P&G Japan: The SK-II Globalization Project

| January 30, 2016

P&G Japan: The SK-II Globalization Project

Questions:

1. Should Paolo recommend to the beauty-care GBU that SK-II become a global brand?

2. Does 02005 support or impede the globalization of SK-II?

3. What should Paolo’s expansion strategy be in rolling out SK-II globally? Which country should be a strategic priority?

4. How well has P&G implemented Jager’s major strategic change?

I need maximum 8 pages paper answering the above questions. use the case study uploaded.

do not use anyother external references, the only reference should be this case study
CHRISTOPHER A. BARTLETT

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.
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P&G Japan: The SK-II Globalization Project

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.

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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—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%.
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P&G Japan: The SK-II Globalization Project

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.
In 1994, the Japanese beauty care business lost $50 million on sales of less than $300 million.
Among the scores of businesses in the 15 countries reporting to him, A. G. Lafley, the newly arrived
vice president of the Asian region, quickly zeroed in on Max Factor Japan as a priority problem area.
“We first had to clean up the Max Factor Blue mass-market mess then review our basic strategy,” he
said. Over the next three years, the local organization worked hard to make Max Factor Japan
profitable. Its product line was rationalized from 1,400 SKUs (or stock-keeping units) to 500,
distribution support was focused on 4,000 sales outlets as opposed to the previous 10,000, and sales
and marketing staff was cut from 600 to 150. It was a trying time for Max Factor Japan.

Organization 2005: Blueprint for Global Growth
In 1996 Jager, now promoted to chief operating officer under CEO John Pepper, signaled that he
saw the development of new products as the key to P&G’s future growth. While supporting Pepper’s
emphasis on expanding into emerging markets, he voiced concern that the company would “start
running out of white space towards the end of the decade.” To emphasize the importance of creating
new businesses, he became the champion of a Leadership Innovation Team to identify and support
major companywide innovations.
When he succeeded Pepper as CEO in January 1999, Jager continued his mission. Citing P&G
breakthroughs such as the first synthetic detergent in the 1930s, the introduction of fluoride
toothpaste in the 1950s, and the development of the first disposable diaper in the 1960s, he said,
“Almost without exception, we’ve won biggest on the strength of superior product technology. . . .
But frankly, we’ve come nowhere near exploiting its full potential.” Backing this belief, in 1999 he
increased the budget for R&D by 12% while cutting marketing expenditures by 9%.
If P&G’s growth would now depend on its ability to develop new products and roll them out
rapidly worldwide, Jager believed his new strategic thrust had to be implemented through a radically
different organization. Since early 1998 he and Pepper had been planning Organization 2005, an
initiative he felt represented “the most dramatic change to P&G’s structure, processes, and culture in
the company’s history.” Implementing O2005, as it came to be called, he promised would bring 13%
to 15% annual earnings growth and would result in $900 million in annual savings starting in 2004.
Implementation would be painful, he warned; in the first five years, it called for the closing of 10
plants and the loss of 15,000 jobs—13% of the worldwide workforce. The cost of the restructuring was
estimated at $1.9 billion, with $1 billion of that total forecast for 1999 and 2000.

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Changing the Culture
During the three months prior to assuming the CEO role, Jager toured company facilities
worldwide. He concluded that P&G’s sluggish 2% annual volume growth and its loss of global
market share was due to a culture he saw as slow, conformist, and risk averse. (See Exhibit 4 for
P&G’s financial performance.) In his view, employees were wasting half their time on “non-valueadded work” such as memo writing, form filling, or chart preparation, slowing down decisions and
making the company vulnerable to more nimble competition. (One observer described P&G’s
product development model as “ready, aim, aim, aim, aim, fire.”) He concluded that any
organizational change would have to be built on a cultural revolution.
With “stretch, innovation, and speed” as his watchwords, Jager signaled his intent to shake up
norms and practices that had shaped generations of highly disciplined, intensely loyal managers
often referred to within the industry as “Proctoids.” “Great ideas come from conflict and
dissatisfaction with the status quo,” he said. “I’d like an organization where there are rebels.” To
signal the importance of risk taking and speed, Jager gave a green light to the Leadership Innovation
Team to implement a global rollout of two radically new products: Dryel, a home dry-cleaning kit;
and Swiffer, an electrostatically charged dust mop. Just 18 months after entering their first test
market, they were on sale in the United States, Europe, Latin America, and Asia. Jager promised 20
more new products over the next 18 months. “And if you are worried about oversight,” he said, “I
am the portfolio manager.”

Changing the Processes
Reinforcing the new culture were some major changes to P&G’s traditional systems and processes.
To emphasize the need for greater risk taking, Jager leveraged the performance-based component of
compensation so that, for example, the variability of a vice president’s annual pay package increased
from a traditional range of 20% (10% up or down) to 80% (40% up or down). And to motivate people
and align them with the overall success of the company, he extended the reach of the stock option
plan from senior management to virtually all employees. Even outsiders were involved, and P&G’s
advertising agencies soon found their compensation linked to sales increases per dollar spent.
Another major systems shift occurred in the area of budgets. Jager felt that the annual ritual of
preparing, negotiating, and revising line item sales and expenses by product and country was
enormously time wasting and energy sapping. In future, they would be encouraged to propose
ambitious stretch objectives. And going forward, Jager also argued to replace the episodic nature of
separate marketing, payroll, and initiative budgets with an integrated business planning process
where all budget elements of the operating plan could be reviewed and approved together.

