The Study of Direct Selling Management Strategies: An ...

The Study of Direct Selling Management Strategies: An example of the Avon cosmetics company in Taiwan

Yen, Jui-Yen, Associate Professor, Department of Business Administration, National Taipei College of Business, Taiwan

Chen, Mei-Liang, Lecturer, General Education Center, Hsin Sheng College of Medical Care and Management, Taiwan

Chen, Yi- chieh, Graduate student, Grabluate Institute of International Business Management, Ching Yun University, Taiwan

ABSTRACT

The management strategy of Direct Selling is quite different than that of business administration of general enterprise; it is an industry that is highly mobile and emphasizes on interpersonal relationship; no matter it is Direct Selling or Marketing, although they can save the company a lot of cost, yet they are accompanied with uncertain risk. Being affected by the rat's club due to the misuse of Direct Selling, government has to put control on Direct Selling; currently, most people still do not know too much about Direct Selling and they worry that they might become a victim of "pyramid fraud" if they are not very careful, which in turn makes the spreading of Direct Selling more difficult. Therefore, some Direct Selling companies such as Avon, changes its form from single-level Direct Selling into multi-channel sale so as to adapt to the change in the social form. Therefore, in this study, we are going to aim at the study of one Direct Selling form, that is, in-depth study and understanding on Avon's multi-channel system. Keywords: Direct Selling , management strategy, 4P, channel marketing.

INTRODUCTION

Master of Management Peter F. Drucker once said: "What an enterprise is, is decided by the customers"1. For a successful Direct Seller, in addition to treating himself/herself as part of the business body to accurately reflect enterprise image and concept, it is more important to clarify and satisfy real customer's need through sincere and objective mind. This is also the most important spirit of Direct Selling and is the reason why an excellent Direct Selling company stays strongly in the market.

In the past, when the vendor sells the product using traditional selling way, profit will be stripped off by vendors in the first stage and second stage sales channels, and the cost of the vendor will get increased greatly and accordingly. No doubt, these costs will be transferred to the customer, which in turn leads to a burden to the consumer. Therefore, some suppliers, in order to reduce profit stripping in several stages by the intermediate vendors, they start to find their own personnel for the product sale, or try to use mobile technology to assist product sale, the new generation of selling ways such as "Direct Selling", "Marketing" and internet shopping are thus generated.

In 1982, with the introduction of Amway, Direct Selling started to enter Taiwan and other Direct Selling companies started to follow. On November 1997, some companies which have the sales mainly based on interpersonal network, for example, Direct Selling for example, Amway, SHUANG HOR (HK) COMPANY LTD., Nuskin Taiwan, Forever, etc., started to launch company's web sites for sales and business promotion so as to enhance the business operation efficiency of Direct Selling; these companies are seen with great potential. At that time, Direct Selling Association also reduces its entrance barrier for the membership application, that is, a company will have the qualification to become a member once it is founded for more than one year; and a commission for promoting commercial virtues has been founded to implement the restrictions of commercial virtues on the companies in this industry.

Direct Selling can be divided into single level Direct Selling and multi-level Marketing; however, in recent years, to cope with the change of industry environment, some of the Direct Selling companies such as Avon started to shift its

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strategy toward the development of multiple channels for Direct Selling. We hope, through this study, to understand the business operation system and planning in Direct Selling and compare the advantages, disadvantages, opportunities and threats of different business systems; we hope that the results of this study can be used as reference by companies or people in the Direct Selling industry.

RELATED LITERATURE 2.1 Definition of terms 2.1.1 The definition of Direct Selling

World federation of direct selling associations (WFDSA) has defined Direct Selling as: "On non-fixed retailing places and through the use of face-to-face way, the product and service are sold directly to the consumers." Robert A. Peterson & Thomas R. Wotruba (1996) briefly described the "Direct Selling" as a face-to-face selling without fixed retailing sites. However, the Direct selling education foundation of USA in 1992 had a definition on Direct Selling: "Direct Selling is a distribution method for consumptive product or service through personnel contact (Sales personnel to the purchaser) and at different commercial locations, mainly at home." Here the nature of "consumptive" and "distribution way" are emphasized fro Direct Selling.

