strategy for internationalization and distribution : a ......2008 annual meeting of the academy of...

2008 Annual Meeting of the Academy of Management Anaheim, California, August 8-13, 2008 12392

Strategy for Internationalization and Distribution : A Brazilian Case - Natura

Author: Silvia Novaes Zilber; Universidade Nove de Julho Author: Carlos Henrique Mora Junior; Universidade Nove de Julho Author: Francisco Lourenço da Silva; Universidade Nove de Julho Abstract The purpose of this work is to describe the process of internationalization of a Brazilian

company whose products are based on the biodiversity of Brazilian flora, looking at the different

options of distribution channels for operating in the external market. A thorough review of the

theory behind the internationalization of companies has been conducted, with a focus on the

factors that determine such a strategy, the methods used to gain entrance into the foreign market,

the main features of this process, including the classic schools of internationalization, and,

finally, the process through which international distribution channels are established. The

company which is the object in this study is Natura Cosméticos, a company whose strategy for

distinction has been the use of active ingredients taken from Brazilian flora, thus exploiting

biodiversity. What we have seen is that the features of the process of internationalization of this

company are very similar to the model proposed by the School of Uppsala, at some moments

bringing some features of other theories, on a smaller scale. Another fact we were able to confirm

is that the company kept the same distribution strategy (direct sales) in market with similar

cultures, like other countries in Latin America, but in relation to their operations in the European

market (Paris) the company preferred to have a retail point of sale, through a shop of their own.

This adaptation in the light of cultural differences in the new market is leading the company to

learn new organizational competences.

Key words: Internationalization; Distribution Channels; Biodiversity

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INTRODUCTION

The opening of the market and the general economy in the most important countries

around the world, together with the advancement of technology, establish a new competitive

scenario for companies. Indeed, the borders between countries and different cultures are no

longer an impediment for the possibility of a customer having his or her needs met by a specific

product or service, even if this has been thought up by a company situated on the other side of the

world. Business has become global, and, in turn, companies, pressured by the effects of

globalization and by the increase in international competitiveness, have needed to rethink their

strategic directions.

Dawar and Frost (1999) suggest four possible positions that can be taken up by these

companies: 1 – steer clear, focusing on the local market, either selling the company or taking part

in a joint venture, 2 – defend itself by strengthening its current advantages and focusing on niches

that have not as yet been exploited by multinationals, 3 – tackle it, by developing skills to

compete with multinationals on the domestic market; or 4 – extend, expanding their activities by

moving into the external market using the competencies that have been developed in their

country of origin. For most companies from emerging markets, the stance of “extension” is

considered as somewhat belated, when compared with the mature international movement of

companies in developed countries (BARTLETT; GOSHAL, 2000; SIM; PANDIAN, 2003;

TSANG, 1999). On the other hand, these companies have the opportunity of starting their

competition within the international market, already having the learning acquired by their

competitors in developing countries who were the pioneers in this type of initiative (URBAN,

2006).

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Most investments coming from emerging countries originate in South and Southeast Asia,

but Latin America is not far behind in this process, with Argentina, Brazil, Chile and Mexico

being worthy of special mention, these being countries that have been making significant

contributions with flows of direct investments abroad, especially over the last decade

(BARBOSA, 2004).

In this context, Brazil was, for a long time, a closed market with protectionist policies in

relation to national companies, and is now considered an emerging economy, with some of its

companies gradually entering the markets where other companies have already established

themselves. In this context, these few Brazilian companies which are now already active in this

international market may be considered as late entrants.

The process of internationalization is a challenge for Brazilian companies due to the fact

that they lag behind in terms of technology and know little about international markets. Apart

from the natural challenges that a company has to face within this process, Brazilian

organizations also need to build a positive image of their products abroad. The cosmetics

business, largely dominated by British, French and American brands, is extremely competitive,

and one of the main challenges in this market is to develop a distinguishing factor that would lead

Brazilian companies of this segment to having a sustainable competitive edge. In this regard, the

biodiversity of Brazilian flora can be seen as a distinguishing factor, as it allows the development

of cosmetics that make use of unique active ingredients, extracted from such biodiversity.

However, on the international market, apart from having a distinctive product based on

biodiversity, the distribution strategy is another key factor for the success of these products. With

the stepping up of international business and also the scattering of productive and commercial

hubs among different countries, there is a proportional increase in the importance of the efficient

flow of raw materials and finished products between different locations in Latin America

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(SCHNEIDER, 2002). In this regard, it becomes vital for companies to define a correct

commercialization and distribution strategy for their products.

In order to make a contribution to the furthering of knowledge about the

internationalization of Brazilian companies, the main purpose of this work is to:

describe the process of internationalization of a Brazilian company and the distribution

channels chosen for operation on the foreign market.

BACKGROUND

THE INTERNATIONALIZATION PROCESS

Internationalization is a process by which a company gets involved with countries other

than their home market. This process may occur in either of two ways: 1 – Inwards, through

imports, production licenses, franchise contracts or technology, or 2 – Outwards, through exports,

concession of production licenses, concession of franchises, technology or direct investment

licenses abroad (BARRETTO; ROCHA, 2003).

In the same way, Hill (2000) defines international strategy as being the sale of products in

markets outside the company’s home market, with the purpose of opening up new potential

opportunities.

The international strategy of a company may be set at either corporate or business unit

level (HITT et al. 2002). At the corporate level, the strategy may be multidomestic, global or

transnational, while at the business unit level, the strategy follows the generic guidelines set by

Porter (1989): cost leadership, distinction or focus.

According to the definition made by Goshal (1987), in the multidomestic strategy the

company seeks to adapt their products to meet the needs of customers in each country, requiring

the decisions to be decentralized in each business unit that operates in these countries. On the

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other hand, this author also points out that in the global strategy the company uses products that

are standardized to compete on the world stage, and the establishment of the competitive strategy

is made by, and controlled by, the company headquarters. Yip (1989) establishes the difference

between the two strategies, by saying that in the multidomestic strategy the company seeks to

maximize world performance through maximization of advantages, turnover and local profits. In

contrast, the author points out that in the global strategy the company seeks to enhance world

performance through sharing and integration of resources.

