P&G Japan: The SK-II Globalization

Project
Case Analysis
Current Business Affairs

Presented by: Syed Fawad Hussain

Submitted to: Captain Munawwar Ahmad

PN

June 03, 2011

OVERVIEW
This case examines P&G and whether or not they have the ability and means to
make their SK –II product a global brand. In this case we examine P&G need for a
new global strategy and their ability to develop SK-II into a worldwide beauty
product. Ultimately we will see the P&G needs to expand their hold in the Japanese
market while becoming more familiar with the needs of potential markets. The key
players in the case study was Paolo de Cesar, the president of max factor Japan, the
hub of P&G’s fast growing cosmetics business in Asia, and previously in charge of
the company’s European skin care business. Yet, as he readily acknowledged that
there was significant risks in P&G’s first ever proposal to expand Japanese brand
into new markets worldwide. Another key player was Alan Lafley, head of P&G’s
beauty care GBU to which de casare reported. In the end it was his organization and
his budget that would support such a global expansion. Lafley would need strong
evidence of the transferability of a brand in a culture, where the consumers,
distribution channels, and competitors were vastly different. Another constraint was
that the P&G’s global organization is in the midst of a 2005 restructuring program
and it can be disruptive.

Throughout its early expansion, the company adhered to set of principles set down
by Watlter Lingle, the first VP of overseas operations. In 1986, the seven divisions in
P&G’s domestic U.S. organization were broken into 26 categories, each with its own
product development, product supply and sales and marketing capabilities. The
company also replaced its international division with four regional entities… each
assuming primary responsibility for profitability. Up to the mid 1980s, P&G Japan
had been a minor contributor to P&G international growth. 12 years after entering
the Japan market, P&G’s board reviewed the accumulated losses of $200m and
eroding sales base decreasing from 44 billion yuan to 26 billion yuan in 1984. But
CEO at that time convinced the board that Japan was strategically important. There
were certain causes of failure in Japan and that was the company had not
recognized the distinctive needs and habits of the very demanding Japanese
consumer. The company had not respected the innovative capability of the
Japanese companies like kao and lion who turned it to be among the world’s
toughest competitors. The company had not adapted to the complex Japanese
distribution system. In 1996, Durk Jager the chief operating officer said that the
development of new products as the key of P&G future growth. He also increased
the budget for R&D by 12% while cutting marketing expenditures by 9%.
Implementation would be painful, he warned in the first five years it called for
closing of 10 plants, and the loss of 15000 jobs- 13% of the worldwide workforce.
Jager said that any organizational change would have to be built on a cultural
revolution. He changed the P&G culture from slow, conformist and risk averse to
stretch, innovation and speed. Reinforcing the new culture were some major
changes to P&G’s traditional systems and processes. Performance based
component of compensation so that for example, the variability of a vice president’
annual day package increased from a traditional range of 20%. And to motivate
people, he extended the reach of the stock option plan from senior management to
virtually all employees. Going forward jager argued for an integrated business
planning process where all budget elements of the operating plan could be
reviewed and approved together. The most drastic change introduced in O2005,
primary profit responsibility shifted from P&G’s four regional organizations to seven
global business units (GBU). GBU were also charged with the task of increasing
efficiency by standardizing manufacturing process, simplifying brand portfolios and
coordinating marketing activities. The restructuring also aimed to eliminate
bureaucracy and increase accountability. Furthermore, numerous committee
responsibilities were transferred to individuals. Japanese women were among the
most sophisticated users of beauty products in the world and on a per capita basis,
they were the world’s leading consumers of these products. With such a small share
of such a rich market, de cesare felt that a strategy of product innovation and
superior in-store service had the potential to accelerate a growth rate that had
slowed to 5% per annum over the past three years. De cesare was extremely
excited about SK-II potential for growth in its home market. One loyal SK-II customer
in Japan already spends about $1000 a year on the brand. Even if you were a
regular consumer of all P&G’s other products from toothpaste and deodorant to
shampoo and detergent all together you would spend nowhere near that amount
annually. A very different opportunity existed in china, where P&G had been
operating only since 1988. China is widely predicted to become the second largest
market in the world. The prestige beauty segment is growing at 30% to 40% a year
and virtually every major competitor in that space is already here. Furthermore, the
skeptics wondered if the Chinese consumer was ready for SK-II. Unlike china, Europe
had a relatively large and sophisticated group of beauty-conscious consumers who
already practiced a multi-step regimen using various specialized skin-care products.
The bigger challenge, in this view would be introducing a totally new brand into an
already crowded field of high-profile, well respected competitors. While the strategic
opportunities were clear, de Cesare also recognized that his decision needed to
comply with the organizational reality in which it would be implemented, but there
were some organizational constraints regarding globalizing the SK-II product.
According to some officials in P&G, cosmetics sales required more time and effort
from local sales forces, more local costs were assigned to that business, and that
has added to profit pressures.
ANALYSIS
P&G’s International Business-Level Strategy

