Kao Corporation
Executive Summary
In this project, I have chosen the Fast Moving Consumer Product industry as the topic of study. First of all we will take a brief look at how the industry started in the late 19th century as soap making companies and slowly evolving into some of the most successful multidomestic company of today. Following we will have insight on the industry’s prominent characteristics and highlight some of the major players. We will also get an idea of the attractiveness of the industry through the use of Porter’s 5 forces industrial analysis.
Included in this project is an in-depth review of Kao Corporation, Japan. Kao Corporation is one of the major players in the industry. Here we will take a look at how the Japanese based company employs strategies to reduce cost and at the same time differentiate its product from its competitors to gain competitive advantage. We will also examine some of the key financial ratios to aid us in identifying some of the company’s strength and weaknesses. Then a SWOT analysis is carried out on the company. From the SWOT analysis we can formulate suitable strategies in order to improve the performance of the company. By closely examining the company’s internal environment to better understand the company’s capabilities and limitations and then analysing the changes in the external environment that could affect the company favourably or adversely, appropriate strategies can be formed in order to ensure high performance of the company. Then finally we will look at other possible recommendation, which I believe would help improve the company’s performance in the competitive fast moving consumer products industry.
Fast Moving Consumer Product Industrial Brief
Fast Moving Consumer Product are products that consumer would use regularly. The product line of Fast Moving Consumer Products encompasses a wide range of products such as shampoo, body foam and facial wash. These products are classified as fast moving due to the nature of its usage and durability. While shampoos are non-perishables, the consumer would eventually finish utilizing it and would require to purchase another bottle of shampoo. Therefore, unlike products like television and radios which consumers would only buy once in a blue moon, Fast Moving Consumer Products are bought constantly from time to time by consumers.
The Fast Moving Consumer Product Industry has evolving since the 19th century. Many of the major players today started of as a soap making company. Colgate Palmolive began in 1806 as soap maker in New York City. Later in 1837, William Proctor and James Gamble, formed Proctor and Gamble which better known as P&G. P&G at that time was only a candle and soap producing company based in Cincinnati, USA. Back then, there were not much innovation in the products. Soap was soap, everybody used the same soap but today due to the vast advancement in technology and the ever-changing consumer needs. Today, companies like P&G no longer just produce soaps. It has expanded its product lines into shampoo, body foam and many others.
The industry underwent much evolution, not only in terms of product innovations but also production methods. As technology advanced, the trends in manufacturing changed as well. In the 1910, the trend of manufacturing moved towards mass production. This is to enable the lowering of cost and the enlargement of market reach. Mass production is still being practiced. Some time in the 1950s, manufacturing began to under take a more lean approach. This is whereby products were given more emphasis and were made possible through research and development. Quality improvement was facilitated by technological advancements. By implementing Just in Time systems, greater cost efficiency were attainable.
As time progressed on, companies found that their respective domestic markets were becoming saturated and that many Big Emerging Markets were spawning across the globe. These New Big Emerging Markets opened many doors of opportunity for companies to go global. As such begin the trend of globalizations. Bodies such as World Trade Organization and GATT, which pushed for free trade on a global basis, further facilitated these trends. As such began the trend of globalization. Today, companies likes P&G Kao Corporation and Johnson & Johnson have operations around the world. Their operation could range from Foreign Direct Investments to Joint Ventures.
Now, the world has just moved into the 21st century and the Fast Moving Consumer Product Industry is fast changing. With the advent of the Internet and the rapid growth of e-commerce, companies are able to capitalize on this new frontier. E-commerce is able to reach the consumers without the presence of middlemen. This reducing both price and cost.
Industry’s Dominant Traits
In order to have a better idea of the Fast Moving Consumer Products industry, we will take a look at several prominent traits in the industry.
Market Size
The target market of the Fast Moving Consumer Products is very wide. The products are used by almost every one of all ages regardless of gender. Due to the large market size this tends to attract new competitors. This would cause the intensity of competition to increase.
Major Players in the Industry
1) Proctor & Gamble, USA.
2) Johnson & Johnson, USA.
3) Kao Corporation, Japan.
4) Colgate Palmolive, USA.
Scope of Competitive Rivalry
The major players in the industry basically competes on a global scale. Thus these companies have production plants all over the globe. Plants are usually set up to serve regional markets. However, there are many other minor players who only concentrate their marketing efforts in specific region or country. Brands such as Follow Me which was incorporated in Malaysia, concentrates its marketing efforts mainly in the South East Asian region.
Nature of Demand in the Industry
Due t the nature of the product, the consumer would practice the Habitual Buying Behaviour. This is because the product is because the product is in inexpensive and there is low involvement on the part of the consumer. The consumer tends to buy a brand out or familiarity or far variety sake. As such the consumer might lack brand loyalty. Many companies such as Kao Corporation put effort into building its brand name to instil brand loyalty. The industry players are very much dependent on the repeat purchase of the consumer to make long term profits.
Product Characteristics
The Fast Moving Consumer Product is made of a wide range of Products. The following are some examples: –
1) Shampoo
2) Facial Wash
3) Detergents
4) Soap
Within these product lines, there is further differentiation, for instance, shampoo for oily, dry and normal hair types. As time progresses on, companies undertake research to better satisfy the needs and wants of the market. Due to the vast differences between individuals more and more product lines are being introduced.
