P Global Expansion

6 June 2017

Introduction of the case: De Cesare, president of Max Factor Japan and GLT member on the Beauty Care GBU, is to present an analysis of SK-II’s potential to become a truly global brand. There are 3 alternatives for SK-II’s global strategy: To build on the brand’s success in Japan, tap into China, or expand SK-II into Western Europe. If P&G chooses to focus on Japan, it is possible that they might achieve national brand recognition. However, to become a truly global brand, it is necessary that SK-II enters new markets.

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Yet, we must bear in mind that there are significant risks in P&G’s first-ever proposal to expand a Japanese brand into foreign markets. These risks are magnified by the vast differences in consumers, distribution channels, competitors, and the political, social and economical systems across borders. Furthermore, P&G’s global organization was currently undergoing a major restructuring program, O2005, which might deter SK-II’s plans. This paper seeks to discuss the merits of Japan as a lucrative market for SK-II and weigh the benefits of entry vis-a-vis the risks and related costs.

In light of obstacles and limited growth, this paper will also examine the prospect of SK-II to develop into a major global brand by tapping into foreign markets. We will discuss the China and Western Europe market separately, and evaluate our plans accordingly. Lastly, we will conclude by showing how our plans would be implemented and integrated in P&G’s newly reorganized global operations. Background of P&G Japan P&G‘s entry and expansion into Japan started off rough. Up to the mid-1980s, P&G Japan had been a minor contributor to P&G’s international growth.

In 1984, twelve years after entering the Japanese market, P&G’s board reviewed the accumulated losses of $200 million, the ongoing negative operating margins of 75%, and the eroding sales base-decreasing from ? 44 billion in 1979 to ? 26 billion in 1984. With this negative outlook, P&G considered exiting Japan. Durk Jagerr, the country’s new GM, analyzed the causes of P&G failure in Japan. He then made radical changes in market research, advertising, and distribution. This resulted in a 270% increase in sales. Just as it was starting to have a positive outlook, the Japan’s “Bubble Economy” burst in 1991.

P&G’s entry into the new category of beauty care worsened rather than improved the situation. In 1994, the Japanese beauty business lost $50 million of sales. Organization 2005 (O2005) When Durk Jager became CEO in January 1999, he implemented the Organization 2005–the proposal for global growth. This was the most dramatic change to P&G’s structure, processes, and culture in the company’s history. Implementing O2005 would promise to bring 13% to 15% annual earnings growth and would result in $900 million in annual savings starting in 2004. Item| 1995| 1996| 1997| 1998| 1999| Gross Profit| -| 5. 41| 6. 4| 4. 44| 10. 3| Table 1: Growth rate of Gross Profit As seen from Table 1, gross profit did grow quite significantly by 10. 3% in 1999, only 6 months after implementing O2005. P&G’s income statement therefore supports Jager’s optimistic forecast of future 13-15% annual growth earnings. Figure 1: Trend Analysis for Current Assets and Long-Term Assets As seen in Figure 2, P&G’s plant, property and equipment have been rising over the past 5 years, with a significant increase in year 1997. On the other hand, current assets (i. e. cash) have been declining, with a considerable decrease in year 1997 as well.

It is highly possible this is due to cash used (decrease) to invest in capital (increase). In 1998, current assets finally increased for the first time in 4 years. This could explain how an increase in investments (on fixed assets) to produce new products, especially with O2005, eventually reaped positive returns with a more than proportionate increase in sales (cash and accounts receivables). Figure 2: P&G’s Timeline Most importantly, with O2005, the organization would become more alert and responsive to issues. It would be possible to anticipate or predict trends in various markets by having a global view.

For instance, if Japanese consumers decrease their demand for one of P&G’s products, it can anticipate that other countries with similar culture may follow this trend. This would also allow P&G to launch new products quickly without the hindrance of autonomous national subsidiaries. Moreover, global business unit would be able to maintain product margins across country boundaries. Having a strong global control of its products, P&G would be able to use similar marketing campaigns in countries within a geographic region thus reducing marketing costs. Financial Ratios for P&G| Column1| Current ratio| 1. 7| Net working Capital| 597,000,000| Total Debt Ratio| 0. 63| Cash Coverage Rate| 13. 67| Total Assets Turnover| 1. 19| Profit Margin| 0. 099| Return on Assets| 0. 117| Return on Equity| 0. 312| Table 2: Financial Ratios of P&G in Year 1999 As seen in Table 2, P&G is doing very well overall. It is relatively able to meet short term debt obligations. It has quite a substantial amount of net working capital which allows development (in Japan) and expansion (into China and/or Europe) of its business. It is also unlikely that the company will face problems with debt load as its financial leverage is not high.

