ECO-LABELS AS STRATEGIC INSTRUMENT OF
PRODUCT DIFFERENTIATION IN A GROWING
MARKET FOR NATURAL COSMETICS.
Master Thesis
by
Deike Schulz
Supervisor
Dr. Wilfred Dolfsma
2
ndsupervisor
Evelien Croonen
University of Groningen
Faculty of Management and Organization
MSc Business Administration,
Strategy & Innovation
July, 2010
ABSTRACT
This thesis explores how the German natural cosmetic industry differentiates their products through an Eco-label. A case analysis of four of the leading brands in the premium-price segment and one firm in the low-price segment discovered that premium price firms collaborate in developing a future dominant design in labeling. However some brands choose a transition strategy by developing self-declaration labels to signal quality of their products. In addition there are different types in labeling available which address specific attributes of products or target audiences. Firms that enter new markets also apply specific sub-labels. Another case discusses the introduction of a unique standard in labeling in the German organic food market to explore how a dominant design has been established in the past. In addition this thesis also researched if there are other factors that can support the legitimacy process regarding natural cosmetic products. To understand the viewpoint of consumers a content analysis shows, that for a specific group of dedicated consumers the label is of less importance than the contents, scent, texture and brand image of specific products.
Future research should also explore the further development in the German natural cosmetic industry, since a dominant design is not yet in place. Also the specific role of the leading firms should be included because these have a close link with the certifying organizations. Another interesting research topic that was beyond the scope of this thesis is the role of online communities in relation to the reputation of specific brands.
PREFACE
With this thesis, that has been quiet a journey for me, I completed the last part of my master of Business Administration in ‘Strategy & Innovation’. Within a year I really got into the natural cosmetic industry. With every interview I did and every new information I gathered I became more enthusiastic about the topic. I am pleased to see that something that has been hiding in a niche market during my childhood in Germany has become an important part of the cosmetic industry. The question is if differentiation strategy by an Eco-label will still be an issue within the industry during the years to come. Also Web 2.0 will be of major importance during the process - but this is another journey planned for the future.
During research various people supported me. First of all I would like to thank the firms and experts, because without their input I had not been able to finalize this thesis. Especially I want to thank Joseph Pine, who helped me to kick-start the whole process. Second, I want to thank Wilfred Dolfsma who really pushed my boundaries by asking the right questions and Evelien Croonen for being the second supervisor of this thesis. Last I would like to thank Aranea de Heer for supporting me throughout the whole process and Klaas, Ella and Lena for making me laugh in times when I really needed (a small) break.
Groningen, July 2010
Table of contents
1.
Introduction... 7
1.1.
Problem statement... 8
1.2.
Contribution to existing literature in the field... 9
1.3.
Boundaries of the study and specific industry terms... 10
2.
Relational context... 12
2.1.
Industry analysis... 12
2.1.1 Definition German industry for natural cosmetics ... 12
2.1.2 Type of market ... 13
2.1.3 Short overview of labels applied in the German market... 14
2.1.4 Scope of market... 17
2.1.5 Leading companies and Strategic groups ... 17
2.1.6 The ‘new’ kid in town: Company 5... 18
2.1.7 Competition... 18
2.2 Brief consumer profile ... 20
2.2.1 LOHAS ... 20
2.2.2 Natural cosmetic fans... 21
3.
Theoretical Background ...22
3.1 Product differentiation ... 22
3.1.1 The concept of product differentiation as part of generic strategies ... 22
3.1.2 The role of Eco-labels in product differentiation... 24
3.1.3 New market entrants and informational product differentiation ... 26
3.2 The struggle for a dominant design... 27
3.2.1 The emergence of a dominant design... 27
3.2.2 Conditions that accompany the emergence of a dominant design ... 29
3.3 Legitimacy ... 31
3.3.1 Innovation and local validation ... 31
3.3.2 Diffusion and General Validation: becoming the Status Quo... 32
3.4 Conceptual framework... 37
4. Methodology...39
4.1 Case study ... 39
4.2 Data collection and specific samples ... 40
4.2.1 Selecting cases... 41
4.2.2 Selecting interviewees ... 41
4.2.3 Selecting Video content on YouTube ... 41
4.2.5 Codebook... 43
5. Case Study results...43
5.1. The concept of product differentiation and the role of Eco-labels... 44
5.1.1 The concept of product differentiation as part of generic strategies ... 44
5.1.2 The role of Eco-labels in product differentiation... 46
5.1.3 New market entrants and informational product differentiation ... 53
5.2 The struggle for a dominant design applied to the industry... 55
5.2.1 The emergence of a dominant design... 55
5.2.2 Conditions that accompany the emergence of a dominant design ... 58
5.3 Legitimacy ... 62
5.3.1 Innovation and local validation ... 63
5.3.2 Diffusion and General validation: becoming a Status Quo ... 68
6. Conclusions & Discussion ...79
6.1 Conclusion and discussion ... 79
6.2 Research limitations and future research ... 81
References ...83
Books and articles:... 83
Websites:... 86
Appendix 1 Overview research methods ...88
Appendix 2 SWOT Strategic Group ...90
2.1 Company 1... 90
2.2 Company 3... 91
2.3 Company 2... 92
2.4 Company 4... 93
Appendix 3 Overview interview partners ...94
1.
Introduction
brands in the German market for natural cosmetics. Additionally a 5th brand form the
drugstore industry will be studied to explore the influence of low-price natural cosmetics that apply Eco-labels as well. To understand how a successful standard can be created another case from the food industry will be discussed. Finally a content analysis of video presentations and reviews of natural cosmetics by dedicated users on You Tube will gather information regarding the value of Eco-labels for dedicated consumer groups.
1.1. Problem statement
The research investigates the strategic factors, intentions, and decisions that lead to new market broad labels being launched by competitors in the German market. A multiple case study examines
- How and why new Eco-labels are introduced to the market,
- Why key players differentiate their products through the usage of Eco-labels and - How differentiation strategy effects consumer behavior.
The following main research question is formulated to reach the objective:
How do natural cosmetic firms differentiate their products in the German market through an Eco-label?
To support the main question five sub questions have been formulated.
The first and second sub questions will be addressed in the contextual part (A) of the study in chapter 2:
A1. What are main characteristics of the German natural cosmetic industry? A2. Which Eco-labels are available within the German market for natural
cosmetics?
