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Reaping rewards of creative destruction

A keen commitment to innovation will set Kao Corporation apart from other consumer goods companies, says CEO and president Michitaka Sawada.

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'The concept of continuous innovation starts with breakthrough innovation; we need great new ideas for products that cause creative destruction. This kind of innovation changes the game.'

ECONOMISTS around the world have fashioned economic indices out of Big Macs, iPhones and a mug of Starbucks coffee. For fast-moving consumer goods (FMCG) conglomerate Kao Corporation's CEO and president Michitaka Sawada, however, the humble laundry detergent is just as telling a measure of how far a society has come.

"People living in countries in their early stages of economic development tend to look for a detergent that cleans," he says, speaking via a translator on the sidelines of the company's 50th anniversary celebrations in Singapore. "They tend to be labourers in physical roles who perspire on the job, or their children tend to play outside and get mudstains on their clothes. For them, cleaning power is key."

As societies develop, and people start moving into cities to take on office jobs, he continues, they start to look for beautifying qualities in their detergent, such as fragrance or anti-bacterial properties.

Finally, as societies reach a mature state of development, the people start to look at values that go beyond the product's physical dimensions alone, such as whether the detergent is environmentally friendly, biodegradable or efficient enough to help save water and electricity while being used.

"Cleanliness is the foundation of all human beings in their daily life. Whatever the country and the culture, this is a trend that is typical as societies continue to develop," Mr Sawada observes. "Homes were originally built to ward off the rain and shelter one from other changes in the weather, but as our living standards go up, homes continue to evolve. People's needs for cleanliness in the home also evolve, and they become increasingly important."

Like Japan, Kao Corporation's home market, Singapore society has reached a high level of development, where consumers are able to appreciate and understand high-value products, he adds, citing how "high-tech" household and beauty brands - such as the self-heating Megurhythm eye mask, Merries diapers and Laurier sanitary napkins - have rapidly taken market-leading positions among local consumers.

This is also why Singapore is often designated as the first overseas market for new product launches from Kao - be they from Kao's stable of Japanese brands such as Biore and Kate cosmetics that they hope to introduce to their American and European markets, or Western brands under the Kao distribution umbrella such as the John Frieda haircare range and Jergens bodycare series.

Says Mr Sawada: "Singapore is an excellent platform as it gives us a yardstick to how much a product is appreciated, or to collect feedback if there are things to be improved before we take a product further into the Asian market at large. The country is a melting pot, where people from various countries around the world gather together, the GDP is really high, and most importantly, people in Singapore can appreciate the high value of our products.

"No matter how good or valuable our products are, if nobody appreciates them in the right way, then the products would have no use." Hence, no expense is spared to get the message right, he says of the company's total annual investment budget of 300 billion yen (S$3.43 billion). "We will not shy away from investments needed to communicate these values."

With stiff competition from larger FMCG companies better known on the global playing field, it is a keen commitment to innovation that will set Kao apart, Mr Sawada believes: "We will use consumer insights and continuous innovation to compete with truly differentiated products that are compelling, while making sure they are price competitive as well."

Kao invests 4 per cent of its annual sales takings on research and development. In comparison, according to Mr Sawada, competitor FMCG companies currently spend about 2.5 per cent of annual sales on research.

Continuous innovation

In line with climbing sales, this annual R&D investment is a sum that has been increasing every year. Fom channelling 45 billion yen of capital investment towards building new plants and maintaining existing R&D facilities in Japan and abroad in 2012, the invesment went up to 55 billion yen in 2013, and 65 billion yen last year. This year, it is expected to top 86 billion yen, and "very soon", 100 billion yen, says Mr Sawada.

"The concept of continuous innovation starts with breakthrough innovation; we need great new ideas for products that cause creative destruction. This kind of innovation changes the game," he points out. "But we cannot stop there, we must follow up with step-by-step innovation. By that I mean a series of small but significant steps that keep our brands fresh in the marketplace. This involves incremental additions to value over time. After all, a product is not innovative if nobody uses it, and we are not in the business of creating fads. This cycle is essential for Kao."

This also ensures that Kao's employees are "not doing research for its own sake, but research that is creating value", he emphasises.