With its cash coverage ratio being very high, it is fairly safe if P&G chooses to increase its financial leverage to help sustain growth and expand its business. Its moderate ability to generate sales from each dollar of asset is also reflected it its low profit margin, which highlights P&G as a company that base its sales on volume rather than on profit. As for P&G’s profitability relative to its assets, it is difficult to comment as it depends largely on the industry’s average, which is not given in the case. ROE too, should be compared to other firms in the industry.

As P&G’s ROE seems considerably sound, earnings must be reinvested to increase stockholders’ wealth and thus, SK-II presents P&G the opportunity to do so. SWOT Analysis for SK-II Strengths The greatest strength of SK-II is Pitera, the unique ingredient found only in SK-II products. It was apparently developed by a Japanese monk who noticed how the hands of workers in sake breweries were kept young looking. The fact that SK-II has gained exclusive access to this “miraculous” ingredient allows them to charge premium prices and still generate demand for their products.

To further justify their premium pricing strategy, they value-add their product by emphasizing on its packaging. For example, the SK-II Foaming Massage Cloth was packaged “in a much more elegant dispensing box” than Olay. Also, SK-II’s technological expertise in developing its product and showcasing detailed scientific product performance data was able to effectively convince Japanese women, who “took a much more scientific approach to their product reviews”. Weaknesses However, this scientific approach could go against them when dealing with Western Europe.

They may not believe the collated results, but prefer hearing of more personal testimonials of the wonders of SK-II. Their premium pricing strategy could also be seen as a weakness as many would not be able to afford it. Also, its tedious multi-step skincare regime might deter lazy consumers from trying its product line. Lastly, with the need of beauty counsellors’ analysis and advice, and the full skin care regimen, it would be ineffective for SK-II to advertise through giving out samples to persuade stubborn consumers.

Opportunities This creates opportunities for SK-II to advertise through their very comprehensive and prestigious beauty-counsellor segment which breaks down into training counsellors, as well as counter design and equipment installation. To support these investments, they used TV advertising to show the effectiveness of SK-II which boosted its product awareness and sales tremendously. With Japanese women being the highest users of beauty care products in the world, the opportunities for SK-II to continue expansion in Japan are huge.

In addition, research showed that there is “a worldwide opportunity in facial cleansing”. With SK-II’s success in Taiwan and Hong Kong, SK-II has a ready opening to tap into nearby China. On top of that, there is a possibility of bringing this brand into a large Western market. This presents SK-II three main global opportunities to make its brand an international one. Threats Nonetheless, SK-II must be fully aware of strong brand competitors in the industry like Shiseido in Japan, and Estee Lauder, Clinique, Lancome, Chanel and Dior in Europe.

Possible lost of exclusive access to the ingredient Pitera could also result in SK-II’s downfall. Japanese Market Build on SK-II brand success in Japan With its phenomenal achievement, SK-II should continue to build on its brand success in Japan. There are numerous benefits to be gained in the Japanese market. According to Exhibit 10, the retail sales of the skin care product in Japan are 6,869 million, which is more than anywhere else in the world.

Also, being a premium, high-margin brand, potential growth in sales could bring more profits than any other of P&G’s regular products, such as toothpaste and shampoo. In fact, it is estimated that one loyal SK-II customer in Japan will spend about $1000 a year on the brand. Most importantly, there is substantial room for growth, as Max Factor Japan only claims less than a 3% share of a $10 billion beauty market. Apart from economical benefits, the Japanese customers are the world’s leading consumers of beauty products and Japanese women had by far the highest use of beauty care product in the world.

Since they already have the skin care practices of a four- to six-step regimen, which SK-II relies on, there is no need to invest in the educating the Japanese consumers. In addition, following the success of the foaming massage cloth, it offers a great opportunity to tap into P&G’s extensive technological resources, leveraging on the existing brand name and image to extend SK-II’s product line and expand into new product offerings, whilst targeting new market segments. For example, new product lines such as anti-aging and skin-whitening products can be added to the SK-II range.

Furthermore, Japan’s demanding consumers and tough competitors will create an important environment that is conducive for leading-edge and innovative ideas. Thus, this will lead to P&G having greater initiatives and discoveries in the cosmetic and skin care industry. Another substantial benefit of the Japanese alternative would be the low investment. In comparison to a new market entry, there would not be a need for large funding in new infrastructure and distribution channels, or in the training of beauty counselors and other personnel.