The information gathered from these questions helps to understand and determine the different actors within the industry. Next to producers and consumers the context retrieves the role of experts, retailers, governmental authorities and the media.
B1. Which mechanisms of product differentiation theory verify the use of Eco-labels within the German market of natural cosmetics?
B2. What is the added value of natural cosmetic Eco-labels for firms?
B3. Do dedicated consumers experience an added value through the application of Eco-labels on natural cosmetics?
Additionally Appendix 1 provides a detailed description of each sub question in relation to the chosen theory and methodology.
1.2. Contribution to existing literature in the field
In recent years there has been an ongoing discussion regarding the strategic value of labels for companies, the reliability of Eco-labels and the impact on consumers trust. The topic has been examined in different studies that are mainly focused on the food industry. The results of a study by Amstel et al. (2007) inspired me to develop a research topic from a strategic viewpoint on labels in the natural cosmetic industry. The original research paper describes specific Eco-labels and their reliability, developed and preferred by producers and retailers within the Dutch food market, like Albert Hein (Greenfields) or Chiquita (Rainforest Alliance). Amstel et al. (2007) describe the relation between firms using Eco-labels as strategic instrument to differentiate their products from their competitors. Also the authors imply that producers are not concerned regarding the confusion of diverse Eco-labels. Their focus is most of all that consumers should recognize the Eco-label and respond positively to it, wherever there are well informed about the standards behind it or not. They state: ‘Actually the producer has an interest in
keeping the public from being able to compare its own Eco-label with other Eco-labels. Indeed the comparison might not turn out well for their own label.’ The Marketing &
Strategy Innovation Blog1 describes a contrary vision to establish broad consumer adoption of Eco-labels. They state: ‘While some retailers may consider proprietary labels
as a competitive differentiator, it is likely that broadly recognized labels will accelerate consumer adoption while reduce the cost to support them.’ In the case of the new
Eco-label for natural cosmetics, NaTrue, leading firms in the organic cosmetic industry developed the label on their own, but through a strategic alliance of multiple brands. The main conclusion of Amstel et al. (2007) is that a product specific label creates a market opportunity for multinationals. Therefore it will be interesting to research if the strategic
1
alliances and the new labels are introduced solely to establish more product transparency and less confusion on the consumer side or if it is used as a strategic instrument to differentiate specific products and gain market influence. The study will provide new insights into strategic management within the natural cosmetic industry.
There has been little attention to strategic issues within this industry in the past. Most of the information attends to issues concerning toxic ingredients, and labeling schemes for cosmetics (Eskeland and Svanes, 2006; Fliess, 2007; Klaschka et al. 2007). Other scholars addressed the role of corporate social responsibility (Fliess, 2007). Additionally in recent years consumers became much more alert in regard to Eco-labels for non-food products especially natural cosmetics (Organic monitor, 2008; Kline Research, 2009). The research can therefore provide strategic knowledge for the natural cosmetic industry and scholars, who research in the field of value creation and product differentiation as strategic tool for established firms in a fast growing market.
1.3. Boundaries of the study and specific industry terms
This study will focus on the natural cosmetic industry, therefore it is important to define specific industry terms and establish a coherent choice for this paper.
To start with Nelson (1970) introduced the term experience goods that are goods where (a) buyers cannot observe the quality of a particular product during the purchasing decision making process, (b) buyers detect the possible quality after purchasing, and (c) contracts cannot be conditioned on quality. Additionally credence goods have the same characteristics but will not reveal their true quality unless they are tested through an authorized organization, which will find all (non) hazardous substances. In the case of cosmetics, most product ingredients are not fully described and often consumers are not aware of questionable ingredients like formaldehyde as a preservative and can’t identify these by themselves (Klaschka et al, 2007). Hence in this study I will consider natural cosmetics as credence goods.
explore and compare the different labels by operating the definition of Reisch (2001, 2002).
The term ‘natural cosmetics’ is often used within the cosmetics industry, even, if products are not genuine natural. (Cossma magazine, 2009; Greenpeace magazine, 2009) To understand and define the general differences of products within the market a clear definition is needed. The German ‘Bundesverband Deutscher Industrie- und Handelsunternehemen Arzneimittel, Reformwaren, Nahrungergänzungsmittel und Körperpflegemittel e.V’, BDiH (2009) provides the following description: ‘Natural care products consist of skin and environmental friendly ingredients, like natural oils from flowers, herbs and plants, greases and waxes, ethereal oils and aromas, which originates from controlled organic cultivation or have been collected in a natural environment.’ In 2008 a traffic light principle was established to define the different market sectors by the German natural cosmetic expert, Elfriede Dambacher in collaboration with Information Resources (IRI), Gesellschaft für Konsumforschung (GfK) and IMS Health. The following overview visualizes the system:
This research will be based on the definition of Elfriede Dambacher (2008) and will focus solely on products that can be found in the general category ‘Natural cosmetics’, which summarizes Reformed Cosmetics, Natural cosmetics and Certified Natural cosmetics. The general market will be addressed as ‘natural cosmetic market’. When needed for comparison, other non- natural cosmetic products will be addressed as ‘mainstream cosmetics’.
Next to the industry term ‘natural cosmetics’ another definition is needed to classify the products included in this particular category. Kline (2009), a US market research firm, distinguishes between six subcategories within the natural cosmetics industry. 1. Skin care products. 2. Hare care products 3. Other toiletries. 4. Makeup 5. Oral care products and 6. Other products. Eco-labels can be applied to all six-product categories; therefore the research will be conducted within the complete product range. Natural personal care products are sold through online and offline retail channels. According to Kline Research (2009) four main retail channels can be identified for the European market: 1. Pharmacies and drugstores; 2. Health and natural food stores and supermarkets; 3. Specialty stores; and 4. Natural cosmetic stores and department stores. The paper will be based upon these retail channels categories.
Moreover consumers that make use of natural & organic cosmetics on a regular basis and have a sense of loyalty or integrity towards particular natural & organic cosmetic brands will be described as ‘dedicated consumers’.
2. Relational context
2.1. Industry analysis
In this chapter an analysis of the German industry for natural cosmetics is carried out to understand the strategic and environmental mechanisms that influence the market. A relational context will be determined by investigating Meso factors in connection to the research topic.
