CLOSING CASE: AVON PRODUCTS
For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products
company famous for its direct sales model, revenues grew in excess of 10% a year. Profits
tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly.
Avon, which derives as much as 70% of its revenues from international markets, mostly in
developing nations, suddenly began losing sales across the globe. A ban on direct sales had
hurt its business in China (the Chinese government had accused companies that used a direct
sales model of engaging in pyramid schemes and of creating “cults”). To compound matters,
economic weakness in Eastern Europe, Russia, and Mexico, all drivers of Avon’s success,
stalled growth there. The dramatic turn of events took investors by surprise. In May 2005 Jung
had told investors that Avon would exceed Wall Street’s targets for the year. By September she
was rapidly backpedaling, and the stock fell 45%.
With her job on the line, Jung began to reevaluate Avon’s global strategy. Until this point, the
company had expanded primarily by replicating its U.S. strategy and organization in other
countries. When it entered a nation, it gave country managers considerable autonomy. All used
the Avon brand name and adopted the direct sales model that has been the company’s
hallmark. The result was an army of 5 million Avon representatives around the world, all
independent contractors, who sold the company’s skin care and makeup products. However,
many country managers also set up their own local manufacturing operations and supply
chains, were responsible for local marketing, and developed their own new products. In Jung’s
words, “they were the king or queen of every decision.” The result was a lack of consistency in
marketing strategy from nation to nation, extensive duplication of manufacturing operations and
supply chains, and a profusion of new products, many of which were not profitable. In Mexico,
for example, the roster of products for sale had ballooned to 13,000. The company had 15
layers of management, making accountability and communication problematic. There was also
a distinct lack of data-driven analysis of new-product opportunities, with country managers often
making decisions based on their intuition or gut feeling.
Jung’s turnaround strategy involved several elements. To help transform Avon, she hired
seasoned managers from well-known global consumer products companies such as P&G and
Unilever. She flattened the organization to improve communication, performance visibility, and
accountability, reducing the number of management layers to just eight and laying off 30% of
managers. Manufacturing was consolidated in a number of regional centers, and supply chains
were rationalized, eliminating duplication and reducing costs by more than $1 billion a year.
Rigorous return-on-investment criteria were introduced to evaluate product profitability. As a
consequence, 25% of Avon’s products were discontinued. New-product decisions were
centralized at Avon’s headquarters. Jung also invested in centralized product development. The
goal was to develop and introduce blockbuster new products that could be positioned as global
brands. And Jung pushed the company to emphasize its value proposition in every national
market, which could be characterized as high quality at a low price.
By 2007 this strategy was starting to yield dividends. The company’s performance improved and
growth resumed. It didn’t hurt that Jung, a Chinese American who speaks Mandarin, was
instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon
to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial
For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products
company famous for its direct sales model, revenues grew in excess of 10% a year. Profits
tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly.
Avon, which derives as much as 70% of its revenues from international markets, mostly in
developing nations, suddenly began losing sales across the globe. A ban on direct sales had
hurt its business in China (the Chinese government had accused companies that used a direct
sales model of engaging in pyramid schemes and of creating “cults”). To compound matters,
economic weakness in Eastern Europe, Russia, and Mexico, all drivers of Avon’s success,
stalled growth there. The dramatic turn of events took investors by surprise. In May 2005 Jung
had told investors that Avon would exceed Wall Street’s targets for the year. By September she
was rapidly backpedaling, and the stock fell 45%.
With her job on the line, Jung began to reevaluate Avon’s global strategy. Until this point, the
company had expanded primarily by replicating its U.S. strategy and organization in other
countries. When it entered a nation, it gave country managers considerable autonomy. All used
the Avon brand name and adopted the direct sales model that has been the company’s
hallmark. The result was an army of 5 million Avon representatives around the world, all
independent contractors, who sold the company’s skin care and makeup products. However,
many country managers also set up their own local manufacturing operations and supply
chains, were responsible for local marketing, and developed their own new products. In Jung’s
words, “they were the king or queen of every decision.” The result was a lack of consistency in
marketing strategy from nation to nation, extensive duplication of manufacturing operations and
supply chains, and a profusion of new products, many of which were not profitable. In Mexico,
for example, the roster of products for sale had ballooned to 13,000. The company had 15
layers of management, making accountability and communication problematic. There was also
a distinct lack of data-driven analysis of new-product opportunities, with country managers often
making decisions based on their intuition or gut feeling.
Jung’s turnaround strategy involved several elements. To help transform Avon, she hired
seasoned managers from well-known global consumer products companies such as P&G and
Unilever. She flattened the organization to improve communication, performance visibility, and
accountability, reducing the number of management layers to just eight and laying off 30% of
managers. Manufacturing was consolidated in a number of regional centers, and supply chains
were rationalized, eliminating duplication and reducing costs by more than $1 billion a year.
Rigorous return-on-investment criteria were introduced to evaluate product profitability. As a
consequence, 25% of Avon’s products were discontinued. New-product decisions were
centralized at Avon’s headquarters. Jung also invested in centralized product development. The
goal was to develop and introduce blockbuster new products that could be positioned as global
brands. And Jung pushed the company to emphasize its value proposition in every national
market, which could be characterized as high quality at a low price.
By 2007 this strategy was starting to yield dividends. The company’s performance improved and
growth resumed. It didn’t hurt that Jung, a Chinese American who speaks Mandarin, was
instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon
to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial
