MGT4010 Self-Study Exercise

Case: Competition in the Cosmetic and Toiletries Industry

The cosmetic and toiletries market in Hong Kong is burgeoning and competitive. Cosmetic and toiletries
products include baby care, bath and shower products, deodorants, hair care, cosmetics, fragrance, skin care,
and sun care. These products have become a daily necessity with locals spending significant amounts on them.
Over 98 per cent of local needs are met by imports, principally from France, USA, Japan, for higher end
market, and China for lower end products. Local production is negligible as they are seen as low quality.

Hong Kong's sophisticated, urbanised and affluent population makes it a lucrative market for high quality
beauty products. At the same time, the market is saturated with many different types of products, and in the
long run established brands that emphasized quality and service may have the edge. Companies therefore
invest heavily in research and development in order to create new products and keep innovating. Users of
cosmetic products are generally highly brand loyal. They look for proven effective and easy to use products
with good textures and quality packaging. Smaller packaging quantities are preferred as the humid and wet
climate in Hong Kong causes most skin care products to expire quickly. Advertising and promotion is crucial
in creating awareness in new products and building brand loyalty among consumers. Advertisement in TV and
printed media such as newspaper and magazines are very common. Samples of toiletries are distributed to
individual households, and products in sachet form are attached to magazines. Free gifts are given during
promotion periods and are advertised in the local major newspapers and on the web.

Markets and distribution

Cosmetic products are mainly imported and distributed by agents in Hong Kong. The market is very
fragmented and can be broadly divided into three. The prestigious brands such as Clinique, Shiseido, Max
Factor are usually sold exclusively at major department stores. These products are displayed through counters
which adopt an open-sell concept where shoppers are free to browse and test. Second, specialty beauty stores
such as Bodyshop and Sasa operate individually in shopping complexes. Competitive pricing is their most
important attraction and products here are sold 10-20 per cent cheaper than at department stores. Finally,
brands that cater to the mass market are sold at supermarkets, pharmacies, and direct selling agents such as
Amway and Nuskin offer low to medium range prices cosmetics. Pharmacies have developed rapidly so that
they no longer supply only prescription drugs, medicines and health related products, but now offer a range of
cosmetics, toiletries and other personal care products. The two biggest pharmacies in town, Watson’s and
Mannings, have 150 and 204 retail outlets respectively. They sell private label products (i.e., products carrying
the retailer’s names) alongside branded products. Their products are priced significantly lower than branded
offerings, and have proven attractive for budget conscious consumers in gloomy times, especially for less
luxury product such as oral hygiene and bath products.

The growing spending power, alongside better choice and more specialized service is helping to boost sales in
specialty beauty outlets. Some of these outlets, such as Lush and Bodyshop, are franchised stores selling only
their own brands. They keep a high margin by cutting the middlemen and outsourcing production to low cost
Asian manufacturers. Lush, for example, serves customers who prefer the use of products that are natural and
preservative free. It markets whimsical fresh hand made toiletries that are very novel. The Body Shop also
serves a similar niche but its products are more practical and cater to those individuals who are more socially
aware. The company believes that business is primarily about human relationships and dedicates its work to
social and environmental change.

Some other specialty beauty stores retail multi-brand and discounted products. They buy their stocks of
branded cosmetics in bulk through parallel imports, which are legal and common in Hong Kong, from long
term vendors, and sell at a third of the retail price at the brand’s own outlets. The largest and oldest of these
outlets, Sasa, sells more than 400 brands. It has 70 stores and an e-commerce business. Its success model is
quickly copied by local competitors such as Bonjour and Angel. The latest development of Sasa is to enter the
lucrative China market with a joint venture operation in Shanghai and to acquire a regional network of

1
healthcare and beauty salons under the “Philip Wain” brand. Sasa has also revamped its retailing image and
has secured exclusive distribution with Elizabeth Arden – a renowned cosmetic brand.

