The purpose of this report is producing an assessment of certain aspects of the Natura cosmetic company’s international development. Understanding the Natura’s international development means enhancing internationalization knowledge, examining how it performs business activities in international markets to finally obtain a critical insight of the company’s strategy. Based on relevant theoretical concepts and models, the information provided in the case study is discussed and analyzed to bring out a critical evaluation of the company’s internationalization strategy, in terms of relationships, learning and innovation, international market entry modes, logistics and distribution in the period 1982 – 2005.
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1. Introduction
Natura is a largest Brazil’s domestic cosmetics company which offers personal-care products and cosmetics to middle and upper class customer segment. The company was established in 1969 as a small laboratory and cosmetic store in Sao Paulo. In 1974, Natura decided to follow a new business model at that time being, direct-selling model, that brought to the company an appropriate approach to expand at low cost. During its operation, the company has most focused on continuous product innovation and development to create a key differentiation advantage for its products among competitors in different international markets.
With aims to give an assessment of Natura’s internationalization, the paper first uses examples from the case study, to examine whether the effectiveness of Natura’s relationship strategy; and its learning & innovation are considered as two key factors that contribute to the success of Natura’s internationalization. Second, relevant theoretical models and examples from the case study are used to give a critical evaluation of the company’s internationalization strategy in the period 1982 – 2005. Third, based on relevant theory, the paper will provide an argument that either for or against Natura’s direct sales/distribution model and other international market entry modes. Finally, the paper will assess whether the decision that Natura’s production facilities are located in Brazil, is correct in terms of strategy and logistics & distribution.
2. Effectiveness of an organisation’s relationship strategy – learning and innovation
2.1 Effectiveness of company’s relationship strategy
It appears on the case study that the company’s relationship strategy is considered as a key factor that gives fundamental contribution to the company’s. Operating by the door-to-door distribution system, Natura has had to continuously invest efforts to develop and maintain a wide range of relationships with its partners, sales representatives, social community, and obviously its customers.
First of all, the relationships between Natura and strategic partners as universities, research centers in Brazil and abroad have played an essential role in product innovation and development that create competitive advantages for products in international marketing (pp. 1).
Specially, with heavy commitment to corporate social responsibility, Natura has put it apart from its international competitors and built up its reputation and relationship with community as well as environment (pp.3). Through its program for social and environmental change and in its products such as its Rainforest Education and Recovery Project, the Rio de Janeiro Botanical Garden, Natura helps to maintain and improve the medicinal plant beds of the gardens. It has also promoted and reserved forests that provide ingredients and raw materials for products. Natura committed to use these ingredients not simply for benefits but also to help the communities who produce it (pp. 3). These activities have given Natura greater relationships with the community, customers where they doing business as it can be proved further in the following case.
In December, 2001, Argentina faced with a worst political and economic crisis. While all its competitors tried to raise prices to avoid risks, Natura decided to keep the prices steady until local salaries were adjusted (pp. 5). This wise strategy had brought to the company stronger relationships and loyalty of the local community, customers, suppliers and employees. Moreover, the company’s revenues from 2002 to 2005 increased show the effectiveness of that relationship strategy.
The company has also paid attention to strengthening relationship with its sales representatives by offering the highest commissions in the industry (30% margin), while having ‘no exclusivity’ contract. This policy allows Natura’s sales representatives get greater earnings since they can free to sell products of Natura’s competitors. Besides, Natura has tried to give appropriate support for its consultants by an important marketing and sales tool, catalogue-based retailing. The catalogue is frequently updated and provides the consultants a reason to repeatedly visit their customers and improve customer relationships. Additionally, the new concept of the Natura House in Mexico market is viewed as an effective instrument to develop multi-relationship between the company, consultants, and customers. This is kind of relationship is mutually beneficial.
From the above discussion, it is clearly showed that Natura has paid most attention to conducting its relationship strategy in effective way which is considered as a sound foundation for the success of its direct selling operation model.
2.2 Learning and Innovation
During the Natura’s development, learning and innovation always play an important role in its success.
The decision of following the direct sales operation model in 1974 of Natura can be seen as the first experiential lesson learnt from its competitors, Avon (pp. 1). The operation model brought to Natura a great chance to expand at a reasonable cost at that moment. From that experience, Natura always focus on learning and innovating on every single aspect of its business during the course of operations.