2.1.1 Definition German industry for natural cosmetics
2007. Significantly the Brachenreport Naturkosmetik (2004) reported a market share of 3 % in the year 2003. In the highly competitive market for natural cosmetics competition is taking place both on the basis of costs and product performance. Next to differences in marketing budgeting and customer service the quality and combination of ingredients has a significant influence on the market price. For instance low-priced natural cosmetics often contain cheap soya oil instead of the more expensive almond or sesame oil (Greenpeace magazine, 2009). Natural cosmetics are sold through different market outlets. In the last years the drugstores channel gained market share, because of the introduction of low price natural cosmetics in this retail category. The following figure illustrates the market shares per category:
Figure 2: Branchereport Naturkosmetik 2008
This overview illustrates the broad variety of distribution channels within the German market. Notable is the 10 percent share of LEH’s (Lebensmittel Einzelhandel: conventional supermarket outlets), which sell natural cosmetics as private brands.
2.1.2 Type of market
campaigns. As an example one of Company 1 products is part of the product range since eighty years (Interview, 2009) and one of the most successful products of Company 3, has been introduced to the market thirty years ago.
Today German consumers are broadly adopting Natural cosmetics and 50 percent of them buy at least once a month a Natural Cosmetic product (IRI, Information Resource, 2006). Differentiation is taking place on the basis of ingredients, packaging and marketing of natural cosmetic products. Price competition is introduced to the market since recently some of the brands launched new low price lines for retailers, in particular drugstores and supermarkets (Naturkosmetik Jahrbuch, 2009). For example Company 2 developed
products, sold within a price range of 2-3 Euros as private brand for a supermarket chain.
Another upcoming and low-cost brand is offered by Company 5, which is sold within a German drugstore chain. In an interview with the German magazine Ökotest (2008) Rainer Plum, a specialist and consultant in Natural and Organic cosmetics, confirms this trend and adds: ‘There are two major trends in this field: Very expensive and very cheap.’ In addition Company 2 introduced a high-end sub brand that sells anti-aging products in the price range between 30 – 80 Euros. All of these products, premium price or low price, are certified, in most cases with the BDiH label (Ratgeber Kosmetik & Wellness, 2008). Also products could be tested within the same category through Ökotest magazine. Ökotest divides products into natural cosmetics and mainstream cosmetics and does not differentiate between low and premium priced cosmetics.
2.1.3 Short overview of labels applied in the German market
Label Logo Profit Non-profit Description/ products certificated Origin/ Scope Information BDiH Profit Around 6000 products are certi-fied.
Ger-many/ Europe
German Trade organization for Pharmaceutics and natu-ral care products.
COSMEBIO Non-Profit 200 companies and And around 6000 products certified. France/ Europe
Industry organization for Raw material and ingredient suppliers, custom manufacturers, cosmetic laboratories, distributors ECOCERT Profit - France/ World-wide
Active in 80 countries. Con-trols, inspects and certifi-cates cosmetic companies and products. Focus on in-gredients and eco-agricultural aspects.
LEAPING Bunny
Non-Profit*
*No licence fee except for the use of the logo on products.
Canada/ World-wide
Focuses solely on non-animal testing. Natural and mainstream cosmetics can be certificated.
NaTrue Non-Profit*
569 products cer-tified. 34 compa-nies. *Additional fee for documentation and production audit. Bel-gium/Wo rldwide NaTrue is co-developed by leading brands in the Ger-man industry. The associa-tion chose to operate from the city of Brussels and is actively lobbying at the European parliament. USDA organic Non-profit - USA/Wo rldwide American governmental organization for certification of food and cosmetics. Mostly visible on US natu-ral cosmetic brands sold in Germany.
Vegan Non-profit*
* Licence fee for the use of the logo on products. (De-pend on yearly turnover com-pany.) UK/ World-wide
Other authentication marks/labels applied in the German market for eco-products
Okotest Profit
Öko-test selects natural and main-stream cosmetics and publishes next to the monthly magazine a year-book for cosmetics and wellness. Hundred of natural cosmetic products are tested every year.
Ger-many/ Ger-many
German magazine, which selects products, and tests independently. Test results are published in the monthly Öko-test magazine. Many brands use the test results to market their products. Brands are also advertisers within the magazine, which makes the independent status questionable. Well-known by German consum-ers.
Bio-siegel Non-profit
3,332 companies and 55, 163 prod-ucts. Ger-many/ Ger-many
Only for the
food/agricultural industry. Original developed by the German government in 2001 to reinstall consumer trust after Mad-cow disease. Applies EU organic farming regulation.
Other developments and new Eco-labels
COSMOS No logo
yet Profit
All agencies provide certification for 1,000 cosmetic companies and 10,000 products. Generic standard came after six years of nego-tiations between the participating agencies.
Europe/E urope
Strategic alliance between lead-ing certification agencies in Europe: BDiH (Germany), Soils Association (UK), EKOCERT (France), Cosmebio (France), ICEA (Italy) and Ecogarantie (Belgium). Standard was intro-duced in 2009. New Eth-ics Non-profit - Ger-many/ World-wide
2.1.4 Scope of market
Geographic scope: Worldwide/national. Production: national.
Although most of the brands started with a focus on the European market they have developed strong export markets as well. Company 3 is well known in the US and other natural cosmetic brands are popular in Japan. According to ECO-News (2009) the total turnover of natural cosmetics in Japan over the year 2008 has been 580 million euro, which is 4 percent of the complete Japanese cosmetic market. One third of Company 2’s turnover in 2008 was achieved outside of Germany (Bio-markt, 2009)2.
All leading brands produce within Germany or Europe. Company 33 and Company 1
(Company 1, Annual Report 2008) also have their own Herb gardens and grow a quantity of ingredients on their own.
2.1.5 Leading companies and Strategic groups
The BioVista Trade panel for the Natural product market (2004) determined four leading firms, which hold approximately 80 percent of the market share of natural cosmetics in Germany. These brands are Company 3, Company 2 , Company 1, and Company 4, According to the Naturkosmetik Branchenreport (2008) all of these brands are still existent but the division of market shares has changed. Today Company 1 is the leading brand followed by Company 3, Company 2 and Company 4. Additionally these firms can also be seen as strategic group, because they use similar strategies along specific strategic dimensions (Porter, 1980).
All four brands have been involved in the development of the BDiH label that has been introduced in 2001 to the German market. Additionally they recently initiated the new NaTrue label as well. Traditionally these brands sell their products through Reformed stores, pharmacies and natural cosmetic stores. Some started to introduce they products via supermarket outlets, but their main aim is to operate in a premium market segment. To give more insight into these firms a SWOT analysis can be found in Appendix 2.