Moreover, the emergence of operational synergies through the cooperation of SK-II’s technology and marketing teams, who developed an innovative beauty imaging system (BIS), also supports the prospect of developing the home market which fits with de Cesar’s vision of the brand. By installing modified BIS at SK-II counters and having beauty consultants to give an accurate and credible analysis of skin diagnosis and counselling process, customers’ loyalty will be built. Hence, there is tremendous potential for growth for SK-II in its home market and thus it is strongly advisable to further expand SK-II in Japan.

Why should SK-II enter foreign market? Despite SK-II ability to generate significant operating profits, this high-end product had little visibility outside Japan, even within P&G itself. With its success in Japan, SK-II has the potential to enter foreign market as SK-II is able to meet the global desire to achieve soft, moisturized, clean-feeling skin. Apart from that, according to Exhibit 9, there is a $10 billion worldwide prestige skin care market which SK-II can tap in. Thus, there is a huge global market opportunity for SK-II.

Another factor is that although the Japanese alternative involves lower risks compared to entering foreign markets, there are still a number of issues that have to be considered. First, as a well-established brand for beauty products, SK-II is also characterized by intense rivalry with strong competitors such as Shiseido. Furthermore, with the very demanding consumers and highly innovative competitors, any slowdown in R&D or major setbacks in launching products could lead to a significant disadvantage for the company.

Considering the other premium brands that had already entered the market, delaying the release would mean having to face greater competition in the future and having to forfeit the first mover advantage. Hence, it is favourable that SK-II to enter the foreign markets. Which foreign markets to enter? The China Market Entering the Chinese market is one option. The Chinese market 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 there.

However, this does not mean that entering the Chinese market would guarantee profits. The right segment should be targeted in the Chinese market first. Basically, there are three Chinas-rural China, low income urban China, and sophisticated, wealthy China concentrated in Shanghai, Beijing, and Guangzhou. This market size is as big a target consumer group as in many developed markets. Especially in China where people are more attracted and loyal to products that are introduced first, it is important to enter the Chinese market now so as to reduce the loss of the first mover’s advantage.

If the movement into the Chinese market is delayed, the battle for those elite will be lost to the global beauty-care powerhouses that have been there for three years or more. Another advantage of entering the Chinese market now is that the expected sales by having a few counters in Shanghai (sophisticated, wealthy China) would amount to $10 to $15 million in sales over the first three years, by which time they expected the brand to achieve breakeven. However, because of the large income gap among the Chinese in China, it is difficult to target the rural China and low income urban China with the SK-II products.

Many argued that targeting an elite consumer group with a niche product was not in keeping with the objective of reaching the 1. 2 billion population with laundry, hair care, oral care, diapers, and other basics. After all, the four step regimen of SK-II-a-three month supply-could cost more than one month’s salary for the average woman working in a major Chinese city. Furthermore, Chinese consumers may not be ready for SK-II. Olay had succeeded only by educating its customers to move from a one-step skin-care process-washing with bar soap and water-to a three-step cleansing and moisturizing process.

SK-II further relied on having women develop a four- to six-step regimen, something which the people may not adapt to. Finally, the Chinese market presented numerous other risks from the widespread existence of counterfeit prestige products to the bureaucracy attached to a one-year import registration process. SK-II would probably incur high cost too because of the import duties of 35 to 40%. This meant that even if P;G squeezed its margin in China, SK-II would have to be priced significantly above the retail level in other markets.

Despite the possible disadvantages and risks that may be incurred when entering the Chinese market, it is still very advisable to enter the Chinese market mainly because it is a huge market. This entry into the Chinese market would be more successful after SK-II’s further expansion into the Japanese market as it would have developed a more reputable brand name. The consumers in China would thus be gain confidence in the product. Most importantly, the China team calculated that because of the lower cost of beauty consultants, selling SK-II in China could still be profitable. See Exhibit 12 for cost estimates. ) The European Market Besides the Chinese market, it is also possible for SK-II to expand into the European market. 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. This makes it easier to bring SK-II into the European market as people are more incline to accept the product. What’s more, the fine fragrances business was beginning to do quite well.

In the United Kingdom, for example, its own 25-person salesforce was on track in 1999 to book $1 million in after-tax profit on sales of $12 million. Even though selling brands like Hugo Boss, Giorgio, and Beverly Hills’ sales approach and trade relationship was different from the SK-II model in Japan, it was a major asset that could be leveraged. Furthermore, it is likely that SK-II provided the fine fragrance business a way to extend its line in the few department stores that dominated U. K. distribution in the prestige business. There is also a hope to achieve sales of $10 million by the fourth year in the U.

