Winners / Selection Rationale

Japan's Professional Hair Care Market

Milbon manufactures and sells haircare products for use and sale exclusively in hair salons. These haircare products fall under the larger cosmetics market together with skincare products, makeup products, perfumes, body soaps, etc. The cosmetics market in Japan came to 2.6 trillion yen (US$25 billion at 104 yen/US$) on an actual basis in fiscal year 2018. Of this total, haircare products accounted for 454 billion yen (US$ 4.4 billion), or 17.1% of the total cosmetics market. (*1)

The consumer hair care market makes products available to consumers through a broad network of retail stores, while the professional-use market supplies products exclusively to specialty stores like salons. The professional hair care market in Japan is estimated at 178 billion yen (US$1.7 billion) in 2019 on an actual basis, which accounts for approximately 38% of the total hair care market, according to one Milbon representative.

While many of the manufacturers that supply the professional-use market have also expanded their business into the consumer market, Milbon focuses solely on the professional hair care market, thus dealing exclusively with hair salons. The company's market share is estimated at approximately 17%, and Milbon has been leading the market since 1999.

(*1) Manufacturer shipments on a value basis. Yano Economic Research Institute, Press Release No. 2355, Feb. 5, 2020. According to the Survey of the Cosmetics Market (2019), "In FY2018, Japan's cosmetics market rose 4.1% year on year to 2.649 trillion yen as a result of continuing inbound demand and the introduction of high-performance products resulting in expansion of the market in all categories." https://www.yano.co.jp/press-release/show/press_id/2355, accessed on Nov. 25, 2020.

Unique Value Proposition

Milbon's value proposition is to "contribute to the increase of revenue and profits of hair salons" through its multifaceted support, and consequently, the company serves hair salons and stylists exclusively. Milbon employees not only sell their products but also provide comprehensive consulting services, including technical product support, salon management support, and the education and training of hairstylists.

Within the professional-use market, Milbon is narrowly focused on addressing the needs of hair salons. The company primarily manufactures and sells "haircare cosmetic products," such as shampoos. The consumer market makes up 60% of the total hair care market, and the scale of that market makes it appealing to manufacturers. However, it is Milbon's understanding that a trade-off must be made with regard to the consumer and professional-use markets. If the company were to sell excellent haircare products and hair coloring agents that consumers could use at home for professional-level results, consumers would make less frequent visits to their hair salons. This would lead to a decline in the professional-use market. Therefore, companies that cater to both the consumer and professional-use markets would face difficulty in sharing the same goal with hairstylists in growing this market. Such companies struggle to gain the trust and loyalty of hairstylists. Milbon believes that simultaneously pursuing both markets would involve a tremendous risk, in terms of both corporate image and the consistency of the company's corporate strategy.

In Japan, there were more than 250,000 hair salons in the fiscal year ended March 2019. (*2) Even though the number of hair salons has been rising at a pace of 1-2% per year, it is an extremely competitive market. Each year, approximately 10,000 salons (or about 4%) either open or close their businesses. The majority of these hair salons are quite small. Meanwhile, during that same period, the number of employed hairstylists totaled more than 530,000, (*3) and there were only 2.1 hairstylists per salon on average.

From among these 250,000 hair salons, Milbon targets those that can adapt to the changing times - "salons that have a strong desire to grow, and ones that resonate with Milbon's policies and measures." In product development, Milbon's researchers scientifically analyze and hone techniques that are limited to a few top professionals. By deconstructing and standardizing those innovative techniques and applying them to product development, the company enables every stylist who uses Milbon products to deliver consistently superior results to their clientele. Milbon's approach is highly trusted and approved by many haircare professionals. (Given that hair salons often carry haircare products from multiple manufacturers, it is vital for Milbon's growth to be chosen by hairstylists.)

Milbon also offers administrative and personnel management support to its salons. Among the hair salons Milbon works with, over 1,000 of them annually provide Milbon with their financial data free of charge. Milbon analyzes this data and verifies that the hair salons have achieved growth in revenue and profits. Although commercial distribution is conducted via salon-exclusive agents, this survey of management metrics enables Milbon to confirm that the company's own goals are being met. Financial data is important management information, and an outside company would normally have difficulty gaining access to such information. The hair salons' willingness to provide this data to Milbon exemplifies their trust and their approval of the company's commitment to helping them increase their revenue and profits.

With regard to pricing, Milbon's product prices are in the medium to high-end range, and compared with the competitors' products, many items in Milbon's product lineup appear expensive. Milbon's prices are justified, however, by the added value of a comprehensive support system for salons.