2
2.1.6 The ‘new’ kid in town: Company 5
Although not present within the strategic group, Company 5 has gained strong market influence since the introduction of the brand 20 years ago. Elfriede Dambacher (Interview 2009) describes the brand as ‘Einstiegsmarke’, a brand that reaches a broad audience of new consumers of natural cosmetics, with a strong influence in the market.
Chapter 5 provides an analysis of all members of the strategic group plus an additional case of Company 5, which is the leading company in natural cosmetics sold in drugstore (Interview Elfriede Dambacher 2009, GfK, 2009).
2.1.7 Competition
Porter (1980) 5 forces model is used to determine the competitive intensity and therefore attractiveness of the German natural cosmetic retail market.
Force Impact Key words
1. Threat potential entry Moderate/High New low and high price labels.
Valuable resources of well-known brands. 2. Competition from substitutes Moderate/High Mainstream-cosmetics
3. Power of suppliers Moderate/High Growing prices for (natural) ingredients 4. Power of customers Moderate/High No switching costs. Brand awareness and
loyalty. 5. Rivalry among competing
sellers
Moderate/High Many brands. Brands recently started with price/quality differentiation. Brand aware-ness of consumers towards traditional brands is high.
Table 4: Porter’s 5 forces model applied to the German Market for Natural cosmetics
1. Threat of new entrants.
Since the natural cosmetic market became so important and consumers are more alert and concerned about the substances and origin of products, conventional cosmetic firms started to developed new brands as well. French high-end brand Clarins introduced Kibio and L'Oréal bought the French natural cosmetic firm Sanoflore. The luxury cosmetic brand YSL Beauté started a cooperation with Star-Designer Stella McCartney, who developed a new natural cosmetic line called ‘Care’.4 Other established brands like Aubrey Organics (founded in 1967 in the USA) also find their way into the German market, which has been dominated by local brands for decades. Finally there are new entrants like Company 5 in the low-price range, which sell only in drugstores and gain
4
market share quickly. They include the BdiH label as well. In addition most of natural cosmetic shoppers (40 % percent) prefer to buy in drugstores. (Greenpeace magazine, 2009; Biopress, 2008)
2. Competition from substitutes
Mainstream cosmetics are still leading within the complete German cosmetic market. 90 percent of cosmetic purchases origin from this category. Scale advantages and impulse shopping have strong influence on consumers; especially first time buyers and consumers that start to discover natural cosmetics will regularly switch to mainstream cosmetics and only 45 percent will buy the same natural cosmetic product twice (GfK Panel Service, 2008).
3. Power of suppliers
Earlier research (Feygin, 2007) found out that natural fragrances and oils are very expensive. As an example sandalwood oil is sold for 1.600 dollar per kilo and rose absolute essence at 2.000 Dollar per kilo. In their year report 2008, Company 1 describes their exclusive partnership with a Turkish Rose distiller. This Turkish company was originally a conventional agricultural company and switched to organic growth and fair trade through this partnership. In this case Company 1 is cooperating and supporting a Turkish firm and in return gets exclusive products controlled by their standards (Annual report Company 1, 2008). But most of the time suppliers often have a great deal of influence on the price and firms can’t switch to other suppliers (Feygin, 2007). Also the cosmetic industry has to compete with companies from other industries as well. Cacao, green tea or citrus is used in both the food and the cosmetic industry (Sahota, 2009).
4. Power of customers
familiar with from traditional brands. These low price natural cosmetics are available on a broad scale via drugstores.
5. Rivalry amongst competing sellers.
According to the Naturkosmetik Jahrbuch (Dambacher, 2009) there are 15 brands competing at the top of this market. Often these brands have no defined boundaries in relation to the position of their brand within the market. Additionally the strong growth of the market in recent years and the diffusion of distribution channels challenge brands to find new ways to position themselves within the market. Elfriede Dambacher (2009) also points out the critical role of Eco-labels and advises brands to apply a brand strategy that focuses on positioning their products and ‘stand out from the crowd’. In the past firms ‘claimed’ their market position through Eco-labels but this strategy is no guarantee for successful positioning in the future anymore, because of the rapid growth of the industry. Green glamour is an important trend within the market and attracts also new and well known mid to high-end organic certified brands from the US (Origins Organic) or France (Kibio) to launch products in Germany.
2.2 Brief consumer profile
As shown in paragraph 2.1.1 consumers, who are interested in natural cosmetics, buy their products through different channels. Additionally this chapter provides a short description of their specific characteristics.
2.2.1 LOHAS
In relation to the growth of the eco product market new consumer groups have been identified by the media and in scientific research. One important group that influences the market of natural cosmetic is a consumer group called LOHAS that stands for ‘Lifestyles of Health and Sustainability’. This consumer group has a strong conscience in regard to sustainable and ethical businesses and products. According to the community website of LOHAS5 other important characteristics are:
• 60 percent is female. • Highly educated. • About average income. 5
• Highly influenced by brand image. • Less price sensitive.
• Sensitive for opinion of friends and family while (buying) decisions are made.
2.2.2 Natural cosmetic fans
3. Theoretical Background
This chapter presents an overview of the literature concerning the central subject of this research. The first part will focus on the concept of product differentiation and will explore diverse viewpoints from marketing, economics and strategy literature. Furthermore the previous chapter portrayed a market saturated by many Eco-label initiatives. Therefore the second part will discuss dominant design theory to understand the strategic mechanism that can lead to a single industry standard, which outperforms competitive initiatives. Third different legitimacy viewpoints will be discussed, to understand how firms make an industry standard available, understandable and desirable to stakeholders. This chapter will also address other legitimacy aspects, like the role of (product) authenticity, influencers and (online) social networks, to identify if alternative non-labeling strategies can justify natural cosmetics as well. Additional viewpoints from Eco-label specific literature will add a specific dimension to address the main research question in relation to the chosen theory. In conclusion the last part in this chapter will present a conceptual model to explain the relation of these various aspects.
3.1 Product differentiation
3.1.1 The concept of product differentiation as part of generic strategies
The concept of product differentiation is an eminent subject in marketing and economic literature. Scholars often describe the topic alongside with other corporate strategies firms can bring into play to gain competitive advantage.
lost focus on its main strategy, will be ‘stuck in the middle’. This means a firm is not able to make a distinctive choice in strategy and therefore will be outperformed in the long run by other competitors who keep their focus on a single main strategy.
