BU491 Lecture Notes - Lecture 4: Sk-Ii, Special Member State Territories And The European Union, Procter & Gamble
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CHRIST OPHE R A. BA RTLETT
P&G Japan: The SK-II Globalization Project
In November 1999, Paolo de Cesare was preparing for a meeting with the Global Leadership Team (GLT) of
P&G’s Beauty Care Global Business Unit (GBU) to present his analysis of whether SK-II, a prestige skin care
line from Japan, should become a global P&G brand. As president of Max Factor Japan, the hub of P&G’s fast-
growing cosmetics business in Asia, and previous head of its European skin care business, de Cesare had
considerable credibility with the GLT. Yet, as he readily acknowledged, there were significant risks in his
proposal to expand SK-II into China and Europe.
Chairing the GLT meeting was Alan (“A. G.”) Lafley, head of P&G’s Beauty Care GBU, to which de Cesare
reported. In the end, it was his organization—and his budget—that would support such a global expansion.
Although he had been an early champion of SK-II in Japan, Lafley would need strong evidence to support P&G’s
first-ever proposal to expand a Japanese brand worldwide. After all, SK-II’s success had been achieved in a
culture where the consumers, distribution channels, and competitors were vastly different from those in most
other countries.
Another constraint facing de Cesare was that P&G’s global organization was in the midst of the bold but
disruptive Organization 2005 restructuring program. As GBUs took over profit responsibility historically held
by P&G’s country-based organizations, management was still trying to negotiate their new working
relationships. In this context, de Cesare, Lafley, and other GLT members struggled to answer some key
questions: Did SK-II have the potential to develop into a major global brand? If so, which markets were the
most important to enter now? And how should this be implemented in P&G’s newly reorganized global
operations?
P&G's Internationalization: Engine of Growth
De Cesare’s expansion plans for a Japanese product was just the latest step in a process of internationalization
that had begun three-quarters of a century earlier. But it was the creation of the Overseas Division in 1948 that
drove three decades of rapid expansion. Growing first in Europe, then Latin America and Asia, by 1980 P&G’s
operations in 27 overseas countries accounted for over 25% of its $11 billion worldwide sales. (Exhibit 1
summarizes P&G’s international expansion.)
Local Adaptiveness Meets Cross-Market Integration
Throughout its early expansion, the company adhered to a set of principles set down by Walter Lingle, the
first vice president of overseas operations. “We must tailor our products to meet
________________________________________________________________________________________________________________
Professor Christopher A. Bartlett prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management. Certain data have been disguised, but key relationships have
been retained.
303-003 P&G Japan: The SK-II Globalization Project
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consumer demands in each nation,” he said. “But we must create local country subsidiaries whose structure,
policies, and practices are as exact a replica of the U.S. Procter & Gamble organization as it is possible to create.”
Under the Lingle principles, the company soon built a portfolio of selfsufficient subsidiaries run by country
general managers (GMs) who grew their companies by adapting P&G technology and marketing expertise to
their knowledge of their local markets.
Yet, by the 1980s, two problems emerged. First, the cost of running all the local product development labs
and manufacturing plants was limiting profits. And second, the ferocious autonomy of national subsidiaries was
preventing the global rollout of new products and technology improvements. Local GMs often resisted such
initiatives due to the negative impact they had on local profits, for which the country subsidiaries were held
accountable. As a result, new products could take a decade or more to be introduced worldwide.
Consequently, during the 1980s, P&G’s historically “hands-off” regional headquarters became more active.
In Europe, for example, Euro Technical Teams were formed to eliminate needless country-by-country product
differences, reduce duplicated development efforts, and gain consensus on new-technology diffusion.
Subsequently, regionwide coordination spread to purchasing, finance, and even marketing. In particular, the
formation of Euro Brand Teams became an effective forum for marketing managers to coordinate regionwide
product strategy and new product rollouts.
By the mid-1980s, these overlaid coordinating processes were formalized when each of the three European
regional vice presidents was also given coordinative responsibility for a product category. While these
individuals clearly had organizational influence, profit responsibility remained with the country subsidiary GMs.
(See Exhibit 2 for the 1986 European organization.)
Birth of Global Management
In 1986, P&G’s seven divisions in the U.S. organization were broken into 26 product categories, each with
its own product development, product supply, and sales and marketing capabilities. Given the parallel
development of a European category management structure, it was not a big leap to appoint the first global
category executives in 1989. These new roles were given significant responsibility for developing global
strategy, managing the technology program, and qualifying expansion markets—but not profit responsibility,
which still rested with the country subsidiary GMs.
Then, building on the success of the strong regional organization in Europe, P&G replaced its International
Division with four regional entities—for North America, Europe, Latin America, and Asia—each assuming
primary responsibility for profitability. (See Exhibit 3 for P&G’s structure in 1990.) A significant boost in the
company’s overseas growth followed, particularly in opening the untapped markets of Eastern Europe and China.
