PM607- Strategic Management

1.1Introduction

This report compares two cosmetics brands, with Fenty Beauty serving as a more compelling business case whereas Innisfree, a South Korean cosmetic brand owned by Amore Pacific, is now losing market share. According to Statista (2022),from March 2021, Innisfree's global sales revenue has been declining from 2016 to 2021. The brand's annual sales  revenue  peaked  in  2016  at  $608.78  when  the  Korean  film industry was particularly influential. The brand's popularity, however, waned over the following five years, with a total sales income of just US$243.20 in 2021. Fenty Beauty is a  unit  of  LVHM.  For  the successful company  Fenty  Beauty,  the  sales volume reached  $10  billion  in  just  40  days  since  its  establishment  in  2017,  creating  a breakthrough achievement  in the beauty  industry (Ismail, 2018).  It  is essential to analyse the reasons why some strategies are successful, and others fail. The strategic management creation, execution, and assessment procedures can be advantageous to the entire firm organization (Tucci, 2020). In the context of business, strategy refers to  an  organization's  long-term  emphasis  and  direction  that  helps   it  employ   its resources most effectively in a cutthroat market (Lippman & Rumelt, 2003). A range of research material has been used to inform the findings of this report with examples being journals, articles and websites.

2 A critical analysis of the strategy of Innisfree

The company in the report that failed will be examined using PESTLE, Porter’s Fie Forces  and  the  Strategic  Drift  in  this  section.  A  structured  macro-environmental analysis  tool  called  PESTLE  analysis  is  frequently  used  to  evaluate  the  macro- environment within the sector in which a company operates. In its expanded form, Political, Economic, Social, Technological, Legal, and Environmental make up the abbreviation PESTLE. (Whittington et al., 2020).

After Innisfree entered the Chinese market in 2012, the “Hallyu” culture is sweeping China, and the brand is expanding rapidly in China. However, in 2016, the South Korean government deployed the THAAD system and they revoked nine kinds of economic cooperation agreements, which to a large extent hindered the development of international trade  between  China and South  Korea  (Kim  & ANU,  2016),  both "Korean Wave" and Korean cosmetics brands lost a large number of markets in China. Prior to declining to just 2% in 2023 and 2024, the GDP is predicted to grow by 2.7% in 2022. Because of the slow growth in disposable income and the weak property market, private consumption and investment are anticipated to decline. Exports will suffer in the short term due to a decline in semiconductor sales. It is anticipated that both the unemployment rate and inflation will increase from their current low levels (Anon, 2022). The  "Russo-Ukrainian  War"  had  a  significant  impact  on  the  world industrial chain, although the cosmetics sector is an anti-recession sector that  is comparatively resilient to inflation and economic downturn. These factors will also have significant impact on social factors too (Pathak, 2021). In the social environment of the pandemic, merchants and consumers are not positive in selling their products, and the  brand's  reliance on offline  channels for transactions  is  undoubtedly  high operating costs and increased pressure on profitability.

Nowadays, the technical factors in PESTLE show that failing to keep pace with artificial intelligence, Internet and other technologies is prone to losing market share (Pathak, 2021). Due to the popularity of TikTok in China, China has ushered in the rapid rise of e-commerce and the era of live streaming, and Innisfree seems to lack sensitivity to the consumption trend of the Chinese market (Yang et al., 2021). PESTLE's social elements show that culture has a significant impact on the market (Pathak, 2021). When choosing cosmetics, consumers in China's Z generation will prioritize Chinese, European,  and  American   cosmetics   companies   (Yang   et   al.,   2021).  Tencent Advertising's National Beauty 2019 Insight Report claims that the market share of domestic  cosmetic  brands  in  China  has  reached  56%.  The  Gross  Merchandise Volumes (GMV) of the top two brands, Perfect Diary and Florasis, hit 3 billion Yuan in 2020 after only four years in operation (Yang et al., 2021).

The main body of law governing cosmetics in Korea is the Cosmetic Act (Teles, 2021). Since the start of 2021, the regulations governing cosmetics in South Korea have changed.  Producers  or  importers  of  functional  cosmetics  must  submit  technical documents to the Ministry of Food and Drug Safety (MFDS) for assessment of the cosmetics' efficacy and safety. (Lim, 2021). However, it was discovered that many of the company's functional skin care products contain significant amounts of alcohol and fragrance  ingredients  in  the  ingredient  list.  As  a  result,  many  users  reported experiencing significant areas of redness, tingling, and even burning after using these products.  PESTLE's  environmental  factors   highlight  the   increasing  demand  for sustainable resources and ethical sourcing (Pathak, 2021). Many consumers question whether a product is truly green and safe when they use it. Due to strict political guidelines and legal requirements, the industry needs to adhere to guidelines for the entry and sale of raw materials. This is a brand principle.

