Chapter 17 Outline

Procter & Gamble in Japan: from Marketing Failure to Success

Introduction

The Globalization of Markets?

Market Segmentation

Product Attributes

Cultural Differences

Economic Differences

Product and Technical Standards

Distribution Strategy

A Typical Distribution System

Differences between Countries

Choosing a Distribution Strategy

Communication Strategy

Barriers to International Communication

Push versus Pull Strategies

Global Advertising

Pricing Strategy

Price Discrimination

Strategic Pricing

Regulatory Influences on Prices

Configuring the Marketing Mix

New Product Development

The Location of R&D

Integrating R&D, Marketing, and Production

Cross-Functional Teams

Implications for the International Business

Chapter Summary

Critical Discussion Questions

Nike--The Ugly American?

Procter & Gamble in Japan:  from Marketing Failure to Success

Procter & Gamble (P&G), the large US consumer products company, has a well-earned reputation as one of the world's best marketers. With its 80-plus major brands, P&G generates more than $37 billion in annual revenues worldwide. Along with Unilever, P&G is a dominant global force in laundry detergents, cleaning products, and personal care products. P&G expanded abroad after World War II by exporting its brands and marketing policies to Western Europe, initially with considerable success. Over the next 30 years, this policy of developing new products and marketing strategies in the United States and then transferring them to other countries became entrenched. Although some adaptation of marketing policies to accommodate country differences was pursued, it was minimal.

The first signs that this policy was no longer effective emerged in the 1970s, when P&G suffered a number of major setbacks in Japan. By 1985, after 13 years in Japan, P&G was still losing $40 million a year there. It had introduced disposable diapers in Japan and at one time had commanded an 80 percent share of the market, but by the early 1980s it held a miserable 8 percent. Three large Japanese consumer products companies were dominating the market. P&G's diapers, developed in the United States, were too bulky for the tastes of Japanese consumers. Kao, a Japanese company, had developed a line of trim-fit diapers that appealed more to Japanese tastes. Kao introduced its product with a marketing blitz and was quickly rewarded with a 30 percent share of the market. P&G realized it would have to modify its diapers if it were to compete in Japan. It did, and the company now has a 30 percent share of the Japanese market. Plus, P&G's trim-fit diapers have become a best-seller in the United States.

P&G had a similar experience in marketing education in the Japanese laundry detergent market. In the early 1980s, P&G introduced its Cheer laundry detergent in Japan. Developed in the United States, Cheer was promoted in Japan with the US marketing message--Cheer works in all temperatures and produces lots of rich suds. But many Japanese consumers wash their clothes in cold water, which made the claim of working in all temperatures irrelevant. Also, many Japanese add fabric softeners to their water, which reduces detergents' sudsing action, so Cheer did not suds up as advertised. After a disastrous launch, P&G knew it had to adapt its marketing message. Cheer is now promoted as a product that works effectively in cold water with fabric softeners added, and it is one of P&G's bestselling products in Japan.

P&G's experience with disposable diapers and laundry detergents in Japan forced the company to rethink its product development and marketing philosophy. The company now admits that its US-centered way of doing business no longer works. Since the late 1980s, P&G has been delegating more responsibility for new-product development and marketing to its major subsidiaries in Japan and Europe. The company is more responsive to local differences in consumer tastes and preferences and more willing to admit that good new products can be developed outside the United States.

Evidence that this new approach is working can again be found in the company's activities in Japan. Until 1995, P&G did not sell dish soap in Japan. By 1998, it had Japan's best-selling brand, Joy, which now has a 20 percent share of Japan's $400 million market for dish soap. It made major inroads against the products of two domestic firms, Kao and Lion Corp., each of which marketed multiple brands and controlled nearly 40 percent of the market before P&G's entry. P&G's success with Joy was due to its ability to develop a product formula that was specifically targeted at the unmet needs of Japanese consumers, to the design of a packaging format that appealed to retailers, and to the development of a compelling advertising campaign.