Thus its optional character can typify differentiation strategy, accompanied by obtaining a price premium as its main benefit and increase of costs as a negative side effect. Nevertheless the classical triptych viewpoint of Porter to treat the generic theories as optional has been challenged by Sharp and Draves (2001) who describe differentiation strategy as: ‘…a pervasive and almost unavoidable aspect of real competitive markets’. The authors discuss the influence of modern markets that turn differentiation strategy into a must-do instead of being just an optional choice next to cost leadership and focus approach.
Caves and Williamson (1985) referred to credence goods in combination with the structure of information flow utilized by buyers and provided by sellers of a product. The authors describe the mindset of buyers who invest in different types of information: ‘…
up to the point where the expected marginal benefits from a better choice among brands become equal to the marginal information costs (both money and time)’. The perspective
of Caves and Williamsons also described important information types, that support buyers to choose the best brand, like advertisements, advice from friends, own experience, data collected by search (physical inspection of products, advice of salesperson) and independent sources like testing agencies. Here the authors assume that a buyer generally consults not one source of information but a portfolio of information sources.
Despite of the fact that the work of Caves and Williamson from the 1980’s provides an interesting clarification it is lacking the influence of New Media as important source of information within modern markets. Lievrouw and Livingstone (2006) enclose a viewpoint that completes the whole picture. They describe that the influence of new media, especially the internet, leads to a high degree of interconnectedness. Also the volume of communication and information moving through networks has created greater economic instability. Firms are challenged to combine economics of scale and scope and have to rearrange standardized processes with fast changing differentiated products and services. The authors here cite the work of Coriat (1993), who called the resulting economic regime as ‘mass variety’.
3.1.2 The role of Eco-labels in product differentiation
personal care are truly green. Hence the beauty industry makes use of Eco-labels to reposition itself within the market and to take away the uncertainty of green claims (Whittaker et al., 2009).
Concluding one way to signal credibility and the environmental advantages of a product (indirectly) is through certification and Eco-labels. Here Eco-labels are often used to differentiate products by indicating that the respective product is environmentally preferable compared to other products in the main product group (Klaschka et al., 2007). According to Whittaker et.al (2009) applying an Eco-label is an excellent way to inform consumers and differentiate natural products within a market. Also Eco-labeling can be seen as marketing strategy applied by firms on a voluntary basis. Actors choose a labeling approach to signal product quality by means of Eco-labels (Liebi, 2002) and communicate something environmentally unique about a product (Clarke et al., 2000). Bruce and Laroiya (2006) add a critical note to this viewpoint by pointing out that firms potentially use labels to manipulate market power. They cite the work of Gumper (2000), Imkamp (2000) and others who showed that consumers are willing to pay a price premium for Eco-labeled products. However a label will only influence purchase decision-making when consumers desire environmental-friendly products (Thǿgersen, 2000). Also a lack or absence of Eco-labeling within a product category will have a positive impact on low-price firms (Teisl et al, 2002).
type one and two. This statement is based on the independent status of public and governmental agencies. According to Thǿgersen (2000) consumers have more trust in labels that are controlled by an independent and public authority compared to private labels introduced by producers. The proposition following from the discussion above addresses the role of Eco-labels to differentiate (new) products in a market of credence goods. Here the Eco-label stands for a distinctive product attribute and therefore will be linked to the attribute model. Additionally this paragraph also addressed the role of sub-labels to highlight the focus of different Eco-sub-labels. Therefore another proposition (1b) will address the idea that different Eco-labels are applied as differentiator of quality within the same market for natural cosmetics.
Proposition 1a: Producers of Natural cosmetics apply Eco-labels as a distinctive and
important attribute to differentiate their products from mainstream cosmetics.
Proposition 1b: Producers of Natural cosmetics apply specific Eco-labels to mark out
distinctive product attributes from competitors within their own market.
3.1.3 New market entrants and informational product differentiation
In the beginning of this chapter the role of incumbents, who face downward sloping demand curves in a market, was described. Besides that it is also important to investigate the role of new entrants. Earlier research identified the role of informational product differentiation, (Schmalensee, 1982; Bagwell, 1990) which also addressed the market of experience goods. Bagwell (1990) argues that a new market entrant will experience barriers to entry even if the product is of higher quality compared to the incumbents. He states: ‘Consumers initially do not know entrant quality, and they therefore will try the
entrant’s product only if a ‘reasonably’ low price is charged.’ The author also discusses
In relation to this paper topic it will be important to search for information that investigates the role of market entrants who ‘soften’ these barriers by applying well-known Eco-labels to their unwell-known products. Therefore proposition 1c will focus on the effects of well-known Eco-labels on new natural cosmetic products.
Proposition 1c: Natural cosmetic brands that enter new markets apply a well-known
Eco-label to soften barriers to entry.
3.2 The struggle for a dominant design
Moving on from the concept of product differentiation a second aspect will be important to explore during the research to understand the role of Eco-labels within the natural cosmetic industry. As shown in Paragraph 2.1.3 the German market for natural cosmetics offers a broad variety of Eco-labels, but still new labels are introduced recently within the market. At the moment the two main competitors in natural cosmetic Eco-labeling are: 1. The BDIH label; and 2. The new NaTrue label that has been introduced as a split-off from the BDIH by members of the Strategic Group (defined in paragraph 2.1.5). This development can be identified as clashing interests within the industry and the call for a dominant design (unique standard) in Eco-labeling.
Dominant design theory has its origin in technological areas but the notion in general is related to the image of an industry broad standard. Suarez and Utterback (1993) describe the emergence of a dominant design as a result of a fortunate combination of technological, economic, and organizational factors. Also Muurman and Frenken (2006) emphasized the important role of dominant design theory for both managers and scholars because it signals a significant change in competitive markets, resulting in winners and losers. The competitive environment concerning Eco-labels is also accompanied by the strategic moves of the organizations and firms and industry organizations that want their label to succeed and become the main standard within the industry. To do so often these actors anticipate how they rivals react. To analyze these factors this chapter will focus on dominant design theory and additionally will look at the role of Industry life cycles (ILC).
