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P&G Japan: The SK-II Globalization Project

15/12/2009

Author: Christopher A. Bartlett Source:
 
HARVARD BUSINESS SCHOOL PUBLISHING
 
Description: Organization 2005, a reorganization that places strategic emphasis on product innovation rather than geographic expansion and shifts power from local subsidiary to global business management. In the context of these changes introduced by Durk Jager, P&G’s new CEO, Paolo de Cesare is transferred to Japan, where he takes over the recently turned-around beauty care business. Within the familiar Max Factor portfolio he inherits is SK-II, a fast-growing, highly profitable skin care product developed in Japan. Priced at over $100 a bottle, this is not a typical P&G product, but its successful introduction in Taiwan and Hong Kong has de Cesare thinking the brand has global potential. As the case closes, he is questioning whether he should take a proposal to the beauty care global business unit to expand into Mainland China and/or Traces changes in P&G’s international strategy and structure, culminating in Europe.
 
Case Study Analysis : P&G Japan: The SK-II Globalization Project
Questions:

1. Should Paolo recommend to the beauty-care GBU that SK-II become a global brand?

Priced at over $100 a bottle, the SK-II is not a typical P&G product, but its successful introduction in Taiwan and Hong Kong has Paolo thinking the brand has global potential.  Baring in mind all of the above there are a few issues that Paolo should consider:

1. Organize the Company Along Product Lines not Geography

2. Continue to be the Technology Leader

3. Roll Out to Other Asian Countries

4. Sell off the SK-II Product Line

As a premium and prestige offering. P&G has gained significant knowledge transfers from SK-II development and further, has successfully tapped the Japanese market and has developed a loyal user-base in Taiwan and Hong Kong. With its phenomenal success, it is only logical that P&G consider rolling-out the SK-II product-line to the international market. However, while there is significant worldwide growth potential within the $9 billion prestige skin-care industry, based on recent organizational changes, new corporate priorities, and thorough market assessment, P&G must base its decision on current resources and capabilities to effectively maintain profitability. In analyzing the three options of Chinese expansion, European roll-out, and further growth of Japanese market, Paolo should recommend P&G to continue concentrate its efforts in Japan Taiwan and Hong Kong to further penetrate and grow its share.

In Addition Paolo may suggest re-evaluating this strategy in one year, and perhaps conducting through this year markets analysis in territories and countries were SK-II may succeed.

 

2. Does O2005 support or impede SK-II's transfer worldwide? 

There is a dilemma here.

On a conceptual strategic level O2005 supports a worldwide rollout. Yet since this rollout seems to still take place and cause more havoc than expected many executives are confused and therefore the potential for failure is enhanced. Thus, even though everyone may have a good intention, the worldwide rollout may fail just for reasons of the putting in practice the O2005 plan, such as – organizational change, changes in management structures and the various implications from operations via marketing to the sales. Another supporting argument is that here is also the issue of risk taking. Jager supports risk taking and so it is expected the SBU`s will take some risks in order to achieve product marketing breakthroughs and dramatically enhance sales. Consequently there is a driving force to promote such projects as SK-II.

To summarize. O2005 plans do indeed support the worldwide rollout of the project. Yet, actual organizational transitions and changes following the O2005 are not complete and are in a fragile state that could not fully support the project and provide it a cross corporate support world wide.

3. Assuming that SK-II is globalized, what should Paolo's expansion strategy be in rolling out SK-II? Which country should be a priority?

For a company to succeed, its strategy must either fit the industry environment in which it operates, or the company must be able to reshape the industry environment in which it operates to its advantage through its choice of strategy. Companies typically fail when their strategy no longer fits the environment in which they operate.

To achieve a good fit, Paolo and his managers must understand the forces that shape competition in their external environment. This understanding enables them to identify strategic opportunities and threats.

An expansion strategy does not necessarily lead to expansion of a market. For example concentration, integration, diversification, cooperation, etc.. are different ways to expand yet do not necessarily lead to expansion of a market for a particular product. An extension of a market by reaching out to a new market segments (such as geographically) is not the same as regional, national, or international geographic expansion of the company's sales. The first option leads to an increase in primary demand for the product category. But in the latter option, a company might grow its sales by gaining market share from existing competitors in new geographic markets. Similarly, if a market penetration is sought by converting non-customers into the customers of SK-II, consequently it may lead to an increase in the primary demand. But if a market penetration is brought about by attracting competitor's customers, 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 the overall sales with current product in new and existing markets. This can be accomplished by:

1. Current markets – Getting existing customers to buy more. Getting potential customers to buy.

2. New markets – selling current product in new markets.

3. Grow Sales with New/Altered/reshaped/renamed SK-II line of Products and versions– With this approach he will achieve

objectives through the introduction of new products. This can be accomplished by introducing:

Updated versions or refinements to existing products

Products that are extensions of current products

New products not previously marketed.

 

Priorities of worldwide rollout in terms of territories and states should be:

1.Japan, Taiwan and Hong Kong

2.China

3.EU

 

4. How well has P&G implemented Jager's major strategic change?

"the road to hell is paved with good intentions" – this is how I would describe the implementation of Jagers strategic change. P&G was in deep trouble in the first half of 2000. In March 2000, announced that its earnings growth for the financial year 1999-2000 would be 7% instead of 14% as announced earlier. The news led P&G's stock to lose $27 in one day, wiping out $40 billion in its market capitalization.

Furthermore, in April 2000, P&G announced an 18% decline in its net profit for January – March 2000 quarter. For the first time in the past eight years P&G was showing a decline in profits. In the late 1990s, P&G faced the problem of stagnant revenues and profitability.

In light of this the Organization 2005 program was launched in July 1999. As indicated in the paper responsibilities and Relationships were not optimised. Nevertheless It takes time for a restructure to become Effective, yet it needed better implementation. It was also indicated that marketing plans and budgets had previously been developed locally, and now they were developed globally—or at least regionally—by new people who were perceived to often not understand the competitive and trade differences across markets. Many Senior executives have left the company. Senior country managers focused more on maximizing sales volume than profits, consequently  the beauty care business went under significant budget pressure.

With the implementation of the program, P&G aimed to increase its global revenues from $38 billion to $70 billion by 2005. The Organization 2005 program faced several problems soon after its launch. Jager concentrated more on developing new products rather than on P&G's well-established brands. Jager conducted some mistakes which proved costly for P&G. For example, efforts made in January 2000 to acquire Warner-Lambert and American Home Products. Contrary to P&G's cautious approach towards acquisitions in the 1990s, this dual acquisition would have been the largest ever in P&G's history, worth $140 billion. However, the stock market greeted the news of the merger negotiations by selling P&G's shares, which prompted Jager to exit the deal.

Therefore it will not be farfetched to conclude that the strategic change was welcomed and important to the corporate yet its implementation was not adequate.

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