Industrial Life Cycle
The industry can be said to be of age. In most developed countries, the industry has already reach maturity and demand is saturated. However, in the Less Developed and Developing countries, the industry is said to be in its growth stage. In order to avoid many of the products to enter the decline stage, many companies have modified existing products in order to breathe new life into it. This is a tactic used to attract both new and existing consumers. Even though the market is matured, the competitions continues to intensify, many firms are introducing new products with new value or convenience in their bid to win consumer support. This in turn causes the introduction stage of the product life cycle to be shorter as competitors are fast to introduce new products into the market. Products are being designed to be more diversified into the individuality of consumers. As such, the trend in the industry is that many new products will be constantly introduced into the market at a much faster rate than before.
Industrial Competitive Forces Analysis (Peter’s 5 Forces)
Intensity of Rivalry
The intensity of rivalry is high in the Fast Moving Consumer Product industry. This is due to several factors. First of all, there are many players in the industry. Apart from the major players, there are many local and regional competitors, which implement different strategies. Some brands like Zaitun, which uses a religious approach to selling its product. Zaitun’s strategy proved successful in Islamic countries is no longer experiencing rapid growth. In fact, many developed country’s market is saturated. As such competition is fierce, as they fight for the same slice of cake. Rivalry is further intensified by the fact that consumers can switch between brands easily and incurring virtually zero cost. This fact causes companies to constantly fight over the same consumers. Firms use many different strategies to obtain competitive advantage ranging from product innovations to low prices. The strategy used would depend on the market position of the firm.
Threat of Entry
The threat of Entry into the Fast Moving Consumer Product industry is quite high as new entrants would require a considerable amount of capital in order to set up a production plant and other administration cost. More over, the existing firms, especially the major players, which are multidomestic companies, have considerable cost advantage due to economies of scale. As such the new entrants would have a smaller profit margin. In addition, in order to produce good quality products, firms have to undertake Research & Development efforts. These factors make the industry less attractive to new entrants. However, the industry does not require high levels of technical know how in its production process and it is not subjected to many government regulations. This eases the entrance of firms somewhat.
Threat of Substitution
The threat of substitution is not very prominent in the Fast Moving Consumer Product industry. Although the switching cost of the consumer is very low, there is not many substitution for Fast Moving Consumer Products. Take for instance, there is no real substitute for using shampoo to wash hair. Although today, soap has much been substituted by body shampoo, but the firms which used to produce soaps, also produces body shampoo now. Therefore it can be summarised that there is no real substitute for Fast Moving Consumer Products.
Power of Suppliers
Much of the input required by Fast Moving Consumer Product industry is in the form of chemical. Many of the major players in the industry vertically integrate backwards in order to reduce the power of suppliers. For instance Kao Corporation has raw material bases in the Philippines and Malaysia. These places have ample supply of key raw material such as coconut and palm oil. The reduction of power of suppliers not only gives the firm lower cost which translate into higher profitability but also better control of the quality of its inputs
Power of Buyers
In the Fast Moving Consumer Product industry, the main buyers are the hypermarkets and other High Traffic outlets. Due to the purchasing power of hypermarkets, there is considerable power of buyer to dictate terms with manufacturers. While many of the major players have the resource to forward integrate but would find it uneconomical to open up a hypermarket just to sell its product to the consumer. However, with the development of the Internet, there lies a possibility for firms to reduce the Power of Buyers in this industry.
Kao Corporation
Company Background
Corporate Name
Address
Foundation
Capital Kao Corporation
14-10, Kayabocho 1-chome,
Nihonbashi, Chuo-ku
TOKYO 103-8210, JAPAN
June 1887, TOKYO, JAPAN
78.0 billion yen (as of March 1998)
(approx. US$590 million)
Mr Tomiro Nagase established Kao Corporation in June 1887 in Tokyo. Back then, Kao Corporation was only a soap making company. Today Kao Corporation has become a multinational company with operations all over the globe. It succeeded in establishing itself as a leading manufacturer of daily use household products.
In Malaysia, Kao Corporation Japan chose joint ventures in order to gain entry into the local market. Kao (Malaysia) Sdn. Bhd. was formed on 20th March 1973 as a private limited company. The partners consist of Kao Japan, Boustead holding and Felda. Both Kao Japan and Boustead holds 45% of the total shares each, while Felda holds 10% of the remaining shares.
The capital structure is as follows: –
TOTAL (RM) ORDINARY PREFERENCE OTHERS
ALLOWED 25000000
Total Shares 25000000 0 0
Divided into 25000000 0 0
Nominal Amount per Share 100 0 0
(in cents)
ISSUED 16000000
Cash 16000000 0 0
Others 0 0 0
The share holding is as follows: –
SHAREHOLDER’S DETAILS
COMPANY NAME TOTAL SHARE
FELDA TRADING SDN. BHD. 1600000
BOUSTEAD HOLDINGS BHD 7200000
KAO CORPORATION 7200000
Kao Corporation’s mission is to ensure the complete satisfaction and the improvement of the daily lives of its customers. Developing products of high value and quality for its customers does this. Kao Corporation strives to win the confidence and trust of its customers in the core fields of cleanliness, beauty and health. Due to the fact that Kao products are sold internationally, it has to ensure that its quality is maintained all around the globe. As such Kao Corporation objectives is to ensure that Kao products is of equivalent quality as Kao products in all parts of the world. This is important in order to maintain Kao product image and reputation internationally. Through this standardisation of quality, Kao is able to instil reliability in its customer’s mind. While Kao Corporation aims to obtain profitable growth, it never neglects its responsibility to the society and environment. Kao Corporation strives to exist in harmony with Mother Nature in the course of its human activities.