3.2.1 The emergence of a dominant design
automobile industry. The authors and others (Tushmann and Murmann, 1998; Murmann and Frenken, 2006) include that the emergence of a dominant design apparently changes the nature of the competition within corresponding industries. Here Muhrmann and Frenken (2006) add that scholars differ on whether a dominant design causes the change of competition or if it is a consequence of changing markets. The first interpretation can be found in the work of Abernathy and Utterback (1978) and later Utterback and Suarez (1993) saying that the introduction of a dominant design forces all producers within a specific industry to adopt it if they want to stay in the game. Here the main assumption is that a product/component becomes dominant because it represents the best (technological) compromise among the various functional features of the technology. In the consequence model scholars (Klepper 1997; Hounshell, 1989) stress the importance of economies of scale where amongst many competing designs one standard will initially take the lead and emerge as dominant design. In this particular market situation dominant design is the consequence of a fist mover advantage. Following the work of various scholars6 on the topic Murmann and Frenken (2006) mention dominant designs on two different levels. The first level includes complete products like typewriters, electronic calculators or Walkman. Another level describes the emergence of the dominant design at the component level or subsystem level of a product. Examples are automotive engines, microprocessors or local networks for computers (Ethernet).
After defining the specific characteristics of a dominant design it can be said that the emergence of it will not be sudden but a process that can include a relative time span. Here the concept of Industry Life Cyles (ILC) can give inside on how industries evolve over time. Klepper (1997) showed the importance of ILC or Product life cycle (PLC) in both technological (automobile) and non-technological (tires, television production, Penicillin) industries. Life cycle patterns can be identified in sales, R&D expenditure, emphasis on product vs. process innovation, number of new products developed, investment outlays required and firm entry/exit rates (Klepper, 1997, Dolfsma and Panne, n.d.). To understand this process a determination of the different stages of an industry by Abernathy and Utterback (1978) can supply an idea where and how a dominant design
6 Murmann and Frenken conclude from topics and authors: typewriters (Abernathy 1978), electronic
will emerge. The authors provide an explanation on the basis of three phases: 1. The fluid phase; 2. The transitional phase; and 3. The specific phase. These phases have influence on resources, companies and the market. The first fluid phase can be described as flexible and experimental, steered by many competing small firms, which differentiate themselves through small product features. In this phase companies can start to establish their product as dominant design or wait until a dominant design emerges to adapt the standard as fast as possible. During the second transitional phase a dominant design will appear and standardize the market. Winning the battle for the dominant design will be important in this stage, because it provides a company or organization with high strategic influence within the market and an advantage through economies of scale. A few firms that compete will drive the last specific phase, primarily on costs and product performance factors. Innovations will be incremental and standardization will be completed until the next discontinuity restarts the whole cycle.
Additionally Klepper (1997) identified alternative Life Cycle Patterns during research. Within one category (petrochemicals) he found a pattern marked by increasing firm specialization over time. Another example (zippers) showed that 20-30 years after commercialization, firms started to introduce new processes of production, new production methods and the like. These specialization processes enabled other firms (integrated producers) to enter the market especially in manufacturing and marketing. The alternative patterns, especially in relation with a firm’s choice to specialize and enter submarkets, provide an interesting link with differentiation strategy, which has been discussed in Chapter 2. In conclusion firms secure market share by differentiating, specializing and participating in the development of a (future) dominant design.
Proposition 2a: A dominant design causes the change of competition
within a specific market.
Proposition 2b: A dominant design is a consequence of changing markets.
3.2.2 Conditions that accompany the emergence of a dominant design
non-technological factors to influence the adoption of a product. The authors define several factors that accompany the emergence of a dominant design:
1. Possession of complementary assets. Complementary assets are market channels, brand image and customers switching costs and can give some advantage to enforce a dominant design. Also after a dominant design is in place the firm or organization that held’s the industry standard will acquire even more complementary assets to strengthen its dominance (Teece 1986).
2. Industry regulation and government intervention influences the adaption of a dominant design to a certain level, while governmental intervention or decisions in favor of a certain design can support the emergence of a dominant design tremendously (Suárez and Utterback, 1992).
3. Strategic maneuvering at the firm level. To establish an industry standard firms can follow different strategies. While one firm choose to establish strategic alliances (the ‘humble’ strategy) with other important actors, another firm or organization can try to achieve the dominant design on their own. Once a dominant design is achieved, economies of scale can create major growth for the firms that manage to adapt the new standard fast.
4. Existence of bandwagon effects or network externalities in the industry. Bandwagon effects can be described as the behavior or expected behavior of decision-makers which react on decisions of others influential’s. According to Katz and Shapiro (1985) networks externalities are defined as the more users in a network consume the same product or service, the more the utility of this product will be enhanced. Users in a telephone network are a typical example in this case. Although in this case most scholars are focusing on technology as the driving force. Rubinfeld (1988) discussed this phenomenon also in other industries such fashion and furniture. Gemser and Wijnberg (2001) add to this: ‘…traditional industries where fads, trends, and bandwagon effects arise.’ They describe these effects as ‘lose’ imitation and ‘transfer of inspiring ideas’, mostly beneficial for the innovator but also showing copy cat behavior of competitors.
5. The influence of sociological, political and organizational dynamics. This viewpoint is
sociological and political logic of institutional environments within Europe, the U.S. and Japan affected the introduction of hard drives.
The various factors above illustrate how the emergence of a dominant design is influenced and steered through different factors. These are a combination of internal factors (1. Possession of complementary assets. 3. Strategic maneuvering at the firm
level.) external factors (2. Industry regulation and government intervention, 4. Existence of bandwagon effects or network externalities in the industry.) or a combination of both (5. The influence of sociological, political and organizational dynamics. ). Therefore the
proposition will describe these factors as a combination of internal and external
strategies to achieve a dominant design.
Proposition 2c: Companies participate in the development of a dominant design to keep
strategic influence within their market. 3.3 Legitimacy
The previous paragraph showed that a combination of internal and external strategies could support the manifestation of a dominant design. A future dominant design has to be accepted by different stakeholders therefore sociological, political and organizational dynamics are of great influence. Legitimacy regarding brands and their strategic moves to apply a specific Eco-label could have a significant impact on the manifestation of a dominant design in the future. Label initiators have to pass different stages of legitimacy in the process to establish a market broad label that will be adapted by different stakeholders. First they have to address direct colleagues and companies within the market to apply their label and secondly the label has to be recognized, understood and accepted by consumers on a broad scale.
