Procter and gamble company began its operations in the year 1837 and immediately after the Second World War it globalized its operations. P&G as it has come to be known focuses on transforming slow-moving products into promising business ventures. The company has been said to concentrate on its core business through innovation, expanding penetration in developing countries, and restructuring its existing business.
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P&G is a dominant household name as it deals with household products and has produced distinguished brands like Pampers and SK-II which is cosmetic-related. SK-II will be the case under scrutiny in this report.
According to Duncan (1995), cultural diversity and geographical differences have dominated the debate on the globalization of standardized products. Other factors that also affect the success of standardized advertising, including such issues as regulation, product use patterns, socio-economic levels of development, education, language differences, and organizational structures.
The objective of this paper is to review the SK-II case which is a brand of P&G in terms of the main challenges and opportunities it encountered. To do this, we will analyze the factors underlying the current performance and the likely effects of future developments in the industry. This is regarding the company’s bid to expand its operations by introducing SK-II as a global product into China and Europe and after the implementation of the organization 2005 strategy in 1999 as the company operated with a 5-year plan.
Statement of the problem
It is important to note that P&G was experiencing serious problems in the early ’80s and their entry into the Japanese market had devastating effects as it was a failure (Bartlett 2004). The first step is therefore to identify the problems that P&G faced with Japan and the wrong steps that they undertook and try to ensure that introduction of the SK-II brand as a global product into the Chinese market and the European market can be a success. We have to determine whether the brand has the potential of becoming a product that can be sold globally. We also have to consider and analyze the effect of the Organization 2005 restructuring program, also known as O2005, which would bring about cultural and organizational changes that would affect the SK-II brand globalization process.
We also have to understand the markets into which the product is to be launched into and determine how lucrative it will be. In this case, the markets are China and Europe which we shall look into in-depth later on in this paper. The pros and cons of expanding into either China or Europe will be dwelt with to be able to give recommendations on the preferred market. The strategies they intend to use for expansion are also important issues to deliberate and will be tackled in this paper.
P&G is a company that is in the household products industry. It is engaged in the production of all sorts of home products like beauty products, baby care, pet health, foods, and personal care among others. This paper will, however, major on the SK-II brand in the skincare line of products although the company also deals in other household and food brands, for example, pampers which is a baby product, and rejoice brand which is a hair product.
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Does SK-II Have Global Potential?
In this section, we are going to look at the strengths and weaknesses of the SK-II brand to determine whether it can or cannot meet the requirements of becoming a global product. One of the advantages of this brand is that it is of high quality and this goes hand in hand with being a product with a high-profit margin. The product also enjoys a good brand image in Japan and there is a huge market base for the product worldwide. The successful launch of the product in Taiwan and Hong Kong also adds to the credibility of the SK-II brand.
However, the SK-II brand name seems to be a household name only in Japan as it is not well known outside of Japan. This is a setback because it takes a lot of resources in advertising and promotion to create awareness of the product. Finally, it was said to be very difficult to sell the idea of how valuable the product is to the western community. After reviewing the arguments for and against the case, it is clear that the SK-II brand does have the potential to become a global product.
Market analysis (SWOT)
In this section, we will take a close look at the current market of the SK-II brand critically which is Japan, and then proceed to dissect the Chinese and European market to establish the probability of the brand becoming a success in the latter markets and as a global product. Since we are using the SWOT analysis, we shall be looking at the strengths, weaknesses, opportunities, and threats that each market has to offer.
SK-II brand has the advantage of being a high-quality product and the previous failure means that the company has learned from its mistakes and will improve on them. Japan has a very large population and a stable economic base therefore it provides a very huge market and growth potential to industries. Japan also has a history of sophistication and a variety of life standards meaning they are keen on fashion and the latest technology and invention and therefore creating a desirable business environment. Japan has an independent economy and is said to be among the leading consumers of beauty products and since most of the population is wealthy it is, therefore, a lucrative place for conducting business.