Mr Sawada should know. His own 30-year career at Kao has spanned both fundamental research and product development research, during which he spearheaded the development of the polymer materials used in the company's now ubiquitous Biore pore strips. He also led the re-engineering of Merries baby diapers as vice-president of Kao's sanitary products research laboratories a decade ago.

He was promoted to take charge of Kao's R&D division in 2006, before working his way up to the board of directors in 2008 and later, president and CEO of Kao in 2012. Today, Mr Sawada helps to shape policies and strategies for the Japanese FMCG industry as an active director of the Chemical Industry Association and Consumer Goods Forum in Japan, as well as chairman of the Japan Soap and Detergent Association and deputy chair of the Japan Cosmetic Industry Association.

Throughout his roles, he says, Kao's corporate core value of yoki-monozukuri has held fast as a guiding principle.

Visibly highlighted throughout the company's corporate website and annual report, and defined as "a strong commtiment by all members to provide products and brands of excellent value for consumer satifisfaction", yoki-monozukuri is a philosophy that goes beyond producing high quality products, Mr Sawada explains. It encompasses a commitment to enriching lives around the world by reducing environmental impact and resolving social issues arising from changing lifestyles, "which requires not just innovation, but the aforementioned spirit of continuous innovation".

On the global front, Kao is "proactively investing" in overseas markets - which now account for about 30 per cent of group revenue - to grow its global business, says Mr Sawada. The performance of markets such as Singapore, Taiwan, China and Hong Kong has "surpassed expectations" in the first half of this year, while Asean markets such as Thailand, Indonesia and Vietnam will, he hopes, continue to grow.

Last year, Kao announced a three-year plan to boost its business presence in Asean by investing about 20 billion yen each in Thailand and Indonesia to expand its manufacturing capacity as well as to launch new production lines, such as for fabric care, sanitary napkins and baby products, with the aim of raising regional sales to 10 per cent of the global total by 2018.

Thailand will be a centre for exporting consumer goods into neighbouring markets while the plant in Indonesia mainly supplies products to its domestic market, and a Vietnam facility exports skincare products back to Japan and several other markets.

Growth markets with big populations such as China and Indonesia are "fundamental" to Kao's future, Mr Sawada says. "Previously, we targeted upper tier consumers with premium products in these markets; now we are adding a strong emphasis on volume zones - categories with sizeable markets such as laundry detergents, sanitary products and diapers targeting mid-tier consumers. We intend to make use of our group's strength: our ability to deliver volume zone products that connect with consumers because they are easy to understand and meet clearly identified needs."

And the outlook for the 2.9 trillion yen company is, in its own books, looking rosy. In the company's latest 2014 annual report, sales is forecasted to rise 4.9 per cent in 2015, driven by growth from all sectors. The healthcare segment is expected to lead growth with an 11.2 per cent increase in 2015, followed by a a 3.5 per cent and 1.7 per cent growth in its fabric and home care, and beauty care sectors respectively.

Besides its personal care products, Kao has a lesser known chemicals arm that offers a variety of chemical products and services for industries such as ironing, electronics and agriculture, and raw materials for consumer products, which is expected to grow by 6.6 per cent in 2015.

Beauty products currently contribute 42 per cent of Kao's total annual sales, fabric and homecare products account for 23 per cent, and the healthcare segment 17 per cent of sales. Kao's chemical business accounts for 17 per cent of the group's income.

Overseas expansion is expected to pay off too. By geographic area, Kao's Asian sales are forecasted to grow 14.3 per cent in 2015; sales from American markets are expected to be up by 11.9 per cent, and European markets by 0.6 per cent.

While he acknowledges Japan's demographic trends - low birth rate and a greying society, and even asks, with a smile, if you concur - Mr Sawada isn't bearish on the economy's potential, and puts his name to his company's forecast of a 2.6 per cent sales rise from the Japanese market in 2015.

"Yes, Japan's market has reached its maturity, but it is a big mistake to think that when a population decreases, the market becomes smaller. This is a very wrong concept," he declares. "Such a society will have increasing beauty and health needs. If we can focus on these two areas, I believe the market for our products in Japan will continue to grow."

While the phenomenon of climate change is a pressing issue, with its impact keenly felt in Japan, Mr Sawada believes this is as much an opportunity as it is a challenge.

