P&G JAPAN: THE SK-II GLOBALIZATION PROJECT

Executive Summary

This case examines P&G and whether or not they have the ability and means to make their SK-II
product a global brand. In this case, we examine P&G's need for a new global strategy and their ability
to develop SK-II into a worldwide beauty product. Ultimately we will see that P&G needs to expand
their hold in the Japanese market while becoming more familiar with the needs of potential markets.

Analysis

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

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1] As Paolo DeCesare, what factors do you need to consider before deciding what to
recommend in your SK-II presentation to the global leadership team (GLT)? What kind of
analysis will you need to do in preparing for that meeting?

As Paolo De Cesare, the factors need to consider before deciding what to recommend in the SK-II
presentation to the global leadership team (GLT) are:
(1) This is P&G’s first-ever proposal to expand a Japanese brand worldwide. Other countries have a

different culture than that of consumers in Japan which is why this is a big risk.

(2) P&G’s global organization is in the midst of a 2005 restructuring program; it can be disruptive.

(3) Cost in 1980’s of running all local product development labs and manufacturing plants was limiting

profits; ever since then local general managers’ resisted emergence of new products because of the

negative impact on local profit.

(4) Lingle’s POV was P&G should meet the demands of every nation, but still have local self sufficient

subsidiaries; P&G built their company around his POV.

(5) Lafley’s POV was that most of the advertising budget should be spent on two products- MaxFactor

Color and SK-II; SK-II had such a high margin.

(6) De Cesare’s POV was there is a great opportunity for SK-II to break into the $9 billion worldwide

prestige skin care market.

(7) Jager’s POV was that a major product development technology center was needed for demanding

Japanese consumers; this would also support product development throughout Asia and other parts of

the world.

(8) Ram’s POV was SK-II should be introduced into Chinese department stores as Oil of Olay moves

into “second-tier stores”; also predicted China to be the 2nd largest market in the world for prestige

beauty products.

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

2] Does SK-II have the potential to become a global brand within Proctor &
Gamble’s worldwide operations? Why or why not?
Following are the pros and cons of the global potential of SK-II:

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

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3. Which of the three market options should Paolo DeCesare recommend to the
GLT? What benefits do you expect to gain? What risks do you see?
After arriving in Japan, Paolo DeCesare found that SK-II is already a successful product in Taiwan and
Hong Kong. This success had already encouraged the management to begin expansion into three
regional market options – Singapore, Malaysia and South Korea. But Paolo DeCesare thought that these
are relatively small markets and he wanted to take bold entry. He instead wants to check the
profitability of entering new major markets.

The options recommended by Paolo DeCesare were as follows:

A] Introducing the brand to mainland China. The beauty care management team for Greater China
was interested in SK – II’s triumph in Taiwan and Korea.

B] Introducing SK – II into the large western market.

C] Restructure the brand positioning strategy in proven market of Japan.

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

Activity Benefits Risks

Option A Introducing the
brand to mainland 1 Previously P&G had 1 P&G is relatively new
China problem with its brand company in mainland
Olay in China just after China. So they are relatively
launching. But they have less knowledgeable about
recovered from that crisis Chinese culture.
by adding service
component to the product 2 All major competitors
formulation. They staffed from the world are present
their outlets or in Chinese market.
showrooms with beauty
consultants. This learning 3 The third is risk about
can be applied to market readiness. The
penetrate in Chinese customer is not accustomed
market. with the process of applying
this product. They usually
2 The major benefit of and traditionally applied
entering into Chinese one step skin care process
market is its popularity. It and only recently they had
is predicted to become switched to three step
second largest market in cleansing and moisturizer in
the world. And especially process. So, the success of a
their target segment - six to seven step skin care
prestige beauty segment- product is on a toss.

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P&G JAPAN: THE SK-II GLOBALIZATION PROJECT

is growing at 30% to 40 %
a year. 4  Chinese local laundry
products are very low in
price.

4 Another risk is about

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

Option B Introducing SK – II 1 The target market for 1 The market is

into the large the product is overcrowded here. The
western market sophisticated beauty main concern is to create
conscious group of visibility in this market.
people. Europe has a large
number of customers 2 Creating the brand
belonging to this group. awareness in European
market is relatively costly as
2 The probable the cost of television and
consumer group are print medium is high. And
already habituated with as it is a product targeted to
six to eight step skin care sophisticated beauty
solutions. conscious group of people,
mass distribution outlet will
not help the brand.

3 Typical distribution
channels cannot deploy in
this case.

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Option C Restructure the 1  Japanese women are 1  Form the past few
brand positioning the most sophisticated years the growth rate in
strategy in proven users of brand products Japan for SK II is not very
market of Japan and they are world's high. The product’s brand
leading consumers of SK - re-positioning may not gain
II care solutions. The totalenough attraction from its
market for sophisticated target consumers.
beauty conscious is even 2  Most of P&G’s product
greater than US laundry are of “stack it high, sell it
market. cheap” nature. This
Japanese technologistsparticular product in Japan
have deep insight about is very costly priced at $ 50
their consumers. So they compared to $ 7 for Olay
could design the product Facial cloth in the United
which is most suitable for States. This pricing strategy
the domestic market. of SK- II does not goes in
line with other products of
2 The cost of market P&G.
expansion is always more
than the cost of product
diversification or
development of new
product. The basic
product can be presented
with some more value
addition, by adding anti-
ageing and anti-whitening
products.
In Japan technologists and
marketers are working
jointly to boost the
accuracy and credibility of
their skin diagnosis.

3 The product has a

small share in a rich
market. Product
innovation and superior
service can accelerated the
growth in market share.

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4. How should he implement your recommended option? What are

implications for P&G’s new post-O2005 organization? What support and/or
resistance do you expect? How will you manage it?
Implementation of the recommended option:

To implement Market development option in mainland China P&G should take the following steps:

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

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

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

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

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

Implications for P&G’s new post-O2005 organization:

According to the Chief Operating Officer, Mr. Jager, the implementation of O2005 will enhance annual
growth 13 % to 15 % which will result in $900 million annual savings starting from 2004. But to
implement this, they have some implication in the following areas:

Implication in change of culture:

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

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Implication in change of process:

Mr. Jager wanted to change the traditional systems and processes. He increased the performance based
pay component. He also extended the reach of stock option from senior management to all employees to
motivate them.

He also stretched on integrated business planning process where all operating plans could be reviewed
and sanctioned together.

Implication in change of structure:

The most drastic change is to shift the primary profit responsibility to seven global business units from
four regional organizations. They also started to standardize their manufacturing process, brand
portfolios and co-ordinating marketing activities.

Resistances and Support of the Proposed Change in Organizational Structure:

The fact says that implementation of O2005 was causing a good deal of organizational disruption and
management distraction. The cause is the focus of profit making has been shifted from local arena to
global. Now making of budget is global responsibility, but European managers often did not
understand the competitive and trade differences across markets. So P&G has to standardize and
centralize their policies and practices out of their head office.

The maximum resistance for the proposed change came from a huge number of efficient local managers
left the company.

Managing the Change:

There are many elements which are to be worked out to make the change successful, which are listed as
follows:

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

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