5.1.1USE DIAMOND MODEL TO ANALYZE COMPETITIVE ADVANTAGES IN THE
DIRECT-SELLING INDUSTRY
Analyzing structural competition in the direct-selling industry through the diamond model (see Figure4-1), we can find that the four basic factors which affect structural competition in the
direct-selling industry in China are relatively strong, so if working hard and gaining the incentives of subsidiary factors such as government and chance, then competition in the direct-selling industry will increase a lot.
1. Production Factors
The key factors of production of direct-selling products are advanced technique and cheap raw materials, and we can find Amway owns abundant resources and technique, and keeps expanding production place and researching modern technique. For example, the Nutrilite Health Experience Center in the production base in Amway (China) is the first experiencing center Amway (USA) builds abroad to reflect the whole processes of farming, processing, manufacturing and related technology of Nutrilite. In the research and development respect, Amway has 65 labs worldwide, hiring more than 570 professional technicians. Each day all of the labs conduct around 500 experiments, including product ingredient, evaluation, examination, manufacture process establishment and so on. Labs also communicate with colleges or other research units and institutes to notice the technological trend and market dynamics, actively absorbing all mature experience and technology. Furthermore, from the capital perspective, a direct-selling firm like Amway has more channels to retain more capital: direct-selling firms can gain more channels to fund through Initial Public Offering; due to no middle agents, direct-selling firms can avoid the risk of delaying product selling income to hold more cash flow in hand.
2. Demand Factors
As the level of Chinese income increases, people require better living quality. Hence, high-quality products are accepted by Chinese consumers. Because Amway (China) insists focusing on product quality and customers’ needs, its product lines are extending to fulfill different customers’
requirement.
3. Support from Related Business
Although Amway (China) have not united backwards completely, Amway already has the ability of uniting backwards in Nutrilite nutritious supplementary food. As the most important product brand, Nutrilite is famous for its natural ingredients. To ensure material quality, Amway has four organic farms in America, Mexico and Brazil to plant various noble plants as material for the worldwide market. These farms do not use chemical pesticide, herbicide and fertilizer. Amway has strict standard and clear requirement for suppliers, manufacturing environment, quality and quantity of material, and so forth.
4. Firm Strategy, Structure and Rivalry Competition
Product differentiation and variety reduce the competition within an industry. For instance, most of Amway’s products are skin care or home utility items, so there are many competitors, most of which are international brand with full capital support and high-end technology. Nevertheless, Amway replaces traditional middle agents and wholesalers with retail stores to establish a higher barrier to existing and potential competitors in channels and pricing. In addition, Amway’s marketing strategy transforms from traditional media advertisement to world of mouth of sales representatives;
it not only helps customers understand, purchase and use products but also reduces Amway’s homogeneity and competition in the industry.
In addition, Amway actively accustomed to Chinese culture to break tradition and successfully create a route for Amway’s special business and product brand establishment. Instead of only relying on mouth of word, Amway (China) launched multi-channels to promote such as high-end theme TV commercials, variety of mass media and outdoor advertisement, and colorful market promotion plan.
Those activities make brand spirit abundant and successfully shorten the distance between consumers.
5. Government
Since April 21, 1980, Chinese government has decided multi-level marketing, but the market chaos in society is still fierce. At that time most firms disappeared and withdrew the market, and some turned to operate underground. However, Amway faced difficulties with distributors, actively communicated with government and media, and transformed followed by Chinese regulation. Thus, Amway erect a solid foundation for development. As the new regulations erect and implement, Chinese government strictly enforces laws to beat illegal firms and develop Chinese cross companies and international well-known brand, and also offers a better environment for Amway to develop. In sum, Chinese government’s protection for the industry is a strong political support for Amway.
6. Chance
As the consumer awareness strengthens, the new market chance is coming. For instance, Amway invests huge in Chinese social public welfare business to increase corporate social responsibility and social recognition. Meanwhile, as the rapid growth of economics, people’s living
level rises, and their demand for product quality also increase. Personalized products satisfy different customers’ needs, so Amway can make effort to research and develop differentiated products to fulfill different consumers’ needs.
