PROCTER & GAMBLE (P&G) Going Local: Procter & Gamble’s Homegrown Success in Japan Key Points • Carries out extensive local market R&D and also uses what is develops elsewhere in the region • Produces and distributes goods locally, tailoring processes to fit Japan’s market • Chose to base itself in Kansai • Remains committed to Japan despite strong competition • Continues to expand into new product lines through strategic M&A Procter & Gamble entered Japan in 1972 when it started a ? 2 billion joint venture with Nippon Sunhome and Itochu Corporation called P&G Sunhome.
P&G chose Kansai instead of Kanto and Tokyo as its Asian hub in the belief that the latter is more costeffective, has the necessary infrastructure and a good pool of talent, and provides a high quality of life. P&G later bought out its joint venture partners and used this base to expand. Initially marketing products that were successful in the United States and elsewhere, such as detergent and diapers, the company has since moved into feminine products, cosmetics, and pet food through both organic growth and global acquisitions that had operations in Japan.
P&G went through some ups and downs in the early seventies and late eighties but made a strong comeback in the nineties after renewing its efforts and further localizing R&D, marketing, and distribution. P&G’s longstanding commitment to the Japanese market has borne fruit. Some Background Started in 1837 as a seller of soap and candles, Procter & Gamble has grown into a global company that operates in over 160 countries and markets close to 300 different brands.
The company initially entered the Japanese market in 1972 with several products that had proven successful in Europe and Latin America, including Cheer laundry detergent powder, Bonus liquid laundry detergent, and Camay soap. In the mid-seventies, P&G successfully test-marketed Pampers disposable diapers in Japan, and proceeded to market them aggressively. Even though Pampers had a significantly higher price tag than the cloth diapers then in use, the initial launch in Japan went so well that P&G invested $50 million to construct a greenfield plant in Japan.
Unfortunately, the competition for Cheer from local companies Kao and Lion became fiercer starting in 1977, and P&G started to lose ground. P&G defended its market position through price cuts, but this once again put the company in a serious financial position. The second oil shock in 1979 dramatically increased the price of raw materials used in detergent, worsening the situation. At the same time, there were concerns emerging among Japanese consumers and government officials about the use of phosphates in detergents.
In 1981 came the launch of Pampers’ first serious competitor, Uni-Charm’s Moony diaper, marketed at a 40 percent price premium to Pampers. Moony captured a 23 percent market share at the sole expense of Pampers. By 1983, P&G had swallowed 10 years of operating losses of $250 million, on declining annual sales of $150 million. But the company believed Japan was the door to the rest of the Asian market, so in 1985 it started a reform project. The three-year plan – called ichidai hiyaku, meaning The Great Leap – was designed to develop a profitable base business while planning for future growth.
The plan’s objectives during the first year were to increase volume dramatically, without causing further operating losses. In the second year, the company sought to build current brands and get new ones into test market, and in the final year achieve a break-even position while developing a sound volume base for expanding test brands. A local R&D team was formed to conduct product development, become the technical support center for P&G in Asia, and develop a P&G worldwide technology group.
With only 60 people in the group, however, this represented a major challenge; by contrast, Kao had 2,000 people in its R&D section. With the help of the company’s R&D unit in the United States, however, the Japan group was able to create the world’s thinnest and most absorbent diaper, far superior to the products released by Uni-Charm and Kao. “Locally focused R&D resources have helped us to gain valuable insights into local consumer needs, habits, and practices, which is critical to designing winning products,” said P&G’s President of Northeast Asia, Werner Geissler. They also gave us a better understanding of our local competition’s technologies and innovation. ” Geissler added: “Since Japan serves as the major technical center in Asia, the work done here is a mix of working on development of certain global technologies, adaptation for Japanese local needs, and adaptation and development for the other Asian markets. ” Marketing, Sales, Manufacturing, and Distribution Moves The marketing team examined the growth patterns of the company’s rivals and conducted studies hat determined a number of unique cultural and communication patterns had a big impact on advertising execution in Japan. For example, the tone of advertising was always friendly, never aggressive, and commercials used background music and well-known celebrities to promote the goods. More important, they explicitly identified the manufacturer. By reducing the average number of plant management staff from 36 to 9 managers and eliminating the 12-month lead time for U. S. custom-made diaper production, P&G was able to radically cut costs and handle product changes more smoothly.
The company maintains a strong manufacturing presence here, with three factories in Akashi (diapers, FemCare products), Takasaki (fabric and home care products), and Shiga (cosmetics). Through intensive in-house research and with the help of a consulting firm, P&G realized that the distribution system relied heavily on primary and secondary wholesalers, not retailers as in the United States. The company began to concentrate its business in the hands of fifty core wholesalers – down from 500 – and cut the number of secondary wholesalers from 2,500 to 1,000.
Deploying the Best Technology Here First Japan is a supremely demanding marketplace. In the diaper market, for example, the performance demands of Japanese consumers clearly exceeded those of Recovering and Regrouping—The Great Leap the European and American consumers. P&G, battling Kao and Uni-Charm for technological leadership, decided to roll out its best worldwide technology in the Japanese marketplace first rather than in the United States. By late 1989, Pampers had reclaimed the market leader position with a 23 percent share.
Similarly, P&G entered the tough feminine hygiene product market in 1986 with Whisper, and was able to achieve a market leadership of 25 percent within three years of launch. P&G also successfully replaced Cheer in 1988 with a new brand called Ariel, which incorporated P&G’s best worldwide detergent technology. It has been over thirty years since P&G entered the Japanese market. Even though the cost of research and development is high here, P&G believes Japan is the best place to have R&D facilities since the country is a hotbed of innovation where new products are introduced at an accelerated pace.
Another Key Growth Ingredient: Acquisitions Years after the original buyout of the Nihon Sunhome joint venture, P&G bought out Max Factor in 1991. This was a global acquisition, but a large part of the business was in Japan. Max Factor had good products and technology and a good understanding of the Japanese consumer, but the company lacked a good, solid business strategy. By providing a clear business plan and effectively utilizing its understanding of the consumer, P&G quickly turned the business around, growing revenues significantly.
The Max Factor business became very successful with its SKII line of beauty products, which started off as a Japan-only brand but has since taken firm root in Taiwan, Hong Kong, Singapore, and a few European countries. In 1999 P&G also acquired IAMS, a global pet food business that had substantial operations in Japan. Capitalizing on its efficient low-cost offshore production and marketing know-how and distribution reach, P&G supercharged IAMS’ revenue growth with brands such as IAMS and Eukanuba.
P&G’s story is one of multifaceted excellence – applying the “best of breed” technique regardless of a product’s geographical source. The company’s success has come from a combination of unrelenting commitment to the Japanese market; localized R&D, marketing, and distribution; global marketing skills and the efficiency and flexibility of offshore production; and global and domestic M&A transactions to accelerate strategic expansion. The company stayed in the Japanese market despite some discouraging financial returns, and in fact chose to make Japan a hub for regional operations and R&D. Conclusion