Case Study On Procter & Gamble’S Internalization Process
This case reviews changes in Procter & Gamble’s internalization process and discusses whether or not they have the ability and means to make their SK-II product a global brand. The case also analysis the role of multinational’s global network not only providing approaches to markets but also as basis of innovation, and the expansive context of the links between global strategy and organization.
In the case, Paolo de Cesare, the present of Max Factor Japan, the bub of P&G’s fast growing cosmetics business in Asia, believes SK-II shows potential as a global brand, but higher executives Alan Lafley remains unconvinced. Yet, readily, Paolo acknowledged the facts that were significant risks to develop SK-II product into new markets worldwide. P&G’s history and its internationalization process Tracing the changes of internalization processes, P&G made a huge structural change by recognizing from Regional Business Units to Global Business Units. In November 1999, P&G launched a new organizational project under Durk Jager called the Organization 2005 Project.
It was a significant period of time for P&G. Each Global Business Units were tasked with creating a uniform production process for all their regional products. As discussed in the case, Jager redesigned the company’s organizational structure by expanding from four regional organizations to seven global business units. The reasons behind this were to increase efficiency of each business unit to produce the best product at the lowest cost. Moreover, by implementation of O2005, there were three significant changes in the company’s history based on culture, processes and structure. P&G needed a budget adjustment, which would lead to the change of focus of the resources from marketing to production, and this will again make sure the best product with lowest cost outcome can be achieved. The company also reduced the number of brands and only kept the ones contributed high sales and who are more global potential. More power was delegated to lower level managers and removing the amount of steps to the top decreased power of bureaucracy. In 1980, China has just launched economic reforms started the process of opening up to foreign companies and set up Special Economic Zones in Shenzhen, Zhuhai, Shantou and Xiamen. At that time, P&G thought that it was immature to address China, as Chinese consumer did not have much purchasing power. However, one counterargument was that staying out of China might let rival companies seize the initiative in what could become a major market. P&G entered in China in Joint venture with a Hong Kong company named Hutchison Whampoa.
Facing unsettled industry, province-by-province regulatory administrations and poor infrastructure in China, P&G primarily target on the Pearl River Delta region, the Yangtze River Delta region and the Bohai Rim. At that time, P&G gradually introduced a few product categories into China started with a type of shampoo. P&G’s sales in China had experienced a rapidly growth, from US$50 million in 1991 to $800 million in 1996.
Analysis and Recommendations
Each country has its distinctive culture and industry environment and that's why there are risks for SK-II to expand world-widely. Applying the Porter’s five forces model on Chinese cosmetic market can help to understand the competitive forces and the overall industry structure for effective strategic decision-making. The bargaining power of customers and suppliers are low. Although the switching cost for customers are low, there is no possibility for a single customer to exert pressure on the company for a higher quality products and lower price. Threats of new entrant are relatively high as Chinese market are considered as the second large market, and the prestige-beauty segment is growing rapidly, at 30% to 40% which is being attractive for new firms to enter.
Threat of competitive rivalry is high, as almost all-major competitors from worldwide are already there: Estee Lauder, Lancôme, Shiseido and other premium brand. The threat of substitute product is also high, local home brands of Chinese company which is 20 to 30 times cheaper, not to mention that the big global firm’ high innovation capacity. After understanding the competitions and threats from the external environment, we can then analyze the risks of the Chinese market and how to uncover opportunities so that we can distinguish ourselves from competitors. The first opportunity of Chinese market is that, skin type are similar. Although you can absolutely say that every single person has different skin type, China, Korea, Japan not only share the Asian history and culture, but also the skin type. Secondly, although China has a relatively small subset of the population that can afford the SK-II product, and ‘Even with SK-II’s basic four step regimen, a three-month supply could cost more than one month’s salary for the average women working in a major Chinese city”, there is an enormously large popularity, which considered as the second largest market in the world; especially their target segment- prestige beauty segment is experiencing a growth of 30% to 40% per year.
With the rapid growth of China’s economy and GDP, the potential for more able consumers is seemingly limitless. However, the top risk is that, as mentioned previously, all major competitors from the world are present in Chinese market. In order to solve this issue, P&G could adopt a differentiation strategy, which helps itself to be distinguished from the other competitors.
Another risk is about market readiness, to the Chinese customer, they are not familiar with this product’s application, they usually and traditionally only apply one-step program and only recently accept a three-step cleansing and moisturizer in process. So a six to eight step skin care process might appear tedious to a customer. In this situation, P&G could learn from the previous successful examples of Olay. The previous launch of the P&G brand Olay in China was not so successful at the start, however that situation was improved by adding service component to the product formulation. They staffed their outlets and showrooms with well-trained skin care consultants. This practice can be applied to SK-II product selling as well.
Another risk that needs to be considered is China has a reputation of selling counterfeit products. The market is flooded with copies of upscale products, which causes increased costs for import taxes, which leads the profit squeezing to a significant level. Although, the import duties are high as 35% to 40% percent, they can take advantage of the low-cost skin care consultants.