Industry standards
The Hong Kong government does not require registration of products for sale as cosmetics/toiletries. There is
no local mandatory labeling and US product labeling is used. Only products of a medical or therapeutic nature
need to be registered with the Department of Health. However, of particular concern to Hong Kong authorities
are breaches of the Trade Description Ordinance regarding labeling. There have been numerous
incidences where products are fraudulently labeled as imported from France or other well-recognised
sources. Penalties for this activity are severe. There is also no import tax applied on cosmetic/toiletries
products in Hong Kong, such products therefore have been attractive to tourists. The price of well known
cosmetics tend to be 30-40% lower than in China. The availability of low price and famous brand names is part
reason why Hong Kong is still attractive to visitors and shoppers and remains one of the world’s premier
tourist destinations.

New trends
Two major trends have hit the cosmetic and toiletries industry in the last few years. First, healthy and organic
ingredients are increasingly in demand, which reflects consumers’ growing health-consciousness. There is an
increasing awareness of natural active ingredients, with some people preferring those with less or no fragrance
or color to branded products. The industry is reacting to anti-animal testing proactively. This could be
indicative of a growing trend in niche marketing and potential substitutes. More personal service at the
retailing front is expected to explain details of products to customers. The second trend is the new PRC tourist
market. The tourist market has been growing significantly with the relaxed travel policy for PRC tourists
visiting Hong Kong. It is estimated that the policy have brought a 15-30 per cent growth of mainland visitors
to Hong Kong in 2004, and therefore become a driving stimulus to the cosmetic consumption as well as to the
overall economy.

Questions:

1. Use Porter’s 5 forces model to examine the cosmetic and toiletries retailing industry in
Hong Kong and answer whether it is an attractive industry to enter, and why. (18
marks)

2. Given the idea of resource-based view, pick any pair of rivals in the cosmetic and
toiletries industry, and analyze why you think one outperforms another. (12 marks)

2
Multiple Choice Questions

1. Effective vision statements include:

A) all strategic directions of the organization.
B) business purpose and definition
C) a brief statement of the company's direction.
D) financial objectives and projected figures.

2. An organization's mission statement and vision statement set the overall direction of the
organization. Strategic objectives:
A) operationalize the mission statement.
B) modify the mission statement.
C) are a shorter version of the mission statement.
D) are only clarified by the board of directors.

3. Aaron planned to cut prices at his bicycle shop, but when a competing shop began to offer
free repairs, Aaron decided to copy them. Aaron's new strategy (offer free repairs) is an
example of a(n)
A) deliberate strategy.
B) emergent strategy.
C) intended strategy.
D) unrealized strategy.

4. An effective business model

A) involves how a company selects its customers.
B) creates value for its customers.
C) achieves and sustains a high level of profitability.
D) produces goods and services.
E) all of the above.

5. A competitive advantage is considered to be a sustained competitive advantage when

A) the advantage endures for a long time.
B) the firm is able to spread the advantage to all of its business units.
C) the advantage is very large.
D) the managers who developed the advantage are still employed at the firm.

6. Scenario-based planning is a technique for coping with the problem of

A) uncertainty.
B) planning equilibrium.
C) bottom-up planning.
D) cognitive bias.

3
7. The aging of the population of the United States
A) is a myth.
B) is not an important socio-cultural trend.
C) increases demand for products geared to retirees.
D) is an important trend in the political and legal environment.

8. Which of the following would be considered part of a firm's general/macro-environment?

A) decreased entry barriers.
B) higher unemployment rates.
C) increased bargaining power of the firm's suppliers.
D) increased competitive intensity.

9. Which of the following firms would likely pose the least competitive threat?
A) A firm in the same industry and in the same strategic group.
B) A firm that produces substitute goods to your product line.
C) A competitor to your product where a high switching cost exists.
D) A firm in the same industry and in the nearest strategic group looking to join your group.

10. Which of the following is an example of the interrelationship between the general and
competitive environments?
A) A decline in a nation's educational standards results in a decline in the nation's
productivity.
B) A country's technological inferiority results in its enactment of strong trade barriers
against importation.
C) Increased awareness of personal health leads to lower demand, and greater rivalry in the
alcoholic beverages industry.
D) Greater awareness of the environment results in environmental legislation.