Figure 4-1 Use Diamond Model to Analyze Structural Competitive Advantages of the Direct-selling Industry
Resource: Organized by This Research 5.1.2 Five Forces Analysis for Chinese Direct-selling Industry
1. Existing Competitors within the Industry
There are 24 firms which already gained permission from Chinese government and can build service spots. Amway (China) always keeps its leading position, but other international business such as Avon, Marykay and Herbalife are actively improving to be competitive and threats to Amway:
(1) Avon
Avon is the earliest international direct-selling business to enter China, and invested in
USD$2,795 to joint venture with Guangzhou cosmetics suppliers in 1990. In 2006, Avon gained the 1st direct-selling operation permission from Chinese government, and had advantages of integration of retailing and direct sales. Avon has 70 branches, more than 6,000 sales and service centers and more than 100,000 distributors in China. Its products include skin and hair care products, cosmetics, perfume, healthy food and fashionable cloths.
Among the big direct-selling firms, Avon’s operation model is the most suited for related regulations of Chinese government, but its distribution channel conflicts lead to damaged benefit of current service centers, and also make Avon confused if transforming.
(2) Marykay
In 1994, Marykay (China) invested USD$2,000 in Hangchow to build the 1st factory abroad. In April, Marykay registered as limited firm. In 2006, it invested USD$0.2 billion to establish Asia and Pacific manufacturing center accounting for 720,000 square meter, 18 product lines and 180,000,000 items. Nowadays, Marykay’s branches are spread around Chinese main provinces, including 0 product lines, more than 200 products such as skin care products, cosmetics, finger nail care, hair care, body wash, suntan lotion, and perfume and so on.
(3) Herbalife
In October 1998, Herbalife built production base in Suzhou, where is the only production base outside America. Herbalife’s products contain more than 20 kinds such as various nutritious health care products, products for control weight and personal care products.
In sum, the reason why Amway (China) can be exceptional is its positive brand and reputation. Avon and Marykay focus on cosmetics and position women market; those may form threats to Amway’s Artistry cosmetics. At the same time, Herbalife promotes nutritious supplementary food, and that covers Amway’s basic market position and cause impact on Nutrilite products. Additionally, digging out outstanding distributors has become competitive focus. Therefore, Amway (China)’s leading position is challenged in several respects.
Therefore, the threat from existing competitors is strong.
2. Potential Competitors
Potential competitors are those new comers may enter this industry with new firms or various business strategies. The enter barrier and existing competitors are the keys when deciding if entering this industry.
According to the “Direct-selling management Rule”, new entrants must have at least registered capital of RMB80milliom. Moreover, before selling specific products in specific areas, firms need to apply for approval. Furthermore, in the approved areas, firms have to build at least service center. Finally, firms have to open an exclusive account in the designated bank by Chinese government to deposit RMB20million as guarantee fees. Those rules intend for promise business to operate under regulations in long-term. .
In addition, it takes quite long time and great effort for new entrants to understand the characteristics of the direct-selling industry and spread the distribution channels. Thus, the time cost is higher for potential competitors.
In short, the above-mentioned constrains new entrants from entering and forms a relatively close competitive environment of this industry.
Therefore, the threat from potential competitors is weak.
3. Bargaining Power of Suppliers
Suppliers influence current business’s profitability and competitiveness through increasing input price and lowering unit price. One of the differences between the direct-selling industry and other industries is direct-selling firms own production, sales channels and customer service.
Therefore, the material of Nutrilite are natural and offered by Amway (America), and Amway (China) only cam purchase materials of package and part of subsidiary products on its own. Because the local materials are highly substitute, local suppliers’ bargaining power is lower. On the contrary, even though Amway (China) accounts for nearly market share of Amway (America) and Amway (China) has privilege to get material support from Amway (America), Amway (China) has no power to bargin material price with Amway (America).
Therefore, the bargaining power of local supplier is weak; that of Mother Company is strong.