Management and Operational Strategies
Kao Corporation is currently a multidomestic company with operations around the world. However, Kao Corporation has operations in 3 major regions, which is Asia, Europe and North America. Within each country, Kao Corporation sets ups its operation in the form of Foreign Direct Investments or Joint Ventures. For instance in Malaysia, Kao Corporation formed a Joint Venture with Boustead Holdings and Felda to form Kao Malaysia. The Joint Venture was seen as a necessary step to overcome entry barriers into the Malaysian market. Due to political and legal environment, the Joint Venture was seen as a strategic move to gain entry. Moreover, due to the vast difference between the Malaysian and Japanese cultures, a local partner was essential in aiding Kao Corporation to successfully market its product in Malaysia. Local partners know the local climate of the market and as such were in a better position to formulate appropriate marketing strategies suited for Malaysian market.
Economic Value Added (EVA)
Kao Corporation recognises that in order to be successful in a competitive world; the company cannot just emphasise on product quality and reliability. The company now is moving into cost efficiency. This means that Kao Corporation is moving a level up in the corporation’s business strategy theme. A model of Business level strategy was introduced by Nakane-Hall and can be seen below
Speed/Flexibility
Cost/Efficiency
Dependability
Quality
In order to achieve better cost efficiency, Kao Corporation has decided to incorporate EVA in its management system. The objective of Eva is to steer the company towards sustainable profit growth. EVA was implemented as of April 1999 for the parent company. EVA was created by Stern Stewart which is a New York based consulting firm. The aim of EVA is to give importance to cost of capital. EVA determines the amount of economic value created by the corporation. This is done by deducting the cost of capital employed from the net operating profit after tax. EVA is believed to encourage its managers to find more value creating employment of capital. This in turn will make Kao Corporation more competitive.
In addition, EVA is able to better the relationship between management and shareholders. The interest of managers and shareholders can conflict at times and this in turn could result in poor performance of the company. EVA will be used as a means to make decisions for daily operations. Employees will be trained on the method of using EVA to create higher awareness of the importance of cost of capital and value creation. Moreover, to ensure the effectiveness of EVA, managers will be compensated through an incentive system which will better motivate the managers to help ensure the success of EVA. In the long run, EVA will be constantly innovated in order to ensure constantly profitability growth in the future.
Operational Reform
In 1986, Kao Corporation began an operational reform process which is still ongoing till present time. The reformation was aimed at improving work methods and planning process, which would result in the reduction of cost. To this end, Kao Corporate integrated Total Cost Reduction (TCR) in its corporate culture.
Currently apart from the implementation of EVA to increase competitiveness, Kao Corporation has undertaken structural reforms in the areas of production, sales and distributions. As of 31 March 2000, the production plant of the Kyushu will be changed into a distribution base in order to facilitate the distribution channels in Japan. In addition, Kao Corporation aims to become the best in customer service in the whole of Japan. In order to achieve this, Kao Corporation has consolidated 8 of its sales company around Japan.
On the international front, Kao Corporation seeks to build strong partnerships with companies, which would complement the company. In a recent development, Kao Corporation formed a Strategic Alliance with Beiersdorf AG in order to strengthen the sales of Biore in Europe. In the US, Kao Corporation entered into an agreement with S.C. Johnson & Son, Inc., to market Kao’s household cleansing kit in U.S. These are examples of the many mutually beneficial partnerships, which Kao Corporation has undertaken.
In conclusion, Kao Corporation has recognised the need for management to implement cost reducing strategies in order to improve profitability and competitiveness on a global scale. Moreover, Kao Corporation is constantly evolving and restructuring its operation all in a bid t make the company into a successful global company.
Marketing Strategies
Consumer Oriented Approach
The consumers are the heart of the industry. Thus, it makes sense to put emphasis on the consumer’s needs and wants. In order to serve the consumers better, Kao Corporation undertakes many efforts to identify their needs. To accomplish this task, the Kao’s Business Divisions, the Product Development Department and the Research and Development Division will take an insight into the daily lives of the consumer in order to create innovative products. In addition, Kao’s Consumer Information Centre gathers consumer’s inquiries and comments on a daily basis. This is called the Kao Echo System. The Kao Information Centre provides information to all Kao’s divisions. To further increase the effectiveness of the collection of consumer data, Kao established an information oriented sales organisation. In 1994, Kao took part in the Electronic Data Interchange (EDI) program with the retailers. This program became the foundation of the birth of the Efficient Consumer Response (ECR) program. These programs served more than just to provide Kao with sales information on a real time basis. The information gathered by EDI and ECR were used as guidelines for new product developments. Retail outlets are an essential contact with the consumers.
While the gathering of information is crucial, Kao Corporation always keeps in mind the view of the consumers. In order to better understand the consumer’s real needs in their everyday lives product developers and marketers would visit homes of product test users to carry out interview with them and obtain firsthand information about the product usage. Kao does not only concentrate on making discoveries on the product but also the method of usage is given emphasis so that it is not inconvenient for the consumer to use. Products that truly satisfy the consumers are the basis of establishing Kao’s brand.
Kao is an international brand and as such it is imperative that efforts to implement consumer orientation must be on a global scale. By taking into consideration the different cultures of each country, Kao Corporation will adapt its product to suit the local needs and preferences. Kao believes the consumer-oriented approach to develop new products will strongly aid the company in establishing a strong brand in the global market.
Product
Building Kao’s Brand Power
Being in the Fast Moving Consumer Product industry, Kao recognises the importance of brand power. By increasing Kao’s brand power, its corporate strength can be significantly reinforced. Presently, Kao has succeeded in empowering its brand. In 1997, the Nikkei Research Institute of Industry and Markets rated Kao Attack as the best selling brand in Japan. This shows that consumers have a good perception and have high brand loyalty towards Kao.
