Although demonstrating strong technical and new product innovation, Kao Corporation has had difficulty implementing administrative innovation with respect to developing new markets outside of Japan. In addition, Kao’s culture and organizational structure have created a relatively slow decision-making process potentially limiting the types of innovation and new products they will be able to implement effectively.
Kao’s “Paperweight” organization is a non-hierarchical, team-based structure promoting the fundamental philosophy of knowledge sharing and learning. Divided primarily along product lines, the inherent ambiguity of such a complex structure (further complicated by the Japanese cultural dislike of uncertainty ) is offset by Kao’s strong culture; in particular, zoawase or consensus decision-making practices.
It’s also interesting to note that Kao’s structure was not organized for a company wide expansion strategy, but was aligned on the product division axis. This structure has a handicap in its ability to leverage cross product synergies and also results in duplication of efforts in establishing international infrastructure for each product. In general, it is useful for coordinating product strategies, but there is little need to coordinate Kao’s products internationally when local markets are distinct.
A self-proclaimed “learning corporation”, there is some question whether everyone in the organization needs to know every piece of information. During the 1990’s, Kao operated at a 3% net profit margin while its competitors Unilever and Proctor and Gamble operated at greater than 7% and 5%, respectively . While a good fit for the Japanese culture, expansion into new markets overseas, may call for adapting to different decision-making styles to orient towards the other culture’s way of doing things.
Vertical Integration and Marketing
Kao operates in a very homogenous business environment. Vertically integrated from raw materials to production to distribution (hanshas), Kao optimally leverages the structure it consciously built over the last 100 years. Any deviation from the homogeneity is likely to be very expensive both from a cost and time perspective. In addition, the business structure in place will not adapt quickly to new needs.
The hurdles to enter into new products evidently are too big to compete successfully and in a timely manner. Entering newer markets with new products may get even more complicated. For instance if Kao were to expand into a new cosmetic product in a new market (e.g. Europe), it could not afford to rely on its raw material supply from its facility in Tokyo, because the logistics costs will outweigh the benefits derived from vertical integration.
Specifically, the marketing of shampoo in Thailand demonstrated a lack of decentralization, as the original marketing strategy was determined in Japan and the eventual solution required intervention by Japanese managers. The use of test markets, feedback from hanshas, and incremental improvement of marketing campaigns has been successful in Japan, but Kao lacks the network for feedback in new markets. While the establishment of a “liaison officer” is a good step towards local control of marketing, Kao realizes that more collaboration is needed.
Network/Cluster Formalization and International Divisions
Already implementing a team-based approach, formalizing a network/cluster design would be a good match for Kao in a domestic sense. Kao’s IT systems, which help assemble human resources from widely disparate parts of an organization and would coordinate their activities without constraints of time and space, already fulfill a key requirement for implementing network/cluster designs .
Innovation requires both strong organic and strong mechanistic components in an organization . Accepting that innovation will be performed by the organic network/cluster organization in Japan, Kao should develop its manufacturing through mergers and acquisitions (M&A) internationally, which allows them to control sources of supply for raw materials and distribution channels for new products and services. In addition, M&A would be a good option to acquire marketing knowledge in new regions. Finally, Kao should create International Divisions decentralizing marketing operations to allow control at the local level.
Interorganizational Design (IOD) with Worldwide Product Divisions
By adopting a hierarchical IOD design with ownership control, Kao can use M&As to expand into new markets. The hierarchy in the IOD design should be Worldwide Product Divisions. The proposed hierarchy leverages Kao’s current division along product lines and also calls for maintaining the status quo on its “multinational strategy by product divisions”. The primary difference in this design is clear-cut functions under each product division.
The IOD design lends itself to supplementing Kao’s vertical integration strategy (control of resources) by way of M&A in new markets. In addition, the IOD design is also open to adapting to potential joint ventures (JV) that Kao might want to pursue in Europe, following on the heels of success with Beiersdorf in Germany.
The hierarchical nature of the IOD (Mixed Worldwide Product Divisions) will extend the central domestic product divisions into international divisions. Product heads worldwide report to central product groups at headquarters. This way the strategies are centrally controlled while the operations can be locally tailored according to the needs in the foreign markets.
Furthermore, the “functional” component of the mixed design could be demarcated on the lines of R&D, Production, IT, Sales/Marketing, Logistics, HR, Legal and Finance. Some of the common functions like HR, Finance, R&D could be kept central outside of the product divisions. The benefits due to this design are cost-cutting due to better supervision and accountability, specialization of skills leading innovation in design, and development of new products. While this may lead to over specialization of skills, the benefits of employee focus, speed of response, cost savings and streamlined nature of the design may outweigh the potential complications.
Based on our analysis, we recommend that Kao implement a formalized cluster/network structure in Japan and International Divisions to decentralize the marketing function. In general, this is a formalization of Kao’s current strategy. Although not a radical solution, this design attempts to leverage off the current strong culture at Kao. The alternative strategy, although addressing a number of efficiency and expansion issues, may come in conflict with Kao’s current team-based culture and may prove difficult to implement. It goes without saying that Kao should create teams to implement these suggestions.
Learning and Integrated IT Systems
While the philosophy of Kao for building systems from scratch has its own merits in flexibility and scalability within Kao, it has downside in interfacing with external IT systems. Kao would be better off building its IT infrastructure based on an industry standard rather than developing its own standards and procedures simply because it may not be able to “handshake” with external systems of the future. It also appears that due to the tight integration amongst the systems, even a simple software change in one system can potentially impact other downstream dependent systems, thereby increasing the time and money to implement ongoing enhancements. Typically, expansion iinto new products requires changes in the IT systems, which will be a bottleneck for Kao.
Strong IT systems are required to support the complexity of cluster/network organizations . Since employees are the greatest source of knowledge within Kao, an inventory of employee skills should be created and maintained.
It seems KAO should restructure its sales and marketing operations to transition from a hierarchical, product-line division-based organization to locally controlled marketing teams as part of the International Division. Members from all geographic regions should participate in the cross-functional cluster/network teams to enable individuals to broaden their understanding of customers’ needs. This could be facilitated by implementing a training solution. All account team members, who represent several functional areas, should receive stand-up training in sales strategy, revenue, margins, inventories, and product specification.
New Product Development
KAO should first analyze their core skills based on history, location, maintenance, environment, and the fundamental business platform they provide for building future and better capabilities. Past success include improvements to already established product lines. Because Kao operates relatively slowly, developing “new”, disruptive products may not be possible, since they will generally sacrifice first mover advantage. Instead, Kao should focus on incrementally improving products within currently established product lines. We would suggest reconsidering the expansion into IT and floppy disk drives as potential diversions from Kao’s core business.
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 “Hoover’s Online – Historical Financials”, http://proxy.library.upenn.edu:8206/subscribe/ (accessed on February 2, 2004 through University of Pennsylvania Lippincott Library)
 Robey, Daniel and Sales, Carol A., Designing Organizations, 4th edition, Irwin-McGraw-Hill , Boston, MA (1994).
EMTM 555-Orgrnizational Behavior & Design: Case #2 – Kao Corporation