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P&G JAPAN: THE SK-II GLOBALIZATION PROJECT

Executive Summary 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's need for a new global strategy and their ability to develop SK-II into a worldwide beauty product. Ultimately we will see that P&G needs to expand their hold in the Japanese market while becoming more familiar with the needs of potential markets.

Analysis In recent years Paolo de Cesare was very successful at the head of the European and Japanese Max Factor divisions, but the idea of taking the SK-II that was so successful in the Japanese market global is very risky. Up until the 1980's, P&G Japan was only a minor contributor to the P&G international growth. In 1985, Durk Jager found that the key reasons for the failure lied in the fact that they had not recognized the distinctive needs of the Japanese consumer. Over the next four years under his management changes were made to research, advertising and distribution that provided a 270% increase in sales, and Jager assumed the position of group vice president for Asia. However, in the 1990s the business could not keep up with the competitors in the Japanese market. Just as indicated in the article "Philips versus Matsushita," the organization began to be more focused on the structure of the company than the strategy of the company and where it was going. Jager then developed Organization 2005, his strategy in the rapid development and roll out of new products globally, which also involved several management changes. Just as indicated in the article "Philips versus Matsushita," the organization began to be more focused on the structure of the company than the strategy of the company and where it was going. One of the changes in O2005 was the promotion of Paolo de Cesare to head Max Factor Japan and was faced with the dilemma of whether or not the SK-II could break into the global skincare market.

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P&G JAPAN: THE SK-II GLOBALIZATION PROJECT

1]

As Paolo DeCesare, what factors do you need to consider before deciding what to

recommend in your SK-II presentation to the global leadership team (GLT)? What kind of analysis will you need to do in preparing for that meeting? As Paolo De Cesare, the factors need to consider before deciding what to recommend in the SK-II presentation to the global leadership team (GLT) are: (1) This is P&G’s first-ever proposal to expand a Japanese brand worldwide. Other countries have a different culture than that of consumers in Japan which is why this is a big risk. (2) P&G’s global organization is in the midst of a 2005 restructuring program; it can be disruptive. (3) Cost in 1980’s of running all local product development labs and manufacturing plants was limiting profits; ever since then local general managers’ resisted emergence of new products because of the negative impact on local profit. (4) Lingle’s POV was P&G should meet the demands of every nation, but still have local self sufficient subsidiaries; P&G built their company around his POV. (5) Lafley’s POV was that most of the advertising budget should be spent on two products- MaxFactor Color and SK-II; SK-II had such a high margin. (6) De Cesare’s POV was there is a great opportunity for SK-II to break into the $9 billion worldwide prestige skin care market. (7) Jager’s POV was that a major product development technology center was needed for demanding Japanese consumers; this would also support product development throughout Asia and other parts of the world. (8) Ram’s POV was SK-II should be introduced into Chinese department stores as Oil of Olay moves into “second-tier stores”; also predicted China to be the 2nd largest market in the world for prestige beauty products. 2|Page

P&G JAPAN: THE SK-II GLOBALIZATION PROJECT The analysis to be done to prepare for the meeting shall consider following objectives: (1) How would the cultural and organizational changes of O2005 affect SK-II in becoming a global brand? (2) The analysis should be based on the business model of SK-II and it shall be very important to understand if the business model of SK-II aligns with the cultural and organizational changes of O2005. (3) Which countries are most attractive? It is significant to find out the global skin care market viz-a-viz global prestige skin care market to find out the potential markets in other countries. (4) Which entry strategies should be implemented? The entry strategies in terms of Marketing Mix, timing strategy, investment decisions, strengths, weaknesses, opportunities and threats must be understood to position the product in new global market.

2]

Does SK-II have the potential to become a global brand within Proctor &

Gamble’s worldwide operations? Why or why not? Following are the pros and cons of the global potential of SK-II:

Keeping all the Pros and Cons it can be realized that SK-II have the potential to become a global brand within Proctor & Gamble’s worldwide operations 3|Page

P&G JAPAN: THE SK-II GLOBALIZATION PROJECT

3. Which of the three market options should Paolo DeCesare recommend to the GLT? What benefits do you expect to gain? What risks do you see? After arriving in Japan, Paolo DeCesare found that SK-II is already a successful product in Taiwan and Hong Kong. This success had already encouraged the management to begin expansion into three regional market options – Singapore, Malaysia and South Korea. But Paolo DeCesare thought that these are relatively small markets and he wanted to take bold entry. He instead wants to check the profitability of entering new major markets. The options recommended by Paolo DeCesare were as follows: A] Introducing the brand to mainland China. The beauty care management team for Greater China was interested in SK – II’s triumph in Taiwan and Korea. B]

Introducing SK – II into the large western market.

C]

Restructure the brand positioning strategy in proven market of Japan.

We will discuss each of the three options in depth here.

Option A

Activity Benefits Introducing the brand to mainland 1 Previously P&G had China problem with its brand Olay in China just after launching. But they have recovered from that crisis by adding service component to the product formulation. They staffed their outlets or showrooms with beauty consultants. This learning can be applied to penetrate in Chinese market. 2 The major benefit of entering into Chinese market is its popularity. It is predicted to become second largest market in the world. And especially their target segment prestige beauty segment-

Risks 1 P&G is relatively new company in mainland China. So they are relatively less knowledgeable about Chinese culture. 2 All major competitors from the world are present in Chinese market. 3 The third is risk about market readiness. The customer is not accustomed with the process of applying this product. They usually and traditionally applied one step skin care process and only recently they had switched to three step cleansing and moisturizer in process. So, the success of a six to seven step skin care product is on a toss. 4|Page

P&G JAPAN: THE SK-II GLOBALIZATION PROJECT is growing at 30% to 40 % a year. 4  Chinese local laundry products are very low in price.

