P&G Japan: The SK-II Globalization Project

Submitted by Harshal Hinger

Key ask : Recommendation and rationale whether P&G should expand SK-II, a Japanese high end
skin care product, to global markets or not.

Overview
The case starts by exploiting the early origins of global strategy of P&< how it has changed over
time and how at the current juncture P&G has come to realize that their future growth will only
come from continuous product innovation and new product introduction. The key personnel in this
case are

Paolo De cesare, amidst new restructuring he was promoted to P&Gs new s president of
Max Factor Japan, GLT member on the Beauty Care GBU and global franchise leader for SKII. He had seen the turn around of loss making Japanese business and the advantages of
Global Product development.

Alan Lafley, Head- beauty care GBU and boss of Paolo De Cesare .
Paolo was to present the recommendation to Alan Lafley in the upcoming meeting with the
GLT. Paolo had great credibility wit the GLT and also Alan had been early champion of SK-II,
but going global would require substantial time, money and effort . For which Alan needs to
be convinced.

P&G : Today
Durk Jager is currently the CEO of P&G and he succeeded Pepper . P&G as an 0rganization is amidst
phenomenal change and flux as it strives to achieve the O2005 goal as set by Papper and Jager. The
O2005 has helped defined the key strategy, business decisions and corporate restructuring.
Outsourcing of all backend operations, including IT services , HR and Global Business Services
(GBS) in last few years have marked the shift in companys strategy & Focus on its core
competencies.

Restructuring of Business Units and change of Vanguards are also part of the O2005. The GBU. MDO
and GLTs structure that has been put in place clearly shows that P&G is using transnational
strategy.

SK-II
SK-II ,a high-end skin care product, has been the salvation of P&G in the highly competitive
Japanese market as it helped them turn around the loss making business into a profitable on. Also
SK-IIs exports into Taiwan and Hong Kong led to good revenues. However, SK-II is a complicated
product to use, as its application has 6-8 steps, probably the highest for any product across the
globe. Thus its goes well with the Japanese Women, owing to their sophistication and cultural
upbringing.
While the global market for cosmetics had been growing and many countries are being explored as
new possible areas to expand, P&G needs to carefully assess the opportunity, as each market has its
own characteristics and consumers have their own preferences, choices and cultural tradition.
P&Gs early setbacks in many countries in the laundry detergents market highlight this difference.
Also, the choice of promotion mechanism with trade/distribution channel, advertisement medium
for consumers may wary from country to country

Porter 5 Force model

For further analysis, I have used the Porter 5 force model, as it provides us with critical parameters
to compare the intended geographies we wish to enter and what are the key challenges and
impediment for the same. As mentioned by Porter basis his 5 force model, that despite the name
international business-level strategies, most strategies are usually based in one or more of these( 5
forces) home-country factors.

Japan

China

Europe

Threat of new entrants

Low

High

Low

Bargaining Power of suppliers

Low

Low

Low

Bargaining Power of buyers

High

Low

High

Threat of substitute products

High

High

High

Intensity of competitive rivalry

High

Low

High

Recommendation :
Firm strategy, structure, and rivalry: SK-II is the result of the combined ingenuity of P&Gs 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 (2, p. 8). 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 (2, p. 8). 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 (2, p.6).

P&Gs International Corporate-Level Strategy

International Corporate-level strategy can be classified into three different types: multidomestic,
global, or transnational (1, p. 277). November, 1999 was an interesting point of time for P&G

because the firms corporate level strategy appears to be shifting from a multidomestic 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 analysis, P&G was "in the midst of a bold but disruptive Organization 2005
restructuring program. As GBUs took over profit responsibility historically held by P&Gs countrybased organizations, management was still trying to negotiate their new working relationships." (2,
p. 1) This quote explains P&Gs international corporate level strategy, both where it was, and where
its trying to go. A tell tale sign of a multidomestic corporate level strategy was for P&G to have
profit responsibility held by their country-based organizations. A multidomestic strategy has
strategic and operating decisions decentralized to each country to allow products to be tailored to
each local market (1, p. 277). 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 (1, p. 280). This was the direction P&G was headed in when
GBUs 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 (1, p. 280).
However, during the SK-II development through the expansion proposal, P&Gs 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 (2, p. 8). 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-IIs 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 multidomestic 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: Porters 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&Gs 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 worlds 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 (3, p. 1).
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 (4, p. 1). 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&Gs competitors, Kao and Lion (5, p. 1). 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 doesnt 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: Lancme,
Shiseido, and Kao are examples of companies selling products in China (6, p. 1). 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, Lancme, 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 brands globalization, and the fact that those companies
can easily legally imitate their competitors 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.
Five forces vs. market table
Japan

China

United Kingdom

Low

High

Low

of Low

Low

Low

High

Low

High

substitute High

High

High

Intensity of rivalry among High

Low

High

Threat of new entrants

Bargaining

Power

suppliers
Bargaining Power of buyers
Threat

of

products

competitors
The I/O and Resource Based Models of Above-Average Returns

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 (1, p. 14). 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 firms unique resources provide a competitive advantage (1,
p. 16). 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 (2, p. 6), 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&Gs 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.
Comparison to other organizations
Loreal Comparison.