(*2) Ministry of Health, Labour, and Welfare. "Trends in the Administration of Lifestyle and Hygiene-related Facilities in FY2018" (as of the end of FY2018).

(*3) Same as above.

Unique Value Chain

The prominent features of Milbon's value chain are: product development, hair salon support, marketing, and employee training. The company provides training programs for its employees to help them develop a deeper understanding of hair salons. By cultivating employees who share salons' views, Milbon is able to realize its unique product development system and support for salons.

Milbon's beauty know-how is gleaned, in part, from hair designers who are highly trusted by their customers. The company reflects this know-how in its product development, through an in-house system called the "TAC Product Development System." (TAC stands for "Target Authority Customer.") Milbon develops its products through a "fusion of science and sensibility," a research and development process inspired by the creative approaches and expertise of professional stylists and realized through Milbon's advanced technologies and innovations. Milbon's product development specialists visit hair salons to learn and analyze the pioneering techniques and know-how of stylists to apply them to product development. Because all Milbon employees undergo training to acquire different haircare techniques and better understand hair salons and stylists, the product development specialists can also comprehend stylists' novel compositions.

Through the TAC Product Development System, the pioneering techniques and expertise of top-class hair designers are standardized and applied to product development, making them available to broader range of salons and stylists.

Milbon recognizes that hairstylists who have cultivated a loyal customer base have both unique approaches to interacting with customers and innovative beauty techniques In addition, some stylists combine a variety of products at the same time, while others use products in unconventional ways. These pioneering techniques and know-how encourage customer loyalty. To perform at this level requires exceptional technical skills and know-how. In the product development process, Milbon researchers treat product development and product usage (in other words, "know-how") as a package. The idea is to "standardize and universalize" this know-how or expertise to make it available to all stylists.

As a result of this process, the value of Milbon's products is not assessed merely by their quality, but also by the beauty know-how that comes with the product. By offering these products together with their expertise, hairstylists are able to offer more than just products. The salon customers enjoy personalized advice from stylists, their knowledge on how to take better care of their hair using those products, and the results that come with it. Those customers perceive such expertise as a significant added value to the products and find this added value appealing. Such interaction serves to strengthen the relationship between the hairstylist and the customer, and greatly contributes to value creation in the professional-use market.

The hair coloring agent "Ordeve" is one example of Milbon's successful product development. At the time of the product's launch, consumers were looking for more than simple differences in tone or brightness. Consumers wanted a luxurious feel with more dimension. The more accomplished hairstylists at the time were using a technique called "foiling" - sectioning the head of hair with aluminum foil, using multiple tones, and creating the desired texture and dimension. However, this technique was being utilized by only a limited number of hairstylists at the time. Milbon successfully standardized the "foiling" technique by identifying both the optimal processing time and the appropriate viscosity of the agent. At the same time, the company created a technical manual for "foiling" and used this to educate and support hairstylists. As a result, the "foiling" technique was made available to a broader range of hairstylists. By combining the product, Ordeve, the technical manual for "foiling," and their educational support, Milbon managed to help a larger number of hair salons to clearly differentiate their services from the hair coloring products available for home-use.

Milbon conducts research on hair-related topics such as how the hair and scalp change with age. Against the backdrop of Japan's aging population there has been a growing demand for a scientific explanation about what happens to the hair and scalp as people age. Customers at many hair salons also ask about how to deal with the negative effects of aging. However, the amount of existing research (including both published papers and presentations made at academic conferences) was limited. In order to unravel this question, Milbon began to research the hair and scalp in 2012 using a large synchrotron radiation facility known as "the Super Photon ring-8 GeV," or SPring-8. (*4) This facility is managed by the Institute of Physical and Chemical Research (RIKEN) and is located in Hyogo Prefecture, Japan. Moreover, Milbon has been studying changes in the hair and scalp of over 300 people each year since 2012. The company analyzes the condition of each subject's hair, as well as the changes in the subjects' hair and scalp that come with age. Results show that aging affects hair in a manner similar to its effect on bones. As is well known, osteoporosis increases bone porosity over time, and this same phenomenon was observed in hair and has come to be known as "hair osteoporosis®." (*5) Milbon is conducting further research on the hair and scalp, studying the hair of approximately 300 people annually at the SPring-8 facility. The findings of this research continue to be incorporated into the company's product development process. No other manufacturer of salon-exclusive beauty products has built such elaborate R&D operations.

