Good morning, everyone. Thank you very much for taking the time to attend Kao's DX strategy briefing session despite your very busy schedule. I am Yoshihiro Murakami, in charge of digital transformation at Kao. Again, thank you for joining me today. Please take a look at this slide. We asked you to fill out a questionnaire after the financial results briefing held in May. In that survey, we received many questions for today's DX briefing.
I thank you for all the questions. There were some common topics. I will first talk about the three points that many of you were interested in to facilitate your understanding of our strategy. After covering those three points, I will give a presentation of our DX strategy. The three points are, first, the scale of digital investments and future investment plans. Second, explanation behind return on digital investment.
Finally, Kao's competitive advantage in DX. I will walk you through these three points in particular about the responses to other questions you've written on the survey are mostly covered in the presentation to follow. First, the scale of investment. Digital investment in FY 2023 was approximately JPY 35 billion. Our digital investment is managed in three major categories.
The first category is so-called core systems such as SAP. The second category is more or less the fixed costs, which we refer to as run the business. The third is DX investment, which is basically digital IT investments to advance ourselves. The breakdown of last year's investment was about one-third each. Here is the image of our investment plan toward 2027. In the area of core systems, you may know about the next generation version of SAP called S/4HANA. Our investment in S/4HANA will almost be completed.
The investment in this category will decrease slightly in 2027. On the other hand, we plan to aggressively increase our DX investment. Compared to the past four years, the total investment will increase moderately. We also received a question about the scale of investment compared to the competitors in the industry. Last year, the ratio of digital investment to sales was 2.3%.
The average for global consumer goods manufacturers reported by Gartner is 2.5%, so our digital investment is roughly on par with the industry average. Let me talk a little about ROIC management of DX investment. As you can see, ROIC is managed using the numerator and the denominator. Needless to say, the denominator is DX investment. One important point is the efficiency of operations. By reducing operational costs, the denominator can be reduced.
The numerator is related to value creation and is managed from both the management and business perspectives. Here is a more detailed breakdown. Digital technology is merely a means to an end, and different departments are tackling with inventory and waste reduction, workforce optimization, and operation efficiency using digital technologies. By reducing constraints, waste, inconsistency in these areas, the denominator can be reduced.
The numerator pertains to management. The strategic price increase that was implemented since last year is one example that illustrates what management can do on the numerator side. Regarding the management component, we are improving the quality of decision making. On the business side, we think about how to create new value and expand LTV or lifetime value, which entails activities to generate profits by building deep and long-term relationships with each customer. The business side also includes rapid global expansion.
If you can keep this slide on the back of your head when you listen to my explanation, I think you'll find it easy to follow my presentation. Another frequently asked question was on the competitive advantage and strength of Kao's DX. In a nutshell, our strength is Kao's version of data lake called Kao i-Lake. It is so important that it is akin to our heart. I will talk about i-Lake later.
It is not well known, but in our long corporate history, we have been promoting data management from early on. As you can see on the left, we deployed a large-scale computer called UNIVAC in the 1960s. As early as 1979, we made it possible to view market and sales data on the fly. The latest cloud-based data lake called i-Lake, which I will talk about later, was actually conceived in 1993.
In other words, we have been planning i-Lake for 30 years. We also introduced SAP 20 years ago and used it to standardize our global operations. Six years ago, we started full-fledged operation of the current Kao i-Lake. Another important component is human capital. In the 1980s, the Knowledge and Information Science Research Lab, the Mathematical Sciences Research Lab, and the Kao System Engineering School were established, and digital IT researches and talent development have been conducted at those institutions.
The term data scientist is becoming a buzzword these days, but we already established DBM back in 2004. We have been training data analysts from early on. We also started training extremely valuable DX personnel called citizen developers. I will explain about them later. Now, this is today's agenda. First, I will cover Kao's DX vision.
After that, I will talk about actions that are already starting to produce results, followed by current actions and wrapping up with future key actions. Firstly, Kao's DX vision. Let me start with this message. DX is a creative and disruptive initiative. Needless to say, we are now in a new era, the digital era. The rules of competition have changed dramatically. This is a statement that conveys how Kao will vigorously go through transformation in this day and age.