L'oreal has been one of P&G's major global competitors in the cosmetics industry. Loreal's
transnational strategy has led them to be the number one in (#1 what?) the world. In 1994 P&G
was number two but they have since dropped to number four. Part of the reason for this has been
Loreals ability to capitalize in the international markets.
Loreal has steadily become the leader in cosmetics by their ability to adapt their products to the
global market and achieve a high level of efficiency. L'oreal's transnational strategy has allowed it to
build a strong global structure while still leaving room for different adjustments that might be
needed at a local level. For example, Loreal's Free Hold line (a mousse) was originally priced on
the high end of the market, targeted for a higher class of consumer. Once it was realized that the
market for their mousse products could be aimed at a younger or less affluent target, Loreal
released a studio line that was less expensive than the Free Hold line (7, p. 1). This example shows
that Loreal is willing to use different price levels in different regions or demographics.
L'oreal has also adjusted its management structure by specific job function. For example, both U.S.
and Europe have a VP of operations. This type of management allows for the businesses to
implement necessary changes at the local level that might not be needed throughout the entire
corporation. These factors allow for the continued success that Loreal has when using a
transnational business strategy on an international level.
Proctor and Gamble is trying to go in a different direction than Loreal when trying to expand their
international business. P&G mostly uses a global strategy where seven global business units that
would take control and implement changes into the local businesses (2, p. 5). This approach uses
the SBUs to makes changes at the local level while still maintaining the best interest of the
corporation. With SK-II, P&G seems to be completing their transition from a transnational strategy
to this global strategy. In a global strategy a company offers standardized products with strategies
dictated from the main headquarters. This type of strategy produces less risk for P&G, but it also
lowers the chance for potential growth by letting local markets dictate their own strategy. With a
global strategy, a business does not take into consideration the local demand by adapting their
products to the needs of the people in that area. The global strategy essentially says that whatever
the main company decides is best for the company no matter where it is located. (this is already
mentioned above, and may be repetitivealso, no reference is made to the text where this was
taken from) P&G has a different corporate structure than that of Loreal based on their different
business strategies. P&G has fewer managers that are in charge of the phases of business. For

instance, P&G does not have multiple people holding the same positions in different countries
where they do business. This structure does not allow for as much adaptation to the regional needs
of the consumers.
Estee Lauder.
The Estee Lauder Company prides itself on being one of the world's leading manufacturers and
marketers of quality skin care, makeup, fragrance and hair care products (9, p. 1). Under the Estee
Lauder name there are many brands and line divisions including the self-titled Estee Lauder
division. Similar to SK-II, Estee Lauder has a large international presence (SKII is still only in
Japan..at least at the time of the caseshould this be changed to say P&G?) and sells principally
through limited distribution channels to compliment the images associated with its brands (10, p.
1).
By using a combination of global and multidomestic strategy, Estee Lauders strategy is much like
the previously mentioned "transnational strategy" (1, p. 282). There are several top level executives
that have a large responsibility to global operations. For example, Patrick Bousquet-Chavanne is a
Group President and is responsible for marketing, sales and financial direction of all brands within
The Estee Lauder Companies in Europe, the Middle East, Africa, Latin America, and the Asia/Pacific
region. However, he has also established consolidated regional Product Development Centers in
Paris and Tokyo (10, p.1).
The Estee Lauder Companies believe in a strong central philosophy typically found in organizations
that use a global strategy but also show the willingness for ideas to come from all areas of the
business. Their multiple research and development sites in New York, Belgium, Japan, Ontario, and
Minnesota prove this (this just proves that headquarters has opened multiple centers for R&Dit
doesnt really prove that decisions are made in regional areas of their business). In order to keep
their product responsiveness quick, Estee Lauders company website speaks of manufacturing sites
in the U.S., Belgium, Switzerland, the UK, and Canada. Estee Lauder has found a successful mix of
upper-end cosmetic products with Estee Lauder and Clinique. While both products are priced with
high-end cosmetics, they are differentiated enough to each bring in significant market share. From
these results, The Estee Lauder Companies do well at mixing both a multidomestic and global
strategy into a successful transnational strategy.