Innisfree was deeply involved in the "greenwashing" storm in April 2021. (Tan, 2021a) Consumers  found  that  the  products  they  bought  did  not  match  the  brand's environmental  protection  promotion.  The  brand  products  used  PVC  materials prohibited by the South Korean Ministry of Environmental Protection. And consumers believed that the brand was falsely advertised as "fake environmental protection"; the brand  later apologized and  promised to  make  rectifications,  but  consumers were disappointed with the brand (Tan, 2021). This meant that Innisfree lost customers to their competitors. This correlates with Porter’s (2008) model which argues that threats to a company’s strategy include the threat if other substitute products and services are available.  Statista  (2023)  also  indicates  that  the  cosmetic  industry  is  vast  with projected  revenue estimated at  188b  billion  dollars by 2026 thus suggesting that buyers bargaining power is high as consumers have lots of choice.

1.2.1Strategic drift

Last but not least, strategic drift is the progressive departure from a company's end aim while achieving its strategic goals (Whittington et al., 2020). Innisfree is losing market share in the Chinese market as a result of its mid to late-stage strategic drift.

1.3A Critical comparison of Fenty Beauty’s strategy and the strategy of Innisfree

This section of the report looks at Porter’s Five Forces, Porter’s Generic Strategies and VRIO to explain why Fenty Beauty's strategy is successful. The first step is to apply Porter's generic strategy to the analysis of why Fenty Beauty is successful. An organizational strategy that is commonly acknowledged is Porter's general strategy, which also includes low-cost, differentiation, and focus strategies (Allen & Helms, 2006). By utilizing Porter's all-encompassing strategy, Fenty Beauty has had success in the beauty sector since the brand's introduction in 2017. A report on racism was published by Sephora in 2020. It was shown that 40% of consumers believed they were treated unfairly due to their race or color. According to Sephora, such behaviour could  "have  permanent  financial  ramifications  for  the  retailer."(McKinnon,  2021). However, Sephrand is the main vendor of Fenty Beauty, this could be a targeted study.

Fenty Beauty works by offering a wide selection of merchandise suitable for all skin types  and  skin  tones.  Fenty  Beauty  differentiates  itself  from   other  cosmetics companies by offering a diverse range of representative products from the start. Its first line of 40 Potter colors of the liquid foundation called Pro Filt 'r was released in the fall of 2017 and made a splash in the industry. They serve women of all genders, colours and backgrounds (McKinnon, 2021). Fenty Beauty Company operates in North America with sales of $570 million in its first month (Elizabeth, 2017). According to Time (2017), "Fenty's unashamed celebration of inclusivity in his makeup campaign has focused unprecedented attention on the need for diverse beauty products." The company's culture is centred on diversity. Fenty Beauty also has adopted a low-cost strategy. By selling top-notch goods at reasonable prices, the corporation keeps its pricing competitive. This strategy allows Fenty Beauty to remain competitive in the beauty business while still providing high-quality goods at cheap costs.

The brand's success is also influenced by low-cost advertising tactics. Social media and other channels have been exploited by Rihanna's potent celebrity benefits to benefit Fenty Beauty. There was some buzz about Fenty Beauty in the US during the survey period because, in September 2022, 28% of 53% of the brand fans had heard of it in the media, on social media, or in advertising (Kunst, 2022). And at last, the Fenty Beauty company has implemented a critical strategy. According to Statista, the industry ignored this large market, particularly among people of color (Funmi Fetto, 2019). The company has concentrated on developing products that are tailored to the needs of its target market, which consists primarily of young women of color. With this focus, Fenty Beauty was successful in creating goods that catered to the demands of this market ，setting it apart from its rivals. One of Fenty Beauty's key selling points for its products is that they are made with innovation, are simple to use, and deliver long- lasting  results. This  clearly  highlights that this  strategy adopted  by  Fenty  Beauty reduces the threat of substitutes as  per  Porter’s  Five  Forces.    According  to  the econometric  findings,  Porter's  other  two  broad  strategies  perform  less  well  for businesses than the pursuit of differentiation strategy (Islami et al., 2020). This is thoroughly reflected in Fenty Beauty (McKinnon, 2021). A SWOT analysis for Fenty Beauty can be found in Appendix 1 of this report.