Porter’s model suggests that international business-level strategies are usually

grounded in one or more of these home-country factors. Based on Porters model,
the firm’s strategy, structure, rivalry and demand conditions seem to be significant
for P&G’s international business-level strategy.

Firm strategy, structure, and rivalry: SK-II is the result of the combined
ingenuity of P&G’s most talented technologists from its worldwide labs, as well as
the specific expertise from a Japanese group. This combination worked well because
it reflected the best of P&G's consolidated R&D while catering specifically to the
needs of the Japanese market. Being a global company headquartered in the U.S.
makes it easier for P&G to bring its global talent to its home-country so that it can
improve its R&D capabilities and thus have a competitive advantage. Having a pre-
existing global structure may also make it easier to adapt this product to the needs
of those other countries where P&G does business. When considering expanding the
SK-II market, this competitive advantage should be considered.
Demand conditions: The initial product opportunity for SK-II came about from
U.S / global demand for an improved facial cleansing product. That spawned the
creation of SK-II as well as other products developed to meet these needs. Because
SK-II was developed in response to the demand conditions in Japan, it became a
highly regarded cosmetics product and survived the ferocious competition in the
Japanese market; thus proving to be a competitive advantage. Furthermore, having
a certain amount of understanding of the emerging Asian economic powers, P&G
realized that fashionable people in countries like Korea, Taiwan, Hong Kong, etc.,
closely follow the fashion trends in Japan. Therefore, by entering the Japanese
market and securing a substantial level of market share, P&G could have also
created further competitive advantage for entering those emerging Asian markets.
This strategy may even prove true in the case of entering the Chinese market.
However, one may argue that China is a poorer country, but the populations in
Hong Kong, Taiwan and Singapore are basically ethnically Chinese. Therefore, their
habits should be much closer than that between Japanese and Chinese. Hence, with
the successful entry into the Hong Kong market, Taiwan markets can be used as a
direct test of the level to which Chinese women will accept the demanding
procedures of SK II.

P&G’s International Corporate-Level Strategy

International Corporate-level strategy can be classified into three different types:

multi-domestic, global, or transnational. November, 1999 was an interesting point of
time for P&G because the firm’s corporate level strategy appears to be shifting from
a multi-domestic strategy to a transnational, or perhaps global, strategy. This is
being done through the O2005 initiative, and explains some of the struggles P&G
may face trying to expand the SK-II product globally.

As discussed in the case overview, P&G was "in the midst of a bold but disruptive
Organization 2005 restructuring program. As GBU’s took over profit responsibility
historically held by P&G’s country-based organizations, management was still trying
to negotiate their new working relationships. This quote explains P&G’s
international corporate level strategy, both where it was, and where it’s trying to
go. A tell tale sign of a multi-domestic corporate level strategy was for P&G to have
profit responsibility held by their country-based organizations. A multi-domestic
strategy has strategic and operating decisions decentralized to each country to
allow products to be tailored to each local market. The opposite is true for a global
corporate strategy. Under an international global corporate strategy, products are
standardized across all markets and economies of scale are emphasized. This was
the direction P&G was headed in when GBU’s took over profit responsibility. In fact,
this structure is very similar to a ‘worldwide product divisional structure’ which
supports the use of a global strategy.

However, during the SK-II development through the expansion proposal, P&G’s
international corporate strategy appears to be a transnational strategy, which
combines aspects of the two aforementioned strategies. This is done in order to
emphasize both local responsiveness and global integration and coordination. This
is true with the SK II project. When the SK-II product was first created it was done so
on a global level to meet a global demand. The product was then localized for the
Japanese market. For instance, separate marketing teams were used in the U.S. and
in Japan to develop this product for each market. By first creating one product to
meet global demand rather than regional demand, P&G was able to achieve
economies of scale and efficiencies by having one R&D team working on a product
that would meet many regions needs. However, P&G then allowed each region
some flexibility in how they marketed, priced, and distributed this product. This was
a big reason for SK-II’s success in Japan.