Innovating and developing products in-house on a continuous basis has been seriously studied and certified by patens and technology from universities and research center in Brazil and abroad (pp.1). Besides, high competition pressure and continuous changing of customer’s needs has fostered Natura’s learning process in order to provide continuous reinvention and reformulation of its product portfolio which has been essential for Natura’s marketing. As such, from 2001 to 2005 with the efforts of product innovation and reformation, Natura launched and improved around 153 products per year. In an effort of differentiating its products, the company has paid more attention to particular research on skin-care products and on the sustainable use of ingredients from Brazil’s biodiversity in Chronos and Ekos product lines to promote, preserve and share the benefits with Brazilian distinct natural resources (pp. 1).
Besides, Natura develops a concept of capturing emotions, feelings and aspirations of its customers behind each product. Its product, therefore, is designed and defined on the “well being/being well” based concept. This great innovation has not only added value, but also created key differentiation advantage for its products.
As a part of learning and innovation, Natura’s headquarters is assumed to be the biggest and the most advanced building in Latin America which comprises all main operations of Natura. It allows Natura expand its manufacturing and storage facilities up to a maximum of 370 million items per year without increasing its storage, conditioning, or distribution capacities substantially (pp. 2). This innovation helps to saves the company’s cost and resource for further expansion or increased orders, when necessary. The vertical warehouse with an automated system also gives effective support to logistics and distribution activities.
Furthermore, learning from Avon experience, “Natura’s focus on sale allow consultants to make orders at any time and to make more than one order within the same sale cycle while Avon’s representatives can only place an order at a specific point in a given cycle” (pp. 3). This innovation helps to improve the sales productivity of the company as it was almost twice the average direct selling market performance in Brazil in 2005.
Additionally, as a pioneer in the use of its “magalogue” in Mexico, a combination magazine and catalogue, Natura has created a new and effective way to approach customers (pp. 6). Moreover, when facing with difficult situation in Argentina market, the innovative solution of keeping the price steady had brought to the company many advantages afterward and above all things, the experiential lesson or market-specific knowledge were transferred quickly to other South American countries where the company was facing mostly the same problem (pp. 5). It is affirmed that continuous learning and innovation are always the most important factors that Natura has been focused to increase its knowledge and experience, especially, in the company’s internationalization process. Therefore, from the experience in Chile market, Natura had adoted a new sales model as retail store in French market. Then a new “hybrid model”, that could mix a pure direct selling and a store chain, is applied in Mexico based on French experience.
3. Critical evaluation of the Natura’s internationalisation strategy in the period 1982 – 2005
3.1. Understanding of internationalization
Internationalization is defined as a process in which firms gradually enhance their involvement in international operation (Johansson J. & Vahlne J.E., 1977; Welch and Loustarinen, 1988). Meanwhile, Agndal (2004) argued that during the internationalization process, firms simultaneously increase their recognition of direct and indirect factors that may have impact on international transactions of their future, and set up as well as manage transaction with other firms. However, Johanson and Widershiem (1975) viewed internationalization process as the forms of international operations which are based on the mutual influence between attitudes and actual behaviors. The most essential obstacles to internationalization are the lack of knowledge and resources. Depending on core competences or the level of achievement in terms of knowledge (market information, abroad operation experiences, management skills, etc.) and resources (financial, people, product-related, etc.), each company that wish to internationalize should thoughtful consider in choosing suitable approaches to internationalization.
3.2 The Uppsala model – a typical approach to international marketing
Influenced by Aharoni’s seminal study (1966), Uppsala model is resulted from a several studies of the internationalization of Swedish manufacturing firms during 1970s by a number of Swedish researchers at the University of Uppsala (Hollensen, 2007). The Uppsala researchers explained some patterns in the internationalization process they had observed from the Swedish firms basing on three basic assumptions (Forsgren, 2002). First of all, the main obstacle to international operations is the lack of knowledge about foreign markets. Second, due to the market uncertainty, firms appeared to invest in foreign markets gradually. Finally, since the high dependence of knowledge on individuals and the difficulty in transferring knowledge to other individuals, firms need more experiential learning. Because of the above obstacles, many companies tend to begin their international expansion to nearby market through export modes, keeping risks at low level.
The original form of Uppsala model, written by Johanson and Wiedersheim-Paul (1975), describes the internationalization process of a firm through four stages along with four different modes of international market entry, where the successive stages represent higher degrees of market involvement (Hollensen S., 2007):
Stage 1: No regular export activities (sporadic export).
Stage 2: Export via independent representatives (export mode)
Stage 3: Establishment of a foreign sales subsidiary.
Stage 4: Foreign production/manufacturing units.