Changing the Structure
In perhaps the most drastic change introduced in O2005, primary profit responsibility shifted
from P&G’s four regional organizations to seven global business units (GBUs) that would now
manage product development, manufacturing, and marketing of their respective categories
worldwide. The old regional organizations were reconstituted into seven market development
organizations (MDOs) that assumed responsibility for local implementation of the GBUs’ global
strategies.1 And transactional activities such as accounting, human resources, payroll, and much of
1 In an exception to the shift of profit responsibility to the GBUs, the MDOs responsible for developing countries were treated

as profit centers.

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P&G Japan: The SK-II Globalization Project

IT were coordinated through a global business service unit (GBS). (See Exhibit 5 for a representation
of the new structure.)
Beyond their clear responsibility for developing and rolling out new products, the GBUs were also
charged with the task of increasing efficiency by standardizing manufacturing processes, simplifying
brand portfolios, and coordinating marketing activities. For example, by reducing the company’s 12
different diaper-manufacturing processes to one standard production model, Jager believed that P&G
could not only reap economies but might also remove a major barrier to rapid new-product rollouts.
And by axing some of its 300 brands and evaluating the core group with global potential, he felt the
company could exploit its resources more efficiently.
The restructuring also aimed to eliminate bureaucracy and increase accountability. Overall, six
management layers were stripped out, reducing the levels between the chairman and the front line
from 13 to 7. Furthermore, numerous committee responsibilities were transferred to individuals. For
example, the final sign-off on new advertising copy was given to individual executives, not approval
boards, cutting the time it took to get out ads from months to days.

New Corporate Priorities Meet Old Japanese Problems
The seeds of Jager’s strategic and organizational initiatives began sprouting long before he
assumed the CEO role in January 1999. For years, he had been pushing his belief in growth through
innovation, urging businesses to invest in new products and technologies. Even the organizational
review that resulted in the O2005 blueprint had begun a year before he took over. These winds of
change blew through all parts of the company, including the long-suffering Japanese company’s
beauty care business, which was finally emerging from years of problems.

Building the Base: From Mass to Class
By 1997 the Japanese cosmetics business had broken even. With guidance and support from
Lafley, the vice president for the Asian region, the Japanese team had focused its advertising
investment on just two brands—Max Factor Color, and a prestige skin care brand called SK-II.2
“Poring through the Japanese business, we found this little jewel called SK-II,” recalled Lafley. “To
those of us familiar with rich Western facial creams and lotions, this clear, unperfumed liquid with a
distinctive odor seemed very different. But the discriminating Japanese consumer loved it, and it
became the cornerstone of our new focus on the prestige beauty-counselor segment.”
Max Factor Japan began rebuilding its beauty-counselor channels, which involved significant
investments in training as well as counter design and installation (see Exhibits 6 and 7). And because
SK-II was such a high margin item, management launched a bold experiment in TV advertising
featuring a well-respected Japanese actress in her late 30s. In three years SK-II’s awareness ratings
rose from around 20% to over 70%, while sales in the same period more than doubled.
Building on this success, management adapted the ad campaign for Hong Kong and Taiwan,
where SK-II had quietly built a loyal following among the many women who took their fashion cues
from Tokyo. In both markets, sales rocketed, and by 1997, export sales of $68 million represented
2 SK-II was an obscure skin care product that had not even been recognized, much less evaluated, in the Max Factor

acquisition. Containing Pitera, a secret yeast-based ingredient supposedly developed by a Japanese monk who noticed how
the hands of workers in sake breweries kept young looking, SK-II had a small but extremely loyal following. Priced at ¥15,000
($120) or more per bottle, it clearly was at the top of the skin care range.

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about 30% of the brand’s total sales. More important, SK-II was now generating significant operating
profits. Yet within P&G, this high-end product had little visibility outside Japan. Paolo de Cesare,
general manager of P&G’s European skin care business in the mid-1990s, felt that, because the
company’s skin care experience came from the highly successful mass-market Olay brand, few
outside Japan understood SK-II. “I remember some people saying that SK-II was like Olay for
Japan,” he recalled. “People outside Japan just didn’t know what to make of it.”

