International Business Strategy

QUESTIONS:
1. Do Silicon Valley and Route 128 function as diamond-based clusters? Why
or why not? What are their similarities and what are their differences?
2. What caused the development, decline and resurgence of the two regions?
What is your understanding of the different explanations for the two
regions?
3. How have Silicon Valley and Route 128 helped the establishment of start-
ups?
4. Can the ‘success formulas’ provided by Silicon Valley and Route 128 be
adopted as templates for other, would-be clusters?

CASE
Case 3.2 Shiseido: becoming an insider in
the perfume business in France28
Initially founded as a pharmacy in Japan in 1872, Shiseido expanded into the
cosmetics business in 1897 by introducing a skin lotion. Shiseido then gradu-
ally expanded its product offerings in the makeup and skin care business. It
also started to expand internationally, entering the Taiwan market in 1957. By
the 1970s, Shiseido had established itself as the market leader in the make-
up and skin care business in Japan.29
However, Shiseido was still weak in the fragrance business. At that time,
Japan had a limited tradition of perfume use: the fragrance market in Japan
accounted for only 1 per cent of the entire cosmetics market, much lower than
the 30–40 per cent characteristic of most Western countries. Because of its
limited tradition of perfume use, Japan lacked domestic fragrance experts and
senior management with fragrance business experience.
Shiseido’s small domestic fragrance market did not prepare it adequately to
compete in the international market. In 1964, Shiseido launched the perfume
Zen in the US. Driven primarily by the marketing concept of ‘oriental mysteri-
ousness with a subtle fragrance’, Zen’s US sales increased rapidly because of
its novelty, but then quickly declined.
Because the fragrance market represented about 30–40 per cent of total
cosmetics sales in Europe and America, Shiseido’s lack of a significant position
in the fragrance market also created barriers for the firm to secure strong
distribution networks internationally. Thus, in spite of its limited domestic
experience with fragrances, Shiseido felt it had to develop strengths in the
fragrance business in order to become a truly world-class cosmetics company.

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 The nature of home country location advantages

In the late 1970s and early 1980s, Shiseido decided to learn more about the
international fragrance business. The lack of a favourable domestic environ-
ment in Japan pushed Shiseido to seek solutions in the very markets it wanted
to penetrate.
France was identified as the ideal place to gain expertise, because it was
the heart of the international fragrance industry. However, simply being in
France did not ensure that the firm would automatically gain access to the
local knowledge network. In fact, Shiseido had to spend a long time learning
how to become an insider in this industry.

Shiseido’s initial failures

In order to absorb French perfume development techniques, especially the

subtle interactions between laboratory development and consumer tests,
Shiseido established in 1980 a 50/50 joint venture with the French cosmetics
company Pierre Fabre S.A. Faced with substantial market hostility in France at
that time, Shiseido chose a joint venture as its entry mode in order to reduce
risks, especially in terms of potential financial losses. At the same time, in order
to collect information related to the fragrance industry, it also established the
Shiseido Europe TechnoCentre as the ‘eye’ of its headquarters in France. Japanese
expatriates were sent to the centre to collect vital local information and transmit
it to headquarters.
Unfortunately, the Japanese expatriates did not have access to the social net-
works required to gain deep insights into the complex and tacit knowledge
aspects of local perfume development and exploitation. Consequently, the infor-
mation transferred back to Shiseido’s headquarters tended to be superficial and
did not truly help product development in Japan. Gradually, Shiseido realized that
its strategies so far had not made it a player in France. Shiseido learned that, in
order to learn the intricacies of perfume development, it would have to become
an insider in the French fragrance industry.

Becoming an insider

To access the required tacit local knowledge, Shiseido decided to establish oper-
ations in France to develop and sell perfume in France, rather than simply
collecting information there. This involved extensive activity development in
France.

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Local operations (plants and salons)

In 1990, Shiseido established a 100 per cent subsidiary in Paris called BPI
(Beauté Prestige International) to develop and sell fragrances in France. In 1992,
Shiseido also set up a plant in Gien, a town south of Paris.
Shiseido also ran salons in France to learn how to provide beauty services. In
1986, Shiseido acquired two high-end French beauty salons, Carita and
Alexandre Zouari. Carita and Alexandre Zouari were among the top five salons
in Paris, the other ones being Alexandre Paris, Maurice Franc and Claude
Maxim. In 1992, Shiseido opened a prestigious parlour called Les Salons du
Palais Royal (‘Les Salons’) in Paris. These operations helped Shiseido under-
stand the world of sophisticated French customers and the importance of local
adaptation. At that stage, Shiseido’s products were of high quality from a
manufacturing perspective, but they lacked the cultural dimension of a fra-
grance as a story/concept, which was a crucial element driving French cus-
tomers’ tastes.
In 1992, BPI launched two perfumes branded after the names of their design-
ers: Eau d’Issey and Jean Paul Gaultier. The former was designed by the famous
Japanese fashion designer Issey Miyake and the latter by the well-known French
fashion designer Jean Paul Gaultier. Both products were manufactured at the
Gien plant and marketed to French customers.