Building Brand Power is a constant ongoing practice, undertaken by Kao. One of such efforts is to utilise Research & Development to support brand building. Through the synergy of scientific knowledge and technological know how, Kao is able to produce new and improved products which would offer consumers more value. Take for instance, Kao scientific research were the first to discover that wrinkles is due to a biochemical process. Thus Kao came up with Sofina Seraty which was able to slow down this ageing process. With constant product improvements and innovations, Kao is able to offer better products to the consumers. This in turn strengthens Kao’s Brand. As can be seen here Research & Development is an essential part of the company’s strategy in building a globally recognised brand. Research & Development is able to support the brand product innovations. With constant product improvements and innovations, Kao believe it is able to gain the trust of the consumers through strong brand loyalty. This in turn will contribute to Kao’s overall objective of achieving profitable growth.
Product Quality
In addition to building a strong brand, Kao aim to satisfy its consumers all around the world. As we know, Kao is dependent on repeat purchase and by satisfying its consumer, Kao stands to benefit from repeat purchase. A satisfied consumer would tell 3 people about his/her bad experience. In line with Kao’s globalisation goals, Kao Corporation ensures that the quality of Kao products all around the world is of similar standards. This is so that consumer can rely on Kao’s products anywhere around the world.
Price
The pricing objective of Kao Corporation has to coincide with the company’s business strategy. In general, the Fast Moving Consumer Product industry is very price sensitive. This means that competitors are very fast to respond to any changes in Kao’s pricing and vice versa. Kao Corporation prices its product according to the product’s position in the market. Take for instance in Malaysia, Kao Laurier is the leader in the sanitary market. As such, Kao does lowers it prices even though the competition has decreased its prices. This is because Laurier is a quality leader and lowering of prices could cause its image to be jeopardised. However in the shampoo market, Kao is the market challenger of P&G. In this case, Kao would change its prices according to changes in prices of P&G products.
Overall, due to the sensitivity in prices, Kao has to adopt a follow the leader pricing strategy in order to avoid a wide price war among competitors that would be very costly to the industry as a whole.
Kao’s Pricing strategy during the Asian Crisis
The Asian Crisis, which caused many repercussions in the region, has a significant impact on Kao Corporations especially several of its foreign subsidiaries. Kao Malaysia was very heavily dependent on imports for its raw material. However when the Asian Crisis struck the Malaysian ringgit depreciated drastically. This in turn caused its cost to rise drastically. This left Kao no choice but to increase prices as well in order to survive. However, should Kao Malaysia had increased it prices in proportion to the rise in cost, the Kao would have faced the risk of losing market share to its competitors. In order to cushion the effects of the price increase, Kao increased its prices gradually. Kao Malaysia increased its prices quarterly and each time the increase would be an increase of 10% – 15%. This would consumers would not feel the price increase is too exorbitant. The psychological effect of this strategy on the consumers proved largely successful. Today, prices have stabilised and Kao managed to pull through the crisis without losing its market position.
Distribution Channel
Kao Corporation established on information oriented sales organisation to carry out regional marketing directly with retailers. In 1994, Kao incorporated the Electronic Data Interchange (EDI) program. The EDI is an online processing of information between Kao and retailers to enable speedy and efficient distribution of products. This co-operation thus successfully minimised transaction and operational cost.
The success of EDI led to the development of Efficient Consumer Response (ECR) program. This made it possible for Kao to constantly innovate its distribution and other marketing activities.
Moreover, Kao Corporation sets up regional production plants in order to reduce cost. Countries chosen would be one that has low production cost due to cheaper rent and labour. Regional plants make distribution within the region to be faster and cheaper. However, Kao Corporation still practices the conventional distribution channel despite its efforts to reduce logistic cost. (Refer to Appendix A).
Promotion
The establishment of Kao products in the market is Kao Corporation promotion objective. This is especially important due to the fact that in the Fast Moving Consumer Product industry, consumer practice the Habitual Buying Behaviour. This is whereby the consumer would choose a brand based on familiarity or convenience. Through the use of Promotion, Kao aims to instil brand loyalty.
The media is also very useful for Kao Corporation to create awareness in market about a new product. Through the use of advertisements Kao can educate the public about the existence and the benefits of particular new product it has launched.
The promotional tools used by Kao are as follow: –
1) Advertisements
– TV, Radio, Newspaper and Magazines.
2) Personal selling
3) Sales promotion
Competitive Strategies
Currently Kao Corporation uses the differentiation strategy to fend off its competitors Kao has adopted a consumer orientated approach in order to better understand the needs and wants of the consumer. Kao is always improving its existing product through Research & Development in order to provide value for the consumers. At the same time, Research & Development enables Kao to introduce new products into the market. Some of these products are first in the market while others are new product lines aimed at winning market share from competitors. Take for instance, in order to fight fierce competitors such as P&G in the hair care market, Kao introduced Lavenus which is a new hair care line. Lavenus has L-AHA formula to make hair softer and shinier. This is Kao’s attempt to differentiate its products from that of its competitors. By providing superior quality and value for the consumers, Kao’s strategy is to instil brand loyalty in its consumers to achieve long term success in the market. Competitors such as Follow Me and Ginvera employs the low cost leadership. These firms use price to gain market share by undercutting Kao Corporation. In defence, Kao uses promotional efforts to emphasis on Kao products superior quality and features. With constant Research & Development activities to ensure consumer satisfaction, Kao has been able to fend off the low cost producers. However there are competitors like P&G and Johnson & Johnson who employ similar differentiation strategy. Both P&G and Johnson & Johnson carry out heavy Research & Development efforts in order to create value for consumers in their product. In addition Johnson & Johnson emphasise on product reliability to gain the trust of the consumers. In order to stay competitive against these strong competitors, Kao has employed lower cost strategy to increase its profitability. However, Kao does not compromise its product quality in its struggle to reduce cost. Instead it reduces cost through increase efficiency in management and operational activities. This enables Kao to stay ahead in the competitive environment of the Fast Moving Consumer Products.