4. Bargaining Power of Buyers
Economic growth raises people’s income and living level, and makes consumers care more about health. So the need for nutritious supplementary products gradually increases. In the high competitive daily-use product industry, the bargaining power is mainly from product quality, service and brand. Amway’s target market is people with medium and high income, and consumer benefit positions high function, efficiency and quality. Consumers care more about brand and are less sensitive to price. Besides, due to the uniqueness of this industry, products are only sold though limited channels, and that also constrains the bargaining power of buyers.
Therefore, the bargaining power of buyers is weak.
5. Threat of Substitutes
Because most of Amway’s products are daily-use products, so there are many substitutes in the market. Thus, Amway has to keep strengthening brand marketing and increasing consumer loyalty to resist the threats of substitutes. In addition, Amway focuses on not only product promotion but also service quality, so this can effectively reduce the threats of substitutes.
Therefore, the threat of substitutes is medium.
In sum, Amway is in a bigger potential market with higher barrier to enter, lower bargaining power of local suppliers, medium bargaining power of buyers, and medium threats of substitutes, so Amway is in a lasting competitive position. This research suggests Amway taking the following differentiated tactics shown on Table 4-3 to eliminate threats from outside.
Table 4-3 Evaluation for Amway’s Competition
Potential Competitors Barrier to enter is high; high time cost; low potential threats marketing. Meanwhile, it increases its brand name of business and helps maintain the leader position.
(2) High product awareness and reputation
Through continuously investing in research and development, strict requirement for product quality, and the concepts of environment and nature experienced in products,
Amway creates a product image of high quality, environment-friendly and natural.
Meanwhile, Amway erects it brand through innovative sport and art marketing, and its brand awareness reach to 87%. The market share of Nutrilite products keeps maintaining the number 1.
(3) Stable channels
Through clearly defining each channel’s duty and responsibility to avoid possible benefit conflicts between channels. For instance, Retail stores are take charge of brand marketing, training and managing distributors; distributors are responsible for selling products.
(4) Strong research and development ability
Amway has 5 categories of products, 198 products, 97 labs, 65 research and quality examination centers, more than 570 professional technicians, and almost 1,000 patents.
2. Weakness Analysis (1) Bad kid image
Compared to Avon’s operation model which most suited for regulations for direct sales set by Chinese government, most people regard Amway (China) as a company running without illegal ways.
(2) Cutting-price phenomenon
Amway asks distributors to sell products according to the price on products, but cutting-price can be bought in current market. This is not fair for distributors who obey the company’s policy, and will finally impact sales revenue of the entire company.
(3) High operation cost
In addition to 30% of sales teams’ revenue, Amway needs to pay huge in brand marketing and 250 directly-owned stores. Moreover, Amway (China) has no right to bargain with Amway (America) in material price, its operation cost gets higher.
(4) Sales teams are hard to manage
Direct-selling firms usually have a giant, loosen and individually different sales team. It
is the biggest challenge for business to create, encourage, adjust and control the sales team.
3. Opportunity Analysis
(1) Chinese economic keeps steadily grow
As the economics keeps growing, the market purchasing power is increasing, and the total retail amount of social consume products will increase as well. Those will help expand market for nutritious food and daily-use products.
(2) Consumer conscious change
As the living level increases, consumer behavior is changing. People desire high-quality life and care more about health and beauty as well as environment and social welfare. Those will help form brand recognition and loyalty.
(3) Underdeveloped direct-selling market
Currently Amway only gets permission in 24 provinces, so there are 7 provinces left in China for Amway to explore, and those markets offer future development space
(4) Huge labor market
Direct-selling firms use great numbers of labors to develop its business and solve the unemployment problem as well.
(5) Internet rises
Because of pervasive Internet, more and more people gain information and buy goods though it. Dealing via the Internet lowers the cost, so many firms take e-commerce now. This also can reduce Amway’s training and operation cost.
(6) Technology improvement
Advanced technology promotes improvement of technical art and product variety and technology upgrade. For Amway with fill of capital and strong research ability, Amway has to grasp chances to win.
4. Threat Analysis
(1) Competition in the direct-selling industry is getting fierce
There are some Chinese local new firms taking similar strategies to Amway’s, and offer similar products. So the homogenous phenomenon is getting serious.
