More specifically, after the acquisition of Max Factor Japan and success in its SK-II line, questions are raised about whether global expansion is feasible and profitable as a franchise. De Cesare ran this skin-care line in Japan, but he reported directly to Lafley. This is crucial because global expansion would require Lafley’s approval in budgeting and organizational support. P&G recently went through major organizational changes over a period of six years known as O2005. This created huge questions in the strategy that would be put together in the case of a global expansion for SK-II. Within the U.S.
Procter & Gamble originally followed an organizational structure consisting of seven different divisions that were furthermore shattered into 26 distinct categories. Each category had its own R&D, supply management and marketing. In addition, the international organization was divided into four regions that were then broken down individually by country. The GM’s of each country and each of the four individual regions were uniquely held responsible for earnings. This would create conflict and resistance in unifying the company due to cultural issues affecting sales in certain countries.
Originally, P&G was a failure in Japan. They failed to understand and accommodate to local culture and its demands, as well as ignoring the fierce competition. Believing in Japan as a key place for the beauty business, the decision to pursue success was held. Finally, in 1999, when Jager was named CEO serious organizational structures were started: O2005. R&D spending was increased by 3% while reducing expenses. Cutting costs was made to become more efficient overall as an organization, but it would come at a painful price by reducing the workforce and taking a hit of $1. 9 billion dollars over five years.
More importantly, he changed the structure of four regional VP’s to seven GBU’s (Global Business Units). This came with a change in responsibilities and mentality. The key to this reconstruction of organization was based on the principle that constant innovation of products will promote growth. To encourage risk taking and innovation, the heads of the GBU’s and management were placed on a performance-based compensation which could dramatically increase earnings. The ultimate goal was to standardize the R&D, manufacturing and marketing across the company disregarding culture as much as possible.
This was meant to increase communication between former countries GM’s and become more efficient and effective in innovating products. Porter’s Diamond-Model: Using Porter’s five forces model in P&G’s structure and strategy to face the international markets, it is convenient to analyze it using the Porter Diamond analysis. These include: factor conditions, demand conditions, related and supporting industries, firm strategy and its structure and rivalry, government, and chance. The theory suggests that all these factors are interconnected.
First of all, the SK-II is a skin-product line originated in Japan that requires a six to eight step procedure to have its max benefits. It is intended to be priced as a high-end product vs. the Olay in the United States. P&G have a huge competitive advantage which is their enormous R&D power. It allows for their global R&D groups to work together through the company’s Beauty Care GLT. This permits the technologists of R&D to make changes to the product as needed to individual cultures. Thanks to P&G’s already established global structure, individual needs are more effectively and efficiently met.
Speaking solely about SK-II expansion, the massive global technologically based R&D can serve as a competitive advantage. Japan is the world’s leading consumer of beauty products per capita. Thus, the demand for highly effective beauty products is always off the charts in Japan. P&G put their best technologist across the world (especially Japan) to create a multi-step product that not only cleaned, but also moisturized and toned the skin. Basically, it was a 360 type of product. Due to market differences, Olay used the same technology but portrayed as a cheaper version to successfully sell in the US.
With more efforts in packaging and selling, SK-II created a loyal consumer in Japan even with all the competition from other companies. About 45% of total SK-11 sales came from Taiwan and Hong-Kong. These two modern Chinese descendent populations followed trends in beauty from Japan. As a result, it was a successful launch that inspired furthermore expansion into the rest of China. Japan being the Paris/New York/Milan of the Asian continent, women in nearby markets are influenced by the larger market share holders. Sk-11 proven success and loyal base can be another competitive advantage.
In 1999, under CEO Jager, the company was going through a colossal structural change known as O2005. As a result, new people were given new responsibilities as well as shifting of jobs. This created a cross-company confusion of who does what. The best way to describe the old structure of the company is through the following quote by former VP of overseas operations Mr. Walter Lingle:” We must tailor our products to meet consumer demands in each nation. But we must create local country subsidiaries whose structure policies and practices are as exact a replica of the US Procter and Gamble organization as it is possible to create.
This talks about an organization where operations of products are managed independently within the local market by a GM. With O2005, standardization becomes the main goal. Instead of putting economical responsibilities on GMs’ like before which stumped growth, each of the seven business units were now responsible for profits. When SK-II was created and brought to the market, a unified R&D team worked on the technology behind it. A standardized process was used in the manufacturing of the product.
In contrast, as I explained earlier, Olay and SK-II used different packaging and sailing methods to more effectively penetrate different markets (US and Japan). This was an important factor in success of the product. Local research was needed to do this. P&G’s O2005 conflicts with the way SK-II is proposing to handle a global expansion plan. Thus, in order to increase the chances of success in international markets outside of Japan, P&G will have to conduct local research in individual markets. Refusal to do not tweak O2005 for the SK-II expansion can result in a loss.