Evaluation and Comment of the Implemented Strategies
Now that we have seen Kao Corporation’s strategies, we can evaluate the degree of effectiveness of these strategies. First of all, it is dear that the company’s current goal is to increase profitability. One of the methods Kao intends to achieve this is through cost efficiency. Since 1986, Kao launched Total Cost Reduction Program to steer the company towards greater cost efficiency. Now in 1999, Kao’s cost reduction efforts are still continuing with the implementation of Economic Value Added Program which aims to increase the value creation capability of the company by training management the importance of cost of capital in making decisions. While this is generally a good strategy, it remains to see how well EVA will perform especially in the area of conflict of interest between management and shareholders see eye to eye in order for the company to sustain profitable growth in the long run.
Looking at Kao’s marketing strategies, the company has managed to layout a well-designed product with emphasis on Research & Development efforts in order to satisfy the consumers better. The consumer is at the heart of Kao Corporation’s marketing strategies. As such, Kao channels considerable efforts into understanding the needs and wants of the consumer. Products are ensured to be of satisfactory quality and value for consumer. While products are of superior quality, Kao does not price its product exorbitantly. In fact, all Kao products are priced competitively in order to win market share. However pricing is not everything. Kao’s uses promotion in order to instil brand loyalty and increase company profitability. However it is very hard to accurately measure the effectiveness of above the line promotion efforts. Moreover, the cost of advertisement and other promotional tools could be significantly high. Once promotional efforts have been carried out, Kao has to distribute its product into the market. While Kao has adopted the EDI and ECR programs effectively to reduce logistic cost while speeding up the process. However, contradictory to Kao’s effort to reduce logistic cost, it still maintains the conventional methods of distribution. Kao’s distribution channel still consists of many levels, which results in higher distribution cost.
Currently Kao Corporation is a multidomestic company. However, the world is moving towards globalisations but Kao Corporation is not showing signs to steer the company towards this end. There are no clear strategies that are aiming at transforming Kao into a global company, which would benefit Kao Corporation in the long run.
Financial Analysis
For the financial year ended 31 March 1999, Kao Corporation’s consolidated net sales saw an increase of 1.9% to ¥924.5 billion. (Refer to Appendix B). Despite the sluggish Japanese market, domestic sales of household products continued to increase by 1%. This was largely due to the company’s ability to improve its products while introducing new products into market. These were made possible through the Research & Development efforts of Kao research team. In the Asia and Oceania region, Kao Corporation was able to strengthen its core brands that resulted in the increase in the region sales. Despite the Asian crisis, Kao Corporation managed to expand sales. This proved that the company’s strategy to build brand power was a right move. As for North America and Europe region, the strong sales performance by Biore facial core products, Kao’s sales were substantially boosted. In addition, Kao took several other strategic steps to strengthen its presence in the region. In May 1998, Kao Corporation acquired Bausch & Lomb Inc, which is a skin core company founded in the United States. In the Europe, Kao Corporation formed a strategic alliance with Beiersdorf A.G in Germany to launch Nivea Usage.
Following are some of the key financial ratios, which I believe would be useful to give us a better insight of the company’s financial standings: –
Return on Equity (Refer to Appendix C)
The return on Equity of Kao Corporation has been fluctuating between 5% to 7.68% in the past 5 years. The low was during the year ended 31 March 1998 where the ROE was 5.77%. This was probably due to the sluggish economic situation in the Asian region. However in 1999, the ratio rose to 7.68%. On an overall, Kao Corporation has been able to maintain profitable performance over the past 5 years. This shows that the strategies of Kao Corporation have been successful. However, while Kao has positive returns, if it is insufficient to cover the cost of capital, then it is not sufficiently profitable.
Earnings per Share (Refer to Appendix D)
The earnings per share of the company has shows significant increase over the years. The high was in 1999 with ¥55.98 per share while the low was in 1995 with ¥39.49 per share. This shows that Kao has been successful in creating value for the company. Kao has been able to protect the shareholder’s interest in the company. This means that management does not just look after their own interest but also take into the consideration of the shareholders.
Inventory Turnover (Refer to Appendix E)
Kao Corporation’s Inventory Turnover has been maintained above 4 times per annum over the past 5 years. This means that Kao Corporations stock are moving relatively fast. The public largely accepts its products and the company does not face the problem of slow moving stocks.
Acid Test Ratio (Refer to Appendix F)
Kao Corporation’s acid test ratio has been on the rise over the past 5 years. In 1995 the ratio stood at 55.41% whereas by 1999, the ratio was at 101.67%. This means that Kao’s liquidity has been improving. An acid ratio of 101% would mean that the company is able to meet any short-term obligation and it has sufficient funds to cover all its current liabilities. This shows that the company is in no danger of liquidation in the near future.
Debt Ratio (Refer to Appendix G)
Over the past 5 year, Kao’s debt ratio has been decreasing. Currently the debt ratio stands at 39.18%. This means the company is reducing its leverage. Lower leverage would mean less financial risk and creditor commitments. Moreover lower leverage would translate into less interest payments. However, at present, 39.18% of the company’s assets are still financed through borrowings. This is still considered quite high and risky on the shareholders as in a case of liquidation; creditors would be paid first.