It is apparent that P&G has adopted a transnational strategy. In line with the
characteristics of that strategy, P&G is considering expanding a product proven to
be successful in a demanding (Japanese) market in to other markets. By doing so,
P&G will need to rely on aspects of a global strategy that uses a standardized
product for the global market such that the competitive advantages in the home-
country (Japan) can be leveraged out globally, thus achieving economies of scale.
P&G will also need to rely on aspects of a multi-domestic strategy that pays great
attention to various unique features of different markets. For the Greater China
market and the European market, P&G will need to make an effort to fit into the
local environment in order to achieve success in a different culture from Japan. In
order for this transnational strategy to work for the SK-II expansion, the P&G
corporate structure must have good communication and flexibility. Without that, a
transnational strategy will not be as effective, and the SK-II expansion may not
succeed.

Industry environmental analysis: Porter’s ‘The Five Forces of

Competition’ Model

Paolo de Cesare knew there were significant risks in his proposal to expand SK-II
into China and Europe. This skin care line from P&G has been a huge success in
Japan, a country where customers, distribution channels and competitors were
different from those in most other countries. The Model of ‘The Five Forces of
Competition’ helps describe the current situation of SK-II in Japan as well as analyze
the Industry Environment in P&G’s target market for its skin care line. This
information can be used by P&G when deciding whether or not to launch SK-II in
China and the United Kingdom.

Japan: In this special market, where the world’s leading per capita consumers and
highly sophisticated users of beauty products are, the threat of a new entrance
seems to be very low. There exist entry barriers that make it difficult for new firms
to enter this particular market. Among these barriers is the difficult access to the
complex Japanese distribution system and the product differentiation of the very
competitive companies that already share the market. Companies as Shiseido, Lion,
Kao, and Kanebo compete for market share, suggesting that with few big players in
a slow growing market there is strong rivalry. Furthermore, the low switching costs
of the skin care products makes easy for competitors to attract buyers from the
rivals, thus enhancing the competition. The threat of substitute products for SK-II in
Japan is high because of the high innovative capacity of P&G’s competitors, Kao and
Lion. These Japanese companies spend huge amounts in research and development
to be on top of the technological challenge. The bargaining power of the buyers is
not the main factor to set the price, but competence for market share among
competitors is. This lets customers have many options to choose from. Additionally,
the bargaining power of suppliers doesn’t seem significant for this industry as well.
China: Just the opposite of the Japanese market, the Chinese market has a high
threat of new entrances. The Chinese prestige-beauty segment is growing fast, at
30% to 40% a year and is very attractive for new firms to enter. Almost all-major
competitors are already there: Lancôme, Shiseido, and Kao are examples of
companies selling products in China. The intensity of rivalry among the competitors
is still low, because this growing market reduces the pressure for firms to take
customers from competitors. However, the threat of substitute products is high,
because the big players in the Chinese market are mostly global firms, with high
innovative capacity. The bargaining power of suppliers and buyers is low.

Europe: Well-respected companies including Estee Lauder, Lancôme, Clinique,

Chanel and Dior crowd the field of high profile skin care products, resulting in high
competence among existing competitors and a low threat of new entrances. The
brands’ prestige and the loyalty of their sophisticated and beauty-conscious
customers are high entry barriers. As in Japan and China, the threat of substitutes is
high because of the brand’s globalization, and the fact that those companies can
easily legally imitate their competitor’s new products. The bargaining power of the
buyers is high because of the multiple options they have to choose from. As in the
previously described markets, the bargaining power of suppliers is not significant.

