BMA328 Leadership in Organisations: Indian Cosmetic Industry

The purpose of this assignment is to provide an opportunity to utilise your skills and knowledge of strategic planning to undertake the tasks associated with the key question of where are we now in relation to the external environment and industry structure currently facing your chosen industry.

You will conduct a five forces analyses for an industry of your choice. Based on your analysis, you need to indicate how profitable do you think the industry currently is and what are the factors driving that profitability. Also discuss how will these factor change in the future and what will be the effect of these changes on industry profitability.

Introduction

Over the past few decades, the cosmetic industry has grown worldwide and this is the well-established industry now. The people, using the cosmetic products have understood the importance of self-presentation and image. It has increased the purchase of cosmetic products. Currently, the presence of cosmetic products is increasing in the Indian market. Indian cosmetic industry is implementing various competitive strategies. It depends on the capacity to launch new and innovative products in the market without any delay. The primary objective of this discussion is the evaluation of different variables of external and macro-economic environment. These factors impact the profitability of this industry in India. In this analysis, the five forces of Porter will be implemented to the industry. This analysis will help in understanding the profitability in the long run.

Current Structure of Cosmetic Industry in India

Cosmetic industry in India is growing rapidly in this modern era. As per the facts of India Cosmetic Market Overview Report, the Compound Annual Growth Rate of the industry is about 17% in the duration of 2015-2020 (Eastern Daylight Time, 2016). As of 2015, the economy of India claims of a GDP rate of 7.5%. This situation makes expanding the money on and development of beauty products. With the increase of fashion awareness among people, purchasing power is also improving. Now, this sector is forecasting to uphold the growth percentage in future also (Ramil 2015). The industry includes the products for skin, hair, fragrance products, baby products and other cosmetics. Products like; creams, perfumes, lotions, lipsticks, nail polish, hair gels and sprays and other makeup products are highly demanded products in India. According to an analysis, there is an important role of herbal products in growth of cosmetic products industry in India. The top leading players in this industry are Lakme, Revlon, Oriflame, Maybelline, Color bar, Avon products etc. There are so many herbal products brands in the Indian industry, such as; VLCC, Himalayas, Lotus, Dabur, Blossom Kochhar etc (Panda, Panda & Rout 2014). Now, this industry is one of the exclusive industries, which holds huge capacity for future growth.

Size of the Indian Cosmetic Industry:

Cosmetic industry in India is forecasted at $950 million currently and it is expecting to increase to $2.68 billion by the year 2020. From all the segments, the color cosmetic is growing very fast. This covers $60 million of the market (Eastern Daylight Time 2016).  In the year 2015-16, this industry is continuing to register a better growth due to improvement in the economic conditions in the country. Cosmetic industry is nurturing primarily from the products with medium and low prices. The demand for the herbal beauty products was on hike in the year 2015 due to effective advertising activities and campaigns by the related firms. This market is indicating the growth percentage of 15 to 20% per annum (Times of India 2013). According to the new report of the Indian cosmetic industry 2015, this sector holds a good growth for both the international and domestic players. Increasing consciousness about the appearance and self-presentation in the people are the major factors, which are driving the profitability of the cosmetic products all over the world (Baldemir & Kaya 2010).

Industry Analysis

Porter’s Five Forces Analysis

The Porter’s five forces were introduced by Michael Porter. These forces evaluate the internal and external factors, which have large impact on the profitability and competitiveness of the industry (Lintner 2009). This analysis includes five forces, such as; threat of new entrants, bargaining power of customers and suppliers, threats of substitutes as well as barriers to entry and exit in the industry. The below discussion will evaluate these forces for Indian cosmetic industry.

Threat of New Entrants

In India, cosmetic industry has low threat from the new entrants. There are some factors behind it (Abraham 2012). The first factor is the strong competition that discourages the entry in the industry. There are some huge competitors, who cover a large market share, like; Avon, Revlon, Unilever, Lakme etc. In addition to them, industry also includes some other small competitors, who also cover the market with small market share (Makarychev, Kaufmann, Tsangari & Temperly, 2011). These small players decrease the total profitability of the companies in this industry. Another factor is higher costs of entry. The firms have to invest huge funds and resources to introduce a better product. Furthermore, they have to spend the large amount of money on the startup, insurance, licensing, advertising and marketing. Introducing a new competent beauty product needs an effective research and development and production process (Reijntjes & Wagij 2012). For example, launching of new brands like; Loreal, Patanjali etc. has reduced the sales of old brands like; Dabur, Himalayas, Lakme etc.  