"Although we are putting in a lot of effort to stop global warming, climate change has an undeniable effect on Japan as a country," he says. Temperatures are rising, and Japan is becoming increasingly tropical in nature, with high humidity and high temperatures, not unlike its Asian neighbours located near the Equator. Hence he reckons that Kao can tap on its experience in selling products for the tropical Asian climates - where people perspire more, and require deodorants and other personal care products - to re-introduce such products back to consumers in Japan.

"People may say that the Japanese market is shrinking but we are taking this in our stride. We want to become a pioneering company that can trailblaze a new trend of growth in our domestic market," he says.

And it's not solely for profit.

Kao also gives back by funding research in ecologically conscious products. It was with this aim that the company invested 16 billion yen to found the 23,000 sq m Eco-Technology Research Centre outside of Osaka in 2011, a sustainability-focused research laboratory that studies the use of renewable raw materials such as plant-derived biomass, the development of non-edible oil plants and of technologies for water-saving products.

Through collaborations with consumers, business partners and other civic groups, Kao has also developed products designed to reduce environmental impact throughout the entire product life cycle, such as the Attack Neo series of liquid laundry detergents that conserve water, electricity and laundry time during each wash, as well as innovations that reduce water and energy usage in factory operations.

The company also participates in global sustainability panels such as the United Nations Global Compact and the Round Table on Sustainable Palm Oil, and sponsors educational initiatives such as the hand-washing stations at Disneyland theme parks to inculcate habits of hygiene and cleanliness among children from a young age.

"Our policy is that whatever changes are going on around us, we are determined to turn the tables around, to use these challenges to our benefit, and as opportunities for us to grow further. I would like to say that for the next five years, we are set to grow further. This does not only apply to our household products, which we are well known for, but also to our chemicals business," he declares.

Essence of the matter

The drive to find opportunities in obstacles is something Mr Sawada gleaned from a former president of Kao in the 1970s, Dr Yoshio Maruta, whom he credits warmly as a role model.

Then an applied chemistry master's candidate in Osaka University, Mr Sawada had two encounters with Dr Maruta that firstly prompted him to join the company in 1981, and later helped shape his outlook when he took the reins as Kao Corporation's president and CEO in 2012.

"I was most impressed when Dr Maruta told me not to look at things superficially, but to always try and understand and appreciate the essence of a matter," Mr Sawada recalls. "I specialised in chemistry in university. Chemistry, as you know, is a rather superficial subject. We get excited by visible changes, such as changes in colour or in shape. This is what we look out for in experiments.

"But Dr Maruta told me that if you would like to continue to research and study chemistry, you have to dig further into the essence of these changes, into their protons and atoms. At that point in time, not many people around me said that to me, it was very rare. Because of that, I felt very surprised, and also very impressed, because it is so true."

Whether in research or in managing the 33,000-staff company today, Mr Sawada uses the incident as a reminder to always get to the essence of any matter, he says.

"After coming into Kao, I felt that we have a wonderful corporate culture where people are very proactive, and not afraid of challenges. In fact they take on challenges courageously. This has motivated me to stay on as president, and I would like to continue to uphold this spirited corporate culture."

Even at 60, he feels that there is still work cut out for him at Kao, admitting frankly, though perhaps a touch too modestly: "Although we are well-known in Japan, globally we are not."

"I would like for us to have a global presence in the market and, in particular, for Kao to be known as a company that comes up with high quality, value-added products that really contribute to the betterment of this world," Mr Sawada says, adding, "even though, to some, we are 'just' a toiletries company".

Add to Mr Sawada's list, perhaps, also the company behind a new detergent economic index?


MICHITAKA SAWADA

President and CEO, Kao Corporation

1955 : Born in Osaka, Japan

1981 : Obtained Master of Engineering, Osaka University

CAREER MILESTONES

1981: Joined Kao Corporation

1999: Manager, Material Development Research Laboratories, Kao Corporation

2003: Vice-President, Sanitary Products Research Laboratories, Kao Corporation

2006: Executive Officer, Kao Corporation & Vice-President, Research and Development

2007: Vice-president, Human Health Care R&D Centre, Kao Corporation

2008: Member, Board of Directors, Kao Corporation

2012: President and CEO, Kao Corporation

OTHER INDUSTRY ROLES

Director, Japan Chemical Industry Association

Chairman, Japan Soap and Detergent Association

Deputy Chairman, Japan Cosmetic Industry Association

Director, Board of Consumer Goods Forum