O3) Global market has different markets from South Korea, need a learning The growing popularity of South Korean culture (O4) curve (T4) Geographically accessible in Cultural issues - no understanding Northeast Chine (O5) of Western Culture (T5) The successful of Lolita Price conscious buyer (T6) Lempicka perfume in France China established a law against (O6) door-to-door sales (T7) Beauty product need from narrower segments such as particular ages, minorities and men has been growth (O7) b. PESTEL Analysis 1. Political Amore Pacific face the complexity of Korean government bureaucracy, the high tariff rate, and product regulations. China limited competition by maintaining 200%-300% tariffs on cosmetics and prohibiting foreign direct investment (FDI).

2.

Economical The Asian financial crisis in 1997-1998 reduced Koreas GDP and forced the reformation of chaebol by consolidation and more transparent accounting practices.

3.

Socio-cultural Asian more concern about the standardization of beauty products for their skin health. Korean women paid a great attention to skin tone and focused more on covering skin flaws. Korean women use more cosmetics than French women. Dealing with international market, the French consumers are not willingly to change their cosmetics producers to newly industrialized country. Chinese customers prefer made-in-Korea products. French consumers reluctance to buy cosmetics from a newly industrialized country. In 2003, Amore pacific introduced what it described as the worlds first digital door-to-door sales system that let beurators check inventory in real time through a company-supplied PDA.

4.

Technological

5.

Environmental AmorePacifics vision was to be world-class, this had the application of forcing it to think internationally. AmorePacific was not shy about learning from its multinational competitors. AmorePacific set up a subsidiary in Northeast China because the geographically accessible from Korea and shares much history and culture with Korea. The Korean beauty products market had a apparently overheated even more than the Korean economy in general.

6.

Legal The R&D Center was credited had been designated a National Research Lab the first in a sector by the Korean Government in 2000, and had been commissioned to develop nanostructure to help the skin selectively absorb effective ingredients.

c. 1.

Other Internal Assessment Culture Commited in investing more in product development and manufacturing as well as marketing/distribution in selected foreign markets.

The company adopt value-based management, promotes corporate transparency, and women-friendliness. Using Korean Wave (Korean culture) to support one of their brand in China market. Amore Pacific engaged in comprehensive cost-reduction programs, boosted R&D, restructuring brand management, realigned longstanding dsitribution relationship, and upgraded the firm infrastructure.

2.

Resources Amore Pacific employed 3,300 employees and sales of 1,272 billion Korean Won (KRW). Amore Pacific employed Amore Ladies to sell its product closely to the customers. Recruited the right human resources by adopting women friendliness value. The company have 350 outlets in 2004 and planned to expand the outlets to 800 branches in 2007. The company facilitated Amore Ladies with PDA to help them scheduling the vistis and improve reordering. Using brand manager system to organized brand manager worked closely with R&D function from product concept to development. Hired a veteran of the French parfume industry with experience to guide product development and strategy to the firms European operations as their director-general.

3.

Structure The company consisted of major function, such as Operations Department, R&D Department, infrastructure. Amore Pacific was a chaebol (conglomerate company) whose family still owned 37% of the company share. Emphasized the modernization of its management infrastructure, and human resources. Marketing Department, Distribution Department, and Firm

d. Financial Analysis AmorePacific posted satisfactory results in 2004, despite the sluggish domestic economy. Sales amounted to KRW1,272 billion and the operating income totaled KRW197 billion, led

by active door-to-door/department sales, a rise in the sales of prestige brands, and the solid growth of the green tea business.

Source : Amorepasific Annual Report 2004

Amore Pacifics financials over the post-crisis period, from 2002 to 2004 are summarized as below. In the new millennium Amore Pacific presented fresh challenged as the domestic market first expanded. Based on the chart, the operation activity likes sales, have increase from 2002 to 2003, but decreased from 2003 to 2004. It is affecting operating income and net income among 2002 to 2004. It affected due to higher operating expense and higher in goods sold. If we see cost of goods sold for 2004, have 32% point, the highest from all over operating margin. It is also implication to the operating profit margin area that need to measuring pricing strategy and operating efficiency.

