International Business Strategy (IBS), Assignment 1

January 2008 Prepared by: University ID: Waleed Sami 7312180

1. Conflict in Motives and objectives between the Chinese government and AVON.
April 21, 1998 is an important day in the history of Avon China; the Chinese government formally announced a ban on all direct-selling activities in the country. The ban was the outcome of 3 years of continuous efforts from the government to permanently stop the spread of pyramids schemes and other fraudulent business. A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered1. Most pyramid schemes take advantage of confusion between genuine businesses and complicated but convincing moneymaking scams In fact, the 1990s was a tough time for direct marketing globally, because governments of many countries were troubled by the severe social impacts related to pyramid scheme. The globalization of the economy provided a new outlet for pyramiding. Pyramids schemes found fertile ground in newly emerging market economies2, such as the Chinese market, where this type of fraud had previously been scarce or unknown3. In Albania, for example, investors poured an estimated $1 billion into various pyramid schemes -- a staggering 43% of the country's GDP4. The Albanian schemes were technically not Pyramid schemes but Ponzi schemes. Direct selling is a new concept to the Chinese. It is obvious that the Chinese do not fully understand it, and the difference between legitimate types of business, so in response to fear of social unrest, the government responded with this dramatic decision that will have a devastating impact on legitimate businesses. There are several objectives and motives disconnection between the Chinese government and Avon which led to the current crisis; they can be summarized in the table below: AVON Move towards Globalization of markets: expand globally Move towards Globalization of production: seek low cost sources for production Expand sales in foreign countries especially in the huge country of China in order to continue the country sales growth which tripled in the last 3 years of operations5 Retain its sales force Chinese government Protect the consumers To avoid social unrest caused by a potential collapse of Pyramid Scheme similar to what happened in other countries of the world during the 90s.

Motives & Objectives

1 2

As defined in wikipedia, http://en.wikipedia.org/wiki/Pyramid_scheme . From a prepared statement by Debra Valentine, General counsel for the US Federal Trade Commission on Pyramid schemes as presented at the INTERNATIONAL MONETARY FUND'S seminar on current legal issues affecting central banks on Washington DC on May 1998 3 Tom Hundley, Always Poor, Albanians Go for Broke, Chicago Tribune, Feb. 11, 1997 at 18. 4 Id. For an analysis of the effect of pyramid and Ponzi schemes on Eastern Europe's insurance market, see Int'l Chamber of Commerce, Pyramid sales of insurance policies condemned, Business World, July 9, 1997 at "http://www.iccwbo.org/html/pyramid.htm". 5 Case study AVON Products China (A), AVON Sales in China (1994-199)7, Exhibit 1.

2. AVON alternatives.

Avon has to make a decision. Avon could keep its running model but then would be giving up its 70M investment in the country and lose Chinas market for the foreseen future, losing its First mover advantages and the wealth of experiences gained in the Chinese market. Except for few countries, the company had never altered its business model. AVON has one of the following options: 1. Change the business model that has made it successful worldwide, in order to stay in China. 2. Leave the country 3. Protest the interference by the Chinese government and revert to political pressure to push the Chinese to lift the ban. Below is a list of each alternative with the relevant advantages and disadvantages: Alternative Pull out of China Advantages 1. Minimizes the expected operational expenditures losses due to the suspension of sales operations. Avon is loosing 100K per day Disadvantage 1. Avon will face the prospect of losing its foothold in the largest consumer market in the world, with 1.3 Billion people, China represents a huge and largely untapped market6 2. waste 70M and 8 years of experiences gained in the Chinese market 3. The risk of not being in China is greater than the risk of being in China, (H. von Pierer, Former Chairman, Siemens AG) With 1. Without joining WTO, its unlikely that China will oblige to the pressure. 2. Might initiate retaliation measure from the Chinese government against similar businesses. In china, it was observed that with every incident of foreign-policy intervention, the second- and third-echelon bureaucrats became weary of befriending U.S. companies7. This will increase trade barriers between US and Chinese companies 1. Switch to a China-oriented business model which will force Avon to deploy a multidomestic sales strategy instead of the followed Global strategy 2. Associated higher costs to establish the new model 3. Revamp the whole business model and the customers value