Bartlett and Goshal (1987) also define the concept of transnational strategy. In this

strategy, the company seeks both global efficiency and local flexibility. According to the authors,

a “flexible coordination”, obtained through the construction of a shared viewpoint and an

integrated network, is necessary so that the transnational strategy may be taken up. According to

Hitt et al. (2002), this strategy is a combination of the multidomestic and the global strategy.

We can find two distinct study lines about internationalization: 1 – the “economic

approach” where the process of internationalization is analyzed rationally, based on economic

aspects and allocation of resources, and 2 – “Behavioral Approach” which appraises the

subjective factors of the decision-making process within the process of internationalization, this

being a gradual sequence of adaptations of factors within the company and its atmosphere

(BARRETO; ROCHA, 2003).

In the economic approach, we must mention the eclectic paradigm defined by Dunning

(1988), by which the internationalization process would be determined by three types of

advantages: 1 – Advantages of ownership, such as technology, products, skills and

entrepreneurial flair; 2 – Location advantages of the country of origin or destination; and 3 –

Internalization advantages. This model is also known by the initials OLI, from Ownership,

Location and Internalization.

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Another classic view of the economic area with regard to internationalization, according

to Lorga (2002), is backed up by the concept of market and product imperfections, which means

that doing business abroad is more costly and riskier than on the domestic market. This means

that the company would only be successful if they exploited the comparative advantages in

relation to market imperfections, making the most of this opportunity to exploit the advantages of

other countries.

The concepts of the so-called Comparative Advantages have resulted in the “Product Life

Cycle Theory”, a concept created by Vernon (1966), who considers the aspect of direct

investments based on the life cycle of a product, which, according to the author, consists of three

phases: the introduction of the new product, its maturation and then its standardization. From this

viewpoint, when a company has already exploited all the opportunities with regard to one product

in the market of origin, the company seeks to exploit, with this same product, advantages in

external markets that are lagging further behind than the market of origin, thus exporting their

obsolete technology to other countries, thus starting a new life cycle for the same product, in

another market.

Within the behavioral approach, we have the School of Uppsala (classic in the studies on

company internationalization), which has been widely known, especially after the publication of

the work by Johanson and Vahlne (1977). This model is based on the learning process,

considering some prerequisites such as: the lack of knowledge is the main obstacle for the

internationalization process; the knowledge acquired through experience is the most important

process within internationalization; the investment in the internationalization process takes place

gradually. The model is based on the idea that the company invests more funds on the

international market as they acquire more knowledge of the market, thereby reducing the

perception of risk. This model uses the concept of psychological distance, this being defined as

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differences in culture, language, Government structure and other variables, which affect the

communication of the company with the market and with its customers. As a rule, the

internationalization of companies starts in locations similar to those of currently existing

operations, with less psychic distance (HEMAIS; HILAL, 2002). The School of Uppsala also

has limitations, with an incremental linear vision, schematic and determinist; it does not consider

the possibility of skipping steps; it does not consider that the sequence and the speed of the

internationalization process may be determined by different types of environments or industries;

it does not consider that experience acquired may increase the speed of new internationalizations;

and also does not consider the possibility of the company deciding to abandon the

internationalization process.

One improvement on the School of Uppsala is the Theory of Networks (BJÖRKMAN;

FORSGREN, 2000) or relationship networks, that emphasizes that the process of

internationalization may arise from intraorganizational relationships among the company

subsidiaries, and interorganizational relationships between subsidiaries and external actors

(suppliers, customers and competitors). In this theory, the headquarters’ perception is not the only

factor that shall explain the greater or lesser commitment of the international operation.

Determining Factors for the Process of Internationalization

As from the opening of the Brazilian market, which became stronger in the nineties, the

companies identified the need to become competitive at a world level. This competitiveness is a

matter of survival, as without it the internal markets, which until then had been protected, could

be absorbed by international competitors. However, by becoming more competitive, these

companies could try to compete in new markets abroad (ALEM; CAVALCANTI, 2005).

Another determining factor in the internationalization process is the strategy taken up by

the company for their research and development (R&D) activities. Alem and Cavalcanti (2005)

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stress that, based on operation in several countries, the company acquires access to new

technologies, which until then had been impossible with only local operation, and in addition the

greater scale of production allows the company to reduce their costs of technological prospection.

Vernon (1996) points out that companies that seek international diversification should

prolong the life cycle of their products through their commercialization on the external market, in

principle, based on their domestic production, and with a rise in demand with the direct foreign

investment in production capacity.

Considering both traditional and new factors for expansion to international markets, Hitt

et al. (2002) summarizes that firms can obtain four main benefits as a result of international

diversification: 1 – Greater market size (saturation of local market or the reduction of risks of

being active only on the domestic market), 2 – Greater return on large capital investments or

investment in new products and processes (new products become obsolete more quickly, which

means that the investments must be returned in swifter fashion), 3 – Larger economies of scale,

scope or learning (standardization of products and similar production plants), and 4 –

Competitive edge through location (access to cheaper labor, essential resources or customers).

In a study conducted with companies from Taiwan and Singapore, Sim and Pandian

(2003) noticed that the reasons that have led companies to internationalizing were: lower labor

costs, joint ventures with suppliers to ensure supplies of raw materials, acquisitions or joint

ventures to have access to technology, and expansion of the market with a view to accessing to

Nafta or Europe. In addition, companies targeted certain countries due to the costs and

advantages offered by them, such as facilities in logistics, publicity and regional relationships.

In studies conducted by Garcia (2005), on the cosmetics industry, the author identified

that “the technical and productive capacities are what really establishes the participation of actors

on the international market”. In this regard, Urban (2006) says that the competencies of the

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companies may be a determining factor for the process of internationalization. This process may

be boosted by the dynamic capacity for learning and unlearning, shown by the company.