3.3.1 Innovation and local validation
need for change) and justifying innovation (the value of the proposed changes for the concerned actors) can be addressed during the research. Macguire et al. (2004) applied the concept of theorization in relation to new practices in institutional entrepreneurship and observed two critical processes during their study: (1) assembling a range of arguments that translated the interests of diverse stakeholders and (2) the development of secure partnerships of these stakeholders through political instruments like bargaining, negotiating and compromise. This kind of group dynamics is also observed by Zelditch (2001) who argues that: ‘…something is legitimate if it is in accord with the norms,
values, beliefs, practices and procedures accepted by a group’. Johnson et al. (2006)
define a similar idea by describing the process of local validation, meaning an innovation has to be accepted on a local level there it has been initiated. According to the authors actors have to justify how the innovation addresses the immediate need/goal within an existing cultural landscape. Also if an innovation is validated locally it may be easier to diffuse and adopt by a broader audience. Consequently it is important to investigate the interaction of stakeholders during the local validation and diffusion process of new Eco-labels.
Proposition 3: A new Eco-label can only be successful when the initiating organizations
invest into local validation and addresses immediate needs/goals within the existing cultural landscape.
3.3.2 Diffusion and General Validation: becoming the Status Quo
From a consumer point of view Reisch (2002) states:
‘Labels are required to be informative in that they provide the consumers with useful and
correct description of the characteristics of the products and its production process. To be more useful for the consumer the information must be relevant, concise,
understandable, and credible.’
consumers an adequate basis for product differentiations. To achieve this, organizations have to provide more details on labels via informational campaigns to educate consumers. Brand equity
Paragraph 3.2.2 gave inside into several factors that accompany the emergence of a dominant design. Here complementary assets like market channels, brand image and customers switching costs were mentioned as an influencer to achieve a dominant design. Regarding the topic of this research brand image and brand equity are often signaled or visualized via Eco-labels on product packaging and as part of an advertising campaign. The American Marketing Association (AMA) describes a brand as: ‘…name, term, sign,
symbol, or design, or a combination of them, intended to identify the goods and services one seller or group of sellers and to differentiate them from the competition.’ Keller
(2008) adds that the creation of a new name, logo, or symbol for a product means creating a new brand. Also a logo, symbol, package design or other characteristics that distinguish a product can be described as brand elements. Logos and symbols in particular will support recognition of a brand. An entire set of brand elements creates a brand identity. Also the cohesiveness of the complete brand identity depends on how constituent each brand element is linked to each other. From this viewpoint an Eco-label can be identified as brand element because it presents a valuable visual identifier as part of a brand identity, in this case natural cosmetics. Additionally Poulsen and Juhl (2001) discussed the role of Eco-labeling via a symbol (pictogram, logo, logotype) in relation to credence goods. In their viewpoint Eco-labels can signal certain attributes that cannot be detected by consumers before consumption. The authors conclude that Eco-labels can affect consumer behavior if the perceived value of the label is positive. Here Tang and colleagues (2004) add that both visual logo and verbal messages within eco- labels have a significant individual and additive effect on the purchase of designated products.
Authenticity and Greenwashing
needed to understand the concept as part of this research. Authenticity in relation to consumption has been an important topic in recent years in marketing literature (Leigh et al, 2006). Reisinger & Steiner (2006) criticized the concept of authenticity because ‘…there is no common ground as to their existence, meaning or importance’ and indicate that authenticity could be replaced by words such as genuine, actual, real or true. Cohen (1988) speaks of the influence of personal experience in relation to perceived quality as an indication for authenticity. Gillmore and Pine (2007) describe the perceived value of authenticity as an individual experience: ‘The perception of Authenticity remains
personally determined, not corporately declared’. Therefore the perceived authenticity of
a label for eco-products can have a significant influence on individual consumers trust (Gillmore and Pine, 2007; Grant, 2007). Also authenticity is more often an issue in markets where the topic is at stake and has been put in doubt (Peterson, 2005). Within the industry of eco-product there has been an ongoing discussion regarding the topic of Greenwashing. Esty and Winston (2006) describe Greenwashing when: ‘… a company is
claiming to do something green and knows full that it isn’t’. If the actual facts do not
match green claims, meaning a strategy is not genuine or authentic, charges of Greenwashing are sure to follow. Also the authors point out that the positioning of a brand only works if it is true, meaning firms have to live their values every day. They state: ‘Before trying to position your products as green, make sure you have your ducks
in a row.’ In addition Pine (2009) mentions two basic rules brands should apply to
perceive a high level of authenticity: 1. Be true to yourself and 2. Be what say you are to others. Eco-labels can support a brand or product to verify a green claim and give credible information, which otherwise cannot be communicated during the purchase process. Pine (Interview: 2009) adds that an Eco-label is a representation of the firm and shows that the product meets the standards of the certification organization on the label. In this case an Eco-label, or as Pine calls it an ‘authentication mark’, can strengthen authenticity because not the firm is calling itself authentic but a third party does.
second type (Original authenticity) is related to the uniqueness of a product for instance in design, content or the way it is presented to consumers. The third type is service related and defines an exceptional involvement towards customers (exceptional authenticity), meaning individual and custom-made approach in service management. The fourth type (Referential authenticity) is related to rituals, concepts and ideas, which one relates to positive experiences in another (past) context. The fifth type (Influential authenticity) addresses ideas, which a brand communicates to influence their customers to get involved in changing the future for the better.
Proposition 4: Natural cosmetic firms with a strong and authentic brand identity are not
per se dependant on a label as part of their brand strategy
Authenticate via online social networks and user generated content
unique platform for consumers to share their thoughts via text or video messages with other peers (Blythe and Cairns, 2009). Also these platforms provide the opportunity to build brand communities. Regarding online communities Potts et al. (2008) discuss the role of YouTube which provides space for user led content creation and collective activism. They state: ‘The creativity and value is situated in the community of users. Additionally Jenkins (2006) introduced the term convergence culture or participatory
culture as the flow of content across multiple platforms in relation to the power of the
media industry and the power of consumers. The author describes a new audience which interacts in unpredictable ways and make their own decision where and how to search for entertainment content. Moreover Jenkins defines participatory culture as one in which ‘…fans and other consumers are invited to actively participate in the creation and
circulation of new content’ (Jenkins, 2006).
