The Competitive Analysis of the Aesop Company - Case Study Example

Student’s Name Course Professor’s Name University City (Sate) Date Executive Summary AESOP Company is an Australian-based skin care product company hosting over 100 branches across the world. The company sold its 65% stake to a Brazilian company called Natura, which in 2012 reported a 6% of total revenue of the Aesop firm. As a world renowned cosmetic and hair care products manufacturer, Aesop is well recognized for its distinct minimalistic packaging and flaunts a customer-friendly approach of selling their products. Apparently, its revenue rose sharply up to $94 million between 2013-2014 due to high consumption rate of their products and reduced costs of production. Nonetheless, the cosmetic industry has hosted an array of challenges in terms of competitive, economic and social factors. Despite being able to integrate culture and cost-effective models in their inbound logistic, Aesop has faced stiff competition from among the biggest companies in the industry. Besides, the new emergent of small skin care products poses great threat of substitutions due to their robust value chain models that they have put in place in a world that now houses educated and innovative labourers. The competitive analysis of the company reveals the reason for its flourish in the industry despite competitive forces. The porter’s five forces of the company reveals how the company has been able to integrate its competitive strategy through the alignment of administrative, technological and human resources to the goals of the company. The company emphasizes on its value chain and logistical costs. It adopts a cost management model that sees its products sold cheaper as its market niche expands. Aesop relies on its online stores where it extends its products to the virtual consumers who are all over the world. Importantly, the cost management techniques that Aesop employs is quite effective. Product costing system enables the company to arrive at an accurate unit cost. However, the information that the values communicate show that the cost of producing a product is higher than their substitutes. On the other hand, the unit cost has been useful to for managerial decision making through the CVP, budgeting techniques and balance scorecard. This report provides a detailed analysis of the Aesop and the recommendations to its management on how to improve its efficiency in managing costs. Table of Contents Executive Summary 2 Introduction 4 Cosmetic and Toiletry Industry Overview 4 Competitive Analysis of Aesop 6 Buyers’ bargaining power 6 Suppliers’ bargaining power 7 Competitive rivalry 7 Threats of substitutes 7 New Entrants 8 Competitive Strategy 8 Cost Leadership Strategy 8 Product Differentiation 10 Aesop Business Activities 10 Cost Management Techniques 11 Product Costing 11 Balance Scorecard 12 C-V-P Analysis 13 Budgeting techniques 13 Sustainability 14 Recommendations 14 Conclusion 15 Reference List 16 Introduction The skin and hair care industry is growing and as time passes by the level of know-how advances, thereby resulting into the changes in customer tastes and preferences. Hence, new products will keep on emerging and so are the new firms. Notably, time is a factor since it determines the fashion and trends while consumers’ behaviour adjusts. With that said, companies in this industry have to censoriously invest in market research so as to ensure that they remain competitive. Moreover, product diversification is more demanding especially when survival is key for a business and that is why many cosmetic firms are still holding a wide market. To achieve this, the management plays a vital role in capturing, analysing and reporting information regarding the costs of production. Since they are responsible for value chain and logistical costs analysis, their effectiveness determine the costs of producing a unit. That said, even though Aesop’s products are expensive, their management accounting techniques are fair enough to enable them to sustain their competitive strategy. Cosmetic and Toiletry Industry Overview The cosmetic industry has grown modestly over the last five years in Australia. The growth in household expenditure on beauty products has been attributed to the escalated growth of revenue in the cosmetic industry. In the year 2009-2014, the rate of growth was recorded at 3.2% that translating to a $4billion revenue collection (IBIS World, 2014). The total number of businesses that sold skincare products accounted for a -0.3% annual growth, which equates to $190 million in the years under review. Until 2014, there were 120 companies that offered various skincare products and provided employment for 565 people. The industry forecast, according to IBIS is that growth is expected to remain flat through 2016-2017 for the next five years at 2.6% (IBIS World, 2017). The number of employment and cosmetic businesses are envisioned to increase to 18,450 and 3,747 respectively. Therefore, the values historical and forecasted values indicate that the industry’s growth is still positive. The cosmetic and toiletry industry is influenced by personal appearances. Australia is experiencing an ageing-population and both men and women are resorting into cosmetic products to feel youthful. The ageing factor is a strong influence of the industry revenue and this explains the reason for increased revenue despite the products being costly. The nature of demand curve that cosmetic products take is not any closer to a perfect one in the Australian cosmetic industry. While appearance seem to drive demand in this case, the producers and suppliers have sought to also emphasise on skin protection and preservation rather than just improving their facial appearances. Therefore, companies that operate in this industry have been working on innovation so as to produce quality products and provide quality services such as incorporating premium ingredients. The Australian cosmetic industry faces a strict regulatory atmosphere and this helps to manage quality through meeting the set standards. The production of skincare