Introduction

SK-II is a high-end skin care product, which has proven to be a success in the highly selective
and competitive Japanese cosmetics market. It fits in the Japanese environment nicely. For
starters, the wealthy Japanese society gives P&G a large market to target. Also, the uniquely
sophisticated habits of Japanese women means they are more likely to accept the more
complicated procedure required by SK-II. SK II involves six to eight steps, which is more than
the number of steps of any other skin care products used in the rest of the world (1, p.8).
Overall strategy of the of the organization
Given this products success in Japan for 1999 ($150 million in sales), P&G is considering
expanding its SK-II into a global brand. When doing this, management has to consider how the
Japanese market compares to the other markets being proposed (China and Europe) as part of
their international expansion. They should also do a thorough analysis of each of the markets
being considered for this product, and an analysis of their competitors firm wide international
strategy. Because the Japanese market is very different from these other markets, the same level
of success cannot be guaranteed. This includes the distribution channel and the supporting
industries, e.g., TV advertising is relatively cheaper in Japan than in Europe.
Models and Theories
P&Gs International Business-Level Strategy.
Porters model suggests that international business-level strategies are usually grounded in one or
more of these home-country factors (1, p. 274). Based on Porters model, the firms strategy,
structure, rivalry and demand conditions seem to be significant for P&Gs international businesslevel strategy.
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 pre-existing 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
country-based 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

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 rivalry
among competitors

High

Low

High

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 BousquetChavanne 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.