Accordingly, Johanson and Vahlne (1977) proposed a clearer explanation for all steps in the internationalization process by the distinction between state and change aspects. The state aspects are considered as the resource commitment to the foreign markets that includes market knowledge and market commitment. The change aspects are related to commitment decisions and the performance of current business activities. This basic mechanism is demonstrated in the Figure 1.
Figure 1: The Basic Mechanism of Internationalization-State and Change Aspects
Source: Johansson & Vahlne, 1977.
It is assumed that the concept of market commitment is filled with two factors: the amount of resources committed and the degree of commitment (Hollensen S., 2007). The amount of resources refers to the size of investment in the market (marketing, organization, personnel, etc.), while the degree of commitment implies to the difficulty of discovering an alternative use for the resources and transferring them to the alternative use.
Meanwhile, due to the requirement of international activities, market knowledge contains both general knowledge and market-specific knowledge. Market-specific knowledge can be achieved essentially through experience in the market, whereas general knowledge or knowledge of operations can be transferred from one country to another. It is postulated that there is a direct relation between market knowledge and market commitment since knowledge can be viewed as a dimension of human resource. As a result, the wider knowledge about a market, the more valuable are the resources and the stronger commitment to the market (Hollensen S., 2007).
Based on the study of Forsgren and Johanson (1975), Hallonsen S. (2007) assumed that additional market commitment as a rule will be created in small incremental steps, both in the market commitment dimension and in the geographical dimension. However, according to Johanson and Vahlne (1990), there are three exceptions. First, when firms have large resources and experience small consequences of their commitment, they are able to take larger internationalization steps. Second, relevant market knowledge can be achieved in other ways instead of experience in case market conditions are stable and identical. Third, when the firm has considerable experience from markets, it is possible for it to generalize this experience to specific markets that have similar conditions.
Additionally, regarding to geographical dimension, the model offers firms a successive way of entering new market with greater psychic distance through its incremental process of internationalization. Psychic distance is defined as differences in culture, language, legal and political systems, which disturb the flow of communication between the firm and the market. Therefore, firms should start internationalization by expanding to markets that they are able to most easily understand. Various opportunities are seen in these markets and market uncertainty is perceived as low.
In 1988, the modification of the original stage model was proposed by Welch & Loustarinen who operate with six dimension of internationalization: sales objects, operation methods, market, organizational structure, finance and personel.
Despite of considerable support of the Uppsala model to internationalization of firms, various criticisms against the idea have been raised.
Some people have insisted that the Uppsala model is also not valid for highly internationalized firms and industries. Competitive forces and factors leave psychic distance out as the principal explanatory factor for the firms’ process of internationalization. Moreover, since knowledge of transactions can be transferred from one country to another, firms advantage of international experience seem to perceive the psychic distance to a new country shorter than others with little international experience (Hollensen S., 2007).
Today, along with the high development of information technology, firms are equipped quicker and easier access to knowledge of international business. Hiring people with expected experience and knowledge seems easier than developing it with an incremental process. Therefore, according to Hollensen (2007), acquiring knowledge in a slow and gradual process is no longer necessary.
3.3 The Uppsala model – a suitable framework to evaluate the Natura’s internationalization strategy during 1982 – 2005
The Natura’s internationalization was started in 1982 by an agreement with an independent distributor in Chile (pp. 4). This first step was assumed to be hastily implemented with limited planning or knowledge about the markets. The development was continued from 1983 to Portugal and Florida. During this period, “people who used to work for Natura or had a personal relationship with the company were responsible for the local operation” (pp. 4).
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Choosing the low-risk market entry mode, exporting, and Natura had started its internationalization process by expanding to neighbor markets where it assumed to have nearly no psychic distance. However, these operations were interrupted after a short time due to financial losses (pp. 4). Roof cause of this failure may mainly come from the lack of market knowledge and experience. Without “any proper planning or knowledge of the markets”, Natura operated its business in these markets by “people who used to work for Natura or had a personal relationship with the company” (pp.4). These unskilled people certainly do not have market knowledge and international experience. It is clear that, the company did not give any commitment in these markets that leads to inefficiency in its current activities. However, behind a failure, there is always a light for success. As the same, from the failure, Natura had drawn a valuable experience that can make considerable contribution to its next steps in the incremental process of internationalization. It is not difficult to perceive that right in the beginning, Natura internationalization strategy was influenced by the Upssala model.