and hair care product involves the use of chemicals that might be harmful to the health of customers. Therefore, measures have been put in place to ensure proper labelling, branding and packaging. Furthermore, companies’ advertisement are also monitored so as to prevent any misleading information from being perpetrated. The Therapeutic Goods Administration is a body in Australia that approves manufactured beauty goods and services. The growth of the industry has been contributed largely by a vast increase I the number of retailers in the country. The workforce structure has changed and now many women are in employment. This status quo makes it possible for women to acquire beauty products in supermarkets and other retail outlets. Competitive Analysis of Aesop The Aesop Company’s competitive strategy can assessed using the porter’s five forces as follows: Buyers’ bargaining power The force that influences the price of the Aesop products is the nature of bargaining power from the customers that faces the company. The use of beauty products for the preservation of the skin care becomes more serious at the age of over 20. Aesop has been targeting the customers whose age ranges from 25 because they are believed to be more cautious about becoming old. Therefore, for this kind of market, the pressure is not significant and the company’s price does not largely affect the demand. It is worth of note that this category of customers are now using the product as a lifestyle enhancer. Since the customers have no choice than to have the product to improve their appearances and self-esteems, then their bargaining power is less when other factors are held constant. Another similar factor is the fact that people prefer products made from organic chemicals. Living a life that is chemical-free is the desire of many cosmetic users and for this reason, they are ready to subscribe to premium products that Aesop provides. Therefore, price does not necessarily matter to some customers. Many companies are now manufacturing organic products and customers are now bound to pay higher for good quality. Moreover, there are many customers who love and can pay any price for the skincare products. Their design strategy that has seen the company incorporate fragrance and perfume-like smells in their skincare products has assisted the company to lessen the bargaining power of the customers. Many consumers love their products. Suppliers’ bargaining power The bargaining power of suppliers depends on the amount of competition among them. The e-commerce landscape has taken a different form as companies now shift to e-retailing. While digital shopping has become increasingly competitive, the prices of the beauty products are low. The sales practices of the wholesalers and large scale retailers has fuelled the price wars amongst. This has in turn resulted into the need for manufacturers to lower their prices because of the discount mentality that has been created in the market. However, despite these bargaining forces from the suppliers, the Aesop products have still maintained its market and it is continuing to expand it further. Competitive rivalry The level of competition is very high in the Australian market. Each and every company is stretching its strides towards meeting what the consumers what. Even though their competitive advantages differ across the firms, the price and quality war remains to be the most featured aspects of rivalry. In 2014, the Australia’s most competitive beauty company, Sephora planned to expand its Australian market by 10 percent by lowering its price and offering new products (Mitchell, 2014). Besides, it also refined its customer service by introducing a self-service format for the purpose of attracting a less invaded market of the young people. Notably, many companies focus mainly on the ageing population and living a huge room for new entrants to exhaust. Threats of substitutes The impact that substitutes have depends on the nature of their quality and the prices they hold. The correlation between prices of goods and substitutes is that the increase in the price of one results into the increase in the demand of the other. The scale of the threat of substitutes is that it is moderate and not high or low. Aesop’s premium skincare products have already established a mass-market and have a strong competitive advantage in price. Therefore, the substitutes have very low impact especially on the premium products that Aesop provides, hence, it is in a better position to continue outdoing its rivals that produce substitutes of the skincare products. New Entrants The new entrants have low impact on the products that Aesop produce. It should be noted that the firm enjoys the economies of scale and it may costs a company substantial amount to establish a similar Aesop company. In other words, the new entrants need to inject very huge amounts of capital to at list be closer to the Aesop’s market position. The economies of scale that Aesop enjoys makes it a cost leader in the context of new entrants. Furthermore, the company already has a well-established online store that has attracted a huge market. In addition, the firm also is accustomed to the regulatory environment such that it clearly conforms to the stipulated standards and legislations that pertain to health of customers. Therefore, Aesop has a very big advantage over the new and emerging cosmetic businesses. Competitive Strategy Cost Leadership Strategy The chief executive officer of Aesop, Micheal O’Keeffe, introduced a new business model. The company has been operating under the product centric business model for many years since it was formed. Product centric model is a business model where a firm focuses on the product alone rather than how the customers will be able to access them conveniently. Such companies tend to continuously adjust their service strategies so as to align them with the customers’ operations that address a certain product (Raddats and Easingwood, 2010, 1334). Even though there are numerous empirical evidence on the benefits of a product-centric business model, the