1497 BUSINESS STRATEGY FOR SAIGON COSMETICS CORPORATION

TRƯ Ờ NG ĐẠ I HỌ C MỞ TP HCM HO CHI MINH CITY OPEN UNIVERSITY UNIVERSITE LIBRE DE BRUXELLES SOLVAY BRUSSELS SCHOOL MMVCFB6 BÙI QUANG LỘ C BUSINESS STRATEGY FOR SAIGON COSMETICS CORPORATION MASTER PROJECT MASTER IN MANAGEMENT (PART-TIME) Ho Chi Minh City (2014) Declaration I declare that all material presented in this research is my own work, or fully and specifically acknowledged wherever adapted from other sources I understand that if at any time it is shown that I have significantly misrepresented material presented in this research, any degree or credits awarded to me on the basis of that material may be revoked Student’s Signature: Date: Acknowledgement I would like to express my special appreciation and thanks to my instructor Professor Dr NGUYEN MINH HA, you have been providing lots of guidance and help for me I would like to thank you for encouraging my research Your questions and comments greatly help me to complete this research A special thanks to my family Words cannot express how grateful I am to my father and my mother for all the encouragement and of the sacrifices that you’ve made on my behalf Last but not least, I would like express appreciation to my beloved wife PHUONG who spent sleepless nights with and was always my support in the moments when there was no one to answer my queries Instructor’s Comments TABLE OF CONTENTS CHAPTER – PROJECT OVERVIEW 1.1 Reason for choosing this topic 1.2 Problem statement 1.3 Project objectives .2 1.4 Research methodology .2 1.5 Data collection 1.6 The significance of this project 1.7 The structure of this project CHAPTER – LITERATURE REVIEW 2.1 Definition of strategy 2.2 The importance of strategy: 2.3 The components of strategy: .6 2.4 Strategy hierarchy 2.4.1 Corporate Strategy .7 2.4.2 Business Strategy .8 2.4.3 Functional level strategy 11 2.5 Strategy planning process 12 2.6 Tools and framework for environment analysis 14 2.6.1 PEST analysis 14 2.6.2 Porter’s five force model 15 2.6.3 SWOT analysis 16 2.6.4 TOWS 17 CHAPTER – SITUATIONAL ANALYSIS 20 3.1 Vietnam situation .20 3.1.1 Political situation .20 3.1.2 Economy 20 3.1.3 Social factors .23 3.1.4 Technology 25 3.2 Vietnam Cosmetic and Personal care market overview 25 3.2.1 Fragrances (Perfume) .26 3.2.2 Hair care 27 3.3 Industry environment analysis 28 3.3.1 Barrier to entry 28 3.3.2 Power of buyer 29 3.3.3 Threat of substitute 30 3.3.4 Rivalry 31 3.4 Internal analysis 33 3.4.1 Business activities 33 3.4.2 Management analysis .35 3.4.3 Business performance 35 3.4.4 Marketing performance 38 3.4.5 SCC core capacity and competency 41 3.5 Summary of situational analysis 41 CHAPTER – STRATEGY RECOMMENDATION FOR SCC 44 4.1 SCC Vision and Mission 44 4.1.1 Vision: 44 4.1.2 Mission 44 4.1.3 Objectives 44 4.2 Business strategy options for SCC 45 4.3 Strategy choice 46 CHAPTER - DETAILED ACTION PLANS 48 5.1 Financial forecast for 2014-2015 period 48 5.2 Budget for key investment for 2014 49 5.3 Key investments and activities 49 CHAPTER - CONCLUSION .54 6.1 Conclusion 54 6.2 Recommendation 54 LIST OF ABBREVIATIONS GSO: Vietnam General Statistics Office FMCG: Fast moving consumer goods GT: General Trade MT: Modern Trade PEST: Political, Economic, Social and Technological SCC: Saigon Cosmetics Corporation SME: Small and Medium Enterprises SWOT: Strength, Weakness, Opportunity and Threat TOWS: Thread, Opportunity, Weakness and Strength LIST OF TABLES Table 2-1 Summary of tools used in environmental analysis 14 Table 2-2 TOWS matrix - strategic alternatives 19 Table 3-1 Vietnam income distribution by Urban and Rural 24 Table 3-2 Vietnam cosmetics and personal care market size 26 Table 3-3 Vietnam fragrance sub-category market value .27 Table 3-4 Vietnam import tax for cosmetics and personal care products .29 Table 3-5 Revenue contribution of SCC top brands 34 Table 3-6 SCC market research outcomes in 2012 39 Table 3-7 SWOT table for SCC 41 Table 4-1 Mapping TOWS alternatives to Porter's generic strategy 46 Table 5-1 Business plan for 2014 and 2015 48 LIST OF FIGURES Figure 2-1 Porter's generic strategy .9 Figure 2-2 Strategy planning process 12 Figure 3-1 Vietnam GDP Growth overtime 21 Figure 3-2 Vietnam inflation rate over time 22 Figure 3-3 Vietnam population over time 23 Figure 3-4 Vietnam population demographics 24 Figure 3-5 Vietnam GDP per capita 30 Figure 3-6 Global cosmetics industry market growth, YOY (2003–2012) 31 Figure 3-7: SCC Corporate structure 34 Figure 3-8 SCC revenue and growth rate over time 36 Figure 3-9 SCC efficiency indicators 37 CHAPTER – PROJECT OVERVIEW 1.1 Reason for choosing this topic Vietnam economy sees the highest growth rate