Dunning (2002) shows new reasons for direct investments of companies abroad,

especially as from the 1990s when there was an explosion of the globalization phenomenon.

These reasons include: the growth of schemes of regional integration, this being a result of the

maturation of the regional economic blocs like Nafta and the European Union, a greater quantity

of policies for the attraction of direct investments by foreign companies, made possible by greater

understanding, on the part of governors, with regard to the importance of multinational

companies in attraction of foreign capital, creation of jobs and the publicizing and absorption of

technological innovations; and, increase in strategic alliances between companies.

A survey conducted by the Dom Cabral Foundation (FDC) in 2002, involving 109

companies out of the universe of the 1,000 largest national companies, has shown that the main

reasons that have led large Brazilian companies to internationalizing were (in order of

importance): search for economy of scale (especially for intermediate products and also

producers of end products), development of competencies for activity on international markets

(this being more necessary, the smaller the company), exploitation of the advantages of being

based in Brazil, and the saturation of the Brazilian market.

Alem and Cavalcanti (2005) summarize by saying that internationalization makes it

possible for the companies to expand their markets, obtain gain in scale, boost their

specialization, gain new knowledge, and strengthen their financial base, by enabling new

investments and technological developments.

Forms of Entry into the International Market

According to Buckley and Casson (1998), location costs, internationalization factors,

financial variables, cultural issues, such as those of trust of psychic distance, market structure and

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competitive strategy, adaptation costs (for adapting to the local environment), and the costs

involved in clinching international business were all identified, by the relevant literature, as

factors that have a bearing on decisions about whether to enter international markets.

Based on the analysis of the interaction between these variables, Buckley and Casson

(1998) defined a model that described 12 different alternatives for entering into international

markets: 1 – Direct international investment (own means of production and distribution); 2 –

Direct international investment in means of production, 3 – Subcontracting, 4 – Direct

international investment in means of distribution, 5 – Exports (for independent distributors), 6 –

Licensing (transfer of technology to an independent company), 7 – Integrated joint venture

(production and distribution), 8 – Joint venture in production (outsourcing distribution), 9 – Joint

venture in distribution (outsourcing production), 10 – Joint venture for exports (production on the

domestic market and then distribution through the joint venture), 11 – Combination of direct

international investment with a joint venture in distribution, 12 – Combination of direct

international investment with a joint venture in production.

The definition of the method of entering international market relies on a number of factors

(KIM; HWANG, 1992). Normally, the entrance on the external market takes place through

exports, as this does not require any experience of overseas production, but rather just

investments in media for commercialization and distribution of their products. However, export

activities involve high logistics costs and import duties, not to mention the fact that the control on

commercialization and distribution is limited, which could restrict the competitiveness of the

product on this market. Apart from exports, licensing and strategic alliances are “better choices

for the first tactics for market development” (HITT et al. 2002). For a stronger irruption into the

international market, acquisitions of greenfield ventures (a new fully-owned subsidiary), could be

more appropriate, but will require significant financial disbursement.

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Andersen (1993) mentions that there are some stages within the process of company

internationalization: 1st – Expansion of company markets through exports on a casual, rather

than a constant basis, which can be seen as an embryonic form of internationalization, 2nd – This

stage has the feature of the significant expansion in exports, mainly through the hiring of

representatives in destination countries, 3rd – Setting up of a subsidiary abroad, with the role of

generating activities of commercialization and distribution logistics, even when this activity is

carried out by third parties, 4th – In this stage, the company sets up production units abroad,

whether connected or not to the establishment of an R&D center.

In a survey conducted by the Dom Cabral Foundation (FDC) in 2002, with 109 companies

out of the universe of the 1,000 largest national companies, 69% of respondents said that they

used direct exports as a way of gaining admittance to the international market. In sequence, the

means of entry with the greatest number of cases were: exports through third parties, own

commercialization offices, strategic alliances with foreign companies, and the setting up of their

own subsidiaries or production units. In this study, we draw your attention to the growth of

strategic alliances that received 25% of answers with a tendency to grow to 47% in the forecast

for future internationalization strategies.

The Internationalization of Brazilian Companies

After the privatizations that occurred on the market in the nineties, one of the issues that has been

most discussed is obviously the internationalization issue of Brazilian companies as a form of

survival in a globalized market. The main reasons recorded for internationalization at Brazilian

companies, according to the studies of the FDC (2002) are: search for economy of scale,

development of competencies for acting in international markets; exploitation of advantages of

location; and saturation of the Brazilian market. These very same reasons were mentioned by

Cyrino and Pinedo (2007), but as benefits of internationalization.

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The FDC survey (2002) also confirmed that, for some Brazilian companies, especially

intermediary producers and larger organizations, the domestic market has started to show signs of

saturation and, therefore, the international markets appear as new opportunities for growth.

For Ricupero and Barreto (2007), there are no determining factors for internationalization

that are specific for the case of Brazil, these authors being based on the definitions made by

UNCTAD, that affirms that the determining factors for the internationalization process are

similar for any company, whatever the country of origin, these companies normally seeking:

resources, markets and technology. These are the same reasons that make companies from

developed countries decide to internationalize.

There is inflamed discourse both for and against the internationalization of Brazilian

companies. Alem and Cavalcanti (2005) list the main points raised by people who are against the

process of internationalization; according to these authors, they say that there is a risk of

exporting jobs, losses in the balance of payments with money leaving the country; and reduction

of the level of domestic investment. At the same time, people who are in favor of

internationalization of Brazilian companies say that this view is static, and say that the

importance of internationalization lies in the survival of national companies within a globalized

market, as also the creation of new competencies for Brazil.

Distribution Channels

The distribution channel is the path taken by the merchandise, from the producer up to the

distributor and final customers. The definition of the distribution channel is an essential task for

the success of the exportation process and the commercialization on the international market

(VENTORINI, 2004). For Stern (1996), the distribution channels are “a set of interdependent

organizations involved in the process of making the product or service available for consumption

or use”.