Bargaining Power of Customers

In the cosmetic industry, the buyers hold a high bargaining power. This is high because of the increased competition and beauty products are available from different manufactures (Kapoor & Si 2014). In the market, there is availability of the substitutes for the products, so it is possible for the customers to pressurize the sellers to reduce the prices through buying them from their competitors. This is a threat which the sellers of beauty and cosmetic products have to face worldwide. For example, Loreal is a well-established brand in the market, but its products are expensive, which are affecting by the economic downturn and people are switching to the inexpensive products (Seinauskiene, Mascinskiene & Jucaityte 2015).

Bargaining Power of Suppliers

The third force of Porter is bargaining power of suppliers. In India, supplier’s bargaining power is low for this industry. This is because of the availability of huge number of manufacturers and great supply of variety of products to the market. Both the large and small scale players develop many cosmetic products. Because of the massive supply of the beauty products, customers can influence the prices in the market as opposed to the manufacturers (Guthrie, Kim & Jung 2008). The organizations have to manage the suppliers in an effective way. For example, currently Parachute, top hair cosmetics dealt with its vendors effectively. There are only few places, which can provide the huge quantity of the coconuts, so the vendors proposed to hike the prices of raw material. In this process, the company established the depots, where the farmers can drop their material and then company will collect this. In this way, the company was able to ignore the proposal of suppliers (Mohammad & Hashim 2016).

Threat of Substitutes

As the cosmetic industry is very innovative, profitable and rapidly grown industry (Roy, 2011). In this market, the innovation in the products and services is important for success of the organization.  There are many competitors in the Indian cosmetic industry, which have discussed above. The firms have high challenges of substitutes. If the customers feel that seller is selling the product of lower quality at higher prices, then they can switch to other players and purchase the substitutes from other competitors in the market (Kaye 2010). So, it is necessary for the manufacturers in cosmetic industry to become more advanced and inventive, so that they can handle the threat of the substitute products. The people are moving forward to the herbal and Ayurveda products, as they think they are natural. For example, with the establishment of Patanjali in 2006, the sale of other beauty and cosmetic products is reduced.

Barriers to Entry and Exit

The entry and exit barriers include some threats, which the organizations face at the time of entering or exiting the industry. There are different costs, which are connected with the entry to this industry (Baldemir & Kaya 2010). These costs are like; product development, research and development and marketing expenses. Additionally, there are some large scale competitors, who are already well-established in the industry and enjoying the economies of scale. They set a barrier to entry for the small and middle scale organizations (Khraim 2011).

In the Indian cosmetic industry, there are some huge costs of research and development. These costs set a barrier to exit for the players. So, it is very hard for the firms to exit the industry without attaining the costs of their production. The firms use many equipment and machines in manufacturing the cosmetic products, so selling them at the market value is very difficult (Kapoor & Si 2014). Thus, it also makes a barrier to exit. For example, there are so many companies, which are providing now mineral-based creams and foundation; they have a low barrier to enter in the market, as there are a small number of companies, who are manufacturing these types of products.

Current Profitability and Factors Driving Profitability

Currently, cosmetic industry in India is a profitable and well-established in the market.  From overall wellness market in India, beauty care market stands at about 29000 Rs. Crore. This figure and growth is attracting more international brands in India. According to the International Beauty Mart 2014, the cosmetic industry in India is growing two times as rapid as its European and United States peers. The major share of the cosmetic industry in India is covered by Hindustan Unilever Limited. This organization has approx. 30% of the total market share. This sector is showing strong growth, with increasing space in the boutiques, retail stores and departmental stores. Cosmetic industry is providing great assistance in the growth of overall market in India.