In 1990s, coincided with favorable political and macroeconomic changes in Brazil and other South and Central American countries, Natura decided to carry out an international expansion in a more planned way (pp. 4). At this time, other Latin American countries such as Mexico, Chile, and Argentina also got promising growth rates and want to tighten their commercial relation with Brazil. With more serious studies and analyses, Natura found that besides several common cultural characteristics which mainly focus on beauty concepts and demands in the region, there still remained some subtle differences in culture, acceptance of direct selling mechanism as well as in management problems between different Latin American countries (pp. 5). It means that Natura’s door-to-door distribution system just adapted well in specific countries. For example, “Chile has a good retail network and a more western European consumer behavior when compared with other Latin American countries” (pp.5). This might be one of the reasons for the unsuccess of the Natura’s first attempt in this country.
Natura had learnt that it is very important to have a good preparation before entering a new market. Renato Ribeiro, Natura’s new market development director said: “Detailed data is gathered in respect of a given market about population; size of the cosmetics, fragrance, and toiletries market; the market’s familiarity with/acceptance of the direct sale model; and regulatory issues, among others. Cultural issues are also, of course, important” (pp. 5).
In December 2001, Natura had to face with a worst political and economic crisis in Agentina. In this circumstance, while all Natura’s main competitors were raising prices, the company decided to go to opposite direction. It tried to reduce costs and let people widely know that it would keep the price steady until local salary was adjusted (pp. 5). This strategy brought to Natura a great chance to achieve competitive advantages over its competitors through enhancing its brand image, prestige as well as position, creating good relationships with customers, suppliers and employees, and giving its high commitment to the market. As the result, from 2002-2005, Natura had achieved incessant development with respect to revenue increase, sizable and stable network of consultants.
The experiential lessons learnt from Argentina market were then transferred to other South America countries where the company had entered in the early 1990s and where was dealing with the similar managerial or positioning problem (pp.5).
It clearly showed that Natura was gradually accumulating experiences, knowledge and developing resources and moving forward on the way of internationalization. In April 2005, the opening of Paris store (‘Maison Natura’) marked the first time that Natura, a direct selling model company, had open a retail store. This flexible adjustment of Natura may come from the experiential lesson in Chile in 1982, where has more western European consumer behavior with a large retail network. However, this adjustment should be done earlier to make the Natura’s internationalization process more efficient.
Based on the Paris experience, Natura’s House was opened in Mexico upon a “hybrid model”. Natura House can be considered as “a middle ground between a pure direct sale and a store chain” (pp. 6). As a late entrant in the market, Natura was aware of the need of using different strategy and introducing several new marketing tools that could help maximize brand awareness.
In 2005, the Natura’s international sales constituted only 3% of its total revenue. That is the achievements of a very time-consuming internationalization process. It is no doubt to say that the Natura’s internationalization development strategy is so thoughtful. From the beginning, with the limited availability of the company resources, Natura decided to follow an incremental process provided by the Uppsala model to achieve its global ambitions. However, after two decades, Natura internationalization process has just reached the stage 2 of the model. With attempt to minimize international investment during expansion, the company has only use exporting as its market entry modes together with direct selling model to all the target markets. This risk-averse strategy contributes to delay the company’s international growth due to its limited international market commitment. In addition, the lack of talent people that specialized in management has been the essential restrain on the company’s international strategy (pp. 6).
With aim to establish the company in the potential markets of the UK, the US and some of the most significant growth markets like Russia in coming years (pp. 7), it is suggested that Natura should speed up its global expansion by making leapfrog and moving to different entry modes such as branches or joint venture. In 2005, a partnership with another international company was considered by Natura (pp. 6). Additionally, nowadays, it seems easier for Natura to hire people with expected international experience and knowledge to efficiently support for its international development than develop them through incremental process. Therefore, the Uppsala model had been useful for Natura during the beginning of its internationalization process.
4. Argument of Natura’s international market entry modes
According to Wind and Perlmutter (1977) the choice of market entry mode has great influence on international operations and can be considered as the most critical strategic decision in international marketing. For most firms, market entry modes represent a critical first step. There are three main types of market entry modes (Hollensen, 2007):
Export modes (100% externalization – low control, low risk, high flexibility)
Intermediate modes (share control and risk, split ownership)
Hierarchical modes (100% internalization – high control, high risk, low flexibility)
However, no market entry mode is considered as an ideal one. According to Petersen and Welch (2002), modes are usually combined for use to enter or develop a specific foreign market. Each market entry mode may be most suitable for one stage of firms’ internationalization. Most manufacturing firms start their internationalization by export modes, and Natura is not an exception. Export modes combined with direct selling model allow Natura conduct its international expansion in high flexibility, low risk, low cost, and also low control (Hollensen S., 2007). However, Hill (2007) argued that on one hand, export modes help the company avoid the costs of building up the manufacturing operations in host countries. On the other hand, it usually requires high transport cost. Moreover, tariff barriers also make export modes become inefficient and also risky. Therefore, internal and external factors which influence strategic decisions must be serious examined.