Direct Selling can be categorized in two ways in broad sense and in narrow sense. In broad sense, Direct Selling is a selling way that the manufacturer or the product importer sells the product directly to the final consumer. For example, the fisherman sells the fishes to the customers directly and the farmers sell the rice directly to the consumers, etc. However, for further definition, the Direct Selling in broad sense should include the narrow Direct Selling: "Product manufacturer or importer, through Direct Seller and consumer and through a way of face-to-face selling, introduces or sells the product or service to consumers. Generally speaking, Direct Seller is not employee of the company and the selling is usually done in non-fixed selling site" (Professor Te-Fa Chen, 2006).

Today, both direct Marketing and direct Selling are sometimes all called Direct Selling. However, a direct effectiveness selling is that the product manufacturer or importer, through the mail of DM, catalogue, broadcasting, TV channel, internet, etc., transfer the product and service information to the consumer, and the consumer then reply through mail or answer through telephone (Professor Te-Fa Chen, 2006). Therefore, we can see two keys in Direct Selling: "Face-to-face selling" and "Sell at non-fixed places". Direct selling is a process of face-to-face communication between two persons, and the direct effectiveness marketing is way of selling product or service such as mailing of catalogue, telephone/TV marketing, direct reply to the advertisement or the recent emergence of network marketing. The lack of face-to-face contact is the major difference between Direct Selling and direct effectiveness marketing.

Direct selling further includes single level marketing and multi-level marketing. In single level Direct Selling, Direct Seller is also the consumer and Direct Seller sells the product or service of the company to the customer, then the Direct Seller receives bonus from the company according to his/her sale performance. In single level Direct Selling, the income of Direct Seller comes directly from the retailing profit he/she sells the product to the final consumer (Professor Te-Fa Chen, 2006).

Multi-level Direct Selling is also called network marketing, in addition to getting profit through the sale of product or service, Direct Seller can also become an upstream to absorb or instruct customer to become downstream Direct Seller, then the Direct Seller is awarded with rank and bonus according to the number of persons in his/her downstream and the sale performance. Bonus system is the major difference between single level Direct Selling and multi-level Direct Selling; especially, multi-level Direct Selling is also called "Marketing" or "multi-level Marketing", which is a business operation model selected by most of the Direct Selling companies.

2.2 The related definition literature of management strategy 2.2.1 Strategy related definition literature

"Strategy" evolves from Greek word Strategos. The term strategy is originally applicable to military and political situation, which means an art of leadership, that is, through the use of effective resource to destroy enemies. Until 1950, the emergence of Game Theory pushes the term strategy to the application in business operation (Yi-Wu Li, 1998). In this study, the strategy related literatures defined by many scholars are summarized as in the followings:

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Year 1980 1988 2001

2004 2007

Scholar Porter

Mintzberg

Ta-Hsien Szutu

Chhing-Pin Lin

Tzu-Tsan Fu

Table 2-1 Strategy definition related literature Views from the scholars

Strategy is that the enterprise creates an unique and valuable position so as to facilitate its attacking or defensive behavior. Strategy includes plan, ploy, pattern, position and perspective. Strategy is to select the development focus, to define the survival space of the enterprise in the industry environment and to instruct the directions of functional policies. Strategy is a thinking way to build and maintain competitiveness. Strategy is the solid actions performed by the enterprise runner and its business operation team when they have to face with enterprise's future development. Strategy is instructive and long term commitment. In the content, it emphasizes on "quality"

goal instead of the" quantity" goal of financial performance. Data source: Summarized by the author

To summarized the above discussions, it can be seen that strategy is to define the survival niche of an enterprise, to use the limited resource to maximize opportunity and to minimize the threats; meanwhile, it controls every step to let it match the plan and it is the solid action taken by the enterprise runner and its business operation team to face with future development of the enterprise.

2.2.2 Related definition literatures for management strategy The main function of "management strategy" is to make a plan for the future development of the enterprise from

the enterprise runner's view point by associating the internal resources of the organization and the external opportunity; all kinds of action projects for the operation of the enterprise are implemented through this plan (Hsin-Pai Liu et al., 2000). In this study, the management strategy related literatures defined by many scholars are summarized as in the followings:

Year 1985 1995

2001 2004 2007

Scholar Omae Keniti

Ta-Hsien Szutu

Yi-Chin Lin

Wen-Ke Chiu

Tzu-Tsan Fu

Table 2-2 Related definition literatures of management strategy Scholar's views

The key of management strategy is competitiveness, And the so-called management strategy is, through the use of the most effective way, to change the power of a company relative to its competitor. Management strategy is the highest level decision in business operation. Management strategy is the means to achieve the organization goal; to up-level, it is to cooperate intimately with the external environment, to the down-level, it guides all the functional policies or strategies within the enterprise. Management strategy means a series of action projects taken by the enterprise in order to achieve organizational goal after analysis and understanding on the opportunities and threats of the external environment and the advantages and disadvantages of the enterprise itself; those actions projects are made based on the internal superiorities of the enterprise and through effect distribution and allocation of resources so as to cope with the external environment and to set up long term competitiveness.