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According to Bradley (1995), the management of international distribution channels

involves the different means that exist for the transfer of products and services from a producer in

one country to the customer in another. The author stresses that the same distribution channels

used in the domestic market may not be considered when the purpose is to distribute

internationally, due to complexity of the factors involved in international activities. The

choice of a distribution channel shall have a direct influence on the costs for the company and, as

a result, on the final price of the product, and in addition “plays a key role in encouraging

demand, through promotional activities by wholesalers, retailers and representatives”

(MACHADO and LIBONI, 2004).

For Stern (1996), the distribution channel should be aligned with the product/market

strategy taken up by the organization, or, in other words, the distribution system may only be

appropriately designed is the company has already defined, with clarity, the product and the

target public concerned.

According to Ventorini (2004), the most significant factors within the process of choosing

the best distribution channel are: nature of the product (size, weight etc), market features

(location, buying habits, purchasing power and the like), qualification of intermediary agents, and

advantages and disadvantages of negotiating directly with final consumers, without

middlepersons.

Machado and Liboni (2004) point out that the distribution may be exclusive, intensive or

selective. In exclusive distribution, the go-between may not work with competing brands. This

strategy is applied when the producer wishes to uphold the prestige of the product and hopes to

control policies of pricing, maintenance and exposure of the products. In the case of intensive

distribution, the focus is on the maximization of sale volume, thereby ensuring greater market

coverage, spatial convenience and spreading of risk. Finally, selective distribution seeks to

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preserve the image of the product while offering better service to the consumer through the

choice of a limited number of intermediaries.

There are several different types of channels and agents that help with the distribution of

the product and its placing on different international markets (FORNER, 1999):

a) Trading companies: purchase, sale, industrialization and financing or operations, operating

in larger businesses;

b) Commercial exporters: purchase, sale and intermediation of merchandise, meeting the needs

of small- to medium-sized companies;

c) Export Consortium: the union of small- and medium-sized companies to reach a certain

external market, with a view to bringing down costs and boosting supply capacity;

d) Sales Representatives abroad: these are the main link between company and market, with

solid knowledge of products and influence on demand, purchasing and consumer habits;

e) Importer-distributor: they act independently, in import and distribution, working with large

volumes;

f) Dealers: companies, or even individuals, who deal with volumes somewhat below those of

the distributor, with little financial and administrative support to import directly from the

manufacturer.

One option for the commercialization and distribution of products is direct sale. Coughlan

(2002) defines direct sale as the “sale of a product or service to the consumer, face to face, away

from a fixed retail location”. For the Brazilian Association of Direct Sale Companies, ABEVD

(2007), direct sales is “a distinctive system for the commercialization of goods and services,

away from a fixed commercial establishment [...] present throughout the world and involving a

range of sectors of the economy – from cleaning products to cars”.

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METHODOLOGY

Seeking to make a contribution towards the advancement of the process of company

internationalization, the object of this work is to describe the process of internationalization of a

Brazilian company and the chosen distribution channel for operations on the foreign market. To

meet this general goal, as our unit of analysis we chose the company Natura Cosméticos. The

method used for the research is the qualitative method, with descriptive character through a single

case study.

Eisenhardt (1989) says that the cases could be chosen to reproduce studies of previous

cases or to expand emerging theories, or they can be chosen to illustrate categories of theories,

and give examples for polarized or extreme types. For the research issue for this study, Natura

Cosméticos can be considered an example of the extreme type, as in their strategy for

internationalization they decided to enter a market with significant psychic distance (HEMAIS

and HILAL, 2002) and with a distribution channel which is totally different from that of direct

sales, which had brought success on the domestic market in a period spanning more than 30

years. As this study shall analyze the alignment between distribution channel and strategy for

internationalization, the choice of this case is both appropriate and coherent.

Case studies are preferred when the focus of the survey is concerned with issues about

“why” and “how” rather than the measurement of the facts, in cases when the researcher has little

understanding about the phenomenon studied, and when the research is focused on contemporary

phenomena, in existing contexts (YIN, 2001). According to Yin (2005, p. 62-63), the logical

grounding for the choice of a single case involves the revealing case – when the researcher has

the opportunity of observing and analyzing a phenomenon that had previously been inaccessible

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for scientific investigation. Among the five fundamental pillars that would justify the use of a

single case, we can also find that of the decisive case, which is used for confirming, contesting or

expanding the theory. Yin (2005) says that this type of study may help to redirect future

investigations within an area. The case of the internationalization of Natura brings together the

two logical foundations shown by Yin (2005), being the only Brazilian company that has resorted

to different distribution channels for internationalization in countries with different national

cultures.

Instruments for Collection and Investigation

The collection of data was made with secondary sources, mostly through the research of

documentation in articles from specialized magazines, Natura case studies, academic articles that

have analyzed the strategies for the internationalization of Natura and shown in several websites,

the most relevant being the site of Natura Cosméticos, of associations of the cosmetics segment,

personal care and perfume articles, as well as the site of the Brazilian Direct Sales Association.

For the analysis of the data, we have used a strategy of analysis of the content of the

different sources of data as mentioned above, seeking to answer the questions of the research and

compare the results with the variables identified in the theoretical reference. The results obtained

from each source of data were grouped into categories, according to the target variables of this

study. These variables are summarized and described below, within the theoretical research

model.

Theoretical Research Model

This model showed in figure 1 below shows that it is based on the competitive strategy of

a company that the need and reasons to expand their actions to international markets arises.