We want to discard old systems, practices, and past legacies that are no longer valid and challenge ourselves to redesign through digital technology. Take the example of management structure. We live in great uncertainties and unpredictabilities known as the age of VUCA. Kao has been practicing matrix management, which is very granular in nature. Is this style still acceptable today? Another example, the decision making.
In the past, it was often said that intuition, experience, and courage were the keys to decision making. Is that really the way to go in this day and age? What about Monozukuri? Kao places great importance on technology. However, is it really viable to continue taking the product out stance where products we manufacture are very technology-driven? How about customer relations?
Can we really offer value that is close to our customers while continuing customer relationship practice that is dependent on existing distribution channels? Don't we have to have more direct close relationship with our customers? We are aware of these issues, we want to use DX to transform ourselves. This is a one-page summary of our vision. Our strategy is to disrupt legacy systems and accelerate transformation into a global sharp top company through the power of digital technology and human augmentation.
We use the word augmentation here, which literally means expansion or evolution. It is a word that expresses our thoughts about how digital technology and Kao will interact with each other. Digital technology is, of course, evolving rapidly. Kao will use it to its full potential. I use this phrase with the hope that we can accelerate the transformation more vigorously by combining human imagination and problem-solving abilities while mastering digital technologies to strengthen our capabilities.
Digital technology has the power to disrupt the old and create new values while going through redesign. Today's presentation will be from the perspective of how we can incorporate the power of digital technology into Kao's business model to create new value. Here is the overall view of Kao's DX strategy. The design is, of course, human capital. Values are the Yoki-Monozukuri, which are ingrained in all our employees.
I will touch on this point a little more later. On this foundation of Yoki-Monozukuri, there are four main topics I want to cover today. These are the major pillars that we are working on in DX. We started DX in earnest in 2018, and we are starting to see some results. Those are the two shown on the left, one being the promotion of data-driven management, and another being the promotion of operational excellence, which is the pursuit of business efficiency.
Now we are working on enhancing the value of customer experience. Going forward, we will thoroughly pursue the rapid global expansion as our key DX initiative. I will talk about these four pillars in detail later, but through these initiatives, we will accelerate our transformation into a global sharp top company.
First, let me talk about the Yoki-Monozukuri cycle, which is the core of Kao's corporate activities. At the bottom you know our consumers and customers best. This is a very important activity that has been ingrained in all our employees. You see Yoki Koe on the slide, and an example of this is the ecosystem, which we can say truly represents Kao. It is a system that quickly feeds various inquiries and opinions from customers to various departments to expedite actions.
Through this mechanism, we improve the quality of our corporate activities. This is just one example. Another examples are home visit surveys and in-depth interviews we conduct when we manufacture an item. We also repeat product testing and get customer feedback. Getting to know consumers well through these systems is the starting point. In product development, we value essential research. It's very important.
We don't just make products, but in our research, we thoroughly unravel the mechanisms of substances and phenomena in the process. That's why we can develop good products. If you want to understand the essence of things in a process, monitoring is necessary. The monitoring technology we've developed leads to UX. The word UX is very popular now, but what it means is user experience and monitoring technology can be used to enhance UX. Kao provides customers with not only products but also various experiences.
For example, the monitoring technology we've developed during manufacturing, it can be converted to UX when communicating with our customers. Say, if you want to really know about skin when developing cosmetics, you must monitor skin in various ways. The information gathered can then be used for customers' UX, for example, in a skin diagnostic app. Or take the example of sunscreen.
How much sunscreen remains on your skin when applied is important. We conduct thorough research. When communicating with customers, you can leverage on the monitoring technology used during the research, and through an app, you can find out whether the sunscreen has come off or not. Essential research results are used in marketing in various ways too. This loop truly showcases the Yoki-Monozukuri cycle, which is our hallmark.
