Debt Ratio (Refer to Appendix G)
Over the past 5 year, Kao’s debt ratio has been decreasing. Currently the debt ratio stands at 39.18%. This means the company is reducing its leverage. Lower leverage would mean less financial risk and creditor commitments. Moreover lower leverage would translate into less interest payments. However, at present, 39.18% of the company’s assets are still financed through borrowings. This is still considered quite high and risky on the shareholders as in a case of liquidation; creditors would be paid first.
SWOT Analysis
Potential Internal Strength
Ability to discover consumers needs
Through the use of consumer orientated approach in its marketing strategy, Kao has been successful in satisfy its consumer. With specific efforts undertaken to obtain valuable feedback from consumers, Kao has constantly been able to keep track of changes in the consumer’s taste or needs and as such be the first to satisfy those needs in the market. Combined with Research & Development efforts, Kao is able to capitalise on the opportunities and gain competitive advantage.
Superior Research & Development
Currently Kao Corporation Research & Development efforts encompass a wide range of fields such as surface science, organic chemistry, polymer science, biological science and material science. At Kao Corporation, Research & Development work is on cutting edge technology which in turn enables Kao to develop new products that provide value and comfort to meet consumer’s needs. Moreover, Research & Development efforts is not only focused on making new products but also considering the product design and the convenience of packages through ergonomic improvements.
Strong Sales Force
In Japan, Kao Corporation has its own sales company system, which differs from other competitors. Kao develops close relations with the retailers. By co-operating and working together on many issues such as store shelves to make convenient for consumers to choose and purchase products, and also improve logistic efficiency through the use of EDI and ECR.
Effective Profit Management
Over a 5 year period beginning in 1995, managed to sustain profitable growth. In 1999, the Return on Equity ratio rose to a high of 7.68%. This continued profitability would aid Kao in its growth and expansion goals. Profits in turn will provide Kao with the required resources to develop superior products. Over the years, Kao has shown stability and sustain growth due to its effective profit management.
Established Brand Name
Kao Corporation has been in business since 1887, and by today Kao’s product is being marketed all around the globe. Kao’s product has managed to penetrate many markets and has gained the confidence of the consumers.
Wide Product Lines
Kao produces many different types of products. Kao has a very diversified product line including household detergents, skin care, and hair care and facial cleanser. Not only Kao’s product line diversified horizontally but also vertically. This means that within each product line would break down into many other products. Each product is aimed at a different segment of the market.
Large Capital
As of 31stMarch 1999, Kao’s capital stood at ?451,776 million. This will enable Kao to undertake any new profitable ventures. Large capital will provide the resources it needs to finance all expansion and growth plans.
High Liquidity
Since 1995, Kao Corporation’s Acid Test Ratio has been rising to reach a high of 101.67% in 1999. This shows that Kao’s liquidity has been strengthening and currently very strong. Strong liquidity would mean that it is able to meet all short-term financial obligations and in the short run should any adverse events turn up, Kao Corporation would be in a better position to survive the ordeal.
Reducing Financial Leverage
The debt ratio of Kao’s Corporation stood at 39.18% at 31 March 1999. Kao has been reducing its debt ratio over the past 5 years. This move will reduce the company’s financial commitments and financial risk.
Potential Internal Weaknesses
Multiple levelled distribution channels
As discussed earlier, Kao Corporation still utilises the conventional distribution channel. This causes the distribution channels to consist of more levels. As such this could increase the logistic cost in the system. This in turn causes higher prices for consumers and lower profitability for Kao Corporation. In addition, more levels in the distribution channel will cause logistic lag time to lengthen. Longer logistic lag time could cause lower responsiveness and other stock out cost at the point of sales.
Non Keiretsu Company
Currently, Kao Corporation is not a Keiretsu company like some of the successful Japanese firms. Keiretsu are very large and are able to enjoy huge economies of scale. Moreover Keiretsu have the ability to integrate forward and backward to reduce the power of buyer and supplier.
Reliance on Imports
Many of Kao Corporation’s subsidiaries outside of Japan depend on imports of raw material. This in turn makes these subsidiaries to be vulnerable to fluctuations in the Foreign Exchange Market. This is evident in the case of Kao Malaysia. When the Malaysian Ringgit depreciated drastically during the Asian Crisis, Kao Malaysia experienced significant increase in raw material cost. As such Kao Malaysia experience losses during the year 1998. Moreover imports are subjected to import tax and this could again cause cost to rise should the local government decides to increase taxes.
Relatively high leverage
Even though the debt ratio is showing a downward trend, it is still relatively high. At 31 March 1999, the debt ratio stands at 39.18%. This means that almost 40% of Kao’s assets are being financed by borrowings. As such this could cause the company to be bogged down by heavy interest and loan repayments.
