P&G Global Expansion

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Introduction of the case:
De Cesare, president of Max Factor Japan and GLT member on the Beauty Care GBU, is to present an analysis of SK-II’s potential to become a truly global brand. There are 3 alternatives for SK-II’s global strategy: To build on the brand’s success in Japan, tap into China, or expand SK-II into Western Europe. If P&G chooses to focus on Japan, it is possible that they might achieve national brand recognition. However, to become a truly global brand, it is necessary that SK-II enters new markets. Yet, we must bear in mind that there are significant risks in P&G’s first-ever proposal to expand a Japanese brand into foreign markets. These risks are magnified by the vast differences in consumers, distribution channels, competitors, and the political, social and economical systems across borders. Furthermore, P&G’s global organization was currently undergoing a major restructuring program, O2005, which might deter SK-II’s plans. This paper seeks to discuss the merits of Japan as a lucrative market for SK-II and weigh the benefits of entry vis-à-vis the risks and related costs. In light of obstacles and limited growth, this paper will also examine the prospect of SK-II to develop into a major global brand by tapping into foreign markets. We will discuss the China and Western Europe market separately, and evaluate our plans accordingly. Lastly, we will conclude by showing how our plans would be implemented and integrated in P&G’s newly reorganized global operations. Background of P&G Japan

P&G‘s entry and expansion into Japan started off rough. Up to the mid-1980s, P&G Japan had been a minor contributor to P&G’s international growth. In 1984, twelve years after entering the Japanese market, P&G’s board reviewed the accumulated losses of $200 million, the ongoing negative operating margins of 75%, and the eroding sales base-decreasing from ¥44 billion in 1979 to ¥26 billion in 1984. With this negative outlook, P&G considered exiting Japan. Durk Jagerr, the country’s new GM, analyzed the causes of P&G failure in Japan. He then made radical changes in market research, advertising, and distribution. This resulted in a 270% increase in sales.Just as it was starting to have a positive outlook, the Japan’s “Bubble Economy” burst in 1991. P&G’s entry into the new category of beauty care worsened rather than improved the situation. In 1994, the Japanese beauty business lost $50 million of sales. Organization 2005 (O2005)

When Durk Jager became CEO in January 1999, he implemented the Organization 2005--the proposal for global growth. This was the most dramatic change to P&G’s structure, processes, and culture in the company’s history. Implementing O2005 would promise to bring 13% to 15% annual earnings growth and would result in $900 million in annual savings starting in 2004. Item| 1995| 1996| 1997| 1998| 1999|

Gross Profit| -| 5.41| 6.64| 4.44| 10.3|
Table 1: Growth rate of Gross Profit
As seen from Table 1, gross profit did grow quite significantly by 10.3% in 1999, only 6 months after implementing O2005. P&G’s income statement therefore supports Jager’s optimistic forecast of future 13-15% annual growth earnings.

Figure 1: Trend Analysis for Current Assets and Long-Term Assets As seen in Figure 2, P&G’s plant, property and equipment have been rising over the past 5 years, with a significant increase in year 1997. On the other hand, current assets (i.e. cash) have been declining, with a considerable decrease in year 1997 as well. It is highly possible this is due to cash used (decrease) to invest in capital (increase). In 1998, current assets finally increased for the first time in 4 years. This could explain how an increase in investments (on fixed assets) to produce new products, especially with O2005, eventually reaped positive returns with a more than proportionate increase in sales (cash and accounts receivables). Figure 2:...
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