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P & G Japan: The SKII Globalization Project

By: Yael Davidowitz-Neu

Part I: Organization 2005

Using Culture, Process and Structure to Build an Innovation Global Organization

P&G in 1999
Jager, P&G CEO, is concerned that company is running out of white space as product innovation slows Sluggish 2% annual volume growth Losing global market share Operations in over 75 Countries but revenue still concentrated in Americas: 58% of revenues in Americas, 32% in Europe, 10% in Asia* Culture is slow, conformist and risk-averse Initiatives focused locally not scaled globally
*Exhibit 4, P&G Japan: The SK-II Globalization Project

O2005: Vision
Make changes to culture, process and structure that will allow P&G to exploit superior product technology
Increase R & D budget by 12% and decrease marketing budget by 9%

Starting in 2004, achieve 13-15% annual earnings growth and deliver $900M in savings
Painful implementation: Cost of $1.9B, loss of 10 plants and 15,000 jobs (13% of worldwide workforce)

Leverage Leadership and Innovation Team to identify and support company-wide innovation
Create 20 new products in next 18 months

02005: Culture
Existing culture is hindering innovation.
Jager: Culture revolution needed shift focus to stretch, innovation and speed. Non-valued added work (eg: memo-writing, chart preparation) must be reduced to make company more nimble. Disciplined, loyal managers, referred to as Proctoids, need to be shaken up, encouraged to take risks and empowered to disagree with status quo. To signal importance of risk-taking and speed, Jager gives Leadership Innovation Team green-light to implement global rollout of radical new products.

02005: Process
Traditional systems and processes must shift along with culture to maximize innovation opportunities. By increasing performance based component of compensation, P&G will encourage risk taking and improve alignment of individual and corporate goals
Variability of a vice presidents annual pay package expanded from 20% (10% up or down) to 80% (40% up or down). Stock options extended from senior management to all employees Even contractors pay becomes linked to performance

Integrated Business Planning Process to reduce time wasted preparing, negotiating and revising budgets for individual products and countries.

02005: Structure
Ownership of profit responsibility by region rather than product did not incentive product innovation or a global mindset so Jager shifts primary profit responsibility from 4 regional organizations to 7 global business units (GBUs).
Regions assume responsibility for carrying out global strategies locally Global Business Service Units (GBSs) coordinate accounting, payroll and other administrative tasks across regions.

In addition to their core product development responsibilities, Jager tasks GBUs with increasing efficiency, coordinating marketing activities & simplifying brand portfolios
Goal is not only to decrease costs, but also to decrease barriers to launching new product lines

To encourage accountability and reduce bureaucracy, many responsibilities are shifted from committees to individuals and management layers are eliminated.

Part 2: SK-II
Turning a local success into a global brand

SK-II: Early Successes

SK-II is a clear, unperfumed liquid with a distinct odor
Very different from Western lotions and creams, but loved by discerning Japanese consumer Contains pitera, a secret yeast based ingredient that keeps skin looking young Prior to marketing push, product has a small but very loyal consumer. A high-margin item, SK-II sells for over $120 per bottle

SK-II becomes Cornerstone of P & Gs focus on prestige beauty-counselor segment in Japan.

P & G launches bold TV advertising experiment to promote SK-II In just 3 years, SK-II awareness in Japan grows from 20% to 70% and sales more than double.

Building on success, management adapts ad campaign for Taiwan and Hong Kong, where SK-II was quietly building a loyal following among women who took their fashion cues from Tokyo.
Sales skyrocket in both markets by 1997 export sales of $68M represent 30% of brands total sales and SK-II is generating significant operating profit.

Despite local successes, outside Japan, SK-II has little visibility among P&Gers
Hard for P&Gers outside Japan to understand how SK-IIs niche strategy differs from Olays mass market success elsewhere around the globe.

SK-II: Next Steps

de Cesare, the global franchise leader for SK-II, must prove SK-II has global potential.
Because of SK-IIs strong performance in Taiwan and Hong Kong, management is currently expanding product into small markets(eg: Singapore, Malaysia and South Korea) but is the time right to make a push into a big global market or are there better ways to demonstrate SK-IIs global potential?

Three options for expansion:

Build upon SK-IIs success in Japan by expanding within Japan. Capture emerging high-end customers in mainland China. Expand to large European market.

Exploiting Japanese Market is the Best Way to Demonstrate SKIIs Global Potential
Good opportunity to grow SK-II market in Japan while sales of SK-II are still strong, home market growth has slowed.
Capture additional market share for Max Factor Japan, which has less than 3% of $10B beauty product market in Japan. De Cesar believes that with innovation in SK-II, product should be able to double in sales within 6-7 years.

Japanese consumers are a very attractive segment.

SK-II product most appropriate for Japanese woman, who already had 4-6 steps in their facecleansing regimes. Loyal SK-II customer spends $1K annually on brand consumer of all P &Gs standard products (eg: detergent, toothpaste) doesnt spend close to that amount. Needs of analytically inclined Japanese consumer are well aligned with innovative beauty imaging system designed by the SK-II technology and marketing teams system allows beauty consultants to diagnose and solve individual skin products.

Easier to garner support for internally than alternative options.

Expansion in Japan less expensive than launching SK-II in a new market. Groups throughout P & G already see Max Factor Japan as a potential source of innovation even stronger success in Japan in the near term will make it easier to convince regional heads to focus their efforts on promoting SK-II in the longer term. De Cesar is head of the Japanese region, so he can ensure SK-II gets necessary support in Japan he has less control in other regions where he is in charge of SK-II, but not the region itself.

Plan to Enter China Soon, But Not Quite Yet

Why is Entry in China Attractive? Rapidly growing prestige beauty market (30-40% annually) By launching SK-II rather than a premium version of Olay, P&G becomes more competitive in premium spaces critical to brand growth. Why Wait to Enter? Chinese women are not ready for SK-II While income is rising, three month supply of SK-II still costs an entire months salary for average woman working in major Chinese city P & G is better off offering Olay premium at a lower price point now and SK-II as an uber-premium brand in the future This is especially true because high import duties of 35-40% means product will need to be even pricier to succeed in Chinese market. Current facial cleansing process is one step and transitioning to four step process will take time. Even if P&G does not act now, the battle for the Chinese consumer will not be lost to global elite powerhouses: since Hong Kong and Taiwan look to Tokyo for the latest trends, it is likely that mainland China will do the same as it modernizes. P&G can likely build on Tokyo success to penetrate China, just as it did earlier in Hong Kong and Taiwan. Internal politics make it safer to focus on building up SK-II in Japan and then use success to role it out worldwide rather than risking a failed attempt to launch in China

Hold off on European Expansion

Why is Entry in Europe Attractive? Sophisticated European consumer is a good match for multistep beauty routine. Lower costs of SK-II consultants because beauty products in UK are concentrated in a small number of outlets. De Caser is familiar with market and knows how to sell into it. Why Hold off on entering? High barriers to entry make it better to enter later, when SK-II has already demonstrated further potential within Japan:
European beauty market is crowded with high profile competitors. Advertising is far more expensive in Europe than in Asia and it will be very expensive for SK-II to advertise sufficiently to achieve brand awareness.

Organizational disruption in Europe means management may be distracted and SK-II will be less of a focus area
Safer to focus on building up SK-II in Japan and then use success to role it out worldwide rather than risking a failed attempt to launch in Europe.

Selling in Europe means localizing to multiple European countries, which is very costly harder to achieve scale with smaller local markets than in a larger, more unified market like Japan.