4 Another risk is about well known existence of counterfeit products. The market is flooded with counterfeited prestige skin care solutions. The bureaucracy attached to the import and registration process is also lengthy. The import duty is about 35% to 40%. So they have to squeeze their profit to a significant level. Option B

Introducing SK – II 1 The target market for into the large the product is western market sophisticated beauty conscious group of people. Europe has a large number of customers belonging to this group. 2 The probable consumer group are already habituated with six to eight step skin care solutions.

1 The market is overcrowded here. The main concern is to create visibility in this market. 2 Creating the brand awareness in European market is relatively costly as the cost of television and print medium is high. And as it is a product targeted to sophisticated beauty conscious group of people, mass distribution outlet will not help the brand. 3 Typical distribution channels cannot deploy in this case.

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P&G JAPAN: THE SK-II GLOBALIZATION PROJECT Option C

Restructure the brand positioning strategy in proven market of Japan

1  Japanese women are the most sophisticated users of brand products and they are world's leading consumers of SK II care solutions. The total market for sophisticated beauty conscious is even greater than US laundry market. Japanese technologists have deep insight about their consumers. So they could design the product which is most suitable for the domestic market.

1  Form the past few years the growth rate in Japan for SK II is not very high. The product’s brand re-positioning may not gain enough attraction from its target consumers. 2  Most of P&G’s product are of “stack it high, sell it cheap” nature. This particular product in Japan is very costly priced at $ 50 compared to $ 7 for Olay Facial cloth in the United States. This pricing strategy of SK- II does not goes in line with other products of 2 The cost of market P&G. expansion is always more than the cost of product diversification or development of new product. The basic product can be presented with some more value addition, by adding antiageing and anti-whitening products. In Japan technologists and marketers are working jointly to boost the accuracy and credibility of their skin diagnosis. 3 The product has a small share in a rich market. Product innovation and superior service can accelerated the growth in market share.

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P&G JAPAN: THE SK-II GLOBALIZATION PROJECT

4.

How should he implement your recommended option? What are

implications for P&G’s new post-O2005 organization? What support and/or resistance do you expect? How will you manage it? Implementation of the recommended option: To implement Market development option in mainland China P&G should take the following steps: 

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There are many low priced products in Chinese market and also fear of counterfeited products. So they have to build a strong brand identity in China. They should convey their brand positioning strategy clearly to the target consumer segment – the sophisticated beauty conscious group of people. P&G also has to educate their customer base to apply this six to eight step skin care solution. The import duty for this product is about 35% to 40%. So they have to squeeze their profit to a significant level. But they should take advantage of the inexpensive beauty consultants. Thus their administrative expenses could be minimized for Chinese operation. Banking on this advantage they can still make the product profitable.

To implement Market development option in large western market P&G should take the following steps:  

To be successful in large western market, P&G has to differentiate its product distribution channel from their other product. P&G should also include beauty consultant’s analysis and advice to their service offering.

To implement Market penetration option in J P&G should take the following steps: 

To justify their high price they have to boost the accuracy and credibility of their skin diagnosis. P&G should work on methods which will increase the loyalty of their Japanese customer.

Implications for P&G’s new post-O2005 organization: According to the Chief Operating Officer, Mr. Jager, the implementation of O2005 will enhance annual growth 13 % to 15 % which will result in $900 million annual savings starting from 2004. But to implement this, they have some implication in the following areas:

Implication in change of culture: He wanted to change their work culture by reducing the employee’s non-value adding work. So, Mr. Jager wanted an organizational reform.

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P&G JAPAN: THE SK-II GLOBALIZATION PROJECT Implication in change of process: Mr. Jager wanted to change the traditional systems and processes. He increased the performance based pay component. He also extended the reach of stock option from senior management to all employees to motivate them. He also stretched on integrated business planning process where all operating plans could be reviewed and sanctioned together. Implication in change of structure: The most drastic change is to shift the primary profit responsibility to seven global business units from four regional organizations. They also started to standardize their manufacturing process, brand portfolios and co-ordinating marketing activities.

Resistances and Support of the Proposed Change in Organizational Structure: The fact says that implementation of O2005 was causing a good deal of organizational disruption and management distraction. The cause is the focus of profit making has been shifted from local arena to global. Now making of budget is global responsibility, but European managers often did not understand the competitive and trade differences across markets. So P&G has to standardize and centralize their policies and practices out of their head office. The maximum resistance for the proposed change came from a huge number of efficient local managers left the company. Managing the Change: There are many elements which are to be worked out to make the change successful, which are listed as follows: 

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Speed: The change should be implemented globally at a rapid speed and it requires aggressive plan and executives to implement the same. The new structure and work has to be designed across all global operations, assignments of people finalized and communicated and the new organizations started up on schedule. Employee Communication: Obviously the key to successful transformation is employee buy in. Proactive two way communication is the key to achieve that. The top management of the organization has to meet a good number of employees across all levels, functions and countries to seek feedback and provide clarifications on O2005. Follow the Global Strategy: An important element should be to give the great degree of standardization to the local management to align their own design with global strategy. This will give a feeling of independence to the local management while the global standard will also be met.

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