since early 2000s with Bilateral Trade Agreement between the USA and Vietnam in 2000 and WTO membership in 2006 Vietnam’s average GDP growth from 2000 to 2006 exceeded percent per year and peaked at 8.5 percent in 2007, translating to a total GDP of USD 60.9 billion in dollar term GDP growth has been slowed down since 2007 due to global economic crisis and intrinsic problems of the economy, high reliance of the economy on the construction booming and credit growth Vietnam ended 2013 with a GDP growth of 5.42% (GSO data) Coming together with enormous economic growth, domestic business sector has been facing increasing completion from large global players backed up with enormous resources on their own home ground As per data from Vietnam Foreign Investment Agency (FIA), total new foreign direct investment (FDI) commitment to Vietnam reached $21.6 billion in 2013, up 54.5 per cent year-on-year The FDI disbursement in 2013 witnessed a strong recovery with an increase of 9.9 per cent, reaching $11.5 billion, versus a decline of 4.9 per cent in 2012 More than 90% of Vietnamese businesses are small and medium enterprises (SME), accounting for 40% of GDP Vietnamese SMEs are struggling to compete with global and regional players due to lack of management expertise, small scale and simple technology (http://fia.mpi.gov.vn/) Saigon Cosmetics Corporation (SCC), as a local SME, was also impacted by the increasing competition SCC experience a period of three from 2009 to 2011 with flat revenue line and rapid declining marketing share This project aims to put a real case study through the framework of strategy formation process By doing so, the project would like to prove that there is a viable business strategy for SCC in particular and for local Vietnamese SMEs in general even in a highly competitive environment 43 products are well accepted and recognized by consumers • Comprehensive • Limited marketing capability and budget There is a lack of production marketing focus and investment facilities which meets regulatory for requirements in term of quality homogeneous investment across management all brand and products • Strong strategic alliance with key products but • Low operation efficiency international suppliers in term of • Limited financial resources R&D knowledge transfer • Under utilization of distribution • Relatively strong financials with cash surplus and no bank borrowing • Established distribution network across Vietnam, covering traditional trade and modern trade network 44 CHAPTER – STRATEGY RECOMMENDATION FOR SCC Strategic alternatives for SCC are formulated and considered against SCC core competency to arrive at final strategy recommendation 4.1 SCC Vision and Mission 4.1.1 Vision: SCC would like to become a leading perfume and personal care company in Vietnam with strong commitment to high product quality and affordable prices 4.1.2 Mission To achieve high and sustainable business growth from core business activities and deliver strong returns on investment 4.1.3 Objectives Specific objectives for SCC are set as below: - Achieve growth rate that is higher than industry growth This will ensure SCC has a clear vision of business development Business growth must ensure SCC market share maintenance, at the very least In details, SCC revenue growth for perfume is set at 15% for 2014 and 2015 – this is double of perfume category growth of 7% SCC revenue growth for personal care products are set at 8% which is double of overall industry growth of 4% - SCC must yield improved profitability and returns on shareholder investments This objective is benchmarked against operating expenses ratio with gradual improvement toward industry average of 7% in 2015 With the aspiration of revenue growth higher than industry average, in the long run, by 2020, SCC aspires to achieve 30% share of fragrance market and 5% share of herbal shampoo 45 4.2 Business strategy options for SCC Extending the SWOT analysis further into TOWS matrix reveals alternatives strategic choices to SCC In TOWS strength and weakness are mapped against opportunities and threats to explore all possible options Strategy alternatives are then compared and mapped back with Porter’s three basis strategies to reconfirm SCC strategic direction Strengths and Opportunities combination: This alternative is to utilize company strengths in manufacturing perfume to benefits from the market opportunities - Increase penetration into the premium perfume to quickly capture the gap in markets share from Avon via developing premium products and expansion of premium retail outlets - Increase penetration in mass and masstige market by deep customer understanding via market