As mentioned in the case study, de Cesare has three different options in routes to take in order to increase growth of Max Factor Japan; Expansion within Japan, go into mainland China, or tap the European market. Europe: European women come mostly from developed countries. Therefore, they are very educated when it comes to fashion, culture, and beauty. Beauty-line products are nothing new in these waters. Unlike the US and other markets, European women appreciate high-end beauty products and are almost as demanding as the Japanese women.
It is no surprise that some of the world’s most renowned brands are from Europe. Some of the brands mentioned in the case are Chanel, Dior, and Clinique among others. Not only do these brands hold the grand majority of market share, but it is equally distributed between them. This creates a very low threat of a new entrant in the market. These brands form significantly high entry-barriers due to their popularity and loyal customer base. To make things worse, the threat of substitution for SK-II is very high in its current market because a company like Clinique is as popular as Coca-Cola is in the beverage industry.
These companies have the money and other resources to create equal, if not superior products to SK-II. Finally, the bargaining power of suppliers is low. Yet, due to the competition level in the European market, the consumers have high bargaining power. Japan: One of the main reasons that Max Factor Japan had harsh time in its first 12 years under P&G was because of the lack of understanding of the distribution systems in Japan. To add on, the women in Japan are extremely ‘picky’ when it comes to beauty products.
Your product has to truly differentiate and gain loyalty from the consumers in order to remain as a leader of the Japanese beauty market. This reasoning explains why the threats of new entrants are very low. Japan has also slowed down in growth to 6% in the two years prior to 1999. So, not only is there an established oligopoly, but the growth is limited. Why would any company that doesn’t know the Japanese market want to even make an attempt at a suicidal mission? Due to this fierce competition within the big market share holders, innovation is crucial.
Clearly, the threat of a substitute product developed by a competitor in the market is relatively high at any given point. The constant competition within the main players allows the consumer to have a high bargaining power. However, the bargaining power of supplies is low in Japan. China: The case study shows a growth rate of 28% in the previous two years (before 1999) in the beauty market. The case study also talks about a potential 30-40% annual growth in the future. Thus, the opportunity for growth is tremendous. The market share is still ‘up for grabs’. From this we can conclude the threat of new entrants is very high.
China is unique because it there is an immense social class gap. A lot of mainland China is very poor. In fact, the average monthly salary of the Chinese woman is equal to a three month supply of SK-II! In the other hand, the special economic zones in China vary drastically in culture and economy. The astronomical growth in the beauty market in China takes some pressure away from competition within the bigger players. Some main European and Japanese brands are already expanding in China. Due to its early stage though, the bargaining power of both suppliers and buyers is low.
Nevertheless, the risks of substitutes are high once again because of the R&D power of the current competitors. It is important to have in mind that SK-II business model is to sell as a high-end product. While the very few citizens with the big bucks can provide a lot of revenue, it is also depended on SK-II being able to capture the limited higher-income society. Recommendations and conclusion: Throughout this analysis, we take a look at Porter’s five forces model to determine the pros and cons of global expansion as proposed by de Cesare. A recurring factor in the global expansion is the threat of a substitute.
It is clear there exists sharp and fierce competition within and Japan and in global markets. This can be very costly. Max Factor Japan should take a very careful look at individual markets it wishes to pursue and identify distribution channels as well as a target market to have success. Learning from the mistakes of others is the cheapest way to establish a competitive strategy. Overall, I suggest that the safest and most logical route is to keep pursuing larger market share within Japan. SK-II already has a loyal consumer base, and through the innovative BIS, sales can significantly increase for a low cost and risk.
In order to successfully expand into other markets, I believe that while still a significant 3% market share, it is not big enough to compete against the bigger players in the world. In Europe, a possible $10 million in sales by year four while absorbing a $1-2 million annual loss for the first few years is a risk not worth taking. Some of the world’s biggest players already dominate an educated and loyal consumer market. In addition, the distribution channels used by Max Factor Japan are completely different from the popular perfumeries in Europe.
It is true that the UK is seeing massive growth in the skin-care market, but the research conducted wasn’t very clear. If success is expected out of a lot of money and effort from P&G, then more in-depth research should be conducted. At last, the Chinese market is very young. There is tremendous opportunity to make money in China. It is of significant value to point out the success of SK-II in similar cultures to the rest of China such as Hong Kong and Taiwan. The fact that SK-II is a high end product, it is subject to import duties of 35-40%. Although this is true, break-even is projected within three years.
Due to the differences in economies in different sectors of China, it is crucial that Max Factor Japan determines which group of people or cities it is going to target, even if it goes against the P&G overall goals. Perhaps experimenting in Shanghai or Beijing would be a good trial before expanding into the rest of China. It is extremely important to not let the big European and other Japanese players conquer the huge Chinese market first; that’s if SK-II ever wants to become a world known brand.