By the mid-1990s, with operations in over 75 countries, major new expansion opportunities were shrinking
and growth was slowing. Furthermore, while global category management had improved cross-market
coordination, innovative new products such as two-in-one shampoo and compact detergent were still being
developed very slowly – particularly if they originated overseas. And even when they did, they were taking
years to roll out worldwide. To many in the organization, the matrix structure seemed an impediment to
entrepreneurship and flexibility.
P&G Japan: Difficult Childhood, Struggling Adolescence
Up to the mid-1980s, P&G Japan had been a minor contributor to P&G’s international growth. Indeed, the
start-up had been so difficult that, in 1984, 12 years after entering the Japan market, P&G’s board reviewed the
accumulated losses of $200 million, the ongoing negative operating margins of 75%, and the eroding sales base—
P&G Japan: The SK-II Globalization Project 303-003
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decreasing from 44 billion yen (¥) in 1979 to ¥26 billion in 1984—and wondered if it was time to exit this market.
But CEO Ed Artzt convinced the board that Japan was strategically important, that the organization had learned
from its mistakes—and that Durk Jager, the energetic new country GM, could turn things around.
The Turnaround
In 1985, as the first step in developing a program he called “Ichidai Hiyaku” (“The Great Flying Leap”),
Jager analyzed the causes of P&G’s spectacular failure in Japan. One of his key findings was that the company
had not recognized the distinctive needs and habits of the very demanding Japanese consumer. (For instance,
P&G Japan had built its laundry-detergent business around All Temperature Cheer, a product that ignored the
Japanese practice of doing the laundry in tap water, not a range of water temperatures.) Furthermore, he found
that the company had not respected the innovative capability of Japanese companies such as Kao and Lion, which
turned out to be among the world’s toughest competitors. (After creating the market for disposable diapers in
Japan, for example, P&G Japan watched Pampers’ market share drop from 100% in 1979 to 8% in 1985 as local
competitors introduced similar products with major improvements.) And Jager concluded that P&G Japan had
not adapted to the complex Japanese distribution system. (For instance, after realizing that its 3,000 wholesalers
were providing little promotional support for its products, the company resorted to aggressive discounting that
triggered several years of distributor disengagement and competitive price wars.)
Jager argued that without a major in-country product development capability, P&G could never respond to
the demanding Japanese consumer and the tough, technology-driven local competitors. Envisioning a technology
center that would support product development throughout Asia and even take a worldwide leadership role, he
persuaded his superiors to grow P&G’s 60-person research and development (R&D) team into an organization
that could compete with competitor Kao’s 2,000strong R&D operation.
Over the next four years, radical change in market research, advertising, and distribution resulted in a 270%
increase in sales that, in turn, reduced unit production costs by 62%. In 1988, with laundry detergents again
profitable and Pampers and Whisper (the Japanese version of P&G’s Always feminine napkin) achieving market
leadership, Jager began to emphasize expansion. In particular, he promoted more product introductions and a
bold expansion into the beauty products category. When P&G implemented its new region-based reorganization
in 1990, Jager became the logical candidate to assume the newly created position of group vice president for
Asia, a position he held until 1991, when he left to run the huge U.S. business.
The Relapse
In the early 1990s, however, P&G Japan’s strong performance began eroding. The problems began when
Japan’s “bubble economy” burst in 1991. More troubling, however, was the fact that, even within this stagnating
market, P&G was losing share. Between 1992 and 1996 its yen sales fell 3% to 4% annually for a cumulative
20% total decline, while in the same period competitor Unicharm’s annual growth was 13% and Kao’s was 3%.
Even P&G’s entry into the new category of beauty care worsened rather than improved the situation. The
parent company’s 1991 acquisition of Max Factor gave P&G Japan a foothold in the $10 billion Japanese
cosmetics market. But in Japan, sales of only $300 million made it a distant number-five competitor, its 3%
market share dwarfed by Shiseido’s 20% plus. Then, in 1992 P&G’s global beauty care category executive
announced the global launch of Max Factor Blue, a top-end, self-select color cosmetic line to be sold through
general merchandise and drug stores. But in Japan, over 80% of the market was sold by trained beauty counselors
in specialty stores or department store cosmetics counters. The new self-select strategy, coupled with a decision
to cut costs in the expensive beauty-counselor distribution channel, led to a 15% decline in sales in the Japanese
cosmetics business. The previous break-even performance became a negative operating margin of 10% in 1993.
Things became even worse the following year, with losses running at $1 million per week.
Document Summary
Re v : ma r ch 3 , 2 0 0 4. In november 1999, paolo de cesare was preparing for a meeting with the global leadership team (glt) of. P&g"s beauty care global business unit (gbu) to present his analysis of whether sk-ii, a prestige skin care line from japan, should become a global p&g brand. As president of max factor japan, the hub of p&g"s fast- growing cosmetics business in asia, and previous head of its european skin care business, de cesare had considerable credibility with the glt. Yet, as he readily acknowledged, there were significant risks in his proposal to expand sk-ii into china and europe. G. ) lafley, head of p&g"s beauty care gbu, to which de cesare reported. In the end, it was his organization and his budget that would support such a global expansion.