research and introduce new products or enhance existing products Strength and threats combination: This alternative is to use company strength to reduce the impact of external threats - Increase funding for marketing activities for key brands and products to grow revenue and hence market share Funding is from company current cash pool and can be raised via leveraging its strong financials for bank borrowing Weakness and opportunities combination: This alternative aims to fix company weakness to gasp market opportunities - Improving marketing capability to ensure company brands and products potentials are fully exploited Improvement can be in the form of investment in human resources to build in house marketing team or completely outsource marketing activities Marketing investment must be supported by actual market data and return on investment must be forecasted and measure 46 - Improving company efficiency by setting clear and integrated objectives for operational functions This is turns help company product competitive in term of pricing or improved cash flow Weakness and threats combination: this alternatives looks at plan to defense company weakness from market threats - Strictly focusing on mass and masstige perfume market and herbal shampoo niche market This will help the company to avoid direct completion with big companies 4.3 Strategy choice The following matrix is the outcomes of mapping strategy alternatives derived TOWS analysis and Porter’s three generic strategies: Table 4-1 Mapping TOWS alternatives to Porter's generic strategy Porter’s Generic Strategy TOWS strategy alternatives Broad cost leadership Broad differentiation S-T: Increasing marketing spending to directly compete with all players in hair care and perfume Focused Cost leadership Differentiation S-O: Focus on perfume category W-O: Focus investment in key brands W-T: Focus on mass and masstige perfume products and herbal shampoo One of the outcomes recommends a broad differentiation strategy To achieve this recommendation, SCC has to increase its marketing activities to directly compete with internal brands of global players like Unilever and P&G Vietnam This is however considered risky option given SCC financial scale compared with big global 47 corporation with stronger financial background backed with long established research and development facilities All the remaining alternatives support the Narrow Focusing Strategy for SCC Recommendations are around leveraging strengths and improving weakness to capture market opportunities By doing this, SCC can avoid direct competition with large market players SCC strengths include its leading position in fragrance market, especially in mass and masstige segment and very high brand awareness Market opportunities is also in favor of SCC with Avon quitting Vietnam market, representing more than 10% market share for SCC to capture in term of beauty and fragrance products Herbal shampoo market is still developing with consumers’ growing preference for natural ingredients By levering its two advantages, SCC should focus its effort to achieve: • Higher penetration to the perfume market, especially mass and masstige, • Develop and penetrate further into hair care mass segment via the herbal shampoo niche In details, SCC focus should primarily on product quality differentiation Product extension outside perfume and shampoo could be considered but strong product differentiation in relation to SCC core competencies, for example luxury fragranced shower gel, etc., should exist Improving operational efficiency, at the same time, is important in this strategy and could be achieved via introducing appropriate corporate governance framework that encourage empowering and performance based rewards The recommendation is also based on the following rationale: - SCC has its own production facility with strong quality management process Product quality is further enhanced by alliance with reputable suppliers - SCC research and development is well established Local customer insights are infused with global R&D knowledge base from partners - SCC have strong distribution network the spread across the country This helps distributing SCC products to the market and consumer effectively 48 CHAPTER - DETAILED ACTION PLANS With the above strategy recommendation, detailed action plans must be in place to ensure successful execution The plan includes (i) specific and measurable objectives in term of sales revenue, key efficiency indicators, and (ii) key corporate level initiatives and investments This will be the basis subsequent strategy implementation evaluation 5.1 Financial forecast for 2014-2015 period Table 5-1 Business