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Kao Corporation Executive Summary Essay, Research Paper
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.
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.
The Fast Moving Consumer Product is made of a wide range of Products. The following are some examples: –
2) Facial Wash
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.
Capital Kao Corporation
14-10, Kayabocho 1-chome,
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
Total Shares 25000000 0 0
Divided into 25000000 0 0
Nominal Amount per Share 100 0 0
Cash 16000000 0 0
Others 0 0 0
The share holding is as follows: –
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
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.
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.
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.
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