(*4) Website for the "Super Photon ring-8 GeV," (or SPring-8). http://www.spring8.or.jp/en/about_us/whats_sp8/

(*5) These research results, from the report on "The 11th Meeting on SPring-8 Industrial Applications" (in 2015), received the Award for Excellence. The research on hair osteoporosis received First Prize at the 30th Conference of the International Federation of Societies of Cosmetics Chemists (IFSCC), held in Munich, Germany in 2018. Then, this research was awarded the "Encouragement Prize for Young People" at the 14th Conference of the Asian Societies of Cosmetic Scientists (ASCS), held in Hong Kong. This shows the high esteem in which these research results are held overseas. In the commercial-use and home-use industries, only a few companies are applying the results of research conducted using SPring-8 in new product development. These companies include Kao Corporation and Proctor & Gamble Japan, as well as Milbon.

The company distributes its haircare products to hair salons through a network of salon-exclusive agents who specialize in the professional-use market (with the exception of some products that are shipped directly from Milbon).

Upon request, the company will even ship an individual product overnight to the agents' distribution centers to respond swiftly to sudden requests from hair salons. Like Milbon, these agents deal exclusively with hair salons. Milbon's strategy to "contribute to hair salons' future revenue and profits" fits well with the contracted agents' strategy of expanding their own businesses. Milbon does not maintain a direct sales channel as this would leave hair salons outside of that sales channel.

Milbon's sales representatives visit their agents frequently to share information about the company's new services. As a result, agents can do more than merely supply hair salons with haircare and skincare products; they can also convey Milbon's strategies to these hair salons.

Milbon does not make its dedicated agents the sole custodians of the company's relationship with the hair salons, but it instead directly supports hair salons through its FP System. The FP System consists of teams of sales representatives, called "field salespeople," and beauty specialists, known as "field educators." The field salespeople visit salons to introduce products by giving technical demonstrations to explain how the products would benefit the stylists. The field salespeople explain the product's attributes from the perspective of a hairstylist. In addition to sharing the necessary product information, they also extend business support to hair salons and make proposals to the salon's owner and manager to help them solve their business challenges. Meanwhile, the field educators teach hairstylists advanced hair design techniques and train the salon's newly hired hairstylists.

Milbon employees, who are divided into these two areas of specialization, work together to help hair salons increase their revenue and profits. For example, any issues identified by a field salesperson can be solved through multifaceted support from both the field person and the field educator. (This includes the technical support that field educators provide.) Most importantly, the support provided through this the FP System does not involve imparting one-way technical instruction. Rather, Milbon staff members work together with hair salons to solve the issues that salons face by providing the technical support necessary to ensure the salon's future growth. Thus, Milbon is not limited to sales calls to discuss the company's products and other sporadic interactions with the hair salons and their staff; Milbon instead acts as a partner to hair salons, nurturing its relationship with each salon with the aim of learning from and inspiring each other. In recent years, Milbon has begun developing salon-exclusive skincare products and has added "field cosmetic educators" to its workforce. The cosmetic specialists are responsible for providing instruction on skincare products to the hair salon staff.

While Milbon's competitors often hire mid-career professionals with technical expertise to provide technical support to hair salons ─ or even outsource their educational support ─ the company's FP System relies solely on employees who joined Milbon straight out of university. (*6) Because Milbon offers extensive training programs for its newly recruited university graduates and cultivates its own field educators, it has far more educators than its competitors. Moreover, those field educators possess in-depth, first-hand knowledge of Milbon's strategies and products, enabling them to provide high-quality customer service.

(*6) In the administrative and management departments and the general affairs section of the Sales Offices, some of the new hires are mid-career professionals.

Through its own proprietary method of customer mapping, Milbon divides hair salons into different categories to determine the FP System's support activities. The company analyzes and maps the salons using information gained through salon visits made with Milbon's agents, as well as information shared by the agents. Milbon refers to this entire process as the "Field Activity System." Furthermore, the president himself visits more than 400 hair salons annually, both in Japan and overseas. He uses this opportunity to speak directly with the salon owners and get their feedback.

he policies devised for each market are comprehensive, and are based on an analysis of the macro-economic environment, demographic movements, and market trends. The policies are first presented to Milbon's executives and later shared with the company's agents and hair salons at the annual "Policy Announcement Meeting."