As discussed above, there are so many competitors in the cosmetics industry, so they must focus on some critical factors. These factors will help them in measuring their success and profitability (Guthrie, Kim & Jung 2008). If the business does not consider them, then it may face reduction in the revenues and profits. The critical success factors are mentioned below:

Economic Factors

Economic factors are the factors, which primarily impact the purchasing power of customers. If there will be more demand for the products then there will be more profit to the organization. These economic factors include economic growth rate, unemployment rate and interest rate (Freeman 2010). Economic growth can be defined as the rise in the Gross Domestic Product (GDP). These are the important factors, which affect the cosmetic industry. A high interest rate may be too costly and it can disappoint the marketers from applying new strategic plans.

Social Factors

Improving lifestyle of the population is the major factor, which is affecting the cosmetics industry. The customers have become more aware for the usage of the beauty and care products in their routine life (Abraham 2012). These products play a significant role in improving the beauty and physical appearance. Not only women, but men are also utilizing the beauty products including different kinds of perfumes and deodorants. It is increasing the demand of products and in turn, it is enhancing the cosmetic industry in India. Today, the choice of the products varies for the different age group, from teenagers to senior citizens (Verma 2015).

Utilize the quality ingredients

Using a great quality of the ingredients can ensure reliability of the cosmetic products. Generally, the consumers search for the products, which are long lasting. They prefer to use the beauty products, which improve and protect their skin and hair (Guthrie, Kim & Jung 2008). If the customers come to know that there is a lack of quality in the products, then they can switch to other brand. The quality control department is spending much of their time in the laboratories with the developers to ensure the quality of products. It is assisting in increasing the overall profitability of the industry (Warner 2010).

Multi-distribution channels

Now, the beauty care products are available for sale at various locations, like; online stores, retail stores, departmental stores and boutiques (Baldemir & Kaya 2010). The firms use the direct selling mode. By choosing a multi-distribution channel system, the organization can enhance the visibility of their brand. If the goal of company is to provide the inexpensive products, then it should hold the discount chains. Providing the products at comparatively lower costs will increase the customer base and profits of the organization (Alhedhaif, Lele & Kaifi 2016).  

Variety of products 

In today’s world, the customers look for the variety in the products. People have different tones of the skin and personalities, so firms are offering the products with different shades and colors (Parrish 2016). The organization might produce the neutrals, which can be applied in any season of the year. There must be a collection of bright colors, which are appropriate for the summer and spring seasons.

Target Market 

Attracting the target market is very important to increase the profitability and visibility of the brand in market (Sahota, 2014). The players in this industry are considering the strategies to enter into the market, establish their brand and cover the large market share in the industry.

Future Effects of Factors on Industry Profitability

With the expansion of the cosmetic industry in India, there has been arrival of various international brands (Jones, Hill, Comfort & Hillier, 2008). The entry of these brands has been increased by the growth in the demand of quality products. According to the research, earlier the cosmetic industry was just female dominated, but now it has started generating profits from the male segment. The demand for the herbal products will also increase in the future because the people are aware of the benefits of natural products (Abraham 2012). It is forecasted that this demand will be increasing in the Southern region of India, because this area is more persuaded to the home made items. If there will be increase in the unemployment rate, then it shows that the customers have lost their purchasing power. This will primarily impact the expensive products as the people will switch to the cheaper products. If this will happen then the cosmetic business will not be able to make money in India. Interest rate is also an important factor that can affect the cosmetic industry in the future (Raajput 2016). With the decrease in the interest rate, there will be increase in the purchase of the products of higher value on credit. This will set a better environment for the cosmetic industry in India.  

Social trends in the cosmetics industry varies on the continuous basis affecting the likes and preferences of the consumers (Lintner, 2009). The organizations in the industry must be aware of these trends and make changes in their advertising strategies. By providing the sales discount on the products, the players can boost the sales and profitability. The firms are forecasted to enhance their operating margin in the near future. There are two key drivers of growth in the operating margin, such as; aspiration of the consumer to get high quality and efficiency in the operations. Thus, the increase or decrease in these factors will affect the profitability of the industry.

Conclusion

Hereby, the above discussion concludes that Indian cosmetic industry is a billion dollar industry now. The impact of Porter’s five forces on the industry has been analyzed in detail. With the realization of the self-presentation in the people, this industry has grown over the past few years. Now this industry has a huge number of manufacturers. Economic factors have an important role in developing industry in India. Firms should implement cost leadership strategy, research and development and effective promotional strategies. These strategies will assist them in capturing larger market share, increase customer base and attain profitability in long run.

References

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