Reference no: EM131753669

Ford

When Ford CEO Alan Mulally ar- rived at the company in 2006 after a long career at Boeing, he was shocked to learn that the company produced one Ford Focus for Europe, and a totally different one for the United States. “Can you imagine having one Boeing 737 for Europe and one 737 for the United States?” he said at the time. Due to this prod- uct strategy, Ford was unable to buy common parts for the vehicles, could not share development costs, and couldn’t use its European Focus plants to make cars for the United States, or vice versa. In a business where economies of scale are important, the result was high costs. Nor were these problems limited to the Ford Focus— the strategy of designing and building different cars for different regions was the standard approach at Ford. Ford’s long-standing strategy of regional models was based upon the assumption that consumers in different regions had different tastes and pref- erences, which required considerable local customization. Americans, it was © iStockPhoto.com/GYI NSEA argued, loved their trucks and SUVs, whereas Europeans preferred smaller, fuel-efficient cars. Notwithstanding such differences, Mulally still could not understand why small car models like the Focus or the Escape SUV, which were sold in different regions, were not built on the same platform and did not share common parts. In truth, the strategy probably had more to do with the autonomy of different regions within Ford’s organization, a fact that was deeply embedded in Ford’s history as one of the oldest multinational corporations. When the global financial crisis rocked the world’s automobile industry in 2008–2009, and precipitated the steepest drop in sales since the Great Depression, Mulally decided that Ford had to change its long-standing practices in order to get its costs under control. Moreover, he felt that there was no way that Ford would be able to compete effectively in the large devel- oping markets of China and India unless Ford leveraged its global scale to produce low-cost cars. The result was Mulally’s “One Ford” strat- egy, which aims to create a handful of car plat- forms that Ford can use everywhere in the world. Under this strategy, new models—such as the 2013 Fiesta, Focus, and Escape—share a common design, are built on a common platform, use the same parts, and will be built in identical factories around the world. Ultimately, Ford hopes to have only five plat- forms to deliver sales of more than 6 million vehicles by 2016. In 2006 Ford had 15 plat- forms that accounted for sales of 6.6 million vehicles. By pursuing this strategy, Ford can share the costs of design and tooling, and it can attain much greater scale economies in the production of component parts. Ford has stated that it will take about one-third out of the $1 billion cost of developing a new car model and should significantly reduce its $50 billion annual budget for component parts. More- over, because the different factories producing these cars are identical in all respects, useful knowledge acquired through experience in one factory can quickly be transferred to other factories, resulting in system-wide cost savings. What Ford hopes is that this strategy will bring down costs sufficiently to enable Ford to make greater profit margins in developed markets, and be able to make good margins at lower price points in hypercompetitive devel- oping nations, such as China, now the world’s largest car market, where Ford currently trails its global rivals such as General Motors and Volkswagen. Indeed, the strategy is central to Mulally’s goal for growing Ford’s sales from 5.5 million in 2010 to 8 million by mid-decade.

AVON

For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products company famous for its direct sales model, revenues grew in excess of 10% a year. Profits tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly. Avon, which derives as much as 70% of its reve- nues from international markets, mostly in developing nations, suddenly began losing sales across the globe. A ban on direct sales had hurt its business in China (the Chinese government had accused companies that used a direct sales model of engaging in pyramid schemes and of creating “cults”). To compound matters, economic weakness in Eastern Europe, Russia, and Mexico, all drivers of Avon’s success, stalled growth there. The dramatic turn of events took investors by surprise. In May 2005 Jung had told investors that Avon would exceed Wall Street’s targets for the year. By September she was rapidly backpedaling, and the stock fell 45%. With her job on the line, Jung began to reevaluate Avon’s global strategy. Until this point, the company had expanded primarily by replicating its U.S. strategy and organization in other countries. When it entered a nation, it gave country managers considerable autonomy. All used the Avon brand name and adopted the direct sales model that has been the company’s hallmark. The result was an army of 5 million Avon representatives around the world, all independent con-tractors, who sold the company’s skin care and makeup products. However, many country managers also set up their own local manufacturing operations and sup- ply chains, were responsible for local marketing, and developed their own new products. In Jung’s words, “they were the king or queen of every decision.” The result was a lack of consistency in marketing strategy from nation to nation, extensive duplication of manu- facturing operations and supply chains, and a profusion of new products, many of which were not profitable. In Mexico, for example, the roster of products for sale had ballooned to 13,000. The company had 15 layers nication problematic. There was also a distinct lack of data-driven analysis of new-product opportunities, with country managers often making decisions based on their intuition or gut feeling. Jung’s turnaround strategy involved several ele- ments. To help transform Avon, she hired seasoned managers from well-known global consumer prod- ucts companies such as P&G and Unilever. She flat- tened the organization to improve communication, performance visibility, and accountability, reducing the number of management layers to just eight and laying off 30% of managers. Manufacturing was con- solidated in a number of regional centers, and supply chains were rationalized, eliminating duplication and reducing costs by more than $1 billion a year. Rigor- ous return-on-investment criteria were introduced to evaluate product profitability. As a consequence, 25% of Avon’s products were discontinued. New-product decisions were centralized at Avon’s headquarters. Jung also invested in centralized product develop- ment. The goal was to develop and introduce block- buster new products that could be positioned as global brands. And Jung pushed the company to emphasize its value proposition in every national market, which could be characterized as high quality at a low price.  By 2007 this strategy was starting to yield divi- dends. The company’s performance improved and growth resumed. It didn’t hurt that Jung, a Chinese- American who speaks Mandarin, was instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial crisis hit. Jung’s reaction: This was an opportunity for Avon to expand its business. In 2009, Avon ran ads around the world aimed at recruiting sales representatives. In the ads, female sales repre- sentatives talked about working for Avon. “I can’t get laid off, I can’t get fired,” is what one said. Phones started to ring of the hook, and Avon was quickly able to expand its global sales force. She also instituted an aggressive pricing strategy, and packaging was rede- signed for a more elegant look at no additional cost. The idea was to emphasize the “value for money” the Avon products represented. Media stars were used in ads to help market the company’s products, and Avon pushed its representatives to use online social networking sites as a medium for representatives to market themselves. The result of all this was initially good: In the difficult years of 2008 and 2009, Avon gained global market share and its financial performance improved. However, the company started to stumble again in 2010 and 2011. The reasons were complex. In many of Avon’s important emerging markets the company found itself increasingly on the defensive against rivals such as P&G that were building a strong retail presence there. Meanwhile, sales in developed markets sputtered.in the face of persistently slow economic growth. To complicate matters, there were reports of numerous operational mistakes—problems with implementing information systems, for example—that were costly for the company. Avon also came under fire for a pos- sible violation of the Foreign Corrupt Practices Act when it was revealed that some executives in China had been paying bribes to local government officials. Un- der pressure from investors, in December 2011 Andrea Jung relinquished her CEO role, although she will stay on as Chairman until at least 2014.

1. What strategy was Avon pursuing until the mid-2000s? What were the advantages of this strategy? What were the disadvantages?

2. What changes did Andrea Jung make in Avon’s strategy after 2005? What were the benefits of these changes? Can you see any drawbacks?

3. Contrast the relative difficulties of actually implementing Avon’s and Ford’s international strategies.