The training program for new hires begins at the moment these individuals enter the company, and lasts a total of nine months. During this time, the new hires are not involved in sales activities, but instead focus solely on the training program. Regardless of their future role within the company, all new employees must spend their first three months attending the "Milbon Person Training Program." Here, participants learn about the hair salon business and develop a deeper understanding of Milbon's strategies. Milbon has developed its own proprietary specialist qualification system, whereby it formally authorizes an individual's successful acquisition of salon techniques. Following training in these techniques, employees must study until they pass their skill assessment tests. From there, the new hires will participate in six months of specialized training in line with their future roles. Field salespeople and field educators will work on acquiring advanced techniques and deepen their understanding of salon management. As part of this training, participants will receive on-the-job training in Milbon's sales operations.

Milbon heavily invests in its personnel training because of its commitment to supporting the growth of hair salons' revenue and profits. Milbon strongly believes that its support system can only be successful if employees maintain a certain level of expertise. While other firms in the industry welcome a high percentage of mid-career professionals as newly hired staff, approximately 85% of Milbon employees have joined the company as new graduates. As a result, a large majority of Milbon employees have attended the company's intensive training program. No other company can compare to Milbon's training curriculum: Milbon boasts the most extensive training program in terms of time, and no other company requires that all employees ─ from the sales staff to the R&D staff ─ acquire hair care skills.

The core of Milbon's competitive strategy is summarized in the "Milbon Way," a booklet that Milbon employees always keep at hand for reference. During the Milbon Person Training Program, the President himself teaches Milbon's philosophy to ensure that it is deeply engrained in each employee. In a survey conducted in fiscal 2019, employees were asked about their understanding of the company's business philosophy. The company's employees scored 4.13 points on a five-point scale. The average of all other companies participating in the same survey was 3.18 points. The Milbon employees' score indicates a very high level of understanding.

Fit among Activities

Milbon's activities have been optimized to best contribute to the growth of hair salons' revenue and profits. In this day and age, it is possible to find a cheap, 10-minute, haircut-only service (no shampooing and styling), and home-use hair treatments and coloring products are constantly being improved and relaunched.

Against this backdrop, it is necessary to ensure hair salons' continued growth in revenue and profits. The key is to provide consumers with both salon-exclusive products superior to those sold on the consumer market combined with an experience that is unique to hair salons and hairstylists. To provide this package of high-quality products and services, Milbon established two systems: the TAC Product Development System and the Field Persons System. Its TAC Product Development System supplies salon-exclusive products developed in tandem with the innovative techniques of cutting-edge hair designers. This system aims to ensure that different hairstylists can achieve the same impressive results so long as they use Milbon's products.

To better support hairstylists in using the products developed through the TAC Product Development System, Milbon also established its FP System. This system dispatches "Field Persons" (hereafter, FPs), who not only explain the products' features and provide instruction on their use but also support salons in improving their operations. In order to achieve both objectives, FPs must possess extensive knowledge beyond a mere familiarity with Milbon's products - they must be experts in professional hair care techniques and possess an in-depth understanding of the hair salon business.

Milbon's training program is designed to ensure its employees acquire such skills and expertise. While not all employees who undergo this training become FPs (some are assigned to R&D), all are committed to raising the added value of hair salons and contributing to the growth of hair salons' revenue and profits. FPs work closely with salons, as a partner, to help them grow their business. This system ensures a greater sense of achievement for the staff (compared with just selling the company's products), and a higher employee retention rate for Milbon, which in turn results in higher-quality services. Please refer to Milbon Co., Ltd.'s activity system map, which appears at the end of this report.)

Innovations That Enabled Strategy

• A comprehensive support system for hair salons entitled "The Field Person System."
• "The Field Activity System," through which Field Persons (field salespeople, field educators, and field cosmetics educators) provide support to hair salons.
• Milbon's unique "TAC Product Development System." The employees in charge of product development have a proficient knowledge of the techniques used by hair designers. These employees visit the hair salons, speak directly with hairstylists to identify their needs, and develop products based on an understanding of the successful techniques employed by hair designers.
• A logistics system that enables the delivery of even a single unit of a certain product. In 1990, when Milbon started this logistics system, the beauty industry was specifying minimum order amounts (on a unit basis), which burdened salons with excess inventory.
• Hair-related basic research, responding to the diversification of beauty needs. Even within Japan, it is extremely rare to find researchers who focus their research on the hair and scalp.

