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 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 ability. Furthermore, numerous committee responsibilities were transferred to individuals. Japanese women were among the most sophisticated s 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 preexisting 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 s 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 homecountry (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 s 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 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 -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.