In researching the market in the early 1990s, P&G discovered an odd habit; Japanese homemakers, one after another, squirted out excessive amounts of detergent onto dirty dishes, a clear sign of dissatisfaction with existing products. On further inspection, P&G found that this behavior resulted from the changing eating habits of Japanese consumers. The Japanese are consuming more fried food, and existing dish soaps did not effectively remove grease. Armed with this knowledge, P&G researchers in Japan went to work to create a highly concentrated soap formula based on a new technology developed by the company's scientists in Europe that was highly effective in removing grease. The company also designed a novel package for the product. The packaging of existing products had a clear weakness; the long-necked bottles wasted space on supermarket shelves. P&G's dish soap containers were compact cylinders that took less space in stores, warehouses, and delivery trucks. This improved the efficiency of distribution and allowed supermarkets to use their shelf space more effectively, which made them receptive to stocking Joy. P&G also devoted considerable attention to developing an advertising campaign for Joy. P&G's ad agency, Dentsu Inc., created commercials in which a famous comedian dropped in on homemakers unannounced with a camera crew to test Joy on the household's dirty dishes. The camera homed in on a patch of oil in a pan full of water. After a drop of Joy, the oil dramatically disappeared.

With the product, packaging, and advertising strategy carefully worked out, P&G launched Joy throughout Japan in March 1996. The product almost immediately gained a 10 percent market share. Within three months the product's share had increased to 15 percent, and by year-end it was close to 18 percent. Because of strong demand, P&G was also able to raise prices as were the retailers that stocked the product, all of which translated into fatter margins for the retailers and helped consolidate Joy's position in the market.

http://www.pg.com

Source: G. de Jonquieres and C. Bobinski, "Wash and Get into a Lather in Poland," Financial Times, May 28, 1992, p. 2; "Perestroika in Soapland," The Economist, June 10, 1989, pp. 69 - 71; "After Early Stumbles P&G Is Making Inroads Overseas," The Wall Street Journal, February 6, 1989, p. B1; C. A. Bartlett and S. Ghoshal, Managing across Borders: The Transnational Solution (Boston, MA: Harvard Business School Press, 1989); and N. Shirouzu, "P&G's Joy Makes an Unlikely Splash in Japan," The Wall Street Journal, December 10, 1997, p. B1.

Introduction

In the previous chapter, we looked at the roles of global manufacturing and materials management in an international business. In this chapter, we continue our focus on specific business functions by examining the roles of marketing and research and development (R&D) in an international business. We focus on how marketing and R&D can be performed so they will reduce the costs of value creation and add value by better serving customer needs.

In Chapter 12, we spoke of the tension existing in most international businesses between the needs to reduce costs and at the same time to respond to local conditions, which tends to raise costs. This tension has been a persistent theme in most chapters since then, and it continues to be in this chapter. A global marketing strategy that views the world's consumers as similar in their tastes and preferences is consistent with the mass production of a standardized output. By mass producing a standardized output, the firm can realize substantial unit cost reductions from experience curve and other scale economies. But ignoring country differences in consumer tastes and preferences can lead to failure. Thus, an international business's marketing function needs to determine when product standardization is appropriate and when it is not. Similarly, the firm's R&D function needs to be able to develop globally standardized products when appropriate as well as products customized to local requirements.

We consider marketing and R&D within the same chapter because of their close relationship. A critical aspect of the marketing function is identifying gaps in the market so that new products can be developed to fill those gaps. Developing new products requires R&D; thus, the linkage between marketing and R&D. New products should be developed with market needs in mind, and only marketing can define those needs for R&D personnel. Moreover, only marketing can tell R&D whether to produce globally standardized or locally customized products. Academic research has long maintained that a major factor of success for new-product introductions is the closeness of the relationship between marketing and R&D. The closer the linkage, the greater the success rate.¹

The opening case illustrates some of the issues that we will be debating in this chapter. Many of P&G's problems in Japan were caused by a failure to tailor its marketing strategy to the specific demands of the Japanese marketplace. P&G learned from its experience with disposable diapers and laundry detergent that a marketing approach that works in one context won't necessarily work in another. The company's subsequent success with Joy drives home the point that in many consumer product markets, it is important to customize the product offering, packaging, and advertising message to the specific needs of consumers in that country. Joy was developed by Procter & Gamble's R&D staff in Kobe, Japan, specifically to meet the evolving needs of Japanese consumers. This illustrates the benefits of locating R&D activities close to the market for the product when that market demands a customized product offering.