Potential Environmental Opportunities
Emerging Markets
Many developing countries such as Malaysia, Indonesia and Thailand are fast becoming tomorrow’s Big Emerging Markets (BEM). These markets have potential to grow and will contribute a significant portion of the tomorrow’s world GDP. There could be an increase in demand in these countries for Kao products.
Downfall of Communism
In the 1990, the world saw the downfall of communism. The Soviet Union broke up and China began to open up its economy to the world. New countries such as Slovenia, Ukraine and China are new markets whereby Kao can market its product. Previously under communism it was hard for Kao to penetrate these markets but now that communism has fallen and capitalism is taking over, Kao can capitalise on this opportunity to expand its operation an a global scale.
Liberalisation and Free Trade
Currently the world is progressing towards free trade. Much of the efforts are being carried out by the World Trade Organisation (WTO). Free Trade would mean less trade barriers among countries. When tariffs and quotas have been removed, Kao Corporation will be able to operate more profitably.
E-commerce
All around the world, the Internet is gaining popularity. The latest development in the Internet is E-commerce. Many believe that E-commerce will be the future way of the business world. By selling product directly to the consumers through the Internet Kao Corporation can significantly reduce its distribution cost.
Changing Age Structure
In many countries, the population is said to be getting older. There is a slow down in birth rate but more importantly, Baby Boomers who were born just after the World War II are now ageing. Taking over, as consumers of the future are the Generation Xers. The generation born between 1965 to 1976 and are poised to have a big impact on the workplace and marketplace of the future.
Population Growth in Developing Countries
Developing countries like Malaysia is expected to experience population growth over the next few decades. As such increase in population would translate into increase demand for Kao’s products.
Potential Environmental Threats
Increase Power of Buyer
Today, there is a new trend of major retailers forcing manufacturers t manufacture products, on the retailer’s behalf using the retailer’s brand. This is already happening in U.K. where Tesco, which is one of the major retail outlets throughout U.K. is forcing manufacturers like Coca-Cola to manufacture soft drinks using Tesco’s name instead of Coke. If Coca-Cola disagrees, then Tesco will not carry Coke in their stores. This will cause a drastic lost of market share. Should this happen to Kao, then Kao would be forced to create another competitor which would undercut Kao’s prices or virtually no existent demand growth in Japan.
Intensifying Competition
Competition in the Fast Moving Consumer Product industry is intensifying both domestically and internationally. Kao is facing fierce competition such as P&G and Johnson & Johnson. These competitors are fast to introduce new products into the market by undertaking heavy Research & Development efforts. Moreover, the number of competitors are increasing, brands such as Shokubutsu body shower by Lion Corporation are fighting for the same piece of cake that Kao is competing far.
Country Risk
As Kao Corporation expands its operation worldwide it faces the risk of the foreign government exercising unfavourable policies such as domestication or expropriation of assets. When this happens, the firm will stand to suffer huge losses. Iran once expropriated all U.S. assets in the country. As a result, U.S. firms lost millions of dollars.
Forex Fluctuations
Being a multidomestic company, Kao’s profits can be adversely affected by foreign exchange fluctuations. The Asian Crisis was a perfect example of this. Moreover, over the years the Yen has been strengthening. This makes Kao’s products to be less competitive in the global market.
Recommendation
Internal Factor
External Factor Strengths
- Ability to discover consumer
need
- Superior Research &
Development
- Strong Sales Force
- Profitability
- Establish Brand
- Wide Product Line
- Large Capital
- Liquidity Weaknesses
- Many levelled distribution
channel
- Non-Keiretsu
- Reliant on Import
- High Leverage
Opportunities
- Emerging Market
- Free Trade
- E-commerce
- Changing Age Structure
- Population Growth SO Strategic
- Expansion
- New Product
- Globalisation WO Strategic
- E-commerce venture
- Vertical Integration
- Diversification
Threats
- Increase Power of Buyer
- Intensifying Competition
- Country Risk
- Forex Fluctuation ST Strategic
- E-commerce
- Superior Products
- Lower Cost/Price
- Vertical Integrate WT Strategic
- Hedging
- Acquisition/Mergers
- Strategic Alliance
- Divest/Turnaround
Table 1: SWOT Analysis Strategies
Now that we have seen Kao Corporation’s SWOT Analysis, we can now relates the 4 different elements together to form effective strategies for the company. Table 1 shows the key factors in each element, strength, weaknesses, opportunity and threats. Basically the strength and weaknesses makes up the company’s internal environment. The external environment on the other hand, consists of opportunities and threats. Internal environment is controllable by the firm where as the external environment depend on factors such as politics, economic, social and technology. By using the combining internal and external environment, we can obtain a basis for strategy formulation. The following are some of the strategy that we can formulate using SWOT analysis.