Regardless of what geographic market Proctor & Gamble plan to enter with SK-II,
they need to carefully observe and learn from those companies already in that
market. They have to find out what it is that successful firms are doing to gain and
maintain market share. The I/O model of above-average returns dictates that firms
in the same industry generally possess the same resources and pursue similar
strategies in order to achieve high returns. On the other hand, P&G has to utilize its
own resources and capabilities which are not similar to competitors in the high-end
cosmetics industry. This theory is based on the resource model of above-average
returns. The resource model maintains that firms in an industry generally do not
have similar resources and capabilities, and that a firm’s unique resources provide a
competitive advantage. The best strategy for P&G to pursue in taking SK-II to the
global marketplace is to congruously use these two models. In Japan, where P&G
had a large market share in this industry, they utilized their extensive technological
resources and extensive research and development. While these resources were
spread over the cosmetics industry (each firm has extensive research and
development and technological resources), P&G had the advantage of being a large
corporation with deeper pockets than many competitors. With the decision of taking
SK-II into the global marketplace looming, these two models serve as effective tools
in determining which geographical markets SK-II can flourish. In some cases, as with
the U.K. market, the application of these two models can reveal that it might be a
better decision to enter a particular market. In the U.K., many firms are fiercely
competing for share in a saturated market. The firms’ resources and capabilities are
spread thinly across the market. This makes it difficult to establish and maintain a
competitive advantage. Contrary to the U.K. marketplace, the Chinese cosmetics
market is still growing. P&G has the opportunity to leverage its own competitive
advantages to enter this market with full force. While SK-II has little visibility outside
of Japan, P&G could use their Japanese market experience to develop an effective
strategy for entering other markets such as China, Europe, and eventually the
United States. They had established market share in Japan, but the other
geographical markets consist of different environments and different competitors
who possess different resources and capabilities. As of 2004, P&G’s most recent
challenge is entering the very competitive U.S. cosmetics market with SK-II. It is
planned for release in America for February 2004, sold exclusively at Saks Fifth
Avenue.
RECOMMENDATIONS
In the highly competitive Japanese skin-care market, P&G¡¦s new SK-II product has
proven its success as a premium and prestige offering. P&G has gained significant
knowledge transfers from SK-II development and further, has successfully tapped
the fickle Japanese market and has developed a loyal user-base in Taiwan and Hong
Kong. With its phenomenal success, it is only logical that P&G consider rolling-out
the SK-II product-line to the international market. However, while there is
significant worldwide growth potential within the $9 billion prestige skin-care
industry, based on recent organizational changes, new corporate priorities, and
thorough market assessment, P&G must base its decision on current resources and
capabilities to effectively maintain profitability. In analyzing the three options of
Chinese expansion, European roll-out, and further growth of Japanese market, P&G
should continue to concentrate its efforts in Japan to further penetrate and grow its
share (only 3% of a $10 billion beauty market).

There are a number of factors under consideration when analyzing and weighing
business opportunities for each of the three markets. In the first stage of this
analysis we reviewed each regional market to size respective target consumer,
weighed barriers to entry, and determine each market¡¦s stage of growth in addition
to potential. Second, we studied the markets to determine whether successful
entry would be permitted due to current constraints/limitations and further, whether
it made business sense for the new P&G global strategy (fit). Finally, a competitive
landscape assessment of each region¡¦s skin-care market allowed us to understand
the viable success of SK-II within its peer product offering space.

For a company to succeed, its strategy must either fit the industry environment in
which it operates, or the company must be able to reshape the industry
environment in which it operates to its advantage through its choice of strategy.
Companies typically fail when their strategy no longer fits the environment in which
they operate.

To achieve a good fit, Paolo and his managers must understand the forces that
shape competition in their external environment. This understanding enables them
to identify strategic opportunities and threats.

An expansion strategy does not necessarily lead to expansion of a market. For

example concentration, integration, diversification, cooperation, etc.. are different
ways to expand yet do not necessarily lead to expansion of a market for a particular
product. An extension of a market by reaching out to a new market segments (such
as geographically) is not the same as regional, national, or international geographic
expansion of the company's sales. The first option leads to an increase in primary
demand for the product category. But in the latter option, a company might grow its
sales by gaining market share from existing competitors in new geographic
markets. Similarly, if a market penetration is sought by converting non-customers
into the customers of SK-II, consequently it may lead to an increase in the primary
demand. But if a market penetration is brought about by attracting competitor's
customers, it leads to increases in the selective demand.

Paolo`s expansion strategy in rolling out SK-II may consider the following ways:

Grow Sales with Existing Product – With this approach he will actively increase the
overall sales with current product in new and existing markets. This can be
accomplished by:

1. Current markets – Getting existing customers to buy more. Getting potential

customers to buy.

2. New markets – selling current product in new markets.

3. Grow Sales with New/Altered/reshaped/renamed SK-II line of Products and

versions– With this approach he will achieve.