But it would be wrong to generalize too much from this case. For other firms in other industries, it may make sense to pursue a global strategy, producing a standardized product for global consumption, and using the same basic market message to sell that product worldwide. Some product markets are truly global in their reach. The market for semiconductor chips, for example, is a global market where consumers demand the same standardized product worldwide so a global marketing strategy, supported by a global R&D strategy, might make sense.

In this chapter, we examine the roles of marketing and R&D in international businesses. We begin by reviewing the debate on the globalization of markets. Then we discuss the issue of market segmentation. Next, we look at four elements that constitute a firm's marketing mix: product attributes, distribution strategy, communication strategy, and pricing strategy. Themarketing mix is the set of choices the firm offers to its targeted markets. Many firms vary their marketing mix from country to country depending on differences in national culture, economic development, product standards, distribution channels, and so on. The chapter closes with a look at new-product development in an international business and at the implications of this for the organization of the firm's R&D function.

The Globalization of Markets?

In a now-famous Harvard Business Review article, Theodore Levitt wrote lyrically about the globalization of world markets.² Levitt's arguments have become something of a lightning rod in the debate about the extent of globalization. According to Levitt:

A powerful force drives the world toward a converging commonalty, and that force is technology. It has proletarianized communication, transport, and travel. The result is a new commercial reality--the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude.

Gone are accustomed differences in national or regional preferences... The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation. The multinational corporation operates in a number of countries and adjusts its products and practices to each--at high relative costs. The global corporation operates with resolute consistency--at low relative cost--as if the entire world were a single entity; it sells the same thing in the same way everywhere.

Commercially, nothing confirms this as much as the success of McDonald's from the Champs Elysees to the Ginza, of Coca-Cola in Bahrain and Pepsi-Cola in Moscow, and of rock music, Greek salad, Hollywood movies, Revlon cosmetics, Sony television, and Levi's jeans everywhere.

Ancient differences in national tastes or modes of doing business disappear. The commonalty of preference leads inescapably to the standardization of products, manufacturing, and the institutions of trade and commerce.

This is eloquent and evocative writing, but is Levitt correct? The rise of global media such as MTV (see the accompanying Management Focus) and CNN, and the ability of such media to help shape a global culture, would seem to lend weight to Levitt's argument. If Levitt is correct, his argument has major implications for the marketing strategies pursued by international business. However, the current consensus among academics seems to be that Levitt overstates his case.³ Although Levitt may have a point when it comes to many basic industrial products, such as steel, bulk chemicals, and semiconductor chips, globalization seems to be the exception rather than the rule in many consumer goods markets and industrial markets. Even a firm such as McDonald's, which Levitt holds up as the archetypal example of a consumer products firm that sells a standardized product worldwide, modifies its menu from country to country in light of local consumer preferences.⁴ And as we saw in the opening case, although Procter & Gamble may sell dish soap, disposable diapers, and laundry detergent worldwide, and although it may use the same brand names worldwide (e.g., Pampers for diapers), it still customizes the final product offering and marketing strategy to the conditions that pertain in individual national markets.

Levitt is probably correct to assert that modern transportation and communications technologies, such as MTV, are facilitating a convergence of the tastes and preferences of consumers in the more advanced countries of the world. The popularity of sushi in Los Angeles, hamburgers in Tokyo, and grunge rock almost everywhere, support this. In the long run, such technological forces may lead to the evolution of a global culture. At present, however, the continuing persistence of cultural and economic differences between nations acts as a major brake on any trend toward global consumer tastes and preferences. In addition, trade barriers and differences in product and technical standards also constrain a firm's ability to sell a standardized product to a global market. We discuss the sources of these differences in subsequent sections when we look at how products must be altered from country to country. Levitt's globally standardized markets seem a long way off in many industries.