K. market. However, given the intense competition, a loss of $1 million to $2 million may need to be absorbed annually over the period as the startup investment. Besides a potential loss during the startup investment period, a bigger challenge would be introducing a totally new brand into an already crowded field of high-profile, well respected competitors including Estee Lauder, Clinique, Lancome, Chanel and Dior. While TV advertising had proven highly effective in raising SK-II’s awareness and sales in Japan, Taiwan, and Hong Kong, the cost of television-or even print-made such a method too expensive in Europe.

And without any real brand awareness or heritage, SK-II’s mystique may not be transferred to a Western market. There is also a possibility that a significant group may not be willing to adopt the disciplined six- to eight step ritual that the devoted Japanese SK-II users followed. Also, countries like France and Germany, where prestige products were sold through thousands of perfumeries, makes it impossible to justify the SK-II consultants who would be vital to the sales model.

Therefore, there is a higher risk of bringing SK-II into the European market before the Chinese market as SK-II is an Asian brand. The brand has been proven successful in countries such as Taiwan, Hong Kong and Singapore. Therefore, it is reasonable to say that consumers in China will be more receptive to its product as compared to consumers in the western market. As seen from Figure 3 and 4 below, although China has the least retail sales so far, its market is growing at a rapid pace.

Thus, there is a lot of potential in China and SK-II must act fast as mentioned earlier to gain a portion of the growing pie. Although Western Europe has the largest retail sales in the industry, it must be noted that it has a whole region consisting of many countries, thus including a much larger number of people who contribute to their high sales as compared to a single country like Japan. Therefore, building on its success in a homogeneous culture like Japan would be an easier and probably more effective initial step to creating SK-II as a global brand.

Furthermore, as seen in Figure 5 below, Japan is the most ready market for SK-II as it has a high percentage that already frequently use facial lotion, which is SK-II’s key selling product. On the other hand, China has a long way to go in changing their skin care habits and practices and SK-II will need to put in a lot more effort in trying to get the Chinese to do so. Figure 5: Skin Care and Cosmetics Habits and Practices Table 3: Evaluating Criteria Customer Criteria| Japan| China| Europe| Usage and Habit| * High| * Low| * Moderate| Maturity| * High| * Low| * Moderate| Market Criteria| Japan| China| Europe|

Market Size| * 5 * Largest| * 3 * Smallest| * 4 * Large| Potential size and growth| * 3 * Smallest| * 5 * Largest| * 3 * Unsure| Experience| * 5 * Already familiar with SK-II in Japan| * 3 * Some experience with Olay| * 3 * Some experience with Lipfinity| Pricing| * 5 * Recognized as a prestige brand * Loyal customer base| * 3 * High import duties VS low labour costs * Relatively low income| * 5 * Already exposed to expensive beauty products| Competition| * 5 * Shiseido| * 3 * Prestige product line target niche market | * 5 * Many existing well-known brands| Distribution| * 5 * Specialised stores with consultants| * 4 * Similar selling experience with Olay * Adapt knowledge| * 3 * Mass distribution * Consultant approach may not be feasible| Financial Criteria| Japan| China| Europe|

Initial Investment & Expected Losses| * Small * Most in R&D| * Quite high * Focus on training| * High * Cost of advertisement| Sales| * Very good * $150m| * Good * $15m| * Fair * $9m| Implementation of the expansion in Japan To expand SK-II product line, they would need to tailor products to meet the consumers’ demands so as to provide customization. SK-II would have to increase their budget for research and development to understand the innovative needs of their consumers such as the SK-II foaming massage cloth. To create this competitive edge among competitors, SK-II would have to create major improvements in their product line.

SK-II should also be marketed through channels of the department stores as the provisions of counter counsellors create a form of personalization for SK-II products. In addition, it gives consumers a personal touch and greater understanding to the products. Thus this also enables them to understand the needs of consumers and hence promote brand switching. With additional personnel, the next step would be for the global business unit to ensure that company strategies are aligned amongst all levels of hierarchy to continue to utilize the building blocks of competitive advantage: superior innovation, quality, customer responsiveness, and efficiency. Implementation of the expansion in China

Since SK-II products are considered as a high-end product due to its price premium, the target segment for this market would be the sophisticated, wealthy China concentrated in Shanghai, Beijing, and Guangzhou. In addition, the prestige beauty segment is growing at 30 to 40% a year, thus this gives SK-II an opportunity to expand their products in the area. SK-II should price their products higher yet maintain both quality and standard for their products thus adding value for their products so that consumers will not feel that they are over paying for the products. The customer services and personnel create an additional value in which it is not easily replicated by competitors and thus can also keep SK-II competitive in the industry.