SO Strategies
As discussed earlier, there are many Big Emerging markets, particular in the Asian region, which are developing countries. These developing countries are experiencing population and economic growth. Thus, these markets are great opportunities for Kao to expand its market share. Moreover, with the newly born countries such as Slovenia due to the fall of communism, Kao can expand its operations into these markets. Kao has the capital and with its well-established brand name, the company should be able to successfully penetrate these untapped markets.
As for the change in global age structure and the upcoming of Generation Xers, this provides Kao an excellent opportunity to capitalise on the future. As Kao already has the ability to discover consumers needs, Kao should undertake efforts to understand the taste, needs and wants of the Generation Xers. Accompanied by Kao’s superior Research & Development capabilities to develop new products especially targeted at the Generation Xers. With the support of Kao’s strong sales force, Kao would be well position to obtain competitive advantage in the future.
Another important trend is the liberalisation of trade worldwide. With WTO, efforts to remove trade barriers, it is a golden opportunity for Kao Corporation to steer the company towards globalisation. By moving from a multidomestic company to a global company Kao Corporation can enjoy higher levels of Economies of Scale. Free Trade will ease Kao’s entry into countries, which previously impeded while the removal of tariffs and levies will increase Kao’s profitability.
WO Strategies
As we know one of Kao’s major weaknesses is the many levels in the distribution channel. This can be overcome through the use of the Internet and its E-commerce capabilities. E-commerce will link Kao directly to the consumers and this in turn will make it possible for Kao to reduce its logistic cost, as there would be no more middlemen cost. In addition, prices can be lowered due to no middlemen mark ups, thus an increase in consumer’s surplus.
Kao is one of the oldest companies in Japan and yet it is not as successful as some of the Keiretsu companies like Toyota and Mitsubishi. These companies are very well diversified with high levels of forward and backward integration. Keiretsus experiences a lot of cost savings and economies of scale. As the world economy is changing the future is very unpredictable. Kao Corporation should look into appropriate diversification plans, which could be related or totally unrelated to Kao’s core competencies. It is always a god idea not to put all your eggs in one basket. Moreover, Kao has the capital to achieve this in stages.
ST Strategies
In the fast evolving world today, many threats can be obstacle in Kao’s struggle to achieve ultimate success. First of all, in order to overcome the threat of powerful buyers, which can dictate unfavourable terms with Kao, Kao can capitalise on the exciting capabilities of the Internet. By using E-commerce, Kao can remove the need for retailers and as such reduce the threat of powerful buyers.
Another threat is intensifying competition. Increase competition means lower profitability. With more competitors fighting for the same piece of cake, Kao has to device ways of staying ahead of the pack. One of these is to use Kao’s superior Research & Development capabilities to develop new products before the competitors do. In addition, Kao should strive to lower its cost in order to increase its profitability. Through the use of Economic Value Added and Total Cost Reduction program, Kao can effectively lower its cost. However, this might not be sufficient. Kao has large capital and large capitals need proper management in order to obtain maximum profit for the company. At the same time lower cost and prices can help maintain the competitiveness of Kao’s products although the Yen continues to rise against the US dollar.
WT Strategies
While the weaknesses of Kao Corporation may not be on that is very serious, it can be significantly amplified with threats from the external environment. Fluctuating Forex can cause severe losses due to heavy reliance on raw material imports by Kao foreign subsidiaries. In order t counter this setback, Kao has to engage into financial hedging activities. Through the use of forward contracts and put/call options, the risk of Forex fluctuations can be significantly reduced.
As for the intensifying competition, Kao can try to merger or acquire a competitive firm. The acquired firm should be one that creates value for Kao Corporation. This would be especially beneficial if the acquired firm has a competitive advantage over Kao Corporation. However, this strategy could be quite capital consuming. Another alternative is to form strategic alliances with competitor for a mutual benefit. The idea is “if you can’t beat them, join them.” Strategic alliances can also be used to reduce the threat of buyers. By forming alliances with major retailers, Kao and retailers can stand to benefit from better understanding of each other’s needs and difficulties. Then together find a productive solution to the problem. Sometimes, business is not all about war, sometimes its about making friends who we can rely on.
However, in the unlikely case of severe economic turmoil and accompanied by severe competition, Kao has to try to employ a turnaround strategy. Depending on the situation, it could use offensive strategies which would include low-cost or adopting a new differentiation strategy. This strategy would require significant resources. In a worse case scenario it could have no choice but to harvest what it has left and exit the industry as soon as possible. These strategies are very negative in nature. In my opinion, the best strategy is to ensure that the company never comes to this stage.