These reasons, also called the determining factors of the process of internationalization, shall

have a bearing on the type of internationalization strategy to be taken up by the company. Within

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the context of the internationalization strategy lie the strategy or mechanism of entering foreign

markets and the distribution channel used for this market. As an intervening factor, this survey

shall be looking at the influence that the type of market has on the strategies of

internationalization and, as a result, on the entry mechanisms and distribution channels. Finally,

the evolution, maturation and success of the international strategy may redirect and have a

bearing on the corporate strategy of the Brazilian company. Figure 1 shows the Theoretical

Research Model:

------------------------------------------ Insert Figure 1 about here

-------------------------------------------

THE NATURA CASE AND THE PROCESS OF INTERNATIONALIZATION

The Cosmetics Market

One difficulty that is often found in studies about the cosmetics industry is its definition

and limitation (GARCIA, 2005). The cosmetics industry originated from the development of

knowledge in the area of biochemistry. The main international companies in this segment are

large transnational organizations, which are normally present in several sectors within the

industry (cosmetics, perfume and personal care products). These companies have important ties

with chemical and pharmaceutical activities, providing great economy of scale and scope, arising

from the closeness between such activities (ALMEIDA, 2006). This segment follows seasonal

trends of fashions and customs and invests heavily in the launch and promotion of new products

and also in the renewal of the most distinctive characteristics of their formulae.

The developed countries dominate the world market for cosmetics, perfume and personal

care products, a market that in 2000 had a turnover of around US$195 billion, with Western

Europe, the United States and Japan accounting for some 75% of this value (GARCIA and

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FURTADO, 2002). The developed countries, more specifically France, the United States,

England and Germany, accounted for just over half the worldwide consumption of such products

(GARCIA, 2005). Brazil was in sixth position among the main international consumer markets,

with a turnover of US$8.5 billion, which is just over 4% of the world market, which participation

is much higher than those of the markets of so many other products (which lie between 1% and

2%). This importance can be confirmed by the presence of large multinationals of this segment,

which have production and commercial activities in Brazil.

On looking at the features of the standard of international trade in the cosmetics industry,

Garcia (2005) identified that one pre-requisite for the establishment of production units abroad is

the internationalization of commercial assets, as the companies, to start with, seek to establish

their brands and commercialization channels in foreign markets. After this step, and only in

countries with significant domestic markets, companies shall set up production units for

cosmetics.

Among these channels of commercialization and distribution, direct sales are worthy of

mention. According to the Brazilian Association of Direct Sales Companies (ABVD), in Garcia

and Furtado (2002), the importance of direct sales in the cosmetics segment may be measured by

its participation in the total turnover of the cosmetics industry in the United States, some 10%

and that generated a total income of US$23 billion in 1999. One of the features of these

operations in the United States is that these are products aimed at the poorer segments of the

population, for whom the appeal of direct sales (through “consulting ladies”) has shown highly

significant effects. In contrast to the case of the United States, in Brazil this channel is not

necessarily linked to the consumption of more downscale products (GARCIA, 2005).

According to ABIHPEC / Sipatesp in the Household & Cosméticos magazine (2007), the

Brazilian industry of personal care products, perfume and cosmetics showed an annual growth,

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disregarding inflation, of 8.2% over the last 5 years, having risen from a turnover (net of sales

taxes) of R$6.6 billion in 1999 to R$13.1 billion in 2004. In Brazil, there are in all 1,258

organizations operating in this market, of which 16 organizations are large companies, which

account for 72.4% of the total turnover of this segment. Personal care products and cosmetics are

distributed through three basic commercialization methods: 1 – Traditional distribution, including

wholesale and retail shops (ranging from kiosks in shopping centers up to department stores and

hypermarkets); 2 – Direct sales, and 3 – Franchises, specialized and personalized shops

(ALMEIDA, 2006). According to Garcia (2005), the companies with a highly diversified product

range prefer the distribution and commercialization through supermarkets and hypermarkets,

while companies whose portfolio is more concentrated on the perfume and cosmetics segment

prefer to make their distribution through specialized shops or, alternatively, through direct door-

to-door sales.

According to data from the Brazilian Association of Direct Sales Companies (ABVD), in

Gomes (2006), Brazil is in the 4th place in the world direct sales league, only behind the United

States, Japan and Mexico (who lead the ranking, in this order). In Brazil, perfumes, cosmetics

and personal care products represent about 90% of the total direct sales in the Country.

According to Ferreira (2000 apud ALMEIDA, 2006), most direct salespeople are

independent businesspeople (mostly women) who accept the responsibility with the risks behind

the business, seeking to top up their family incomes, seeing this business activity as an alternative

to traditional work. Direct sales take to the consumers the benefits of convenience and specialized

service, with demonstrations and detailed explanations about the products, and home delivery.

The Company, Natura Cosméticos S.A.

Natura, a fully national company, completed 38 years of business activity in 2007, and

enjoys the position of market leader within the Brazilian market for cosmetics and personal care

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products. Natura is also the largest cosmetics company in South America, with a gross

consolidated turnover of R$3.9 billion, with a market share of 22.8% in the target Brazilian

market in 2006 (NATURA, 2007b).

Natura was born from a small shop and a laboratory which were opened in 1969, on Oscar

Freire Street in São Paulo. As from 1974, the company decided to operate using the system of

direct sales, supported by the work of independent salespeople known as “Natura Consultants”,

which were a solid base for the expansion of their business (ALMEIDA, 2006). As from the

eighties, the company showed steady growth based on regional expansion as well as the

diversification of their product range. In the nineties, the company takes on a public commitment

with social and environmental responsibility, while also starting international expansion. As from

the year 2000, Natura has taken up policies of the sustainable usage of Brazilian biodiversity and,

in line with this philosophy, has launched the Ekos line of products. In 2004, the company

becomes listed on the São Paulo Stock Exchange, the BOVESPA (public offering NATU3)

(NATURA, 2007c).

The success of the company in recent years has been put down to the presence of a door-

to-door sales team, well trained and highly motivated, that sells cosmetics and also special high-

margin personal care products to the middle and high social classes in Brazil (this being a

customer base that is not at all usual in the direct sales segment) (MINTZBERG et al., 2006).

Toledo et al (2005) showed that, right from the start of the organization, the consultant

ladies have been the strong point of the company, the very heart of the organization. The

community of Natura consulting ladies has grown significantly, and in 2006 reached the figure of

617 thousand consultants, including their operations in Argentina, Brazil, Chile and Peru

(NATURA, 2007b). An important indicator of consultant satisfaction has been the low level of

staff turnover, which in 2002 came to about 6%. Toledo et al. (2005) also point out that the

20


Natura consultants play a key role in the collection of information from the customers. The

consultants perform countless procedures and use techniques to make communication closer and

to get to know the customer’s specific requirements.