success of their products in the market depends on the complexity of those products. In addition, the product-centric business model makes a company to limit its decisions regarding establishment and expansion of new stores in other areas. The new business model that costed $250 million was crafted to bring the products closer to the customers. The retail-centric business model was basically aimed at improving the performance of Aesop’s skincare and haircare products in all of its market. According to O’Keeffe, even though their products were different, they were not doing well because of the limitations of the product-centric model that was predominantly used also by many of its competitors (Powell, 2016, par.12). The amount of money that was injected for the implementation of the above business model was expected to pay-off a return of $1 billion by the year 2015 if the company maintains its annual growth of 40% year-on-year. The effectives of the business model in maintaining the low costs of its products is drive by how the company will streamline administrative, technological and human resources. Apparently, the company has been able to successfully engage in e-commerce and its products are selling. This has enabled the company to reduce the cost of infrastructure if the physical stores were to be established. In addition, O’Keeffe has been very vocal in sustaining a good relationship between the human resource management and the other departments. The company’s CEO believes that working with the right people is very imperative because it reduces the costs of control. Aesop human resource focuses on the development of talents and careers of its employees. The net outcome of this strategic practice is that the quality of labour provided by the human resource improves and in the long run it cuts down the administrative and production costs. Therefore, the effective management of the human resource, investment in technology are the key drivers of the cost leadership of Aesop. Product Differentiation The Aesop’s products are unique because they are well differentiated from the competitors’ ones. Firstly, many customers are attracted by their design and in fact they are easily identified in any retail store. The company’s strategy of branding and packaging also puts its products in the top list. Another feature that Aesop incorporates is the use of aromatic fragrances. The perfumes that form the contents of their products are what attracts people the most. Besides product differentiation, Aesop has also been able to differentiate its markets. The company’s marketing strategies has made it to segment its market and meet each market’s needs. The premium products are loved by many customers especially those who are above the age of 25. The reason is that the use of product is coming more of a lifestyle thing than for health purposes. Aesop Business Activities The company procures raw materials from suppliers on certain agreements. They ensure that they acquire quality and affordable chemicals that will not harm the health of the customers. The chemicals Aesop use in production are organize in nature and user-friendly. Therefore, the company only engages in sourcing the ingredients and not the made products. The company undertakes the production process to manufacture its own products. The activities involved during the production process include inventory management, ingredient measurements, content mixing and blending and most importantly cost accounting for the purpose of accounting for the process loss and gains during product costing. Once the products are ready they are tested. The company ensures that it conforms to all the health and safety standards that protect the consumers. The beauty products are passed through the Therapeutic Goods Administration for approval before it is released into the market. The role of this body is to test the products and ensure that they are safe to consumers. The company advertises the product after approval. The form of advertisement ranges from online marketing to the mainstream and newspaper advertising. The company then sales the products to their customers though online and offline platforms. Customer services is a key component of Aesop’s business activity. They review customers’ feedback on their websites. Their system enables them to capture customers’ complaint which in turn is evaluated and used to improve the products. Cost Management Techniques Product Costing The cosmetic industry is regulated by the Industry Chemical Acts. This piece of legislation provides the requirements that must be during the formulation, production and distribution of cosmetic products. The act requires also individual companies to disclose all the information regarding the ingredients that are used. Of importance, the cost of each ingredient is used in arriving at the unit cost. Nonetheless, other cost accounting concepts, such as the allocation and absorption of the company’s overheads are also taken into account. The following is the structure of how Aesop does its product costing: Item Cost Ingredient A xx Ingredient B xx Ingredient C xx Direct Labour Cost xx Indirect costs xx Markeitng and Distribution xx Administrative costs xx Company’s overheads xx Total production over heads xx Profit margin xx Price xx Balance Scorecard The balance scorecard is used to track performance. The company uses various metrics to measure their performance and facilitate the decision-making process. a. Financial performance Objective Metric Revenue growth by 40% Increase in sales High profit margin Efficiency of operations Low prices Discount available and economic factors Aesop expects a sales growth of $1 billion by 2025, which is a forecast that is based on its 40% year-on-year growth. Therefore, this growth can be measured by the amount of sales that is made every year. If the year-on-year percentages growth declines it implies that sales dropped. b. Business operation efficiency Objective Measure Reduce cost of production Machine hours taken to produce a single unit. Labour hours taken to produce a unit. Number of units produced