Market Segmentation

Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Markets can be segmented in numerous ways: by geography, demography (sex, age, income, race, education level, etc.), social-cultural factors (social class, values, religion, lifestyle choices), and psychological factors (personality). Because different segments exhibit different patterns of purchasing behavior, firms often adjust their marketing mix from segment to segment. Thus, the precise design of a product, the pricing strategy, the distribution channels used and the choice of communication strategy may all be varied from segment to segment. The goal is to optimize the fit between the purchasing behavior of consumers in a given segment and the marketing mix, thereby maximizing sales to that segment. Automobile companies, for example, use a different marketing mix to sell cars to different socioeconomic segments. Thus, Toyota uses its Lexus division to sell high-priced luxury cars to high-income consumers, while selling its entry-level models, such as the Toyota Corolla, to lower-income consumers. Similarly, personal computer manufacturers will offer different computer models, embodying different combinations of product attributes and price points, precisely to appeal to consumers from different market segments (e.g., business users and home users).

When managers in an international business consider market segmentation in foreign countries, they need to be cognizant of two main issues--the differences between countries in the structure of market segments, and the existence of segments that transcend national borders. The structure of market segments may differ significantly from country to country. An important market segment in a foreign country may have no parallel in the firm's home country, and vice versa. The firm may have to develop a unique marketing mix to appeal to the unique purchasing behavior of a unique segment in a given country. For example, a research project published in 1998 identified a segment of consumers in China in the 45-to-55 age range that has few parallels in other countries.⁵ This group came of age during China's violent and repressive Cultural Revolution in the late 1960s and early 1970s. The values of this group have been shaped by their experiences during the Cultural Revolution. They tend to be highly sensitive to price and respond negatively to new products and most forms of marketing. The existence of this group implies that firms doing business in China may need to customize their marketing mix to address the unique values and purchasing behavior of the group. The existence of such a unique segment constrains the ability of firms to standardize their global marketing strategy.

In contrast, the existence of market segments that transcend national borders clearly enhances the ability of an international business to view the global marketplace as a single entity and pursue a global strategy, selling a standardized product worldwide, and using the same basic marketing mix to help position and sell that product in a variety of national markets. For a segment to transcend national borders, consumers in that segment must have some compelling similarities along important dimensions--such as age, values, lifestyle choices--and those similarities must translate into similar purchasing behavior. Although such segments exist in certain industrial markets, they are rare in consumer markets. However, one emerging global segment that is attracting the attention of international marketers of consumer goods is the so-called global-teen segment. As noted in the Management Focus on MTV, the global media are paving the way for a global teen segment. Evidence that such a segment exists comes from a study of the cultural attitudes and purchasing behavior of more than 6,500 teenagers in 26 countries.⁶ The findings suggest that teens around the world are increasingly living parallel lives that share many common values. It follows that they are likely to purchase the same kind of consumer goods and for the same reasons. Even here though, marketing specialists argue that some customization in the marketing mix to account for differences across countries is required.

Product Attributes

A product can be viewed as a bundle of attributes.⁷ For example, the attributes that make up a car include power, design, quality, performance, fuel consumption, and comfort; the attributes of a hamburger include taste, texture, and size; a hotel's attributes include atmosphere, quality, comfort, and service. Products sell well when their attributes match consumer needs (and when their prices are appropriate). BMW cars sell well to people who have high needs for luxury, quality, and performance, precisely because BMW builds those attributes into its cars. If consumer needs were the same the world over, a firm could simply sell the same product worldwide. However, consumer needs vary from country to country depending on culture and the level of economic development. A firm's ability to sell the same product worldwide is further constrained by countries' differing product standards. In this section, we review each of these issues and discuss how they influence product attributes.