The country has a very competitive beauty and skincare industry but SK-II was launched triumphantly into the market and still has an opportunity for further growth of the brands’ consumer base. The launch of SK-II was a huge success in Japan and still has a huge potential for expansion. The Japanese government has however been accused of being uncooperative in the enforcement of trademark and patent laws that would prevent duplication and counterfeiting of their products but they managed all the same.
The SK-II sales in the year 1999 were more than $150 million in Japan. The retail sales in skincare products were estimated to be $6,869 million and the growth rate of two years was 6%. There was also the potential of sales doubling over the next 6 to 7 years.
The Marketing Mix
The Japanese market called for innovation and inventiveness of products. As for the pricing strategy, premium pricing was used and it proved to be efficient. They also availed a procedure involving 8 steps on the use of the product as well as providing solutions for individual skin problems by specialists. Finally, there was the introduction of skin whitening and anti-aging products.
As for the place, SK-II brands were available in department store counters while promotion entailed reviews of their products in magazines and having trained counselors in stores for customer care services.
China is one of the countries that have the largest population in the world. This creates an opportunity for P&G because it means that there is a huge untapped consumer base. It is said to be the second-largest market of beauty products in the world; with the prestige cosmetics segment growing at 30 to 40% per year (Bartlett 2004). The huge population also means that the cost of labor is minimal as there is the availability of cheap labor. It should be profitable to use the labor-intensive approach. To make it in the Chinese market High-quality products should be launched to ensure product success in the market. The presence of wealthy customers in the population is also an added advantage to the company. They could decide to major with the elite section of the wealthy women who are in it for quality and don’t mind paying extra for the same Bartlett (2007). The target population covers a large area and is widespread hence growth opportunities are present.
On the other hand, the Chinese government tends to protect their local industries from foreign competitors and this would pose a threat to the SK-ii brand. The competitors in china would be Kao and Lion who have a better position in the market because they are familiar with the market better than P&G.
The company estimated that it would incur a substantial amount of losses initially for the first three years before it could begin making profits. According to the P&G annual report (1999), the initial investments would lead to estimated losses of roughly 10% of the sales in the first three years of operation after which a break-even point would be realized. The retail sales in skincare products were estimated to be $I, 022 million and a two-year growth rate of 28% in 1999.
As for the Chinese market, the pricing strategy is the same as Japan’s which is the premium pricing strategy. However, the price should be lower than that in Japan. As for promotion, they should educate the consumer and advertise the product using Chinese models and in beauty magazines. They should also offer superior store service with trained counselors. They should place their product on counters in departmental stores.
In the European market, SK-II will have the advantage of being a high-quality product. This means that it will capture the segment of consumers who are after quality who are the vast majority. Unfortunately, that sums it up for the strengths of the product. As for opportunities, since P&G is a company that has vast resources, it will be easy for them to create a channel of distribution for the brand and be able to reach the untapped market by creating a large network that reaches out to the consumer.
Various threats are expected in this market, for example, the existence of already established competitors makes it very difficult for the brand to be able to penetrate the European market which is already crowded. The consumers are also multi-cultural and a bit rigid therefore will prove difficult to convince them to switch to the SK-II brand. There is also the high operation cost like the cost of advertising which is abnormally high but is vital if the product is to be launched into a new market to educate people of the existence of the product and promote the brand to sway consumers towards it.
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By entering the European market, P&G hoped to achieve $10 million after four years of operating in the area and out of this absorb $1 million – $20 million annually for the entire period as start-up capital investment. In the year 1999, the retail sales in skincare were $1,052 million and a growth rate of 17 %. ( P&G Annual Report 1999)
The European market requires highly innovative products and they should offer solutions for individual skincare problems. The pricing strategy is also the premium pricing strategy and should be placed in department store counters and pharmacies. Finally, for promotion, there should be superior in-store training, marketing the product online, and offering free samples.