11. Cosmetics makers focus on the unique needs of customers of different ages. The cosmetics
makers recognize the importance of
A) the threat of new entrants.
B) sectors.
C) market segments.
D) substitutes.

12. In Porter's Five Forces model, conditions under which a supplier group can be powerful
include all the following except
A) lack of importance of the buyer to the supplier group.
B) high differentiation by the supplier.
C) dominance by a few suppliers.
D) readily available substitute products.

13. If economies of scale are an industry's primary entry barrier, a new entrant's major risk is
A) its inability to access labor and materials.
B) its inability to match the innovation of the established firm.
C) its inability to produce in sufficient volume to match the cost advantages of established
producers.
D) its inability to get buyers to switch to its product.

4
14. Firms would be most likely to face intense rivalry with competitors when they
A) are in a high growth industry with low fixed costs.
B) are in a protected market.
C) have high fixed costs, in a slow growth industry with high exit barriers.
D) have low exit barriers for easy transition to another industry.

15. What is the impact of shifting industry boundaries on firms within the industry?
A) Higher exit barriers
B) More competitors
C) Reduced threat of substitutes
D) Lesser bargaining power of buyers

16. Buyer power will be greater when

A) the products purchased are highly differentiated.
B) there are high switching costs.
C) the industry's product is very important to the quality of the buyer's end products or
services.
D) it is concentrated or purchases large volumes relative to seller sales.

17. Which of the following statements about strategic groups is false?

A) Closest competitors are within the same strategic group and may be viewed by
customers as close substitutes for each other
B) Each strategic group can have different competitive forces and may face a different set
of opportunities and threats.
C) strategic groups are helpful in thinking through the implications of each industry trend
for the group as a whole.
D) strategic groupings are of little help to a firm in assessing mobility barriers that protect a
group from attacks by other groups.

18. Mobility barriers

A) prevent movement within a strategic group.
B) inhibit the movement of companies between strategic groups in an industry.
C) inhibit the movement of a company from one industry to another.
D) include exit barriers of the strategic group that a company wants to enter.

19. Advertising is a ______activity. Delivery of inventory is a _________activity.

A) primary; primary
B) support; primary
C) support; secondary
D) primary; support

5
20. Which of the following examples demonstrates how successful organizations manage their
primary activities?
A) By employing JIT inventory systems, Hewlett Packard has been able to cut lead time
from five days to one.
B) Motorola has revised its compensation system to reward employees who learn a variety
of skills.
C) National Steel improved its efficiency by consolidating, reducing the number of job
classifications, and broadening worker responsibilities.
D) Wal-Mart implemented a sophisticated information system that resulted in reduced
inventory carrying costs and shortened customer response times.

21. Which of the following is not an advantage of Just-In-Time inventory systems?

A) reduced raw material storage costs.
B) minimized idle production facilities and workers.
C) reduced work-in-process inventories.
D) reduced dependence on suppliers.

22. Although firm infrastructure is often viewed only as overhead expense, it can become a
source of competitive advantage. Examples include all of the following except:
A) negotiating and maintaining ongoing relations with regulatory bodies.
B) effective information systems contributing significantly to a firm's overall cost
leadership strategy.
C) marketing expertise increasing a firm's revenues and enabling it to enter new markets.
D) top management providing a key role in collaborating with important customers.

23. ______________ are the competencies or skills that a firm employs to transform inputs into
outputs.
A) Tangible resources
B) Intangible resources
C) Reputational resources
D) Organizational capabilities

24. The following are examples of socially complex organizational phenomena except
A) a firm's culture.
B) interpersonal relations among a firm's managers.
C) complex physical technology.
D) reputation with suppliers and customers.

25. A crash R&D program by one firm cannot replicate a successful technology developed by
another firm when research findings cumulate. This is an example of
A) social complexity.
B) path dependency.
C) physical uniqueness.
D) causal ambiguity.

- END -