plan for 2014 and 2015 Key indicators (USD) 2012 2013-e 2014-f 2015-f 8,936,136 9,382,943 10,626,183 12,042,773 Perfume 6,702,102 7,037,207 8,092,788 9,306,707 - Growth 20% 5.0% 15.0% 15.0% 2,234,034 2,345,735.75 2,533,395 2,736,066 5.0% 8.0% 8.0% 5.0% 13.3% 13.3% 804,252 797,550 850,095 903,208 % of revenue 9% 8.50% 8.0% 7.5% Operating profit 450,000 650,000 750,000 900,000 Revenue Personal care -Growth 20% Revenue growth Operating expense Lower estimated sales growth in 2013 due to low focus on core activities SCC focus in 2013 was to exit and spin off non-core operations and improvement of internal processes Revenue budget for 2014 and 2015 is derived from specific growth rate for each product segment, perfume and personal care (mainly shampoo) From the objective of maintain and expand market share, growth rate for each product is set higher than industry forecast growth for the period (Table 3-2, 3-3) 49 Key operating indicator is operating expense as percentage of revenue Over the course of 2014-2015, the objective is to bring down the ratio to industry standard of around 7% Specific operating profit figures are set for the period Operating profit growth rate is set higher than revenue growth to ensure improving returns on investment and shareholder equity 5.2 Budget for key investment for 2014 A budget of USD500 thousands is sought and approved for key activities in 2014 to ensure the set objectives for 2014 and 2015 are achieved Details of each activity and share of overall investment is explained in the next section 5.3 Key investments and activities: 50 Area Activity / Investment Marketing Investment in marketing director: The USD60,000 1.Revenue growth: this is to ensure SCC personnel will be in charge of building achieve high revenue growth target internal marketing functions and setting 2.Operational up standard marketing process across all decision will be based on proven research brands and products data and investment must be measurable in This senior personel is in charge of term of returns Returns and effectiveness developing on marketing investment will be measured and planning Cost marketing activities based on research data and Outcome efficiency: Marketing and expected to improve rationales Product Comprehensive review of existing brand USD100,000 Revenue growth: review outcome will positioning to identify: ensure SCC product fundamental are well - - Natural change in brand position understood Marketing activities are built (due impact of time) around products fundamentals SCC will be Depicting target customer profiles able to identify untouched potential market with detailed understanding of segment for product development customers habbits - Potential market segments that can be penetrate to drive sales revenue 51 Distribution Expansion of premium retail outlets: USD160,000 Revenue growth: expansion of premium SCC currently has premium retail retail outlets will allow higher penetration in outlets, locating in Ho Chi Minh (6) and these two key markets – Hochiminh and Hanoi (2) Investment plan for 04 more Hanoi Consideration will also be given to premium outlets is to be developed and other key big cities in Vietnam, including reviewed Da Nang, Can Tho, Hai Phong and Binh Duong additional Potential outlets revenue is gain estimated from at USD400,000 Driving profit growth: premium retails outlets will drive higher sales of high margin products, improving SCC overall profit margins 52 Product New product development: USD150,000 Revenue growth: new products are Perfumes: SCC products not cover expected to drive the increase in revenue for market segments from 17 to 25 and 25 to SCC 30 Vietnam disciplined around SCC identified key demographic, successfully capturing the focus This will also ensure SCC sustainable mentioned segment will be key revenue growth in the future years of age Given driver and form the basis for sustainable growth Shampoo: Extending current herbal shampoo brand, which is currently solely based on saponin extracts Natural ingredient extracts that could be used for line extension is Grapefruit, Coconut and Avocado Shower gel: Fragranced shower gel is to be launched as a line extension to current Perfume Brand Cindy Key product differentiation is on its long lasting and New product development is 53 luxury fragrance The product is positioned as a full body care set to enhance personal indulgence Training & Training and coaching for functional USD20,000 Internal process This is crucial to ensure the success of SCC managers on strategy planning process at corporate strategy Strategy process does functional unit level not stop at corporate level; it must be seen Develop