SWOT Analysis
Potential Internal Strength
Ability to discover consumers needs
Through the use of consumer orientated approach in its marketing strategy, Kao has been successful in satisfy its consumer. With specific efforts undertaken to obtain valuable feedback from consumers, Kao has constantly been able to keep track of changes in the consumer’s taste or needs and as such be the first to satisfy those needs in the market. Combined with Research & Development efforts, Kao is able to capitalise on the opportunities and gain competitive advantage.
Superior Research & Development
Currently Kao Corporation Research & Development efforts encompass a wide range of fields such as surface science, organic chemistry, polymer science, biological science and material science. At Kao Corporation, Research & Development work is on cutting edge technology which in turn enables Kao to develop new products that provide value and comfort to meet consumer’s needs. Moreover, Research & Development efforts is not only focused on making new products but also considering the product design and the convenience of packages through ergonomic improvements.
Strong Sales Force
In Japan, Kao Corporation has its own sales company system, which differs from other competitors. Kao develops close relations with the retailers. By co-operating and working together on many issues such as store shelves to make convenient for consumers to choose and purchase products, and also improve logistic efficiency through the use of EDI and ECR.
Effective Profit Management
Over a 5 year period beginning in 1995, managed to sustain profitable growth. In 1999, the Return on Equity ratio rose to a high of 7.68%. This continued profitability would aid Kao in its growth and expansion goals. Profits in turn will provide Kao with the required resources to develop superior products. Over the years, Kao has shown stability and sustain growth due to its effective profit management.
Established Brand Name
Kao Corporation has been in business since 1887, and by today Kao’s product is being marketed all around the globe. Kao’s product has managed to penetrate many markets and has gained the confidence of the consumers.
Wide Product Lines
Kao produces many different types of products. Kao has a very diversified product line including household detergents, skin care, and hair care and facial cleanser. Not only Kao’s product line diversified horizontally but also vertically. This means that within each product line would break down into many other products. Each product is aimed at a different segment of the market.
Large Capital
As of 31stMarch 1999, Kao’s capital stood at ¥451,776 million. This will enable Kao to undertake any new profitable ventures. Large capital will provide the resources it needs to finance all expansion and growth plans.
High Liquidity
Since 1995, Kao Corporation’s Acid Test Ratio has been rising to reach a high of 101.67% in 1999. This shows that Kao’s liquidity has been strengthening and currently very strong. Strong liquidity would mean that it is able to meet all short-term financial obligations and in the short run should any adverse events turn up, Kao Corporation would be in a better position to survive the ordeal.
Reducing Financial Leverage
The debt ratio of Kao’s Corporation stood at 39.18% at 31 March 1999. Kao has been reducing its debt ratio over the past 5 years. This move will reduce the company’s financial commitments and financial risk.
Potential Internal Weaknesses
Multiple levelled distribution channels
As discussed earlier, Kao Corporation still utilises the conventional distribution channel. This causes the distribution channels to consist of more levels. As such this could increase the logistic cost in the system. This in turn causes higher prices for consumers and lower profitability for Kao Corporation. In addition, more levels in the distribution channel will cause logistic lag time to lengthen. Longer logistic lag time could cause lower responsiveness and other stock out cost at the point of sales.
Non Keiretsu Company
Currently, Kao Corporation is not a Keiretsu company like some of the successful Japanese firms. Keiretsu are very large and are able to enjoy huge economies of scale. Moreover Keiretsu have the ability to integrate forward and backward to reduce the power of buyer and supplier.
Reliance on Imports
Many of Kao Corporation’s subsidiaries outside of Japan depend on imports of raw material. This in turn makes these subsidiaries to be vulnerable to fluctuations in the Foreign Exchange Market. This is evident in the case of Kao Malaysia. When the Malaysian Ringgit depreciated drastically during the Asian Crisis, Kao Malaysia experienced significant increase in raw material cost. As such Kao Malaysia experience losses during the year 1998. Moreover imports are subjected to import tax and this could again cause cost to rise should the local government decides to increase taxes.
Relatively high leverage
Even though the debt ratio is showing a downward trend, it is still relatively high. At 31 March 1999, the debt ratio stands at 39.18%. This means that almost 40% of Kao’s assets are being financed by borrowings. As such this could cause the company to be bogged down by heavy interest and loan repayments.
Potential Environmental Opportunities
Emerging Markets
Many developing countries such as Malaysia, Indonesia and Thailand are fast becoming tomorrow’s Big Emerging Markets (BEM). These markets have potential to grow and will contribute a significant portion of the tomorrow’s world GDP. There could be an increase in demand in these countries for Kao products.
Downfall of Communism
In the 1990, the world saw the downfall of communism. The Soviet Union broke up and China began to open up its economy to the world. New countries such as Slovenia, Ukraine and China are new markets whereby Kao can market its product. Previously under communism it was hard for Kao to penetrate these markets but now that communism has fallen and capitalism is taking over, Kao can capitalise on this opportunity to expand its operation an a global scale.
Liberalisation and Free Trade
Currently the world is progressing towards free trade. Much of the efforts are being carried out by the World Trade Organisation (WTO). Free Trade would mean less trade barriers among countries. When tariffs and quotas have been removed, Kao Corporation will be able to operate more profitably.
E-commerce
All around the world, the Internet is gaining popularity. The latest development in the Internet is E-commerce. Many believe that E-commerce will be the future way of the business world. By selling product directly to the consumers through the Internet Kao Corporation can significantly reduce its distribution cost.