Responding to the Innovation Push
Meanwhile, Jager had begun his push for more innovation. Given his firmly held belief that
Japan’s demanding consumers and tough competitors made it an important source of leading-edge
ideas, it was not surprising that more innovative ideas and initiatives from Japan began finding their
way through the company. For example, an electrostatically charged cleaning cloth developed by a
Japanese competitor became the genesis of P&G’s global rollout of Swiffer dry mops; rising Japanese
sensitivity to hygiene and sanitation spawned worldwide application in products such as Ariel Pure
Clean (“beyond whiteness, it washes away germs”); and dozens of other ideas from Japan—from a
waterless car-washing cloth to a disposable stain-removing pad to a washing machine-based drycleaning product—were all put into P&G’s product development pipeline.
Because Japanese women had by far the highest use of beauty care products in the world, it was
natural that the global beauty care category management started to regard Max Factor Japan as a
potential source of innovation. One of the first worldwide development projects on which Japan
played a key role was Lipfinity, a long-lasting lipstick that was felt to have global potential.
In the mid-1990s, the impressive but short-lived success of long-lasting lipsticks introduced in
Japan by Shiseido and Kenebo reinforced P&G’s own consumer research, which had long indicated
the potential for such a product. Working with R&D labs in Cincinnati and the United Kingdom,
several Japanese technologists participated on a global team that developed a new product involving
a durable color base and a renewable moisturizing second coat. Recognizing that this two-stage
application would result in a more expensive product that involved basic habit changes, the global
cosmetics category executive asked Max Factor Japan to be the new brand’s global lead market.
Viewing their task as “translating the breakthrough technology invention into a market-sensitive
product innovation,” the Japanese product management team developed the marketing approach—
concept, packaging, positioning, communications strategy, and so on—that led to the new brand,
Lipfinity, becoming Japan’s best-selling lipstick. The Japanese innovations were then transferred
worldwide, as Lipfinity rolled out in Europe and the United States within six months of the Japanese
launch.

O2005 Rolls Out
Soon after O2005 was first announced in September 1998, massive management changes began.
By the time of its formal implementation in July 1999, half the top 30 managers and a third of the top
300 were new to their jobs. For example, Lafley, who had just returned from Asia to head the North
American region, was asked to prepare to hand off that role and take over as head of the Beauty Care
GBU. “It was a crazy year,” recalled Lafley. “There was so much to build, but beyond the grand
design, we were not clear about how it should operate.”
In another of the hundreds of O2005 senior management changes, de Cesare, head of P&G’s
European skin care business, was promoted to vice president and asked to move to Osaka and head

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P&G Japan: The SK-II Globalization Project

up Max Factor Japan. Under the new structure he would report directly to Lafley’s Beauty Care GBU
and on a dotted-line basis to the head of the MDO for Northeast Asia.
In addition to adjusting to this new complexity where responsibilities and relationships were still
being defined, de Cesare found himself in a new global role. As president of Max Factor Japan he
became a member of the Beauty Care Global Leadership Team (GLT), a group comprised of the
business GMs from three key MDOs, representatives from key functions such as R&D, consumer
research, product supply, HR, and finance, and chaired by Lafley as GBU head. These meetings
became vital forums for implementing Lafley’s charge “to review P&G’s huge beauty care portfolio
and focus investment on the top brands with the potential to become global assets.” The question
took on new importance for de Cesare when he was named global franchise leader for SK-II and
asked to explore its potential as a global brand.

A New Global Product Development Process
Soon after arriving in Japan, de Cesare discovered that the Japanese Max Factor organization was
increasingly involved in new global product development activities following its successful Lipfinity
role. This process began under the leadership of the Beauty Care GLT when consumer research
identified an unmet consumer need worldwide. A lead research center then developed a technical
model of how P&G could respond to the need. Next, the GLT process brought in marketing expertise
from lead markets to expand that technology “chassis” to a holistic new-product concept. Finally,
contributing technologists and marketers were designated to work on the variations in ingredients or
aesthetics necessary to adapt the core technology or product concept to local markets.
This global product development process was set in motion when consumer researchers found
that, despite regional differences, there was a worldwide opportunity in facial cleansing. The research
showed that, although U.S. women were satisfied with the clean feeling they got using bar soaps, it
left their skin tight and dry; in Europe, women applied a cleansing milk with a cotton pad that left
their skin moisturized and conditioned but not as clean as they wanted; and in Japan, the habit of
using foaming facial cleansers left women satisfied with skin conditioning but not with moisturizing.
Globally, however, the unmet need was to achieve soft, moisturized, clean-feeling skin, and herein
the GBU saw the product opportunity—and the technological challenge.
A technology team was assembled at an R&D facility in Cincinnati, drawing on the most qualified
technologists from its P&G’s labs worldwide. For example, because the average Japanese woman
spent 4.5 minutes on her face-cleansing regime compared with 1.7 minutes for the typical American
woman, Japanese technologists were sought for their refined expertise in the cleansing processes and
their particular understanding of how to develop a product with the rich, creamy lather.
Working with a woven substrate technology developed by P&G’s paper business, the core
technology team found that a 10-micron fiber, when woven into a mesh, was effective in trapping
and absorbing dirt and impurities. By impregnating this substrate with a dry-sprayed formula of
cleansers and moisturizers activated at different times in the cleansing process, team members felt
they could develop a disposable cleansing cloth that would respond to the identified consumer need.
After this technology “chassis” had been developed, a technology team in Japan adapted it to allow
the cloth to be impregnated with a different cleanser formulation that included the SK-II ingredient,
Pitera. (See Exhibit 8 for an overview of the development process.)
A U.S.-based marketing team took on the task of developing the Olay version. Identifying its
consumers’ view of a multistep salon facial as the ultimate cleansing experience, this team came up
with the concept of a one-step routine that offered the benefits of cleansing, conditioning, and
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toning—“just like a daily facial.” Meanwhile, another team had the same assignment in Japan, which
became the lead market for the SK-II version. Because women already had a five- or six-step
cleansing routine, the SK-II version was positioned not as a “daily facial” but as a “foaming massage
cloth” that built on the ritual experience of increasing skin circulation through a massage while
boosting skin clarity due to the microfibers’ ability to clean pores and trap dirt. (See Exhibit 9 for
illustration of the Foaming Massage Cloth with other core SK-II products.)
Because of its premium pricing strategy, the SK-II Foaming Massage Cloth was packaged in a
much more elegant dispensing box and was priced at ¥6,000 ($50), compared to $7 for the Olay Facial
Cloth in the United States. And Japan assigned several technologists to the task of developing
detailed product performance data that Japanese beauty magazines required for the much more
scientific product reviews they published compared to their Western counterparts. In the end, each
market ended up with a distinct product built on a common technology platform. Marketing
expertise was also shared—some Japanese performance analysis and data were also relevant for the
Olay version and were used in Europe, for example—allowing the organization to leverage its local
learning.