Management strategy means a combination of business operation decision and action.

Management strategy is used by an enterprise to make development blueprint and to decide "What things are worth of investing efforts" (That is, do the right thing); furthermore, it is used to decide what goals should be reached by each department and what are the implementation actions each department must do.

Data source: Summarized by the author

From the above descriptions, it can be seen that management strategy is a set of consistent plan made by the enterprise to cope with environment change and competition situation; to the up-level, it acts intimately with the exterior environment, to the down-level, it instructs all kinds of functional policies or strategies within the enterprise to ensure that the basic goal of the enterprise can be achieved through appropriate implementations by the organization.

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THE HISTORY OF DIRECT SELLING IN TAIWAN

3.1 The background of Direct Selling in Taiwan Direct Selling originated in 1886 from "California Perfume" Corporation (It is Avon right now). At that time,

sales personnel sold perfume through Direct Selling way, later on, the product sold is expanded to cosmetic and skin care product; therefore, many people think that it is the sign of the birth of single level Direct Selling. In Taiwan, company that uses ways similar to Direct Selling model to sell the product for the first time is English publishing company. Later on in 1978, The head of rat's club of "ChiaHsien Coporation" of Japan escaped to Taiwan and founded " Pao-Kang-Ai Association of China" and "Taichia Corporation". They use Marketing model to cheat massive amount of money, and many companies follow their ways of rat's club to run their businesses; therefore, general public have very bad or unforgettable image on the word "Marketing". Until 1982, Amway and Avon entered Taiwan's market and Direct Selling starts to take off in Taiwan. The followings are the development events in recent years for Direct Selling:

Year 1886

1978 1982 1990 1992

Dec., 1997

April, 1998

Table 3-1 Recent development of Direct Selling Direct Selling history

"California Perfume" Corporation (It is known as Avon right now) sells perfume through person-to-person way. The head of rat's club in Japan escaped to Taiwan and founded " Pao-Kang-Ai Association of China" and "Taichia Corporation". They use Marketing model to cheat massive amount of money. Amway and Avon entered formally Taiwan's market. Taiwan Direct Selling Association was founded. Taiwan issued "Fair Trade Legislation", and the Direct Selling is formally given a legal identity. Direct Selling starts tough fighting in bonus system; the heading of the bonus system of single level Direct Selling toward that of multi-level Marketing is an unavoidable trend. After China's government founded it very difficult to manage, in order to prevent the frequent occurrence of illegal fraudulent events, it starts to entirely prohibit Direct Selling, and the legal Direct Selling company is forced to be changed to the operation of real general store.

Data source: Summarized by the author

3.2 Direct Selling category and overview Taiwan Direct Selling Association has a rule that once a company is founded for more than one year, it will be

qualified to become a member; currently, there are 39 members joining Direct Selling Association. The classification based on multi-level Direct Selling and single level Direct Selling is as in the followings:

As shown in table 2-1, Mary Kay (single level Direct Selling), Nu Skin (multi-level Marketing) and Avon (converted from single level channel to multi-level channel Direct Selling) all have their main products on cosmetic and skin care products; in this study, the management strategy of the above mentioned three Direct Selling companies will be studied and investigated.

Mary Kay was founded in 1960 with its Direct Seller called cosmetology consultant; Nu Skin was founded in 1984 with three business groups under it, namely, Nu Skin, Pharmanex, Big Planet. Among them, Nu Skin sells personal care product, Pharmanex sells health food product and Big Planet mainly sells high tech product and environmentally friendly cleaning products. Since this study only focuses on Direct Selling involves cosmetology and body care product, hence, only Nu Skin is taken as target in the study.