In the age of digital transformation, it is very important to run this Yoki-Monozukuri cycle at an ultra-high speed. We aim to improve both speed and quality. Of course, it is important to know consumers and customers best. In addition, however, in the digital age, the overwhelming majority of customer voices are scattered digitally. It is very important to collect those voices digitally and strengthen our ability to know our customers.
I will elaborate on it later, but it is crucial to collect customer voices stored on our platform called My Kao provides us with first-party data. By using digital technology, we can learn about customer voices on SNS and in e-reviews, handling overwhelming volume of data at overwhelming speed. By gathering our customer voices, we create good products.
I will talk about the examples of Essential research later, but the speed of research also increases overwhelmingly by using AI. I will talk more about it later. Through various activities such as marketing and sales, we increase the frequency of life value proposals, which is the value proposals to customers. We can truly make new value proposals that are personalized for each individual. The level of life value proposals will increase in both speed and quality.
When we advance Yoki-Monozukuri through digital technologies, the management side on the left can quickly visualize what is happening on the manufacturing side. Management can also quickly take relevant actions. I hope you got the image of our Yoki-Monozukuri. Next topic is human capital. First, citizen developers. You may not be familiar with this term, but their activities are a major strength of Kao's DX. Citizen developers are people who do not have specialized knowledge or skills in IT and are so-called non-IT employees.
They find business issues by themselves, use simple tools to create their apps, and improve business operations. Such employees are referred to as citizen developers. For example, please take a look at the bottom of this slide. During the pandemic, I'm sure you had to go through a hassle when you were infected with COVID-19.
You had to mail or call about 10 different places and deal with numerous factors such as close contacts. Kao was able to complete the entire process with just one app. Once you enter the information into this app, all the information was sent to all related parties. When much data was accumulated, it was visualized on the dashboard.
This system was created in no time by a citizen developer. Another example is shown on the left. Settling commuting expenses is quite cumbersome, a citizen developer created an app using gate entry and exit data. Thanks to this, we have saved an overwhelming amount of effort. If we had outsourced the development of this app, it would have taken multiple meetings, probably more than a month, and it would have cost several tens of millions of JPY.
One employee created this app in no time, it was built almost at no cost. Kao now has 1,500 citizen developers. That's an incredible number. There is a video from Microsoft introducing our activities, please take a look.
[Presentation]
Citizen developers are our gem. We plan to double that number to 3,000 by 2027. Another major pillar of our human capital development is a skill improvement program for all employees. We call it the DX Adventure Program. Until 2022, Kao had been promoting DX on a project basis, focusing on employees with relatively high digital literacy.
We decided to go ahead and promote DX company-wide, last year we started a program for all employees. The response from employees has been extremely positive, we are starting the program one after another. There are 13,000 employees, about 90% of them have already completed Level 1.
That's 12,000 people. We provide motivation to everyone in the form of open badges. Already, 12,000 people are challenging and studying for Level 2. For AI, Kao started to work on AI from the very early stage. Since spring in last year, generative AI became a buzzword in the world. We created Kao Version AI Chat in June. We have overcome security challenges to prevent information leaks, the environment for in-house use was ready in June, it was adopted in Europe, North America, and Asia later.
Today, our generative AI is available globally in extremely safe environment. AI can expand in more extensive applications, we launched AI Academy in April this year, this is open for all employees. This slide shows how we develop DX human capital. Let me explain actions that are already starting to produce positive achievement.
Promotion of data-driven management. JPY 25 billion. Since last year, the entire company, including businesses and the sales function, have been working on strategic price increases, this is a result of top line increase.
It was a remarkable result, being able to increase the price for the raw material cost increase, expand the market share concurrently. I'd like to explain how this achievement was supported by DX. The answer is data lake, as explained at the beginning. This slide shows the conceptual image of Kao i-Lake. Data in various division is integrated, turned into intelligence in Kao i-Lake. Many companies in Japan take on challenges in data lake, the successful case is limited.
In Kao, it is highly successful. Why? In unsuccessful cases, it is often pointed out that the siloed data is a cause of failure, this prevents the accumulation of data. The quality of data also matters. In our case, the initiative started in 2018, led by Mr. Hasebe.