The SK-II Decision: A Global Brand?
After barely six months in Japan, de Cesare recognized that he now had three different roles in the
new organization. As president of Max Factor Japan, he was impressed by the turnaround this local
company had pulled off and was optimistic about its ability to grow significantly in the large
Japanese beauty market. As GLT member on the Beauty Care GBU, he was proud of his
organization’s contribution to the GBU-sponsored global new-product innovation process and was
convinced that Japan could continue to contribute to and learn from P&G’s impressive technology
base. And now as global franchise leader for SK-II, he was excited by the opportunity to explore
whether the brand could break into the $9 billion worldwide prestige skin care market. (See Exhibit
10 for prestige market data.)
When he arrived in Japan, de Cesare found that SK-II’s success in Taiwan and Hong Kong (by
1999, 45% of total SK-II sales) had already encouraged management to begin expansion into three
other regional markets—Singapore, Malaysia, and South Korea. But these were relatively small
markets, and as he reviewed data on the global skin care and prestige beauty markets, he wondered
if the time was right to make a bold entry into one or more major markets. (See Exhibits 11 and 12
for global skin-care market and consumer data.)
As he reviewed the opportunities, three alternatives presented themselves. First, the beauty care
management team for Greater China was interested in expanding on SK-II’s success in Taiwan and
Hong Kong by introducing the brand into mainland China. Next, at GLT meetings de Cesare had
discussed with the head of beauty care in Europe the possibilities of bringing SK-II into that large
Western market. His third possibility—really his first option, he realized—was to build on the
brand’s success in SK-II’s rich and proven home Japanese market.

The Japanese Opportunity
Japanese women were among the most sophisticated users of beauty products in the world, and
per capita they were the world’s leading consumers of these products. Despite its improved
performance in recent years, Max Factor Japan claimed less than a 3% share of this $10 billion beauty
product market. “It’s huge,” boasted one local manager. ”Larger than the U.S. laundry market.”

9
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P&G Japan: The SK-II Globalization Project

Although SK-II had sales of more than $150 million in Japan in 1999, de Cesare was also aware
that in recent years its home market growth had slowed. This was something the new manager felt he
could change by tapping into P&G’s extensive technological resources. The successful experience of
the foaming massage cloth convinced him that there was a significant opportunity to expand sales by
extending the SK-II line beyond its traditional product offerings. For example, he could see an
immediate opportunity to move into new segments by adding anti-aging and skin-whitening
products to the SK-II range. Although this would take a considerable amount of time and effort, it
would exploit internal capabilities and external brand image. Compared to the new-market entry
options, investment would be quite low.
An exciting development that would support this home market thrust emerged when he
discovered that his SK-II technology and marketing teams had come together to develop an
innovative beauty imaging system (BIS). Using the Japanese technicians’ skills in miniaturization
and software development, they were working to create a simplified version of scientific equipment
used by P&G lab technicians to qualify new skin care products by measuring improvements in skin
condition. The plan was to install the modified BIS at SK-II counters and have beauty consultants use
it to boost the accuracy and credibility of their skin diagnosis. The project fit perfectly with de
Cesare’s vision for SK-II to become the brand that solved individual skin care problems. He felt it
could build significant loyalty in the analytically inclined Japanese consumer.
With the company’s having such a small share of such a rich market, de Cesare felt that a strategy
of product innovation and superior in-store service had the potential to accelerate a growth rate that
had slowed to 5% per annum over the past three years. Although Shiseido could be expected to put
up a good fight, he felt SK-II should double sales in Japan over the next six or seven years. In short,
de Cesare was extremely excited about SK-II’s potential for growth in its home market. He said: “It’s
a fabulous opportunity. One loyal SK-II customer in Japan already spends about $1,000 a year on the
brand. Even a regular consumer of all P&G’s other products—from toothpaste and deodorant to
shampoo and detergent—all together spends nowhere near that amount annually.”