comprehensive integrated as a discipline embedded to every function performance based rewards system; of the company Change management framework must Corporate strategy and objects must be also translated into functional strategy and be introduced to engagement and enthusiasm drive staffs objections via the same process 54 CHAPTER – CONCLUSION 6.1 Conclusion By going through the literature text and applying theory into practice, a narrow focused strategy is recommended for SCC to ensure sustainable growth and profitability Despite highly competitive environment, SCC can achieve its revenue growth by focusing on its core competency, perfume and its niche market of herbal shampoo In complements to that operation efficiency and overcome weakness in marketing capability will be essential in making the identified strategy successful The recommended strategy and action plans however not complete of the strategy exercise for SCC Execution is very important to the whole process Literature has shown that one of the main reasons for strategy failure is due to poor execution The pre-requisite is the support the board of management The board need to be total convinced about the strategy to ensure full support in term of resources allocation and personal involvement The next critical aspect is communication to all level of staffs to ensures consistent understanding and highest possible staff engagement with company strategy, vision and objectives Change management is also another critical exercise in the strategy execution phase Changes need to be very well explained and ensure limited resistance which could detriment business growth With firm level strategy in place, functional unit managers, distribution manager and brand managers should go through the same process to have business unit and product strategy in place All must be in line with firm level strategy to ensure maximum delivery result and avoid disruption to execution 6.2 Recommendation This project utilizes concepts, principles and model in strategic management field to formulate a strategy for SCC This can also be used as the framework for similar local SMEs in formulating their own directions Strategy execution outcome can be used 55 to assess the framework effectiveness and form the basis for further enhancement to the process The framework could be further enhanced in several aspects Organization behavior theory and framework can help with the assessment and preparation of strategy execution Future scenarios and Critical success factors (CSF) developed by John F Rockart and the MIT Sloane School of Management in 1979 can be integrated into the framework to ensure implementation success 56 REFERENCE Bart, CK, and Hupfer, M (2004) Mission statements in Canadian hospitals Journal of Health Organization and Management Benjamin Tregoe and John Zimmerman (1980) Top Management Strategy, Simon and Schuster, New York Charles Baden-Fuller and John M Stopford (1992) Rejuvenating the Mature Business: The Competitive Challenge, Routledge Daniel I Prajogo, (2007) The relationship between competitive strategies and product Quality, Industrial Management & Data Systems, Vol 107 Iss: 1, pp.69 – 83 Dess, G.G & Miller, A (1993) Strategic management Mc Grow-Hill book Co New York Francis Joseph Aguilar (1967) Scanning the business environment, Macmillan - Business enterprises George Steiner (1979) Strategic Planning: What every manager must know, New York Free Press George Stonehouse and Brian Snowdon (2007), Competitive Advantage Revisited: Michael Porter on Strategy and Competitiveness, Journal of Management Inquiry 2007 16: 256, http://jmi.sagepub.com/content/16/3/256 Johnson, G., Scholes, K., Whittington, R (2006) Exploring Corporate Strategy, 7th edition, Prentice Hall Lionel Urwick (1956) The Span of Control, Harvard Business Review Michael Porter (1986) Competitive Strategy, Harvard Business School Press Michael E Porter (2008) The Five Competitive Forces that Shape Strategy, Harvard Business Review, January 2008, p.86-104 Mintzberg, H ,Quinn, J.B & Ghoshal, S (1998) The strategy Process Edinburgh Gate Harlow Mintzberg, Henry, 1994, The rise and fall of strategic planning: Reconceiving roles for planning, plans, planners, Free Press Toronto 57 Robert G Dyson (2004) Strategic development and SWOT analysis at the University of Warwick, European Journal of Operational Research 152 (2004) 631–640 Schwartz, RW, and Cohn, KH (2002) The necessity for physician involvement in strategic planning in healthcare organizations The American Journal of Surgery Spallina, JM (2004) Strategic Planning – Getting Started: Mission, Vision, and Values Journal of Oncology Management Jan – Feb, 10-11