Leigh at al. (2006), who research the role of authenticity in relation to brand communities of the UK Retro car brand MG concluded that brand managers have to facilitate fan and community activities that promote brand authenticity and heritage. The authors point out that under the ‘regime’ of an active brand community, brand managers no longer ‘solely’ own the brand, because members of the community ‘… subjectively negotiate the
meaning of what is authentic’. Hence marketers have to take into account that these
dedicated consumers become co-creators of brand authenticity.
Proposition 5: Consumers create online information portfolios to authenticate
information concerning specific products.
3.4 Conceptual framework
Figure 3: Overview conceptual framework
4. Methodology
The study combines research on a Macro level, investigating the German organic cosmetic market and a Meso level, focusing on the actors, which are members of the strategic group within this particular market and dedicated consumers of natural cosmetics. A multiple case study is chosen to create insight into the usage of Eco-labels as part of an integrated differentiation strategy by natural cosmetic companies. The case study includes material from online consumer communities to test if Eco-labels do add a substantial value to the positive experience of credence goods.
The study will triangulate data through the use of both qualitative and quantitative information from various sources (Eisenhardt, 1989). According to Yin (2003) ‘... the unique strength of case study is its ability to deal with the full variety of evidence -documents, artifacts, interviews, and observations’. By including these elements the research was divided into two phases and started investigating secondary data, like annual reports, specialized press items, dedicated websites, online communities for natural cosmetics and scientific publications. This phase gathered industry information, information about dedicated consumers of natural personal care products and information from the different actors in the industry. After analyzing this data relevant interview questions were written for the empirical part of the study. In between the first and the second phase interviews with actors from the industry and content analysis produced additional in-depth information to build multiple individual cases (Yin, 1984, 2003). Finally all cases were analyzed by cross-unit comparison and the chosen theoretical framework was applied to find out to which extent natural cosmetic firms differentiate their products in the German market through an Eco-label.
4.1 Case study
investigator to explore real-life events like organizational and managerial processes and industry changes especially when she has little/no control over the events (Yin, 2003). Furthermore multiple case studies were applied to strengthen the results and provide information, which can be analyzed through a pattern matching method (Yin, 2003). This study investigates four cases, analyzing how the top four firms in the natural cosmetic industry in Germany and one firm from the drugstore segment that significantly gained market share apply product differentiation strategy. Their strategic approach regarding the appliance of Eco-labels and other differentiation techniques will be analyzed. These cases will also be compared with the German ‘Bio-siegel‘ that has become a well-known standard for food. Important in selecting the cases will be to analyze repeating patterns and contrasting strategies applied by the firms who make use of the labels. By applying this method a main explanation can be found in every case, even if the selected cases differ in their detail (Yin, 2003). Finally after building individual cases, cross-case search was conducted by testing the defined themes from the theoretical framework. The emphasis was on what differences occur, why and with what effect (Cooper and Schindler, 2006). Additionally information regarding consumers who experience natural cosmetics as credence goods has been added to develop descriptive cases concerning the communication strategy of firms (cause) and the influence of these strategies on dedicated consumers (effect). This information has been gathered through content analysis of YouTube Video material. A precise description of the content analysis can be found in paragraph 4.2.3.
4.2 Data collection and specific samples
research and content analysis) was collected. The interviews were semi structured and open-ended. In general all interviews had the same structure and the same main topics divided in (a) general information regarding the natural cosmetic market and (b) information regarding labels in the natural cosmetic industry. All interviews were recorded (with the permission of the interviewee), written down and sent to the interviewee for approval before applying the data within the research. Data was also selected by a content analysis of a YouTube community7 that consists of dedicated users
of natural cosmetics. This corresponds with the idea of Cooper and Schindler (2006) who mention the advantage of researching online communities to get in touch with populations that have special interest. Additionally a research overivew of all methods can be found in appendix 1.
4.2.1 Selecting cases
To developed relevant cases a selection of an appropriate population is needed (Eisenhardt, 1989). In this study the cases focus on brands that apply Eco-labels as part of a differentiation strategy. To determine a significant sample I started with investigating industry specific literature, articles and market researches (from Elfriede Dambacherresearch/Ger; Kline research/USA; Organic monitor/UK). Moreover expert from the industry (n=6) were interviewed to find out which labels are important to select and compare within the case study. Additionally a list with a description of the interviewees can be found in appendix 3.
4.2.2 Selecting interviewees
The interview partners were selected using two methods. First, relevant industry literature, articles, congress programs (key-note speakers) and online media were scanned for names of leading experts. Secondly a snowball system was applied by asking interviewees for other relevant experts in the field. Snowball sampling provided me with qualified expert data through the use of referral networks (Cooper and Schindler, 2006).
4.2.3 Selecting Video content on YouTube
During the literature study I discovered a German community of dedicated consumers of natural cosmetics on YouTube. YouTube is a well-known video sharing website, which started in 2005 and provides free video stream for Internet users.
7
In 2008 German users introduced a new category including product reviews about natural cosmetics. These reviews are often combined with video-tutorials of the presenters on how to use specific products, like make-up and skin care products. The presenters of these videos describe different brands of natural cosmetic products and their use.
Most of the presentations are accompanied by feedback of the viewers, who give their opinion on the presentation, the products and topics that have been reviewed.
Because video analyzing of online content is not very common in research methodology I searched for scientific projects that included the analysis of video content on YouTube as a research method. The Journal of American Medical Association (2007) published a related article, that used this method concerning ‘YouTube as a Source of Information on Immunization: A Content Analysis’. In this article the authors analyzed video content on YouTube by starting to search the website using two keywords, vaccination and
immunization. In total 153 videos were analyzed with a result of 48 percent negative, 32
percent positive and 20 percent ambiguous towards the topic of immunization. The authors also indicate the presence of a community of YouTube users, who criticize immunization and therefore influence their peers e.g. other YouTube users and actors, who seek information about immunization. Therefore the authors recommend clinicians to be aware and prepared to respond to patients, who collect their health information from these sources (Keelan et al, 2007). They selected only English content videos and used the following measurements: type of clip, clip length, and scientific claims made by the video. Also the user interaction with the viewers was measured using view counts, and the viewer reviews from 1 star (poor) to 5 stars (awesome). After that the authors categorized if the videos portrayed vaccination and immunization in a negative, positive or ambiguous (either negative or positive or included a debate of both) way. In total they analyzed 153 videos with a result of 48 percent negative, 32 percent positive and 20 percent ambiguous.