Building local relationships

Shiseido used several techniques to build relationships with major stakeholders

in France, including celebrities, journalists, bankers and local communities.
First, Shiseido invited leading celebrities in Parisian high society to its recep-
tions held at ‘Les Salons’. For example, the celebrations at the 1992 opening of
‘Les Salons’ lasted two days, with numerous parties, including a reception for
journalists, a reception for VIPs and a reception for bankers. Such events at ‘Les
Salons’ were not only covered by articles in newspapers and magazines, but also
widely discussed in Parisian high society. The exposure in the media connected
‘Les Salons’ and Shiseido’s brands with sophisticated customers and supported
the firm’s efforts to establish its brands as premium fragrances. More import-
antly, this exposure helped Shiseido build strong linkages with beauty and
fashion journalists, local celebrities and bankers.
Second, Shiseido became actively involved in local communities, especially by
sponsoring various cultural events in France. For example, Shiseido was active as
a patron for the Festival International de Sully-sur-Loire, where Shiseido’s Val de
Loire factory was located. Such activities with local communities increased the
connection between Shiseido and French consumers.

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 The nature of home country location advantages

Local hiring

Rather than sending Japanese expatriates to direct its French operations,

Shiseido hired local experts to manage several important positions throughout
the value chain.
First, Shiseido hired a French creator, Serge Lutens, to craft Shiseido’s overseas
brand image. Before joining Shiseido in 1980, Lutens had worked for Christian
Dior for 14 years. Serge Lutens contributed substantially to Shiseido’s becoming
an insider in France, by designing ads and posters that created a mysterious and
artistic image for the firm. Even though his work was viewed as too indirect and
artistic in Japan, he achieved his goal: his work became well accepted in Europe
and America.
Second, a French CEO, Chantal Roos, headed BPI. Involved in launching the
famous Opium perfume when she was marketing vice-president of Yves Saint
Laurent, she was an expert in creative marketing and fragrances, and well known
in the French fragrance industry. It was very rare for a Japanese company to hire a
local person to head a strategically important subsidiary, but it was a wise move.
Chantal Roos brought to the company a much-needed creative and artistic culture.
She led Shiseido’s credible entry into the French fragrance industry by leading the
development of Eau d’Issey in 1992. Moreover, she insisted on creating a separate
BPI division in each host country to distribute BPI’s high-end fragrances.
Finally, Shiseido hired locally at its Gien plant. The plant, although managed
by a Japanese president, had a French vice-president. In 1998, the plant
employed only six Japanese expatriates out of 180 local full-time staff and 80
temporary workers. By 2005, Shiseido had 12 organizations in France, with 12
Japanese nationals out of 1,300 employees. The local hiring policy helped
Shiseido to become a true insider in France.

Local success

Although the major objective of the French operations was to plug into the local
fragrance knowledge, Shiseido did not assess its success simply based on the
amount of knowledge transferred back to Japan.
Rather, success was assessed by the company’s competitiveness in France
itself. Perfumes such as Eau d’Issey and Jean Paul Gaultier were launched first in
France and marketed first to French customers. These premium fragrances did
very well there. For example, Jean Paul Gaultier Le Mâle produced by BPI was the
leading brand among men’s premium fragrances in France, with a market share
of 4.8 per cent in that country in 2005. Among all fragrances in France, Jean Paul
Gaultier Le Mâle was ranked tenth in 2005 with a market share of 1.2 per cent.
This was good penetration, considering that the leading (down market) brand
Yves Rocher had a market share of only 2.6 per cent in the same year.30

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Similarly, the quality of the perfumes produced at the Gien plant was also
evaluated against the French standard of perfume quality. In this context,
Chantal Roos was very satisfied with the quality of Shiseido’s products when
benchmarked against high profile French rivals such as Christian Dior’s Svelte.

Local decisions
Shiseido granted substantial autonomy to BPI, because it realized that Japanese
headquarters lacked sufficient understanding of the French artistic style in the
fragrance industry. Therefore, product development, packaging and labelling of
BPI products were all performed by BPI and the Gien plant’s R&D division,
without intervention from Shiseido.

Subsequent developments

Brands such as Eau d’Issey and Jean Paul Gaultier have given Shiseido a solid
position in Europe, and some of the knowledge learned by the expatriates has
been transferred back to Japan for the development of future perfumes. In 1997,
Shiseido decided to spend $30.5 million building a new plant at Ormes, France,
to meet the expected rising demand in Europe for its fragrances and skin care
products.
In 2004, Shiseido ranked 14th in the fragrance business with a market share
of 1.8 per cent – still far behind L’Oreal Groupe, the market leader in fragrances
with a market share of 8.9 per cent.31

QUESTIONS:

1. How did Shiseido finally become an insider in Paris? What factors had
been instrumental to its initial failure?
2. What does Shiseido’s experience imply for those companies not born in a
cluster?
3. Which patterns of FSA development did you observe in the case?
4. Drawing on the discussion of Porter’s single diamond framework versus
the double diamond framework, what suggestions would you give
Shiseido to help it to develop further its perfume business?

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