Source : AmorePacific Annual Report, Datastream International

Amore Pacific also has decreased in Asset Turnover Ratio. We get 1.2 in 2002, 1.02 in 2003, and 0.9 in 2004. But if we see the total asset, there is increased 30% in this point, from 2002 to 2004. Amore Pacific also competed with several international brands like LOreal SA, P&G, Unilever PLC, Shiseido Co. Ltd, and The Estee Lauder Cos Inc. Among this competitor, LOreal SA always becomes market leader as first or second position in global share for hair care, make-up, fragrance and skin care. Many several product have launched by the Amore Pacific and competitors with also several priced. AmorePasific : Overseas Operations Estimated Financials (KRW bn) Sales in 2004
US 8% Asia 28%

France 46% Hongkong 11% China 7%

Source : Company data; Morgan Stanley Research

As an important part of the vision for Amore Pacific was to become world-class, this had the implication of forcing it to think internationally. Three countries combined to account the international sales in 2004 as figure above.

From the France had great sales among the other region, but also France had the minus point for net profit. It indicates that Amore Pacific has expansion cost combined to lead to significant operating losses. Its indicates that Amore Pacific has to Quadrupling production capacity to return to profitability. This condition in France have similar in other region likes China and U.S. Different form three region, in Asia and Hong Kong, Amore Pacific have gradually good sales and affected to the net profit they get. Over all, the growing popularity of South Korean culture become accelerated apparent success in Asian people.

Relative Performance of Distribution Channels in Korea for Cosmetics (KRW Billion)

Beauty Salon 4% Dept Store 20% Multilevel 5% Door-to-door 22%

Mass Market 41%

Direct sale 8%

Source : Company data; Morgan Stanley Research

V. Business Solutions a. Grand Strategy Matrix Matrix Analysis IFAS and EFAS No Internal Factor Strategy Strength
1 AmorePasific has prestige brands with outstanding competitiveness such as Hera and 5 Sulwhasoo (S1) AmorePasific built its dominance in the doorto-door channel and has own IT-system of it 9 (S2) AmorePacific manufactured all its product 9 itself (S3)

Weight

Rating

Score Rank

3 4 4

15 36 36

VII II I

2 3

AmorePasific implemented streamline operations with ERP, Six Sigma, TQM and 4 IT outsourcing with IBM ( S4) Company had pioneered mass-media 3 advertising (S5) Already have many subsidiraries in international market such as china, LA, New 7 york, France (S6) The R&D Centre was well organized and 7 developed (S7) Modernization of management, infrastructure, 5 and HR (S8) Mixing a holistic identity that merges Eastern 5 and Western inspiration (S9) Weakness

3 2 3 4 4 3 54

12 6 21 28 20 15

VIII IX V III IV VI

5 6 7 8 9 Total

1 2 Total

Limited availability of key ingredient such as 6 Green tea (W1) Low brand equity in Western area France 10 (W2)

3 4 16

18 40

II I

Opportunity
1 2 3 4 5 6 Big opportunity in beauty product market 7 (O1) Personal care market was forecast growth, 6 faster than global GDP (O2) In asian market, familiarity with Asian skin 7 care needs (O3) The growing popularity of South Korean 5 culture (O4) Geographically accessible in Northeast Chine 4 (O5) The succesful of Lolita Lempicka parfume in 5 France (O6) Beauty product need from narrower segments such as particular ages, minorities and men 7 has been growth (O7) Threats 1 2 Intense competition from other players. (T1)

4 3 3 2 2 2 4 49

28 18 21 10 8 10 28

I III II V VII VI IV

7 Total

4 2

24 10

I V

The complexity of distribution system in 5 Korean market. (T2)

3 4 5 6 7 Total

The complexity of government bureaucracy 4 in Korea. (T3) Global market has different markets from 5 South Korea, need a learning curve (T4) Cultural isses - no understanding of Western 4 Culture (T5) Price conscious buyer (T6) 3 China established a law against door-to-door 4 sales (T7)

2 3 3 4 2 31

8 15 12 12 8

VI II III IV VII

VI.