Current State of P&G

Currently the CEO of P&G is A.G. Lafley, a 1969 graduate of Hamilton College (not Harvard), who
was previously in charge of the Beauty Care GBU. Under Lafleys leadership, P&G has drastically
changed its corporate structure and focus. Within the last year or two, P&G has outsourced all of its
back-office operations, including $3 billion worth of IT business outsourced to IBM (13, p.1). This
recent outsourcing trend also includes many of the Global Business Services (GBS) that were a
major part of the corporate structure in 1999. Now GBSs like Finance and HR have been
outsourced so that P&G can focus on concentrating on its core products and competencies (14, p.1).
According to its most recent annual report, P&Gs core competencies are branding, innovation, and
scale, and this focus can be seen in the business decisions made by Lafley (11, p.6).
P&Gs corporate structure has gone through a restructuring that consists of more than just the
reduction of unnecessary GBSs. The international corporate strategy of P&G has clearly become
transnational. There are currently 5 GBUs which work to provide speed to market, as well as
centralized product control for P&G. The GBUs work closely with seven Market Development
Organizations (MDOs) who work with the local customers and country business teams to develop
the right product mix for over 160 countries that P&G does business. (11, pp. 5 7) The
coordination between these two groups shows P&Gs focus on using a transnational strategy to
become a profitable global business in the 21st century.
Recommendations
China: We recommend P&G enter the Chinese market. As was previously discussed, the
tremendous growth potential of this market is well worth the high import tariffs and government
delays in the import process. If anything, these delays only further stress the importance of starting
the process of entering China now, rather than later. There is also a risk of profit loss due to
counterfeiting in China. However, because competition has already begun to enter the market, it is
extremely important for P&G to also enter to take advantage of the increased growth rate while it
exists.
Europe: We recommend P&G do NOT enter the European market. This market appears to already
saturated, and growth in the region does not appear to be very strong. We are also concerned with
the modest forecasted gains in relation to the expected losses incurred entering this market. P&G

does not have expertise dealing with the perfumeries in Germany and France, and so we
recommend that they look to acquire/partner with another company who has proven success in
this region, should they decide to expand into these markets. Perhaps the recent acquisition of
Wella could provide this kind of expertise. With the mixed results from the testing done in the UK,
we recommend P&G do some more subjective research in this area before deciding to expand the
SK-II line here.
Japan: We recommend P&G expand the SK-II product line in Japan. This is the home country for the
SK-II line, and has already established a market for the product. While the slowing market growth
and increased competition will result in companies having to fight for market share, SK-IIs proven
success here should help this product line as it expands. A more plentiful SK-II product line may
also help solidify its brand name as it expands to other countries.

RECOMMENDATIONS
In the highly competitive Japanese skin-care market, P&Gs new SK-II product hasproven its
success as a premium and prestige offering. P&G has gained significantknowledge transfers from
SK-II development and further, has successfully tappedthe fickle Japanese market and has
developed a loyal user-base in Taiwan and HongKong. With its phenomenal success, it is only
logical that P&G consider rolling-outthe SK-II product-line to the international market. However,
while there issignificant worldwide growth potential within the $9 billion prestige skincareindustry, based on recent organizational changes, new corporate priorities, andthorough
market assessment, P&G must base its decision on current resources andcapabilities to effectively
maintain profitability. In analyzing the three options of Chinese expansion, European roll-out, and
further growth of Japanese market, P&Gshould continue to concentrate its efforts in Japan to
further penetrate and grow itsshare (only 3% of a $10 billion beauty market). There are a number
of factors under consideration when analyzing and weighingbusiness opportunities for each of the
three markets. In the first stage of thisanalysis we reviewed each regional market to size respective
target consumer,weighed barriers to entry, and determine each markets stage of growth in
additionto potential. Second, we studied the markets to determine whether successfulentry would
be permitted due to current constraints/limitations and further, whetherit made business sense for
the new P&G global strategy (fit). Finally, a competitivelandscape assessment of each regions skin-

care market allowed us to understandthe viable success of SK-II within its peer product offering
space.For a company to succeed, its strategy must either fit the industry environment inwhich it
operates, or the company must be able to reshape the industryenvironment in which it operates to
its advantage through its choice of strategy
Companies typically fail when their strategy no longer fits the environment in whichthey operate.
To achieve a good fit, Paolo and his managers must understand the forces thatshape competition in
their external environment. This understanding enables themto identify strategic opportunities and
threats.An expansion strategy does not necessarily lead to expansion of a market. Forexample
concentration, integration, diversification, cooperation, etc.. are differentways to expand yet do not
necessarily lead to expansion of a market for a particularproduct. An extension of a market by
reaching out to a new market segments (suchas geographically) is not the same as regional,
national, or international geographicexpansion of the company's sales. The first option leads to an
increase in primarydemand for the product category. But in the latter option, a company might
grow itssales by gaining market share from existing competitors in new geographicmarkets.
Similarly, if a market penetration is sought by converting non-customersinto the customers of SK-II,
consequently it may lead to an increase in the primarydemand. But if a market penetration is
brought about by attracting competitor'scustomers, 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 theoverall sales with current
product in new and existing markets. This can beaccomplished by:
1. Current markets Getting existing customers to buy more. Getting potentialcustomers to buy.
2. New markets selling current product in new markets.3.
Grow Sales with New/Altered/reshaped/renamed SK-II line of Products andversions With this
approach he will achieve