Procter and gamble key success factors

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 product’s 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&G’s International Business-Level Strategy .

Porter’s 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 firm’s strategy, structure, rivalry and demand conditions seem to be significant for P&G’s international business-level strategy.

Firm strategy, structure, and rivalry: SK-II is the result of the combined ingenuity of P&G’s 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&G’s 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 firm’s 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 GBU’s took over profit responsibility historically held by P&G’s country-based organizations, management was still trying to negotiate their new working relationships." (2, p. 1) This quote explains P&G’s international corporate level strategy, both where it was, and where it’s 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 GBU’s 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&G’s 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-II’s 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: Porter’s ‘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&G’s 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 world’s 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&G’s 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 doesn’t 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: Lancôme, 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, Lancôme, 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 brand’s globalization, and the fact that those companies can easily legally imitate their competitor’s 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 firm’s 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&G’s 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

L’oreal Comparison.

L'oreal has been one of P&G's major global competitors in the cosmetics industry. L’oreal'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 L’oreal’s ability to capitalize in the international markets.

L’oreal 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, L’oreal'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, L’oreal released a studio line that was less expensive than the Free Hold line (7, p. 1). This example shows that L’oreal 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 L’oreal has when using a transnational business strategy on an international level.

Proctor and Gamble is trying to go in a different direction than L’oreal 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 SBU’s 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 repetitive…also, no reference is made to the text where this was taken from) P&G has a different corporate structure than that of L’oreal 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 case…should 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 Lauder’s 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&D…it doesn’t really prove that ‘decisions’ are made in regional areas of their business). In order to keep their product responsiveness quick, Estee Lauder’s 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 Lafley’s 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 GBS’s 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&G’s core competencies are ‘branding, innovation, and scale’, and this focus can be seen in the business decisions made by Lafley (11, p.6).

P&G’s corporate structure has gone through a restructuring that consists of more than just the reduction of unnecessary GBS’s. The international corporate strategy of P&G has clearly become transnational. There are currently 5 GBU’s which work to provide speed to market, as well as centralized product control for P&G. The GBU’s work closely with seven Market Development Organizations (MDO’s) 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&G’s 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-II’s 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.