Background to the plan
In the 1960s, Kao carried out a bold sales company reform, breaking away from dependence on wholesalers and building a distribution structure that consolidated pricing control and sales data within the company through direct retailer transactions. This framework established long-term competitive advantage in the consumer goods market, and from the 1970s onward, Kao steadily built up capital investments and R&D capabilities to strengthen its cash flow generation.
In the late 1980s, cost reforms through TCR (Total Cost Reduction) were introduced, followed by EVA adoption in the late 1990s, continually updating management methodologies in response to changing business environments. Capital-efficiency-focused management became deeply embedded throughout the organization.
However, from the 2000s onward, declining overseas profitability and prolonged stagnation in the cosmetics business gradually slowed profit growth. While EVA functioned as a certain level of discipline from a company-wide perspective, situations emerged where it could not sufficiently visualize capital efficiency by business segment or prioritize growth investments. Reflecting on these shortcomings, Kao reassessed its approach to mid-term management planning, centering on structural reform and growth strategy. K27 was formulated in August 2023, with implementation beginning from FY2024.
Core management policy
Under K27, all businesses are re-evaluated using ROIC as the central metric, with improvement in capital efficiency and restoration of value-creation capability positioned as the top priorities. In the consumer goods business, Kao aims to leverage the brands, technologies, and distribution data accumulated over many years in an integrated manner, rebuilding a high-profitability model that does not rely on price competition to strengthen the foundation for stable cash generation.
Simultaneously, for overseas operations and the cosmetics business, a shift has been declared from scale-driven investment to selective investment emphasizing profitability and reproducibility. Management resources are concentrated on areas with growth potential, while structural reforms are pursued for businesses with unclear results, aiming to enhance company-wide cash flow generation. In other words, K27 is not a plan pursuing short-term revenue growth, but rather a management transformation oriented toward sustainably improving capital efficiency and balancing growth investment with shareholder returns.
Author's Questions
Why have Kao's past reforms failed to accumulate sufficiently as improvements in corporate value?
Kao has adopted progressive management methods for each era — including sales company reform, TCR, and EVA adoption — yet from the 2000s onward, declining overseas profitability and stagnation in the cosmetics business meant these did not translate into improvements in ROIC or stock valuation. Compared to past decision-making, what is K27 most trying to change from a corporate value perspective?
Can it truly be said that the premises for decision-making have shifted under K27 to see the reform through?
In past mid-term plans, structural reform and growth strategies were proclaimed while business continuity and incremental improvement remained the underlying assumptions. Can the ROIC-centric approach and business re-evaluation outlined in K27 be definitively stated as being based on premises that will not retreat mid-course, rather than being an extension of past approaches?
After an activist challenged K27, does Kao have the foundation to drive management reform through internal pressure rather than external pressure?
K27 was a plan formulated based on Kao's own problem awareness, yet subsequently an activist presented criticisms regarding capital efficiency and business structure. Rather than merely reacting defensively, can Kao use these criticisms as a catalyst to create internal tension and continuously update its management planning and decision-making going forward?