An analysis of

Procter and Gamble

SK-II Globalization Project
http://acpspouse.tripod.com/v3.htm






Prepared for:
Dennis J. Gillen, Ph. D.









Prepared by:
Scott Debruin
Chris Dixon
Nicolas Echeverria
Ryan Houx
Robert Nealon
Hao Qi
Gregory Tait
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 business-level 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.
J apan: 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 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&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 21
st
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.
J apan: 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.
Reference List

1. Hoskinsson, Robert, Michael Hitt, and Duane Ireland. Competing for Advantage. :
Thomson
South-Western, 2004.
2. Bartlett, Christopher A. P&G Japan: The SK-II Globalization Project. Harvard
Business
School. 2003.
3. Shiseido Home Page. Index. 6 Feb 2004.
http://www.shiseido.co.jp/e/
4. Kenebo Cosmetics Division Home Page. Index. 6 Feb 2004.
http://www.kanebo.co.jp/english/jigyo/e_cos.htm
5. Lion Home Page. Index. 9 Feb 2004.
http://www.henkel-lion.co.jp/index.html
6. Kayo Cosmetics and Toiletries Home Page. Index. 9 Feb 2004.
http://www.euromonitor.com/Cosmeticsandtoiletries
7. Need the Author. "Need the Title." Women's Wear Daily October 12 1990: 10(2).
8. L'oreal Home Page. Index. 6 Feb 2004.
http://www.loreal.com/us/index.asp
9. Estee Lauder Home Page. 07 Feb 2004.
http://www.elcompanies.com/htm/frm_m1.htm
10. Yahoo! Finance Home Page. Index. 7 Feb 2004
http://finance.yahoo.com/

added references.
11. (2003 Annual Report)
http://www.eu.pg.com/downloads/PG2003AnnualReport_Online.pdf
12. (Focus on P&G in Western Europe)
http://www.eu.pg.com/downloads/FOCUSbrochureWE_2004_final_full_screen.pdf
13. Outsourcing IT (2003)
http://webministry.christianity.com/CC/article/0,,PTID313926%7CCHID593574%7C
CIID1664634,00.html
14. http://www.itweb.co.za/office/ibm/0309170806.htm