Natura’s major market players are the main producers of cosmetics in Brazil and the

world. Considering that Natura sells their products through direct sales, their main competitor is

Avon, which operates on a large scale in Brazil and in Latin America as a whole. The other main

direct competitors are: O Boticário, Beiersdorf AG (producer of the Nivea brand, among others),

L’Oréal, Unilever, Monange, Colgate-Palmolive and Johnson & Johnson (ALMEIDA, 2006).

Like the other main players of the segment, Natura needs to invest in R&D to remain

competitive on the market. In 2006 alone, the company invested R$87.8 million on innovations

and launched 225 new products (NATURA, 2007b).

The Process of Internationalization of Natura Cosméticos S.A.

The process of internationalization of Natura started in 1983, in Chile. At the start, the

company had great difficulties through the lack of a business model that could be taken up

internationally (Gomes, 2006). The initiative came from some former Natura managers who

started to distribute the products, importing them from Brazil (MINTZBERG et al., 2006).

To get around the problems found in the first attempt at internationalization, Natura

sought a redefinition of their organizational processes and would only invest in a new attempt in

1992 and 1993, with operations in Argentina and Peru, respectively, reproducing the Brazilian

commercial model through direct sales. Even though the surveys show that direct sales were

highly promising in the region, the lack of integration between the cultures of these countries and

the values and culture of Natura made the operation difficult (GOMES, 2006). Several mistakes

jeopardized the success of this second initiative: 1 – a former manager of Avon was hired to lead

the office in Argentina, without having had any prior knowledge of Natura, 2 – the focus of the

21


company was still on the Brazilian market which was going through a period of significant

growth; and 3 – the sales structure copied from Brazil had not been correctly implemented

(MINTZBERG et al., 2006).

After three decades, Natura decided to undergo a profound reorganization to grow in the

national and the international market. Since 1999, the company’s strategy has been to send

employees from Brazil with the mission of transmitting the business model and the institutional

vision for international operations and integrate them into the local culture, which has proved to

be more efficient and productive (GOMES, 2006).

Right from the start of its internationalization, Natura has used the strategy of making

own investments to enter other countries. Based on the results of their surveys, Gomes (2006) has

noticed that Natura has preferred to run the risk of entering the international markets alone

without the help of a strategic partner, rather than share strategic decisions, preparation of

products and all the research developed, to make sustainable use of Brazilian biodiversity. Natura

does not rule out the possibility of making an international purchase, but strategic alliances are

out of the question, at least in the short to medium term.

On the other hand, Garcia (2005) suggests that the difficulties found by Natura on the

international market arise from the lack of significant commercial assets in the external markets

they tried to enter. These assets could be made feasible through partnership collaboration with

local companies or through a merger or an acquisition, which would permit the use of the brand

and the commercialization channels that have already been established.

Mazzola (2005) says that the results obtained by Natura in the markets in neighboring

countries may be considered as insignificant, as these account for less than 3% of total business

volume. According to the author, these poor results are due to the excessive use of Brazilian

expatriates instead of making use of local skill, and also to the poor credibility of Brazilians with

22


local customers, not to mention the direct sales system which came up against a situation of

market saturation, as the possible consulting ladies who could sell Natura products are already

selling products from competitors such as Avon. The author makes a point of stressing that “the

Latin American experience, despite the poor results, has proved to be an important learning

process”.

Gomes (2006), in his studies, has shown that Natura researched the European market and

discovered that some countries value the issue of sustainable usage of natural resources, and

similarly add value to companies with social and environmental responsibility; however, for

cultural reasons, the possibility of direct sales did not please the consumers who were surveyed.

The main doubt shown by European consumers was about the tradition of Brazil in the

cosmetics area and also about the ability of a Brazilian company to ensure the compliance with

commitments. The Ekos line of products, chosen for entry into the European market, was seen as

a product of high added value, with a high price position, meaning that the option should be made

for selective distribution in large stores (grands magasins) or boutiques (NATURA, 2007a).

In 2005, Natura decided to open a shop in Paris, which proved to be the European city

with greatest identification with the products of the company, Brazilian biodiversity and the

philosophy of sustainable development. Being one of the most competitive markets in the world,

this would be an excellent test for the company to look into the possibility of expansion to other

locations in Europe (GOMES, 2006). The idea behind the shop, that was given the name of Casa

Natura, is to promote Brazilian culture, as well as commercializing the products of the Ekos line

(derived from raw materials using Brazilian biodiversity). While the customer gets to know the

Natura products, he or she may also savor Brazilian coffee and fruit juices, as well as delving into

Brazilian magazines, books and music.

23


The main aim of the entrance into the French market is different from that of Latin

America: “more than just selling products and increasing turnover, the intention here is to

strengthen the brand and make it better known among some of the most demanding communities

of the world” (SPOTORNO, 2006). In addition, the idea is to make Natura stand out from the

stereotyped standard of beauty and take the concept of biodiversity and sustainable development

(D’AMBROSIO, 2005). Another aim behind the Paris launch is to gauge if the personalized

shops shall be the correct model for making the expansion of the brand in Europe, as the option

to sell the products through retailers has been ruled out by the company.

One year after its arrival in France, Natura believes that the countries of Eastern Europe

would be receptive to direct sales, while the shop format is better for Western Europe. The

company is actually looking into the possibility of opening a second shop in Paris (GOMES,

2006).