According Hollensen (2007), internal factors include: firm size, international experience and product; while external factors comprise sociocultural distance, country risk, market size and growth, trade barriers and intensity of competition. Before making a commitment decisions to a new market, firms need to have an insightful understanding of both advantages and disadvantages of its internationalization strategy. In the Natura’s internationalization process, export modes were used from the beginning when the company’s resource availability was not enough to achieve a high degree of control. Taking over two decades, Natura’s resources have been gradually increased along with more international experiences and product improvement; the company should switch to intermediate and hierarchical modes to make the internationalization more efficient. Joint venture model has been considering by Natura in 2005 (pp. 6). With aim to enter established markets like the UK, the US and Japan, joint venture is the best choice for Natura to survive and develop in high intensity of competition. In some extent, cooperating with experienced local or international partners bring to the company considerable advantages related to skills, knowledge, experience, distribution network, resources, technology, government relationship, etc. and minimize failure and risks.
Besides, the direct selling business model of Natura did not seem to adapt well to all markets due to specific consuming behaviors. It was proved in Chile in 1982. The use of only one sale channel as direct selling made contribution to slow down the Natura’s internationalization. Until 2005, Natura had to adopt a new sale model, retail store, when entering French market. Then the Natura House in Mexico was viewed as “a middle ground between a pure direct selling model and store chain” (pp. 6). In order to speed up its international growth, Natura should considered further possibilities such as: selling products in duty-free shop in the airports, using internet sales and establishing retail chain in certain countries.
5. Assessment of Natura’s current strategy and logistics & distribution
Since it was founded, Natura had decided to expand its business with low marginal cost via direct-selling model. Therefore, this door-to-door distribution system is considered as “the core of Natura’s DNA” (pp. 3). This business model receives widespread acceptance in Brazil and helps the company achieve a strong expansion throughout the country.
However, in the Natura’s current internationalization strategy, the company had to face some obstacles related to the door-to-door distribution system, logistics and export modes.
First, the direct selling model just took maximized effect in Latin American countries, except Chile (pp. 5). Some countries prohibit the use of direct selling model (Hollensen, 2007). Depending on specific consuming behaviors and legal regulation of certain markets, the door-to-door distribution system was widely accepted or not. From the experiential lesson in Chile in 1982, until 2005, the company had just made an adjustment by adopting store chains, a new distribution model, when entering French and Mexico markets (pp. 5). During two decades of the internationalization process, along with export modes, Natura used only door-to-door distribution system for all the chosen markets. This might be one of the roof causes for the delay of the Natura’s international growth. Although there were several efficient distribution systems that could match well with Natura’s products, the company still insisted on keeping international investment at low level.
Second, due to the above risk-averse point of view, all Natura’s main operations included logistics are only located in Sao Paulo, Brazil. This is also the reason why export modes were considered as the only market entry mode for Natura during its international expansion. However, in the long run, the expansion of international operations would cause certain difficulties in logistics when all Natura products have to be developed, manufactured, and shipped from Brazil to warehouses and distribution centre in each market (pp. 6). Dealing with this matter, Natura should consider alternative market entry modes to well support for the growth of its internationalization. Joint venture, foreign sales subsidiaries and foreign manufacturing operations are suggested entry modes for Natura in the future.
6. Conclusion
From the above analysis and evaluation, it appears that the Natura internationalization process was very time-consuming and inefficient after two decades, due to some obstacles causing by door-to-door distribution system, logistic and entry mode (export mode) as mentioned. With aim to become a global brand, Natura needs to increase its involvement in international markets by increasing its resources or commitment to get high level of control in its international operations.
The company has successful in building an effective wide range of relationships with its partners, suppliers, sales consultants, customers and society that support well for its key operation model, direct selling. Natura also proved that it has a continuous progress of learning and innovation during its course of operation. Therefore, the Uppsala model is considered as an appropriate direction for Natura at the beginning of its internationalization process when it lack of availability resources and knowledge. Today, with the development of information technology, international knowledge can be accessed and learnt easier via the internet. Acquiring knowledge through a gradual process provided by the Uppsala model is no longer necessary.
Since there is a huge potential global market for cosmetic industry in general and for Natura specifically, these mentioned weaknesses should be adjusted by adopting a new model, for instance, joint venture, foreign sale subsidiaries or manufacturing operations.
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