(2) Market competition is becoming fierce
As the regulations continuously completed, consumer ability and rational degree increase, channel and brand competitions are fierce. Hence, Amway has to think about how to keep upgrading and maintaining the leading position.
5.1.4BLUE OCEAN STRATEGY
As the Chinese income level continuous rises, people require more for daily product quality, so their spending on skin care products, health care products and home utilities has been increasing.
Compare to other big firms’ products, Amway’s products have fewer quality problems. In addition, Amway offers one by one service to make customers experience the product quality, and to reach the experiencing marketing goal.
Because there are too many similar firms selling similar skin care products, customers’
bargaining power is increasing. Therefore, to grasp the market share, what firms can do is satisfy the requirement of all channels by cutting price. That can not achieve the meaning of innovative business model and the Blue Ocean Strategy.
After entering China, Amway is continuously adjusting business strategy. Its marketing features are localization of research, management, human resource and economic revenue. Moreover, due to Amway’s huge amount of investment and big differentiated products, its brand recognition is still high even if there are many illegal multi-level marketing cases in this industry. The competitors after Amway are not easy to enter the homogenous market, and because Amway has great research team and production base plus better marketing strategy, it is competitive. This fulfills the Blue Ocean Strategy and creates a total new market where no competitors.
The Blue Ocean Strategy is to create a market in which there is no competition. Developing this strategy is to lower cost and raise product value. Product value which customers get is from product benefit and selling price; product value which firms get is from product price and cost structure.
Hence, only under the appropriate allocation of product benefit, selling price and cost structure, a
firm can acquire value innovation. This system which concentrates on whole activities can last the strategy because it unites all functional and executive activities to make value innovation an integrated strategy rather than pure “innovation”. To reach value innovation, a firm has to position to
“leap forward” on both customer and firm value.
“Blue Ocean Strategy” can be initiated with 4 assumption principles and 2 execution principles:
4 assumption principles
1. Reconstruct Market Boundaries: Redefine the boundary of the industry from six approaches to go out of traditional thought and reduce search risks.
2. Focus on the Big Picture，Not the Number: Strategy should come from vision to avoid being in the game of numbers, and to reduce planning risks.
3. Reach beyond Existing Demand: Pay attention to divide the differentiation of customers, trying to find out the common part between firms and non-customers to expand new demand and market, and to reduce risks.
4. Get the Strategic Sequence Right: Put the buyers’ benefit into top priority, set up target product based on pricing strategy, and figure out the hinters due to force of strategy to solve the risks from business model.
2 execution principles
1. Overcome Key Organization Hurdles: Use “Tipping point leadership” to overcome hey obstacles. There are some people, behavior and activities have asymmetry influence on the performance of each organization. Therefore leaders should find out the key factor and make good use of it to overcome the hurdles.
2. Build Execution into Strategy: Because of the difference between the Blue Ocean Strategy and the traditional competition strategy, there are inevitable blocks when pushing the former strategy. Thus, use fair programs to make members work proactively with sense of responsibility and help implementation of strategy with small management risks.
Under the multi-level marketing channel rather than traditional layers of channels, Amway can touch more potential customers due to different customer base and change of customer behavior.
Selling through retail stores is an innovative business model in the multi-level direct-selling industry;
however, this may lead to strike on sales representatives. Firms attempt to apply retailing to approach more potential customers, but this threats potential revenue of sales representatives. Thus, firms must understand how to deal with this conflict between channels in the entire distribution system.
In the direct-selling industry, the relation between firms and sales representatives is not employer and employee, but supplier and distributor. Sales representative can have their own organization to be the leaders or bosses, and their tasks are to make their downsides to be the bosses as well. No matter who are upsides or downsides, they buy products from Amway at the same price.
In fact, Amway’s customers are Amway’s products sellers. There are two types of sales representatives. Both of the types are continuously consuming their own products. The first type is those who need products, and share their experience with others. Only if you experience products and share your experience with others, others will trust you and buy your products. The experiencing
In fact, Amway’s customers are Amway’s products sellers. There are two types of sales representatives. Both of the types are continuously consuming their own products. The first type is those who need products, and share their experience with others. Only if you experience products and share your experience with others, others will trust you and buy your products. The experiencing