The Chinese Puzzle
A very different opportunity existed in China, where P&G had been operating only since 1988.
Because of the extraordinarily low prices of Chinese laundry products, the company had
uncharacteristically led with beauty products when it entered this huge market. Olay was launched
in 1989 and, after early problems, eventually became highly successful by adopting a nontraditional
marketing strategy. To justify its price premium—its price was 20 to 30 times the price of local skin
care products—Shivesh Ram, the entrepreneurial beauty care manager in China, decided to add a
service component to Olay’s superior product formulation. Borrowing from the Max Factor Japan
model, he began selling through counters in the state-owned department stores staffed by beauty
counselors. By 1999, Olay had almost 1,000 such counters in China and was a huge success.
As the Chinese market opened to international retailers, department stores from Taiwan, Hong
Kong, and Singapore began opening in Beijing and Shanghai. Familiar with Olay as a mass-market
brand, they questioned allocating it scarce beauty counter space alongside Estee Lauder, Lancôme,
Shiseido, and other premium brands that had already claimed the prime locations critical to success
in this business. It was at this point that Ram began exploring the possibility of introducing SK-II,
allowing Olay to move more deeply into second-tier department stores, stores in smaller cities, and to
“second-floor” cosmetics locations in large stores. “China is widely predicted to become the secondlargest market in the world,” said Ram. “The prestige beauty segment is growing at 30 to 40% a year,
and virtually every major competitor in that space is already here.”

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P&G Japan: The SK-II Globalization Project

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Counterbalancing Ram’s enthusiastic proposals, de Cesare also heard voices of concern. Beyond
the potential impact on a successful Olay market position, some were worried that SK-II would be a
distraction to P&G’s strategy of becoming a mainstream Chinese company and to its competitive
goal of entering 600 Chinese cities ahead of Unilever, Kao, and other global players. They argued
that targeting an elite consumer group with a niche product was not in keeping with the objective of
reaching the 1.2 billion population with laundry, hair care, oral care, diapers, and other basics. After
all, even with SK-II’s basic four-step regimen, a three-month supply could cost more than one
month’s salary for the average woman working in a major Chinese city.
Furthermore, the skeptics wondered if the Chinese consumer was ready for SK-II. Olay had
succeeded only by the company’s educating its customers to move from a one-step skin care
process—washing with bar soap and water—to a three-step cleansing and moisturizing process. SKII relied on women developing at least a four- to six-step regimen, something the doubters felt was
unrealistic. But as Ram and others argued, within the target market, skin care practices were quite
developed, and penetration of skin care products was higher than in many developed markets.
Finally, the Chinese market presented numerous other risks, from the widespread existence of
counterfeit prestige products to the bureaucracy attached to a one-year import-registration process.
But the biggest concern was the likelihood that SK-II would attract import duties of 35% to 40%. This
meant that even if P&G squeezed its margin in China, SK-II would have to be priced significantly
above the retail level in other markets. Still, the China team calculated that because of the lower cost
of beauty consultants, the product could still be profitable. (See Exhibit 13 for cost estimates.)
Despite the critics, Ram was eager to try, and he responded to their concerns: “There are three
Chinas—rural China, low-income urban China, and sophisticated, wealthy China concentrated in
Shanghai, Beijing, and Guangzhou. The third group is as big a target consumer group as in many
developed markets. If we don’t move soon, the battle for that elite will be lost to the global beauty
care powerhouses that have been here for three years or more.”
Ram was strongly supported by his regional beauty care manager and by the Greater China MDO
president. Together, they were willing to experiment with a few counters in Shanghai, and if
successful, to expand to more counters in other major cities. Over the first three years, they expected
to generate $10 million to $15 million in sales, by which time they expected the brand to break even.
They estimated the initial investment to build counters, train beauty consultants, and support the
introduction would probably mean losses of about 10% of sales over that three-year period.

The European Question
As he explored global opportunities for SK-II, de Cesare’s mind kept returning to the European
market he knew so well. Unlike China, Europe had a relatively large and sophisticated group of
beauty-conscious consumers who already practiced a multistep regimen using various specialized
skin care products. What he was unsure of was whether there was a significant group willing to
adopt the disciplined six- to eight-step ritual that the most devoted Japanese SK-II users followed.
The bigger challenge, in his view, would be introducing a totally new brand into an already
crowded field of high-profile, well-respected competitors including Estee Lauder, Clinique, Lancôme,
Chanel, and Dior. While TV advertising had proven highly effective in raising SK-II’s awareness and
sales in Japan, Taiwan, and Hong Kong, the cost of television—or even print—ads in Europe made
such an approach there prohibitive. And without any real brand awareness or heritage, he wondered
if SK-II’s mystique would transfer to a Western market.