In product aspect, Mary Kay's product includes skin care product, cosmetic, SPA body cosmetology product and perfume series; Nu Skin's product includes face and body care, hair and skin care product. The product of Mary Kay has a warranty period of three months, if the product has trouble within the warranty period, consumer can contact with the cosmetology consultant he/she knows for product exchange or an exchange of equivalent product.

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Single level Direct Selling

Multi-level Direct Selling

Table 3-2 List of membership company of Taiwan Direct Selling Association

Name of the company

Formosan Magazine Press Ltd.

Avon Taiwan

Mary Kay

Amway Taiwan Co., Ltd.

Taiwan Nefful Co., Ltd.

Forever Sunshine Life

Sunpak Corporation

MJ Life Enterprises, Ltd.

Enterprise Co., Ltd.

President Natural Industrial

Melaleuca of Asia Co., Ltd.,

WideDoctor (International)

Corp.

Taiwan Branch

Enterprise Co., Ltd.

Nu Skin Taiwan Inc., Taiwan Summit International Lily Co., Tianshi Health Products, Inc.,

Branch

Ltd.

Taiwan Branch

Medical Designs Inc.

Morinda International Inc.,

Meiyi Corporation, Taiwan

Viva America Marketing,

Taiwan Branch

Branch

Taiwan Branch

Redin International Co., Ltd.

Usana Health Sciences Taiwan

Sunrider Taiwan Inc., Taiwan NIKKEN Taiwan Inc., Taiwan Inc., Taiwan Branch

Branch

Branch

Synergy Taiwan Inc., Taiwan

E. Excel International (Taiwan) Boching Enterprise Group

Branch

Inc.

Nu Life International

AMKEY (TAIWAN) Co., Ltd.

Taiway International Co., Ltd. Matol Taiwan Corportation

Sheng-En Development Co.,

Lanfar Interantinoal Co., Ltd. Fuh Jen International Co., Ltd. Ltd.

Hsin-Ten Enterprise

Altwell Taiwan Inc.

Re-Young International Co.,

Herbalife Taiwan Inc., Taiwan Taiwan Naturally Plus Co., Ltd. Ltd.

Branch

Kelti Group

Totallife (International) Co.,

Ltd.

Data source: 2007 Taiwan Direct Selling Association.

In the price aspect for Mary Kay, only Direct Seller can shop in the web site, when the amount is over 10,500 and 17,325 respectively, the discount would be 40% and 50% respectively of the original price; Nu Skin has web site shopping function; in the past, as long as you are member of Nu Skin, you can enjoy 70% of the original price in the shopping, but today, the web site price is the same as that of a member and Nu Skin ARO member can purchase it at 90% further the web site price.

In the sale channel aspect, Direct Seller is the only sale channel of Mary Kay, hence, when consumer wants to order Mary Kay's product, the consumer has to find cosmetology consultant he/she knows, the sale channel is thus very narrow; for Nu Skin, in addition to Direct Seller, another easy way of shopping is through the internet, and the consumer does not have to spend time to find Direct Seller he/she knows; therefore, its sale channel is a little bit superior. Both products' transportation is through logistics transportation.

In the promotion aspect for Mary Kay, in addition to publishing enterprise's book and launching the web site, it also promotes charity business "Blossomy rose" project and cooperates with "Fund for Children and Family" to help poor children to improve their life; moreover, Nu Skin cooperates with Nongnong Magazine to open a Nu Skin special column to discuss how the business runner of Nu Skin heads toward success. In 1996, "Force for good foundation" was founded to promote "Nutrition project for children under huger"; it designed warm dish for children for domestic and foreign children under hunger, meanwhile, a donation project of warm dish for children was started to try to help more children under hunger.

In the personnel aspect, Mary Kay recruits female of over 18 years old to become its cosmetology consultant (that is, the Direct Seller). Anyone who wants to join but does not know any cosmetology consultant can check into the web site to leave personal contact information. Before the entrance of Mary Kay, it will take about 1,490 dollars to purchase "Career entrance kit"; meanwhile, cosmetology consultant is incubated by supervisor of Mary Kay, in addition to group meeting held once a week, the company will also hold irregularly a series of education activity; anyone who wants to join Nu Skin can select to spend 850 dollars to purchase "Entrance tips", or purchase company's product for at least 2,000 dollars; anyone who use ARO repeating and circulation system for placing order every month can waive from the membership fee. However, there is no limitation on the qualification of becoming a member of Nu Skin, and

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