Corporate Strategy According to our group analysis we suggested that Company corporate strategy to go

global is Growth Strategy with concentration since a firm still has a strong competitive position and industry attractiveness is high. Company can choose both of basic concentration strategies are vertical growth and horizontal growth. Company also need to consider

country-specific strategy due to the differentiation of culture of western and asian. Company need to always learn from successful entry in France, Lolita Lempicka, strategy to enter the fragrance market in France, instead of the skin-care segment. In vertical growth, company already implementing an optimal supply chain process by integrating production and logistics, they adopted the efficiency in line production, integrated all function into ERP. The system could made advantages to company especially in backward integration to supplier differentiate ingredient such as green tea. Moreover the forward integration between company and direct channel (door-to-door), the major distribution channel should be improve by company with functional strategy, explain in next sub-bab. With horizontal growth company could expanding its operations into other geographic locations and/or by increasing the range of products. A relatively quick way to move into an international area is through acquisitions purchasing another company already operating in that area. Learning from France company had struggled with Frances culture with key problem of Korean manager faced are no understanding of Western Culture, It takes time for Learning to know different country and poor market response. Hired French cosmetics experts and Licensed a French fashion designer brand are key successful factor of French and bring conclusion to our group that acquisitions could help company to go global (inorganic growth).

VII.

Business Strategy

After fully discussion with our group team member we suggest that business strategy is differentiation with point as our consideration are : 1. Corporate reputation as cosmetic brand with high quality 2. The company commitments by investing in product development and manufacturing as well as marketing/distribution in selected foreign market 3. Strong cooperation from channel : mass market, sales by person, department store and beauty salon 4. Strong marketing abilities especially in door-to-door direct channel 5. Strong coordination among functions in R&D 6. A wide range of brand pyramid (super prestige, prestige, premium and mass) with specialty in each brand, excellent product power and various product, price range, cannot make company to fully focus on one segment. Sulwhasoo, Hera and AmorePasific = differentiated quality, service and design IOPE,Lanaige, Mamonde = attractive concept and reasonable price.

The differentiation would be as follows : Expand into baby/men/elderly markets Premiumize hair/body care Premiumize green tea Maintain growth by expanding products and channels in emerging market (China and other ASEAN countries) Strengthen the position and improve profitability in developed markets Build strong relationships with business partners Localized the product regarding destination country Build environmental sustainability with their R&D Value chain partnership with supplier

VIII.

Functional Strategies

Marketing

Using a market development strategy, Company can use functional marketing strategy as follow 1. Using advertising and promotion to implement a market saturation/penetration strategy to gain the dominant market share in a product category : Using Korean actress/actor to introduce product while Korean wave increasing 2. Lead the market through innovation in retail distribution 3. A campaign to raise public awareness such as cancer campaign Finance 1. Consider about foreign exchange country in emerging market (i.e China) and advanced market (i.e Europe, United States) 2. Maintaining the financial performance of company 3. Reduce financial risk that might be incurred HR Creation of a workplace where people want to work by using these strategies : 1. Improved evaluation system and differentiated compensation 2. Preparing for global talent development : establishing diverse training programs for developing leadership and global competencies of employees 3. Implementing a variety of welfare benefit systems for employee and distribution channel especially door-to-door sales, professional talent in retail store R&D 1. Safe products & sustainable innovation 2. Reduction of corporate-wide environmental impact 3. Develop new product that meets with customer demand in destination country such as whitening, anti-aging and skin regeneration. 4. Avoid imitation with patent Operation 1. Maintaining the production efficiency with the digization of key process, ERP to support line in operation, IT Sourcing with IBM 2. High quality product with Six sigma for TQM Purchasing 1. Imroving the integrated system in ERP 2. Increasing contribution to local community by using their sources (localization)

3. In order to enhance the competitiveness of Suppliers Company can offer to reinforce communication with suppliers and also provide support on training programs for the employees of its suppliers. Distribution 1. Maintain market dominance through differentiated quality of door-to-door sales 2. Improving door-to-door sales competencies