Changing Age Structure
In many countries, the population is said to be getting older. There is a slow down in birth rate but more importantly, Baby Boomers who were born just after the World War II are now ageing. Taking over, as consumers of the future are the Generation Xers. The generation born between 1965 to 1976 and are poised to have a big impact on the workplace and marketplace of the future.
Population Growth in Developing Countries
Developing countries like Malaysia is expected to experience population growth over the next few decades. As such increase in population would translate into increase demand for Kao’s products.
Potential Environmental Threats
Increase Power of Buyer
Today, there is a new trend of major retailers forcing manufacturers t manufacture products, on the retailer’s behalf using the retailer’s brand. This is already happening in U.K. where Tesco, which is one of the major retail outlets throughout U.K. is forcing manufacturers like Coca-Cola to manufacture soft drinks using Tesco’s name instead of Coke. If Coca-Cola disagrees, then Tesco will not carry Coke in their stores. This will cause a drastic lost of market share. Should this happen to Kao, then Kao would be forced to create another competitor which would undercut Kao’s prices or virtually no existent demand growth in Japan.
Intensifying Competition
Competition in the Fast Moving Consumer Product industry is intensifying both domestically and internationally. Kao is facing fierce competition such as P&G and Johnson & Johnson. These competitors are fast to introduce new products into the market by undertaking heavy Research & Development efforts. Moreover, the number of competitors are increasing, brands such as Shokubutsu body shower by Lion Corporation are fighting for the same piece of cake that Kao is competing far.
Country Risk
As Kao Corporation expands its operation worldwide it faces the risk of the foreign government exercising unfavourable policies such as domestication or expropriation of assets. When this happens, the firm will stand to suffer huge losses. Iran once expropriated all U.S. assets in the country. As a result, U.S. firms lost millions of dollars.
Forex Fluctuations
Being a multidomestic company, Kao’s profits can be adversely affected by foreign exchange fluctuations. The Asian Crisis was a perfect example of this. Moreover, over the years the Yen has been strengthening. This makes Kao’s products to be less competitive in the global market.
Recommendation
Internal Factor
External Factor Strengths
– Ability to discover consumer
need
– Superior Research &
Development
– Strong Sales Force
– Profitability
– Establish Brand
– Wide Product Line
– Large Capital
– Liquidity Weaknesses
– Many levelled distribution
channel
– Non-Keiretsu
– Reliant on Import
– High Leverage
Opportunities
– Emerging Market
– Free Trade
– E-commerce
– Changing Age Structure
– Population Growth SO Strategic
– Expansion
– New Product
– Globalisation WO Strategic
– E-commerce venture
– Vertical Integration
– Diversification
Threats
– Increase Power of Buyer
– Intensifying Competition
– Country Risk
– Forex Fluctuation ST Strategic
– E-commerce
– Superior Products
– Lower Cost/Price
– Vertical Integrate WT Strategic
– Hedging
– Acquisition/Mergers
– Strategic Alliance
– Divest/Turnaround
Table 1: SWOT Analysis Strategies
Now that we have seen Kao Corporation’s SWOT Analysis, we can now relates the 4 different elements together to form effective strategies for the company. Table 1 shows the key factors in each element, strength, weaknesses, opportunity and threats. Basically the strength and weaknesses makes up the company’s internal environment. The external environment on the other hand, consists of opportunities and threats. Internal environment is controllable by the firm where as the external environment depend on factors such as politics, economic, social and technology. By using the combining internal and external environment, we can obtain a basis for strategy formulation. The following are some of the strategy that we can formulate using SWOT analysis.
SO Strategies
As discussed earlier, there are many Big Emerging markets, particular in the Asian region, which are developing countries. These developing countries are experiencing population and economic growth. Thus, these markets are great opportunities for Kao to expand its market share. Moreover, with the newly born countries such as Slovenia due to the fall of communism, Kao can expand its operations into these markets. Kao has the capital and with its well-established brand name, the company should be able to successfully penetrate these untapped markets.
As for the change in global age structure and the upcoming of Generation Xers, this provides Kao an excellent opportunity to capitalise on the future. As Kao already has the ability to discover consumers needs, Kao should undertake efforts to understand the taste, needs and wants of the Generation Xers. Accompanied by Kao’s superior Research & Development capabilities to develop new products especially targeted at the Generation Xers. With the support of Kao’s strong sales force, Kao would be well position to obtain competitive advantage in the future.
Another important trend is the liberalisation of trade worldwide. With WTO, efforts to remove trade barriers, it is a golden opportunity for Kao Corporation to steer the company towards globalisation. By moving from a multidomestic company to a global company Kao Corporation can enjoy higher levels of Economies of Scale. Free Trade will ease Kao’s entry into countries, which previously impeded while the removal of tariffs and levies will increase Kao’s profitability.
WO Strategies
As we know one of Kao’s major weaknesses is the many levels in the distribution channel. This can be overcome through the use of the Internet and its E-commerce capabilities. E-commerce will link Kao directly to the consumers and this in turn will make it possible for Kao to reduce its logistic cost, as there would be no more middlemen cost. In addition, prices can be lowered due to no middlemen mark ups, thus an increase in consumer’s surplus.
Kao is one of the oldest companies in Japan and yet it is not as successful as some of the Keiretsu companies like Toyota and Mitsubishi. These companies are very well diversified with high levels of forward and backward integration. Keiretsus experiences a lot of cost savings and economies of scale. As the world economy is changing the future is very unpredictable. Kao Corporation should look into appropriate diversification plans, which could be related or totally unrelated to Kao’s core competencies. It is always a god idea not to put all your eggs in one basket. Moreover, Kao has the capital to achieve this in stages.