Trade-offs

• Does not sell products outside of the hair salon market and has foregone any involvement in the large-scale consumer market. Consequently, Milbon is less likely to get entangled in the intense competition of the cosmetics industry.
• Does not hire mid-career jobseekers as field salespeople or field educators.
• Does not make product sales a priority. Milbon's FP System "sells concepts, not products," and consequently, Milbon focuses on supplying customers with "concepts" through a proposal-based sales approach. More specifically, FPs provide technical support, know-how and salon management expertise, and make proposals to help salons solve problems and increase their revenue and profits. The company does not prioritize short-term sales, but rather cultivates an ongoing, long-term relationship that supports the professional growth of hairstylists. Milbon simultaneously demonstrates its staunch commitment to increasing the revenue and profits of hair salons. In this way, Milbon works to build a strong partnership with hair salons.
• Does not work on technological "seed" development. Under the TAC Product Development System, the R&D department does not seek to generate new "seeds," but rather utilizes the product development system to meet the customer's needs. In other words, this product development program focuses exclusively on the salons' "needs."
• Does not engage in any activities that do not directly translate into higher revenue and profits for hair salons. All activities are designed to contribute to the financial and professional performance of hair salons.

Consistency of Strategy over Time

Milbon has maintained the same value proposition since its founding in 1960: "Everything we do contributes to increasing revenue and profits for hair salons." The decision to manufacture and supply salon-exclusive products has not changed in the company's 60-year history, even though the company now operates in 13 overseas markets.

The core of Milbon's competitive strategy is summarized in the "Milbon Way," a booklet that all employees keep at hand. This booklet encompasses the business strategy of Ichiro Konoike, Milbon's founder, and was compiled in 2012 by Ryuji Sato, the company's current President and CEO. (Mr. Sato is Milbon's second president.) This booklet has been edited fives time to date, but the main essence of the original strategy has remained consistent and continues to be relevant despite the changing times.

The "Milbon Way" is best embodied by the company's FP System, Milbon's proprietary hair salon support system. This system was developed in 1984 when Milbon opened a training center and began to train its new employees. Since then, the company has been developing field salespeople and field educators with the skills required to help hair salons' increase their revenue and profits.

Launched in 1988, the TAC Product Development System has been the key to success for all Milbon's new products. The company develops its products through a "fusion of science and sensibility." Approximately 200 product lines have been generated under this system.

The hair coloring services of Japanese hair salons have been gaining popularity since the late 2000s. In order to achieve more sophisticated coloring effects, Milbon has cultivated "hair color specialists" among its field educators. These employees already possessed high-level skills. Noting hairstylists' desire to acquire cutting-edge techniques, Milbon developed further training aimed at deepening the hairstylists' understanding about chromatics, hair coloring, and the advanced use of chemical agents. Additionally, the Field Persons training program added "foiling," a novel technique used for hair coloring, to the curriculum to enhance its support to the salons.

In the 2010s demand for quality shampoo and hair treatment products grew among consumers. Accompanying this trend, hair salon customers began to seek more than just a selection of the salon's technical services - they also began inquiring about purchasing salon-exclusive products for home-use. As a result, the market for hair salons' retail sales has expanded considerably. The TAC Product Development System has responded to this growing consumer demand by developing Milbon's "Aujua," a comprehensive hair care system designed specifically for the hair-related conditions and concerns of Japanese consumers. The company then assigned "Aujua specialists" from among its field educators to teach hairstylists both advanced hair diagnostic measures and novel counselling methods to help customers grow comfortable discussing their hair concerns. The company has even established a qualification system for hairstylists to become certified "Aujua Sommeliers," and 3,273 people have become certified to date. Hair salons with a qualified "Aujua Sommelier" are listed on Milbon's website.

In recent years, customers have begun looking for hair salons that can provide all-around beauty services, including both haircare and skincare treatments. Milbon responded to this trend by forming a capital and business tie-up with the Japanese cosmetics company KOSÉ Corporation in 2017. Together, Milbon and KOSÉ have developed and launched a skincare brand specifically designed for hair salons. In line with these developments, Milbon began cultivating cosmetic specialists to enhance its support to salons via its FP System.

Meanwhile, a growing number of hair salon customers are requesting that Milbon's beauty products be sold online. To contribute to increasing salons' revenue and profits, a portion of the products available at hair salons can now be purchased online on an e-commerce site established by the company in 2019. This site is not available to the general public but serves only customers who have been issued an ID number by a registered hair salon. While Milbon ships the products directly to the customer, the sale itself is booked to the hair salon, as well as to the sales agent assigned to that salon.

In short, Milbon's dedication to increasing revenue and profits at salons has remained unchanged since its establishment. Moreover, the company has worked consistently to expand its support system for responding to the changing demands of salons and their clientele.

Profitability

Milbon saw its five-year averages for return on invested capital (ROIC) and the return on sales (ROS) exceed the industry average. (Profitability analysis was conducted by PwC Japan.)

Activity System Map of Milbon