In the late 1990s, P&G undertook a major restructuring of their operations that was named Organization 2005 or O-2005. The restructuring had the effect of “further centralizing an organization already more centralized than its peers” (Neff, 1998). The O-2005 was introduced by Jager in 1999 which brought various changes in the company’s organizational structure. The strategy involved restructuring the company from geographical lines to product-based. It also proposed speeded up production and innovation and finally the elimination of bureaucracy in the company. This restructuring was surely bound to affect the operations of the company as well as the globalization of the SK-II brand.
With the new strategy, “Procter & Gamble grouped its businesses into global business units (GBUs)” (Dyer, Dalzell & Olegario, 2004, pp. 294-5), and on the other hand, arranged its global business services into “geographically based market development organizations (MDOs)” (pp. 294-5). The GBUs were to manage product and brand development and manufacturing. The MDOs on the other hand handled the marketing strategies for local implementation.
However, the company encountered difficulties in the implementation of O-2005 until Lafley took over in 2000 as the CEO and strived to eliminate the setbacks that were rocking the implementation of the strategy.
Effect of 0-2005 on Globalization of SK-II
In this section, we shall discuss the impact that the 0-2005 strategy will have on SK-II as a global product. One of the strong points is that there is an increased budget allocation and therefore there will be no major financial constraints. The strategy also incorporated incentives for workers and this, in turn, improves their performance. There were a lot of bureaucracies in the company and 0-2005 strived to eliminate them to create a better business environment. This was in line with the improvement in accountability. Finally, the culture of stretch, innovation, and speed was of great help in the globalization of the product.
On the other hand, 0-2005 presented some challenges for example it led to budgetary pressures on the company. It was also faced with the challenges of not understanding the trade differences between markets and the competition they were to face. All in all, the 0-2005 strategy after reviewing its strengths and weaknesses supports the globalization of SK-II.
SK-II Product Strategy
The P&G company strategy placed the global business units in charge of the product development. They were in control of manufacturing and marketing and would therefore need to have a strategy for rolling out the product. They had to create an image for the product that will be consistent. They also needed to consider cost reduction and to achieve this had to consider economies of scale.
The MDOs that handled local implementation needed to cater to the requirements of the customers in different markets and countries and familiarize themselves with the stages of the life cycle of the product.
The analysis raises a couple of issues that should be clearly understood. First is the fact that the SK-II brand is a high-quality product, it uses superior technology and provides in-store service and all these factors qualify the product as having global potential. It means with no doubt that the SK-II brand can be transformed into a global product. P&Gs growth would therefore depend on its ability to develop new products and roll them out rapidly worldwide.
The increase in the budget of the R&D operations for technological purposes and the support of the O-2005 organizational structure were helpful to the rolling out of the SK-II brand. On the issue as to whether the O-2005 strategy is effective and whether it will deliver results. The options for this issue are acknowledging the fact that restructuring is not expected to deliver results instantly and it takes time for it to work.
After analyzing the markets, Japan, China, and Europe are very promising markets although Japan is the most attractive followed by China and finally Europe.
There are several recommendations to be made regarding the globalization of the SK-II brand. The first one is that P&G should restructure the company into a global product competitor and continue implementing the O2005 strategy. Better implementation of the strategy is required though. O2005 is effective and should therefore not be done away with.
Secondly, the strategy that P&G should use in the market entry is determined by the analysis of the markets. According to Lindstrom (2006), the global-only campaign does not exist. It should therefore first penetrate the Japanese market and then start market development in China than Europe gradually.
Finally, when it comes to the product strategy, the company should strive to ensure that it remains the predecessor when it comes to technological know-how, inventiveness, and innovation. It should therefore apply the standardized product development strategy which implies maintaining quality but at the same time keeping it simple. It is therefore important that the company P&G considers globalizing the SK-II brand as it has the potential of becoming a market leader.
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