per day Efficient requisition Time taken to place a requisition and receive and receive the ingredient. Amount of inventory entering and leaving the store. The efficiency of producing the units is measured by the number of machine and labour hours used to produce them. Importantly, the requisition of inventory for production process should be efficient to allow easy flow of stocks from the store to the production department. The accounting system that has been adopted is a perpetual accounting system for inventory management. c. Effectiveness of Staffing Policies Objective Measure Reduce lateness and absenteeism Check-in and leave-out hours. Minimize turnover costs Turnover rate Improve productivity Output per individual, level of skills and expertise and time taken to complete assignment C-V-P Analysis The CVP analysis describes whether the cost and price of a unit product affects the volume. The CVP analysis uses the concept of marginal costing, where the fixed and variable costs are separated. The contribution margin is determined by subtracting the variable costs from the unit selling price. However, Aesop produces more than one product line and therefore, they adopt a methodology that results into a weighted unit contribution margin. The following formula is used to arrive at the break-even point of each line of product: BEP= Budgeting techniques The Aesop Company undertakes its budgeting on an annual basis. The budgeting process involves the communication of key budgeting policies to the internal budgeting team. The process also involves each department where they are informed to present their departmental budgets so that they may be considered during the preparation of the master budget. The budget sales if first forecasted and other functional budgets follow. These functional budgets include the production budgets, material usage budget, material purchase budget, labour budget, cash budget and overhead budget. All these functional budgets are then incorporated into the master budget, which now contains values that reflects the overall quantification of organizational activities. Flexible budgeting is conducted to find out the reasons for the differences in actual and the budget performance. In a flexible budget, the standard values of costs and prices are used to flex the budget using the actual number of products that have been produced. Therefore, stands costing also emerges to be an important aspect of the entire budgeting process. Sustainability The need for sustainable practice and accounting has seen Aesop engage in environment and health-oriented initiatives. The company values the health of people as well as the impact of their business operation on the environment. As mentioned earlier in the beginning of the report, Aesop uses organize ingredients to make its products. This has made its product chemical-free and harmless to the health of the customers. Recommendations 1. Communicate the New Business Model Effectively The new retail-centric model should be understood by all the staff of the company. Therefore, before even spending money on this multimillion model, the CEO has to engage the management and other relevant stakeholders so as to ascertain the cost implications of the project in the future. Besides that, the investment of such money also affects the cost structure of the production and this may render the product very expensive. Even though the CEO forecast that the model would increase sales because the products are brought closer to the customers, there is a fact that the consumer behaviour may render the project ineffective. In other words, the difference may not be significant if the company would have continued with the product-centric model. It should be understood that the right partnerships with other stakeholders and the inclusion of employees in each level of management is more imperative if success has to be real (Noland and Phillips, 2010, 39). Therefore, I recommend that the new business model that O’Keeffe wants to implement requires a critical analysis and extensive stakeholders’ engagement. Conclusion Aesop Company’s brands are one of the most famous one across the world. Their uniqueness in terms of design and ingredient is something that has made the company to grow since its foundation. Aesop Company is a skincare manufacture and also deal in salon products. Quality is what drives their sales despite being costly in some areas. The company has extended its services and products to other markets through the e-commerce. Its positive growth has seen many investors hold a stake in it. The performance in various areas that Aesop exhibits can be attributed to its cost accounting system. It is the cost management system that generates important information pertaining to performance that facilitate decision-making. Reference List Donaldson., C, 2016. How hr helps drive business & customer success at Aesop. InsideHR. http://www.insidehr.com.au/how-hr-helps-drive-customer-success-at-aesop/ [Accessed On 18th May 2017] IBIS World, 2017. Cosmetic and toiletry retailing in Australia. https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/other-store-based-retailing/cosmetic-toiletry-retailing.html [Accessed on 18th May 2017] Mitchell S., 2014. How beauty retailers Sephora plans to disrupt the Australian cosmetics market. Financial Review. http://www.afr.com/business/how-beauty-retailer-sephora-plans-to-disrupt-the-australian-cosmetics-market-20140610-jyvql [Accessed on 18th May 2017] Noland, J. and Phillips, R., 2010. Stakeholder engagement, discourse ethics and strategic management. International Journal of Management Reviews, 12(1), pp.39-49. Powell D., 2016. How Aesop chief executive Micheal O’Keeffe helped craft a $250 million business model. Smart company. http://www.smartcompany.com.au/entrepreneurs/influencers-profiles/how-aesop-chief-executive-michael-okeeffe-helped-craft-a-250-million-business-model/ [Accessed on 18th May 2017] Raddats, C. and Easingwood, C., 2010. Services growth options for B2B product-centric businesses. Industrial Marketing Management, 39(8), pp.1334-1345. Read More