At the end of 2005, as a continuation of their internationalization process, Natura started

their operations in Mexico, where the company is now considering opening a shop like the one in

Paris. According to Gomes (2006), “this enables one to draw the conclusion that, in Mexico, the

model of direct sales is not being so successful”. The main goal with the opening of the shop in

Mexico is that of having a space for the presentation of the values and beliefs of Natura for the

saleswomen and also the end consumer. The plans for the Mexican market are ambitious because

the country is the second largest cosmetics market in Latin America (after Brazil) and the third

largest world market for direct sales (after the United States and Japan). Natura is currently

developing some specific products for this market, as Mexican consumers like stronger, sweeter

and fruitier fragrances, different from consumers in Latin American countries of warmer

climates, like Brazil, where the preference is for milder and more floral fragrances (GOMES,

2006). These adaptations are being made by the company, as they believe that the company needs

24


to adapt to the culture of the country where they are starting business operations, to ensure the

loyalty of the consumers.

In 2006, Natura started testing the model of direct sales in Paris, where they have also

opened their first research laboratory outside Brazil (NATURA, 2007b). The next international

step taken by Natura in 2007 is the start of operations in Venezuela and Colombia. The aim here

is to consolidate the position of the company in countries that consume 80% of all cosmetics,

perfumes and personal care products in Latin America. In Brazil, the brand has already achieved

a market share of more than 20%, but in Latin America as a whole this market share is only 0.3%

(SPOTORNO, 2006). The company has already announced its intention to enter into the United

States and Russia in 2008 (NATURA, 2007b), while seeking, that same year, to break even for

the first time in their operations under consolidation (Argentina, Chile and Peru).

Spotorno (2006) points out that the production line of the company is still fully

concentrated in Brazil, at the company plant in Cajamar, State of São Paulo. To reach the

countries where Natura is present, the products are exported from Brazil to the other operating

units.

ANALYSIS OF THE PROCESS OF INTERNATIONALIZATION OF NATURA

In this section, we shall be analyzing the process of internationalization of Natura in the

light of the theoretical reference and focusing on the research issues of this study.

The reasons that led Natura to being active on the international market were different

when considering the Latin American and the French markets. In Latin America, the intention

was to expand their market of activity, by reaching countries that jointly account for more than

80% of the consumption of cosmetics and personal care products of the region. As shown by

Garcia (2005) and Urban (2006), Natura took advantage of their competences and technical and

25


productive capacities, highly developed and consolidated on the domestic market, to gain new

markets in neighboring countries.

On the other hand, in France, the reason for internationalization was that of strengthening

the Natura brand, by exposing the brand to one of the world’s most demanding consumer groups.

To carry out this test, the company decided to offer the products of the Ekos line, which bring an

innovative philosophy of sustainable use of Brazilian biodiversity. Finally, the company sought

to appraise a distribution channel other than direct sales that could be copied for future expansion

within the European market. These reasons confirm the findings of the FDC survey (2002) that

gave “the development of competences to act in international markets” as the 2nd most common

reason for internationalization given by Brazilian companies.

The internationalization strategy used by Natura, according to the definitions of Goshal

(1987) and Yip (1989), is the multidomestic approach, given that the company has not yet

clinched a significant share in the main world markets, and the supply of their products is being

personalized according to the regional characteristics of each market. As an example, this work

mentioned the case of products specifically made for the Mexican market, with stronger, sweeter

and fruitier fragrances. Another aspect that confirms the multidomestic strategy consists of the

marketing decisions, which are independent for each country, as mentioned herein, like the

personalization of the whole shop for the launch of the brand in Paris.

Analyzing the strategy chosen by Natura based on the behavioral approach of the classic

school of Uppsala, we see the application of the concept of psychological distance, as the

company started its process of internationalization in locations very similar to those of domestic

operations, with fewer differences in culture, language and Government structure. This was the

case of the South American countries (Argentina, Peru and Chile), where Natura started their

international operations.

26


On the other hand, the case of Natura partly contradicts the gradual and sequential process

of commitment set by the forerunners of the school of Uppsala. Natura, instead of starting their

process of internationalization by direct or indirect exports, with independent distributors or

commercialization partners, preferred to make direct investments abroad, creating their own

structure for commercialization and distribution (structures for coordination and control of direct

sales, or a personalized shop structure). As mentioned in this work, Natura preferred to run the

risk of entering the international market alone, without the help of a strategic partner, rather than

share their strategies and business philosophies. However, looking at the issue from another

angle, based on the basic internationalization mechanism of Johanson and Vahlne (1977), we see

that the process of internationalization of Natura was gradual, as the company sought to capture

market knowledge in a few South American countries before expanding their business activities

to the whole of Latin America. And, in the European case, they decided to start with only one

shop in Paris, learning how to work with the more demanding consumer, before expanding their

presence to the rest of Europe.

Analyzing the ways in which Natura entered the international market, following the

classification proposed by Buckley and Casson (1998) we see that the company preferred to

make direct international investment in distribution media, which means that the company

manufactures the products in their home market, in this case Brazil, and then exports to foreign

markets where they are distributed and commercialized through a dedicated structure.

With regard to the stages of the internationalization process, as defined by Andersen

(1993), Natura started and currently finds itself in the 3rd stage, as both in Latin America and

Europe, they established a subsidiary with the role of generating commercialization activities and

distribution logistics.

27


In relation to the distribution channels, we also see that Natura has made use of different

strategies for the Latin American and French markets. In Latin America, the company decided to

copy the Brazilian model of intensive distribution through direct sales, trusting the philosophy of

having a distinctive relationship with the customer which is provided by the Natura consulting

ladies, and in the experience spanning more than a quarter of a century in this type of business. In

the French market, in contrast, considering the results of the market research that suggest

rejection of the door-to-door model, Natura preferred to work with exclusive distribution by

opening a personalized shop that enabled the sale of all the distinctive factors of the company

products, that were erected upon three main pillars, namely: 1 – Brazilian active ingredients; 2 –

Social and environmental sustainability of the operation, and 3 – Use of popular traditions. Only

after lengthy exposure of the Natura brand to the French public did the company start testing with

the direct sales model. However, the efficiency of these tests has not yet been made public.

