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Product innovation in cosmetic industry

Added on - 18 Jan 2022

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1)As the newly appointed Regional Operations Director, you are asked to
find a suitable location to set up a new plant factory in Malaysia. Based on
an industry that you are familiar with, list out 4 important points that you
will consider in identifying the location with reason why.
COSMETIC INDUSTRY
The cosmetic industry has grown over the past few decades and it is currently a billion
dollar industry. Many consumers of cosmetic products have realized the importance of
self image and presentation and this has boosted the purchase of cosmetic products
across the world. There is great innovation in this industry which has also led to the
gradual growth in the cosmetic industry. Products such as lotions, creams, lipsticks,
perfumes, makeup, toe and nail polish, hair spray and gels, bath salts and bubble baths
as well as baby products are in high demand especially in developed countries. The
global cosmetic industry generates over $160 billion, which shows the importance of
the industry (Begoun, 2003: 23-24).
However, there are certain factors which affect the entry to the cosmetic industry by
firms. These factors can be briefly analyzed using the Porter Five forces analysis.
They include the threat of substitutes, threat of new entry, bargaining power of
customers and suppliers as well as intensity of rivalry in the industry (Porter, 1980: 5-
11). These factors should be assessed whenever a firm is entering any industry since
they help the management develop effective marketing and competitive strategies.
Knowledge of the Porter Five forces also helps business evaluate the feasibility of
making profits in the long run.
This paper will evaluate the cosmetic industry in relation to the Porter Five forces.
The five factors which were developed by Porter will be applied to the industry in
order to develop a competitive entry strategy. In addition, the barriers to entry and exit
in the industry will be discussed in detail. Recommendations will then be made on
how businesses may appropriately apply the Porter Five Forces model in order to
enter the cosmetic industry and achieve long term profitability.
The cosmetic industry has grown over the decades to become a billion dollar industry,
surpassing many other products which are sold in the market. Consumers are aware of
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theimportanceofcosmeticproductsandespeciallytheirpositiveimpactson
improving self image, confidence and self esteem. They are also aware of the
importance of first impression both at the workplace and in society in general (Bruno
et. al., 2010: 56-59). The realization of the importance of cosmetic products has
spurred demand for these products which are consumed by both males and females
equally. As was stated in the introduction, the global cosmetic industry generates over
$160billion.Inadditiontoconsumerknowledge,therehasbeenincreasein
innovation of different cosmetic products across the world. These products aim at
improving the physical and mental state of humans in general. Due to increased
innovation and supply, demand for cosmetic products has also gradually increased
(Winter, 2005: 5-7).
However, it must be noted that the global cosmetic industry is a large industry which
has high entry costs, if firms are to be successful. This industry is very dynamic and
requires huge investments in research and development to meet client needs. In
addition, the intense competition presently seen in the market especially by large
manufacturers such as Avon, Revlon, Clinique, Estee Lauder, LR, Mac, Unilever and
others, demand high expenses in marketing and advertising (Kotler & Pfoertsch, 2006:
63). These are already established global cosmetic brands which have market goodwill
and loyalty, and capturing a fair market share demands aggressive advertising and
innovating unique products. Further analysis of the cosmetic industry with respect to
the Porter Five forces will be undertaken below;
PORTER’S FIVE FORCES ANALYSIS
The Porter Five forces were developed by Porter and they analyze internal and
external factors which affect the competitiveness of a product or industry. They
include the threat of substitutes, threat of new entry, bargaining power of customers
and suppliers as well as intensity of rivalry in the industry (Porter, 2008: 3-7). These
factors will be identified and applied to the cosmetic industry.
THREAT OF NEW ENTRY
Thisfactoranalyzestheeasewithwhichfirmsmayenterintoanindustry.
Competitive industries are likely to attract many firms which will strive to capture a
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market share (Aaker, 2001: 23). This is likely to reduce the overall profitability of
firms which are present in the industry. In order for firms to enjoy long term
profitability, they should develop customer loyalty within their industry. This will
ensure that although new firms enter an industry, their market share is unaffected
since customers have faith on their products. Development of customer loyalty is
achieved through innovating new products which meet the unique market needs.
The cosmetic industry has a low threat of new entrants. This is due to several factors.
The first is the huge costs of entry. Developing unique cosmetic products requires a
lotofresourcesbothintermsofresearchanddevelopmentandtheactual
manufacturing process. Few middle and small scale firms have access to the funds and
expertise required to perform this effectively. Another factor which discourages entry
into this industry is the huge competition present in the industry. In addition to the
huge competitors such as Avon, Revlon, Clinique, Estee Lauder, LR, Mac and
Unilever, who have a large market share, there are many other small scale competitors
who also have a small market share and who reduce the overall profitability of firms
in the industry.
BARGAINING POWER OF CUSTOMERS
The bargaining power of customers analyzes the power which consumers have
relating to price changes in the industry. This factor analyzes the power which
consumers have in manipulating price changes due to shifts in demand (Aaker, 2000:
102-120). When consumers have a high bargaining power, the manufacturers and
sellers may not adequately predict future demand by the market. This may make them
unable to achieve long term profitability due to unpredictable demand patterns.
The cosmetic has a high bargaining power of customers. This is due to the increase
competition and availability of cosmetic products from a variety of manufacturers.
Since these products have high substitutes, then it is possible for consumers to force
manufacturersto reducetheirproductpricesthroughpurchasing those of their
competitors. This is a challenge which manufacturers of cosmetic products face across
the world.
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BARGAINING POWER OF SUPPLIERS
This factor analyzes the power which suppliers have regarding making price changes
for their products. Suppliers who have a high bargaining power are able to influence
price changes through using techniques such as market manipulation through hoarding
andrestrainingsupply.Althoughsomeofthesestrategiesareillegalinmany
countries, suppliers usually apply them when they want to effect price changes (Diller
et. al., 2006: 33-36). The cosmetic industry has a low bargaining power of suppliers.
This is due to the high number of market players and large supply of diverse products
to the market. There are many cosmetic products which are developed by both large
and small scale manufacturers. Due to the huge supply, consumers have the power to
influence the market prices as opposed to the suppliers.
THREAT OF SUBSTITUTES
Thethreatofsubstitutesariseswhentherearesimilarproductsdevelopedby
competitorswhichsatisfythemarketneeds.Whenconsumershaveaccessto
substitute products which can satisfy their market needs, then manufacturers and
suppliers lose their bargaining power. Consumers are able to purchase competitor’s
products if they are not satisfied with product price or quality. In order for suppliers to
tackle the challenge of threat of substitutes, they have to innovate products which
meet the needs of their target market segments (Keller, 2003: 595-600).
In the cosmetic industry, there are many competitors as has been discussed. There is
therefore a high threat of substitute products. If manufacturers sell their products at
higher prices, or if the products are of low quality, then consumers are able to
purchase substitutes from the many competitors who are present in the market
environment (Gregory, 2003: 77). It is therefore essential for the market players in the
cosmetic to be innovative if they are to tackle the challenge of the threat of substitute.
BARRIERS TO ENTRY AND EXIT
Barriers to entry and exit refer to the challenges firms face when entering or leaving
the industry respectively. It has been discussed that there are huge costs which are
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