Mobilize political pressure to push the Chinese to lift the ban

1. Avon can continue adopting its global go-tomarket strategy in the Chinese market

Shift to Wholesale & Retail go-to-market strategy

1. continue operation in this fast growing market which holds great potential for growth 2. The emerging economy of China provides Avon with an unprecedented opportunity for growth 3. Leverage the experience

The Political Economy of International Trade, International Business: Competing in the Global Marketplace, Sixth Edition (Hill), The changing world order, chap. 1 p.24. 7 From Harvard Business Review articles , MayJune 1998 Books in review, Book titled: Opening the Doors for Business in China by Jeffrey E. Garten

gained from the similar Retail operations in Taiwan and few other locations8.

chain 4. develop new competencies will result in higher training costs 5. lose its existing sales force or uncertainties with calibre and skill of those resources which were hired and trained without the retail experience consideration

If we use a decision grid to come up with the best alternative that would achieve Avon objectives, we can define the weighting factors in terms of importance as below: Objectives Comply with the government legislation Preserve and maximize the return on the investment made in China Maintain and grow current sales revenues Retain its sales force Weighting factor 0.15 0.25 0.45 0.15

Then mapping the alternatives to those objectives to identify the matching fit and using a scale of 1 to 10 with 1 being lowest and 10 being highest being will result in: productionlow cost sources for Name Total Weighting score 1 5 6.6

Pull out of China Mobilize political pressure to push the Chinese to lift the ban Shift to Wholesale & Retail go-tomarket strategy

1 5 8

1 5 6

1 5 8

countries

1 5 2

Case study AVON Products China (A),

Retain its sales force

3. Recommendations and Implementation

Based on the analysis above, it is recommended that Avon operate as a wholesaler to Chinese retail stores and convert its branches into typical retail outlets. This move will allow the company to rescue its investment in the market at the expense of risking loosing its highly experienced sales force. Additionally Avon can deploy a franchising system with their existing sales representatives. Franchising will enable Avon to: 1. Expand the Distribution Channels. 2. Elude the additional cost required to establish new branches in remote areas/regions or in areas of less importance9 (China cannot be treated as one entity it should divided into several economic regions). In a standard franchising model, inadequate inventory management skills and systems, and
suboptimal quality control are common contributors to a higher cost of operations10

The following are recommended steps: 1. In order to remain a true Global company Avon must not spare any efforts in taking the time to discuss with the Chinese government different scenarios to arrive at some sort of compromise agreement. 2. Avon should immediately start working closely with the Chinese administration and take them through an educational process to neutralize the fear of direct selling as a viable business approach completely different from pyramid scheme or even Multi-level-marketing adopted by other competitors in China. 3. Bring in management experiences from Avon Operations in retail business in Taiwan to help Avon China management in developing the new operational model. 4. Identify and recruit key talents among the current Avon sales representatives. 5. Develop training plans on the new model for all concerned members. 6. Continue localization of employees who are familiar with consumer preferences, as well as the culture and politics of China. 7. Localization of the business model. 8. Provide support for Chinas entry into the World Trade Organization (WTO). 9. Engage in active community involvement in the areas of human services, education, environment, and culture. 10. Restructure the organization chart to reflect the new model and provide alignment with the traditional lines of retails operations The above steps should be fully developed through a detailed implementation plan and put in place during the grace period; before October 31st.

Entry Strategy & Strategic Alliance, International Business: Competing in the Global Marketplace, Sixth Edition (Hill), Franchising-Advantages, chap. 14 p.490. 10 Strategy+business magazine, Ongoing Research The Right Way to Achieve Profitable Growth in the Chinese Consumer Market By Edward Tse, second Quarter 1998