The choices of the Natura distribution channels followed the definitions proposed by

Stern (1996) who defends alignment with the strategy for the product or the market. In the case of

Latin America, Natura followed the winning formula practiced on the Brazilian market, mainly

due to market similarities, and in the French case preferred to make use of a channel that made it

possible to sell the proposal of values set by the company, for this market. Natura’s other option

for the French case would be to choose an international partner to be active in the

commercialization and distribution of their products, thereby reducing the risks of entering such a

competitive market.

The table 1 sums up answers for the survey issues of this study:

------------------------------------------ Insert Table 1 about here

-------------------------------------------

28


FINAL COMMENTS AND CONTRIBUTIONS

The purpose of this study was to describe the internationalization process in a Brazilian

company and also the distribution channels chosen to operate on the external markets, using, as a

case study, the case of Brazilian company Natura Cosméticos S.A., which is starting to be active

in different markets of Latin America and Europe, with plans to expand to the United States and

China.

According to Ricupero and Barreto (2007) and the FDC report (2002), there are no

specific determining factors that establish differences between the reasons of company

internationalization in Brazil and elsewhere. In the case of Natura, we have seen that all the

reasons given by different sources all lead to the same conclusion or, in other words, the general

reasons are: seeking economy of scale; development of competencies to be active in international

markets; exploitation of advantages of location; and the saturation of the Brazilian market.

Considering the theoretical model used as a reference in this study and the analysis of the

process of internationalization at Natura, we reach the conclusion that, in this case, the type of

market (in this case Latin America x Europe) has influenced the internationalization strategies of

the company in the “distribution channel” aspect (direct sales in Latin countries and own physical

point of sale in Paris), but has not changed the “method of entry” issue, which has become

characterized as direct international investment in distribution, through own structure, without

resorting to partners. It is also important to point out that the reasons behind the

internationalization were different considering the two types of markets analyzed, with Latin

America being good to boost sales through the achievement of a new market, and the entrance in

Paris being good to strengthen the brand, for learning through a demanding international market,

and as a test for a distribution channel for a demanding market.

29


Natura has used the same type of strategic position, whether in the domestic or the

international market. This stand is characterized by differentiation, where the different sources

consulted stress the differentiation by product, characterized by the use of components from

Brazilian biodiversity, supported by a marketing strategy focused on social responsibility with

development in the sustainable use of Brazilian biodiversity.

The difference between the Latin American and the European processes with regard to the

adaptation of the distribution channel strategy came about due to cultural factors within the

market, with direct sales being rejected by Parisians but well accepted by the Latin market, and

the need to have strong marketing effort to sell the image of quality for a Brazilian product. The

impact of the cultural differences of international markets (Latin and European) on the

internationalization strategy, in the case of Natura, appears in the form of needing to develop new

competencies to allow the internationalization to be put into operation or, in other words, for

Natura to enter the French market they had to forsake their key competency which is direct sales

through consulting ladies and hence, through the concept of learning, they are developing a new

competence which is the sale through a physical point of sale.

In a new form of analysis based on the economic approach according to Dunning (1988),

we can see that Natura acquired the advantage of ownership with regard to the issue of

biodiversity, as they use raw materials extracted from Brazilian flora, from the Amazon region,

which is inimitable, as well as the skill in transforming these active ingredients taken from

biodiversity, turning them into products that bring benefits, cosmetics accepted throughout the

world, such as unique fragrances and skin treatment, among others. The issue of biodiversity can

also be seen as one aspect of the advantage of location, which in this case is the fact that the

Amazon Forest lies within Brazilian territory. According to the viewpoint proposed by Lorga

(2002), by which doing business abroad is more expensive and more risky than on the home

30


market, Natura is still not reaping the financial benefits comparable to those coming from sales in

Brazil, and this is because heavy investments had to be made for the company’s

internationalization, the company not having chosen the export, licensing or strategic alliance

models, preferring to set up their own structure in the external market, using their own

distribution channels.

It is also possible to reach the conclusion that the results of the internationalization

strategies have fed back to the Natura corporate strategy, as the company has reappraised the

options of whether to concentrate on the domestic market or intensify their strategy for

international expansion. In the case of Natura, even though the results have not been significant

as yet, the company preferred to step up its expansion in Latin America and is also looking into

their next steps on the European market.

In the process of internationalization at Natura, it is possible to see strong features present

in the model of the school of Uppsala, such as: the search for markets close by; process starting

with activities considered as exports and outsourced operations; a gradual process with search of

learning about the new market; and decisions taken centrally by the Head Office.

However, the evidence found seems to contradict the statements made by Vernon (1966),

who says that a company internationalizes when they have already exploited all possible

opportunities with regard to a product on the market of origin, seeking to exploit, with this same

product, advantages in foreign markets which are further behind than the market of origin: on

launching the Ekos line in Paris, the world Mecca of cosmetics, this being a sophisticated line

based on Brazilian biodiversity and with recent technological development, the company sought

to add value to aspects that are prized by European culture, such as the use of natural products.

This study has contributed for a better understanding of the factors that affect the choice

of distribution channels of a company, when the company decides to internationalize, as well as

31


helping to shed light on the process of internationalization of a Brazilian company, in this case

Natura, confirming most of the theoretical assumptions shown in relevant specialized literature,

except for the gradual process of commitment and market risk, defended by the forerunners of the

classical school of Uppsala.

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FUGURE 1

Theoretical Research Model – Process of Internationalization

Source: Prepared by the Author.

Entry Method

DistributionCha nnels

Strategy

Internationalization

CompanyStrategy

Reasons for Internationalization

Intervening Factors

Type of International Market

36


TABLE 1

Summary of answers for the survey issues of this study

Research Issue Latin America Europe

Strengthen the Natura brand Learn with a demanding Conquer newDetermining factors markets

International Market for internationalization Use of competencies Test a distribution channel

suitable for the European market

Multidomestic Features of the Processof

Internationalization Start in a place of less psychological Multidomestic

Non-gradual process distance Non-gradual process

Direct international investment in Direct international investment inMeans of Entry into the distribution distributionInternational Market Export and Export and own structure forown structure for

distribution distribution

International Channel of Direct sales Personalized Distribution Shop

37

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