To add, they should also implement the counters and train beauty consultants to market their products as it can also increase customization and personalization. Since SK-II will be targeting the high end consumers, creating a personal touch for these consumers would be important so as to add brand loyalty and decrease brand switching of these consumers. It is highly recommended that SK-II experiment with a few counters in Shanghai, and if successful, to expand to more counters in other major cities. This is mainly because SK-II still faces some resistances from entering the market. Thus it would be good, if other affluent brands go into the market to reduce resistance before SK-II enters the market full on.

Implementation of expansion in Europe 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. Therefore, this gives SK-II an opportunity to expand their range of products as SK-II at current is having woman rely on a four to six step regime on their moisturizing process. In Europe, beauty products were sold primarily to mass distribution outlets, brands like Hugo Boss, Giorgio, and Beverly Hills to department stores and Boots, the major pharmacy chain, its sales approach and trade relationship was different from the SK-II model in Japan.

However, this can serve as an asset that could leverage SK-II’s products as distributing their products in department stores can be in line with the small scale entry of SK-II. To add, SK-II can also implement trained beauty consultants at the department store counters to market their products as it can also increase customization and personalization. This can give consumers a personal touch and build favourable consumer first impression. Another advantage of having trained personnel would be the increased level of interaction with the customers and thus can also increase brand loyalty and promote consumers to switch from other brands to SK-II. SK-II Japan’s activity of product in China and Europe Culture

As mentioned earlier, Jager toured P&G’s sites worldwide and he concluded that P;G’s sluggish 2% annual volume growth and its loss of global market share was due to a culture he saw as slow, conformist, and risk-averse. Thus, it is necessary to prevent such culture dilution in China. Also, Jager revolutionized the organization to take greater risk and speed and gave a green light to the Leadership Innovation Team to implement a global rollout of two radically new products. Therefore, to reduce employee inefficiency, SK-II China should adopt a similar culture of SK-II Japan to innovative teams who can create radical new products. Advertising

SK-II Japan experimented with TV advertising featuring a well respected Japanese actress in her late 30s. In three years SK-II’s awareness ratings rose from around 20% to over 70%, while sales in the same period more than doubled. Building on this success, management adapted the ad campaign for Hong Kong and Taiwan, where SK-II had quietly built a loyal following among the many women who took their fashion cues from Tokyo. In both markets, sales rocketed, and by 1996/97, export sales of $68 million represented about 30% of the brand’s total sales. Similarly in SK-II China and Europe, we recommend that they make use of this advertising strategy to generate sales for their products.

This is mainly because celebrities are role models in which consumers can easily relate to and thus by using celebrities as their endorsers, they can create a favourable brand image and also slowly build brand loyalty among the consumers. Moreover, fans of the celebrities will also promote brand switching as they feel affiliated to the brand Conclusion | Feasibility| Sustainability| Japan| | | China| | | Europe| | | Japan is the most feasible market because of current success. It is also the most sustainable in the long run because of the ready segment for SK-II’s skincare products as well as the already well-established structure. Entering China is slightly less feasible because of the consumers’ lifestyle.

China also poses various barriers of entry that might affect SK-II’s profit margin and ability to sustain in the future. However, China’s skincare market is growing at the fastest rate, thus have the greatest market potential for SK-II to grow. Europe is the least feasible of the three mainly because of the strong competition in the skincare industry. However, Europe is a sustainable market if SK-II is able to create a favourable brand image to the Europeans as they already have a thorough skincare regime and large market segment. It was mentioned earlier that De Cesare was to present an analysis of SK-II’s potential to become a truly global brand.

Our group, having analysed the case, decided that further expansion into the Japanese market should be the primary step taken. While doing this, P;G could settle China’s import registration process, train beauty conselors and educate the public. Some beauty technology developed in Japan could be transferred when entering the Chinese market. SK-II should penetrate Europe last of all as significant risks involved in entering foreign markets simultaneously, especially given that P;G’s global organization was in the midst of the bold but disruptive O2005 restructuring program. Since the brand will then be operating in various countries, it is crucial that a overall brand manager is assigned.

This would improve communication across the various countries. A contingency plan must be drafted to fall back on in case the global expansion fails. This is why priority should be given to the Japanese market lest SK-II is unsuccessful in becoming an international brand. 2010: Diversify into cosmetics market that contain Pitera to gain larger market share 2000: Continue to build on Japan’s success Figure 6: Forecasted Timeline for SK-II During 2000: Invest in R;D; Expand SK-II product line; Settle China’s procedures and train counselors 2006: Withdraw product if banned substances used in production of SK-II in China; Re-enter only when problem is rectified 2005: Enter Europe 2001: Enter China

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