11
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P&G Japan: The SK-II Globalization Project

As he thought through these issues, de Cesare spoke with his old boss, Mike Thompson, the head
of P&G’s beauty business in Europe. Because the Max Faxtor sales force sold primarily to massdistribution outlets, Thompson did not think it provided SK-II the appropriate access to the European
market. However, he explained that the fine-fragrance business was beginning to do quite well. In
the United Kingdom, for example, its 25-person sales force was on track in 1999 to book $1 million in
after-tax profit on sales of $12 million. Because it sold brands such as Hugo Boss, Giorgio, and
Beverly Hills to department stores and Boots, the major pharmacy chain, its sales approach and trade
relationship was different from the SK-II model in Japan. Nevertheless, Thompson felt it was a major
asset that could be exploited.
Furthermore, Thompson told de Cesare that his wife was a loyal SK-II user and reasoned that
since she was a critical judge of products, other women would discover the same benefits in the
product she did. He believed that SK-II provided the fine-fragrance business a way to extend its line
in the few department stores that dominated U.K. distribution in the prestige business. He thought
they would be willing to give SK-II a try. (He was less optimistic about countries such as France and
Germany, however, where prestige products were sold through thousands of perfumeries, making it
impossible to justify the SK-II consultants who would be vital to the sales model.)
Initial consumer research in the United Kingdom had provided mixed results. But de Cesare felt
that while this kind of blind testing could provide useful data on detergents, it was less helpful in this
case. The consumers tested the product blind for one week, then were interviewed about their
impressions. But because they lacked the beauty counselors’ analysis and advice and had not
practiced the full skin care regimen, he felt the results did not adequately predict SK-II’s potential.
In discussions with Thompson, de Cesare concluded that he could hope to achieve sales of $10
million by the fourth year in the U.K. market. Given the intense competition, he recognized that he
would have to absorb losses of $1 million to $2 million annually over that period as the start-up
investment.

The Organizational Constraint
While the strategic opportunities were clear, de Cesare also recognized that his decision needed to
comply with the organizational reality in which it would be implemented. While GBU head Lafley
was an early champion and continuing supporter of SK-II, his boss, Jager, was less committed. Jager
was among those in P&G who openly questioned how well some of the products in the beauty care
business—particularly some of the acquired brands—fit in the P&G portfolio. While he was
comfortable with high-volume products like shampoo, he was more skeptical of the upper end of the
line, particularly fine fragrances. In his view, the fashion-linked and promotion-driven sales models
of luxury products neither played well to P&G’s “stack it high, sell it cheap” marketing skills nor
leveraged its superior technologies.
The other organizational reality was that the implementation of O2005 was causing a good deal of
organizational disruption and management distraction. This was particularly true in Europe, as
Thompson explained:
We swung the pendulum 180 degrees, from a local to a global focus. Marketing plans and
budgets had previously been developed locally, strongly debated with European managers,
then rolled up. Now they were developed globally—or at least regionally—by new people
who often did not understand the competitive and trade differences across markets. We began
to standardize and centralize our policies and practices out of Geneva. Not surprisingly, a lot
of our best local managers left the company.
12
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P&G Japan: The SK-II Globalization Project

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One result of the O2005 change was that country subsidiary GMs now focused more on
maximizing sales volume than profits, and this had put the beauty care business under significant
budget pressure. Thompson explained the situation in Europe in 1999:
One thing became clear very quickly: It was a lot easier to sell cases of Ariel [detergent] or
Pampers [diapers] than cases of cosmetics, so guess where the sales force effort went? At the
same time, the new-product pipeline was resulting in almost a “launch of the month,” and
with the introduction of new products like Swiffer and Febreze, it was hard for the MDOs to
manage all of these corporate priorities. . . . Finally, because cosmetics sales required more time
and effort from local sales forces, more local costs were assigned to that business, and that has
added to profit pressures.

Framing the Proposal
It was in this context that de Cesare was framing his proposal based on the global potential of SKII as a brand and his plans to exploit the opportunities he saw. But he knew Lafley’s long ties and
positive feelings towards SK-II would not be sufficient to convince him. The GBU head was
committed to focusing beauty care on the core brands that could be developed as a global franchise,
and his questions would likely zero in on whether de Cesare could build SK-II into such a brand.