VRIO analysis will now be used to assess the success of Fenty Beauty. The VRIO framework is used to assess a company's internal resources and capabilities to see if they may serve as a source of long-term competitive advantage (Whittington et al., 2020).  The  acronym  VRIO  stands  for  value,  rarity,   imitability,  and  organization (Whittington et al., 2020). Firstly, by providing a variety of products that are suitable for all skin types and tones, Fenty Beauty has added value to its customers (McKinnon, 2021). The company has added value by providing premium goods at competitive prices (Ismail, 2018). Secondly, due to its innovations, Fenty Beauty has established a new standard for the beauty sector. Offering solutions for all skin types and tones, the company has adopted an  inclusive product  concept (McKinnon, 2021).  Fenty Beauty differs from competing brands thanks to this strategy. Thirdly, because of the high quality and unique formulations of Fenty Beauty products, are made possible by LVHM Group's robust supply chain and channel (Ismail, 2018).   The company has also made significant investments in research and development, enabling them to produce distinctive items that are challenging to imitate. Finally, because of significant marketing and advertising expenditures, Fenty Beauty has been able to reach more followers. For instance, a growing number of Instagram influencers are beginning to work together with companies  (Ismail, 2018). The  company  has also  invested  in developing a web presence that enables them to communicate with clients, forge bonds with them, and solicit feedback. In conclusion, Fenty Beauty’s success can be attributed  to  its  value,  rarity,  imitability,  and  organization.  While  Fenty  Beauty  is growing, Innisfree is in the third phase of strategic drift, losing market share.

1.3.1 Strategic comparative

In contrast to  Fenty  Beauty, which has valuable, rare, and unique resources and capabilities (Kovack, 2022), Innisfree lacks any organizational processes to leverage its resources and capabilities (Ismail, 2018). "Having a competitive advantage that distinguishes you from your competitors is the key to success in any market" (Kotler et al., 2016). The gradual exit of Innisfree from the Chinese market can be attributed to  a  lack  of  competitiveness,  ineffective  marketing  strategies,  and  a  lack  of understanding of the Chinese beauty market as a whole (Kovack, 2022). First, the ingredient strategy that dominates Innisfree products is no longer sufficient to attract consumers, and more and more local Chinese brands, such as Flower West, have successfully combined ingredients and functionality to outperform Innisfree (Yang et al., 2021). This report contains numerous examples which illustrate that Innisfree’s strategy failed because of the five major influences that can cause a strategy to fail (Grundy,2006). Because the company employed a differentiation approach and the product set-up has maintained the brand continually new and ahead of the curve, Fenty Beauty has not been displaced in the Chinese market. On the other hand, Innisfree has a biased perception of the Chinese market and its people. A targeted marketing plan is necessary for a successful company. (Porter, 1985). Because of China's political decision to "restrict Korea" (Kim & ANU, 2016), the corporation lacked a thorough understanding of Chinese culture and values, which hindered its ability to successfully interact with and analyse its audience. The company culture at Fenty Beauty, on the other  hand,  is naturally inclusive and varied, and they were well prepared before entering the Chinese market. Additionally,  Fenty  Beauty  uses  a flexible system to analyze their audience and has always  encouraged  customer suggestions and feedback (McKinnon, 2021). In terms of Porter's generic strategy, Innisfree employed a low-cost approach, but this strategy did not provide the brand with a competitive edge because it lacked any additional special assets or abilities that distinguished it from its rivals, which failed in the worldwide market. Fenty Beauty, on the other hand, was successful in the sector thanks to its valuable, uncommon, and distinctive resources and competencies, along with its differentiation approach.

1.4 Conclusion

In  light of current trends, digital marketing is playing a bigger role in the beauty business. For instance, consumers will receive more individualized cosmetic products depending on their skin type, age, and other attributes. The beauty sector will also put more emphasis on digital marketing techniques, utilizing cutting-edge tools like big data and artificial  intelligence for consumer analysis and customer relationship management (Yang  et  al.,  2021). Additionally, the beauty sector will advance ecologically friendly products and adopt more sustainable practices and ideas.

One of the key market-influencing aspects is the consumer market, which is changing from traditional to modern perceptions (Yanget al., 2021). Customers are getting more and  more demanding, driving  businesses to adjust their tactics and stay up with technological advancements to survive. According to Statista (2023), projects that the beauty and personal care business will generate US$59.06 billion in sales by 2023, with online sales accounting for 52.6% of the total. This demonstrates that more than half of the industry's overall revenue in China comes from online sales, which means the beauty business needs to improve its online marketing strategies. Overall, the market is constantly changing, and the industry must adjust to it to keep up with the changes (Eijk, 2020). To retain its competitiveness in the market, the beauty industry must, overall, adhere to the idea of sustainable development, consider the company's unique  position, step up research and development  efforts, and timely revise its strategy.

Here are some measures that businesses can take to prevent strategic drift. First, the personnel at the organization needs to be consistent and make sure that their remarks are current since this is crucial in the long run. Secondly, businesses should assess their business strategy frequently to make sure that they are still on track for both  short- and long-term success. To ensure that their strategy is aligned with the needs of the macro environment, the company should complete a  PESTLE  analysis periodically; scenario analysis is also useful for informing strategic decisions as to  whether managers need modify the strategy of a company. Abraham Lincoln once said, "The only way to foretell the future is to make it." (Eijk, 2020). Therefore, the best  strategy to prevent strategic drift is to look and think long-term.