Michael Porter's generic strategies, five forces, and value chain analysis

Kao Corporation is one of Japan's leading manufacturers of household products, beauty products, computer storage discs, and more. Founded in 1890, the Kao Soap Company was first established to produce high quality soap. Fifty years later, the company diversified into laundry detergent, and then soon after expanded their product line to include dishwashing and household detergents (Ghoshal & Butler, 2004).

Over the next four decades, Kao was able to build upon their knowledge of technologies in fat and oil science, as well as surface and polymer science. They expanded their product lines to include cosmetics, hygiene products and floppy discs (Ghoshal & Butler, 2004). This vertically integrated company has quickly gained market share in many of its endeavors in the East; however, expansion in the West has been a long and tedious process. The future of Kao will depend on the company's continued ability to learn, their ability to remain flexible and adapt strategies efficiently and effectively, and their perseverance in completing their international expansion goals.

Kao's Strategic Agenda:

Kao has had phenomenal success in their efforts in the Japanese and South East Asian markets. They have been able to dominate most of the markets in Japan. It is the market leader in detergents, shampoo, disposable diapers, and cosmetics, with the exception of lipsticks, in Japan.

Yet, although Kao is active in 50 countries, it truly has not capitalized on these foreign markets, other than the neighboring countries of South East Asia. "In 1988, only 10% of its total sales was derived from overseas business, and 70% of this international volume was earned in SE Asia" (Ghoshal & Butler, 2004, p. 732). This is the most fundamental challenge that lies in Kao's way, how to take their successful Eastern approach and apply it so that it is effective in Western markets.

Kao's Competitive Position:

Kao's competitive position in the Eastern market is strong. They have been able to successfully and consistently gain market share from their competitors, in multiple industries. Kao has been able to take an evolutionary approach to strategy, as would be defined by Whittington. They are constantly evolving, understanding that what was appropriate for yesterday may be ineffective and inefficient today.

Kao's strong competitive position, in this region of the world, has been facilitated by their ability to address the paradox of logic vs. creativity. They are very analytical about how they develop new products and enter new markets, ensuring that each product will be well received, using logic to help them guide their positioning. Yet, Kao also relies on creativity to make those 'leaps of faith' necessary, such as entering the cosmetics industry to truly be innovative in the marketplace. They now need to expand this ability to meet the very different needs of globalization vs. localization.

SWOT Analysis:

SWOT Analysis of Kao allows further insight into their current positioning.

Strengths:

Kao has several internal strengths that has, and will continue to, serve it well. First, is their commitment to learning. This commitment to not simply accepting that they have a sound strategy in place, or stable product line with significant market share, is an attitude that fosters innovation and will continually provide a competitive advantage for Kao, despite industry imitators.

Second, is Kao's commitment to customer service. Not only is Kao committed to developing the finest products that meet their customer's needs, but they are continually redesigning these products to fine tune their product lineup and the features of their products. In addition, their customers are not simply the end users of their products, but the retailers who carry their products. By helping the retailers determine what products to carry, where and how to display them, and ensuring that their needs are met, they help the retailer be more successful, which leads to increased success at Kao.

Weaknesses:

Kao's primary weakness lies in their lack of experience in the international marketplace. This has hurt them, more than once, in doing business outside of Japan. In addition, their lack of human resources is certain to become a significant weakness, especially as the company continues to expand.

Opportunities:

There are many opportunities for Kao both abroad and at home. Most considerably is the opportunity to make a strong market presence in the Western worlds, especially in the United States. In addition, new product development, especially in high growth markets such as anti-aging products, both in Japan and overseas is an opportunity that would certainly be an attractive option, for Kao.

Threats:

The primary threat for Kao comes from its competitors and their possible ability to become more competitive in the South East Asian marketplace. This could considerably hurt their revenues. Also, certain products, such as Kao's floppy discs could become obsolete with advancements in technology.

PESTEL Analysis:

PESTEL analysis sheds further light on Kao's positioning. Political factors are noteworthy as tumultuous political trade relations could affect Kao's ability to operate, or operate profitably, in certain markets. Economic factors are important as well. If consumers have reduced discretionary income, they will look for more value for their money, and may discontinue purchases of unnecessary items, such as cosmetics.

Socio-cultural factors, as Kao has already learned are noteworthy, as each culture has unique habits that require customization of product lines. Technological factors have already played a role in Kao's success, as they are able to use their technological knowledge to develop the most innovative products.

Environmental factors will need to be considered as well, especially in the operation of their chemical and manufacturing plants, as society becomes more eco-friendly. And, legal facets will need to be considered, especially as each country has its own unique requirements and restrictions.

Michael Porter's Five Forces Analysis:

Using Michael Porter's Five Forces, one can better understand some of the pressures on Kao. There is intense rivalry among competitors in their industries. Organizations such as Proctor & Gamble and Unilever are constantly vying for Kao's market share.

There is also significant threat of substitutes. Consumers can turn to major competitors and there is also a trend to look towards more natural products. For this reason, end users do have a certain amount of bargaining power in the industry. However, as Kao is so vertically integrated, the bargaining power of suppliers is limited. And, barriers to entry, for new competition, on the scale of Kao's operations, are high and not a major force.

Michael Porter's Generic Strategies:

Kao uses a generic strategy of differentiation, according to Michael Porter's Generic Strategies. They take a unique selling position, as their competitive advantage. This includes the best quality products at reasonable pricing. This is industry wide, as they do not focus on niche market development.

Michael Porter's Value Chain:

In order to better understand the activities of Kao that lead to a competitive advantage, one can begin with analyzing the facets of the generic value chain. Inbound logistics is the first facet to be analyzed. Kao's inventory control system is of particular use in creating competitive advantage, as it allows for specific, on-the-fly information that helps adjust production numbers on a daily basis. This same technology facilitates outbound logistics as well.

The company's operations are also a source of advantage. Kao's unique organizational structure, including assisting other facilities when challenges arise is key to this source. Marketing and sales are also superior at Kao, with careful market testing before the full release of a product, such as with the Sofina line of cosmetics. And, their superior customer service, for both end users and retailers, add to their arsenal of competitive advantages.

Boston Matrix:

According to the Boston Consulting Group, there are four types of classifications when it comes to how to allocate resources to business units: cash cows, stars, question marks, and dogs. For Kao, business units that are currently established in Japan, such as their detergent, cosmetics, hygiene, and floppy disc units, are cash cows and require little investment to generate revenue. Instead, these revenues may be invested in their question mark business units, which include their international expansion of these same industries into the Western economies.