13
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P&G Japan: The SK-II Globalization Project

Exhibit 1

P&G’s Internationalization Timetable

Year

Markets Entered

1837–1930

United States and Canada

1930–1940

United Kingdom, Philippines

1940–1950

Puerto Rico, Venezuela, Mexico

1950–1960

Switzerland, France, Belgium, Italy, Peru, Saudi Arabia,
Morocco

1960–1970

Germany, Greece, Spain, Netherlands, Sweden, Austria,
Indonesia, Malaysia, Hong Kong, Singapore, Japan

1970–1980

Ireland

1980–1990

Colombia, Chile, Caribbean, Guatemala, Kenya, Egypt,
Thailand, Australia, New Zealand, India, Taiwan, South
Korea, Pakistan, Turkey, Brazil, El Salvador

1990–2000

Russia, China, Czech Republic, Hungary, Poland, Slovak
Republic, Bulgaria, Belarus, Latvia, Estonia, Romania,
Lithuania, Kazakhstan, Yugoslavia, Croatia, Uzbekistan,
Ukraine, Slovenia, Nigeria, South Africa, Denmark,
Portugal, Norway, Argentina, Yemen, Sri Lanka, Vietnam,
Bangladesh, Costa Rica, Turkmenistan

Source:

Company records.

14
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Exhibit 2

P&G European Organization, 1986

Group VP Europe

VP Central Europe/
Category Executive, Laundry

GM
Belgium

GM
France

Manager,*
Laundry

GM
Austria

Manager,
Paper Prod.

VP Southern Europe/
Category Executive
Personal Care

VP Northern Europe/
Category Executive, Paper

VP
Finance
& Admin.

VP
Product
Supply

GM
Switz.

Manager,
Pers. Care

Manager,
Manufact.

Manager,
Purchasing

Manager
R&D

Manager
Fin./Admin.

Etc.

Other subsidiaries had similar organizations to France

Sales
Sales
Force

Marketing
Brand
Managers

* Managers of Laundry Products in all subsidiaries had a similar dotted line relationship to the European Category Executive for Laundry.

Source:

Company records.

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VP
R&D

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303-003

P&G’s Worldwide Organizational Structure, 1990

Exhibit 3

CEO

Supply

HR

Group VP
North America

Legal

Ext.
Relns.

Corporate
R&D

Group VP
Europe

Finance

GM Korea

Global
Category Exec.
Fabric Care
Global
Category Exec.
Baby Care
Global
Category Exec.
Feminine Care

GM Fabric
Japan

IT

Group VP
Asia Pacific

Group VP
Latin America

GM Japan

Controller

GM Fem.
Care Japan

GM Taiwan

GM Hong Kong

Other
Countries
Subs.

Other
Businesses

GM Diapers
Japan
GM Max
Factor Japan

Global
Category Exec.
Beauty Care
Etc.

Source:

Company records.

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Exhibit 4

P&G Select Financial Performance Data, 1980–1999

Annual Income Statement ($ millions)

June 1999

June 1998

June 1997

June 1996

June 1995

June 1990

June 1985

June 1980

Sales
Cost of Goods Sold
Gross Profit

38,125
18,615
19,510

37,154
19,466
17,688

35,764
18,829
16,935

35,284
19,404
15,880

33,434
18,370
15,064

24,081
14,658
9,423

13,552
9,099
4,453

10,772
7,471
3,301

Selling, General, and Administrative Expense
of which:
Research and Development Expense
Advertising Expense

10,628

10,035

9,960

9,707

9,632

6,262

3,099

1,977

1,726
3,538

1,546
3,704

1,469
3,466

1,399
3,254

1,148
3,284

693
2,059

400
1,105

228
621

Depreciation, Depletion, and Amortization

2,148

1,598

1,487

1,358

1,253

859

378

196

Operating Profit
Interest Expense
Non-Operating Income/Expense
Special Items

6,734
650
235
-481

6,055
548
201
0

5,488
457
218
0

4,815
493
272
75

4,179
511
409
-77

2,302
395
561
0

976
165
193
0

1,128
97
51
0

Total Income Taxes

2,075

1,928

1,834

1,623

1,355

914

369

440

Net Income

3,763

3,780

3,415

3,046

2,645

1,554

635

642

62.5%

75.4%

80.9%

39.9%

22.3%

22.4%

Geographic Breakdown: Net Sales
Americas
United States
Europe, Middle East, and Africa
International
Asia
Corporate

58.4%

54.7%

53.8%

52.9%

55.1%

31.9%

35.1%

35.3%

35.2%

32.9%

9.7%

10.2%

10.9%

11.9%

10.8%
1.2%

-2.1%

2.3%

-3.3%

Number of Employees

110,000

110,000

106,000

103,000

99,200

94,000

62,000

59,000

Abbreviated Balance Sheet ($ millions)

June 1999

June 1998

June 1997

June 1996

June 1995

June 1990

June 1985

June 1980

ASSETS
Total Current Assets
Plant, Property & Equipment, net
Other Assets
TOTAL ASSETS

11,358
12,626
8,129
32,113

10,577
12,180
8,209
30,966

10,786
11,376
5,382
27,544

10,807
11,118
5,805
27,730

10,842
11,026
6,257
28,125

7,644
7,436
3,407
18,487

3,816
5,292
575
9,683

3,007
3,237
309
6,553

LIABILITIES
Total Current Liabilities
Long-Term Debt
Deferred Taxes
Other Liabilities

10,761
6,231
362
2,701

9,250
5,765
428
3,287

7,798
4,143
559
2,998

7,825
4,670
638
2,875

8,648
5,161
531
3,196

5,417
3,588
1,258
706

2,589
877
945
0

1,670
835
445
0

TOTAL LIABILITIES

20,055

18,730

15,498

16,008

17,536

10,969

4,411

2,950

TOTAL EQUITY

12,058

12,236

12,046

11,722

10,589

7,518

5,272

3,603

TOTAL LIABILITIES & EQUITY

32,113

30,966

27,544

27,730

28,125

18,487

9,683

6,553

Source:

SEC filings, Standard & Poor’s Research Insight.