ST Strategies
In the fast evolving world today, many threats can be obstacle in Kao’s struggle to achieve ultimate success. First of all, in order to overcome the threat of powerful buyers, which can dictate unfavourable terms with Kao, Kao can capitalise on the exciting capabilities of the Internet. By using E-commerce, Kao can remove the need for retailers and as such reduce the threat of powerful buyers.
Another threat is intensifying competition. Increase competition means lower profitability. With more competitors fighting for the same piece of cake, Kao has to device ways of staying ahead of the pack. One of these is to use Kao’s superior Research & Development capabilities to develop new products before the competitors do. In addition, Kao should strive to lower its cost in order to increase its profitability. Through the use of Economic Value Added and Total Cost Reduction program, Kao can effectively lower its cost. However, this might not be sufficient. Kao has large capital and large capitals need proper management in order to obtain maximum profit for the company. At the same time lower cost and prices can help maintain the competitiveness of Kao’s products although the Yen continues to rise against the US dollar.
WT Strategies
While the weaknesses of Kao Corporation may not be on that is very serious, it can be significantly amplified with threats from the external environment. Fluctuating Forex can cause severe losses due to heavy reliance on raw material imports by Kao foreign subsidiaries. In order t counter this setback, Kao has to engage into financial hedging activities. Through the use of forward contracts and put/call options, the risk of Forex fluctuations can be significantly reduced.
As for the intensifying competition, Kao can try to merger or acquire a competitive firm. The acquired firm should be one that creates value for Kao Corporation. This would be especially beneficial if the acquired firm has a competitive advantage over Kao Corporation. However, this strategy could be quite capital consuming. Another alternative is to form strategic alliances with competitor for a mutual benefit. The idea is “if you can’t beat them, join them.” Strategic alliances can also be used to reduce the threat of buyers. By forming alliances with major retailers, Kao and retailers can stand to benefit from better understanding of each other’s needs and difficulties. Then together find a productive solution to the problem. Sometimes, business is not all about war, sometimes its about making friends who we can rely on.
However, in the unlikely case of severe economic turmoil and accompanied by severe competition, Kao has to try to employ a turnaround strategy. Depending on the situation, it could use offensive strategies which would include low-cost or adopting a new differentiation strategy. This strategy would require significant resources. In a worse case scenario it could have no choice but to harvest what it has left and exit the industry as soon as possible. These strategies are very negative in nature. In my opinion, the best strategy is to ensure that the company never comes to this stage.
Other Recommendations
A part from the strategies, we have obtain through the use of the SWOT Analysis, there are other recommendation I would like to make. First of all, the company should take steps to look into its Financial Management. In sight of the company’s optimal capital structure in line with the Kao’s launch of the EVA program. High gearing might provide cheap capital to the firm. However the trade off is higher financial risk. Higher financial risk would cause shareholders demand for an additional risk premium. This is an increase to the cost of capital.
Moreover, in Appraising projects just considering cost of capital and the usage of Net Present Value Method or Internal Rate of Return would be sufficient. Current there is a new method called the Project Wealth Creation Profile. The idea is that projects are competing for capital and projects should be awarded according to the following criteria: –
(a) Financial Value
(b) Cash Flow Profiles
(c) Strategic Value
(d) Stakeholders Value
(e) Risk Profile
(f) Management Motivation
As capital is scarce, the company should employ careful steps in deciding how to spend its capital.
As for the operation side of Kao Corporation, it has yet to implement Just in Time stocking system. A lot of Kao’s Japanese counterparts have already adopted JIT. JIT can provide Kao with stockholding cost savings. This would be inline with Kao’s ongoing operational reforms and Total Cost Reduction efforts.
In the area of marketing, Kao should develop a catchy jingle to accompany a unique advertisement, which will be shown repetitively. The aim is to have high Brand Recall Rate in the minds of consumers. Then at the point of sale or high traffic outlets, supporting promotional tools such as promoters and shelf fliers should be use. By combining high recall rate and supporting promotional tools at the point of sale, Kao’s sales can be increase. This is because most of the time, the decision to buy a fast moving consumer product like shampoo is made at the point of sales. Moreover, as Islamic countries like Malaysia and Indonesia emerge as the big markets of tomorrow, there is an opportunity for Kao Corporation to use its R&D capabilities that would be specially designed for the Islamic society. Zaitun in Malaysia has proven that this strategy can be very successful.
In addition to obtain further cost reduction, further product standardisation should be adopted. Standardisation of products can give the company more economies of scale. Currently Kao does not standardise its products. Most new products are first launched in Japan then later brought over to the South East Asia region. By launching its new products simultaneously worldwide, it can take advantage of greater economies of scale and faster market penetration.
One last area I would like to make some recommendations on is to use cross-functional management. Currently Ford carries out this practise. By combining all the department of the organisation to perform a project, greater speed and flexibility can be achieve. There is also cost saving in this method of project management. Better understanding can be achieve among members of the different divisions and also decisions are made faster with less bureaucracy.
Conclusion
Kao Corporation is basically a strong and profitable company. It has sound financial fundamentals and has been largely successful in marketing its product both domestically internationally. The strategies that Kao Corporation employs in its bid to achieve profitable growth are admirable. However, Kao still has its weaknesses. These weaknesses can be overcome through the use of an appropriate strategy.
Now, Kao Corporation is moving into the new millennium with new challenges to face and new opportunities to grasp. The external environment is changing rapidly. Changes are not just led by the Internet but also changes in people and their way of life. People have new needs All of Kao’s competitors are well aware of the external environmental changes. Competition is intensifying and in order for Kao to emerge successful, it has to carefully analyse and formulate the appropriate strategies.