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Exhibit 5

P&G Organization, 1999 (Post O2005 Implementation)
Durk Jager
CEO
Finance
GBS

Fabric & Home Care,
GBU

Human Resources
GBS

Baby Care
GBU
Feminine Care
GBU

Product Supply
GBS

Family Care
GBU

R&D
GBS

Food & Beverage
GBU

Information Technology
GBS

Health Care
GBU

Accounting
GBS

Beauty Care
GBU
A.G. Lafle y

Global Market
Development Organizations
Developed Markets
North America
MDO

Fragrances

Cosmetics
Skin Care

Etc.

Developing Markets *
Central & East
Europe MDO

Western Europe
MDO

Latin America
MDO

Northeast Asia
MDO

Japan
GM

GM Fabric

Greater China
MDO

Middle East &
Africa MDO

Korea

ASEAN, India &
Australia MDO

* GBUs had global profit
responsibility except for developing
markets where MDOs were primarily
responsible for profit.

GM Fem
Care

GM Max Factor
Paolo de Cesare

Source:

Other businesses in Japan

Company records.

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P&G Japan’s SK-II Project

Exhibit 6

303-003

Beauty Counselor Work Flow

Skin Care Counseling

Make-up Counseling

Skin Diagnosis

Color Counseling
(Consumer Color-tone Analysis)

Skin Care Regimen Recommendation
Product Demonstration
Product Demonstration
Plus
Skin Care Service (i.e., facial/massage)

Make-up Service

Record Consumer’s Purchase
Make-up Service

Record Consumer’s Purchase

Source:

Company documents.

19
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Exhibit 7

Source:

In-Store SK-II Counter Space

Company documents.

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Exhibit 8

Representation of Global Cleansing Cloth Development Program

Country

Subsidiaries

1 Consumer research on facial cleansing needs by country.

GLT
2 Identification of an unmet worldwide consumer need for
cleansing that resulted in “soft, moisturized clean-feeling skin.”
3 Technologists and marketers from key labs and markets are assembled
in a lead R&D lab to develop a technology “chassis” and a core product concept.
Lead
R&D
Lab

4 Local technologists and marketers adapt the core technology and product
concept to fit local needs and opportunities.
Country

Subsidiaries

Source: Casewriter’s interpretation.

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Exhibit 9

Source:

Illustration of Part of SK-II Product Line

Company brochure.

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P&G Japan’s SK-II Project

Exhibit 10
!

303-003

Global Prestige Market: Size and Geographic Split

Global Prestige Market: 1999
(Fragrances, Cosmetics, Skin) = $15 billion at retail level
(of which approximately 60% is skin care)

United States
Canada
Asia/Pacifica
United Kingdom
France
Germany
Rest of Europe
Rest of World

26%
2
25
5
5
5
16
16

Source: Company data.
aJapan represented over 80% of the Asia/Pacific total.

Exhibit 11

Global Skin Care Market Size: 1999

Skin Care (Main market and prestige)

Region/Country

Retail Sales
($ million)

Two-Year
Growth Rate

Western Europe
France
Germany
United Kingdom

8,736
2,019
1,839
1,052

7%
7
14
17

North America
United States

6,059
5,603

18
18

11,220
1,022
6,869
1,895
532
266

2
28
6
9
18
6

Asia/Pacific
China
Japan
South Korea
Taiwan
Hong Kong
Source:

Company data.

23
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P&G Japan’s SK-II Project

Exhibit 12

Skin Care and Cosmetics Habits and Practices: Selected Countries

Product Usage (% Past 7 Days)

United
Statesa

Japana

Chinab

United
Kingdoma

45%
25
51
70
84
76

95%
28
90
85
97
27

26%
52
57
35
75
13

37%
45
41
57
85
75

Facial Moisturizer—Lotion
Facial Moisturizer—Cream
Facial Cleansers (excluding Family Bar Soap)
Foundation
Lipstick
Mascara

Source: Company data.
aBased on broad, representative sample of consumers.
bBased on upper-income consumers in Beijing City.

Exhibit 13

Global SK-II Cost Structure (% of net sales)a

FY1999/2000
Net sales
Cost of products sold
Marketing, research, and selling/
administrative expense
Operating income

Source:

Taiwan/
Hong Kong

PR China
Expected

United Kingdom
Expected

100%
22

100%
26

100%
45

100%
29

67
11

58
16

44
11

63
8

Japan

Company estimates.

aData disguised.

24
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