There was a corporate culture of sharing data, which entire company embraced, and the quality of data handled by information system division is prominently high. To make data lake a success, high quality data is essential as they will be translated into the quality of output. As mentioned at the beginning, data-driven management of Kao, which has a robust track record, worked here as well. This enables us to view the global sales immediately and inventory monitoring.
S&OP is very important tool for sales and production for their supply demand adjustment. Marginal profit rate monitoring and Digital Clairvoyance to measure brand equity are also enabled. These are only a part of intelligence available. Another factor for us to make it happen is citizen developers, as mentioned before. Integrated data cannot be used without dashboard, ideas, and skills. 1,500 members of citizen developers are integral part of this initiative.
Let me come back to price increase. This time, we used this tool for successful price increase. This time, business and management collaborated in optimizing the price using dashboard of combination, including price market share, which need to be monitored against competitors, and financial contribution in addition to brand power. This slide shows a conceptual image. Model on the left is based on the instinct, experience, and courage without understanding of brand power.
It will not be successful with price increase. Both of market share and profit will fall. With the Digital Clairvoyance, and when the brand power of our product is strong and we know its price elasticity, even with a bullish price increase, we can improve both market share and profit. In the case of weak brand power product, we will increase price slightly and market share may decline, but we can secure profit.
In this case, it will be a matter of judgment whether we will increase price and accept the loss in market share and secure profit, or give up the price hike. Needs to be decided. This is just one example how it will lead to quick decision-making based on data-driven management. Besides this, in various divisions, we began to observe a number of new moves.
This is promotion of operational excellence, which started in 2018 in nine fields, and 27 project are already completed with improvement in efficiency in many divisions. This is never-ending activity, and many new project have launched. I'd like to share with you some of these examples in this occasion. I talked about the R&D before, and this is materials informatics with digital technology. In R&D, experiments are of vital importance, and it takes time. Digital technology dramatically improves efficiency.
This is example of chemical segment. In the case of cleaning agent for power semiconductors, previously, we have conducted enormous number of experiments, but now we are able to select the best surfactant from 877 species promptly. A case on the right is extraordinary. We reduced the labor intensity by one-thousandth, this is not the improvement of efficiency by twofold or threefold. On research front, these changes are already happening.
This is a case study of cosmetics business process transformation. Cosmetics business has many SKUs and many divisions are involved. Due to the repetitious code entry, misentry tends to happen. We have established a once only system reflecting Kao and KANEBO ways, and this is misentry free system after code is once entered. This ensures accuracy and improves the speed, reducing overtime by 20,000 hours a year.
I will explain marketing transformation, how digital technology is utilized in marketing, showing one case study. This is about the social listening tools to know customers and consumers by using digital technology. We can grasp the words going viral in social network or customers' searching behavior promptly. Previously, we used ad agency services, and it took time and cost. By adopting these tools, now marketers can know immediately the number and types of online reviews. For example, about Bioré Sunscreen in specific country.
We are now providing internal training to let them use these tools. Today, about half of marketers can use the tools. On much advanced level, we trained approximately 40 employees in data analyst training. Through these activities, we began to deliver some results in marketing. In addition to digital tools, the operational transformation is also essential.
We are shifting from conventional matrix method to scrum method, which also contributed to enhanced speed. I'll explain successful cases with synergy effect. In KATE, rather than simply selling lipsticks and eyeshadows, we encourage consumers to enjoy experience in digital virtual space and become enthusiastic fan of KATE.
Through this initiative, in a very competitive market, we gained share from 7% to 10%. In Bioré UV, we succeeded in typical digital tool use. We had a combination of test marketing, social listening tools, and the scrum system, and the market share tripled. In hair care, Merit got off to a good start, and Essential is getting better. The prominent change is speed. In one year, the concept for three new brands is completed with prepared materials. We are now ready to enhance three existing brands.
By the combination of scrum system and digital technology, we accelerated the speed of decision making. Third, current priority actions. Let me explain enhancement of the value of customer experience with two major initiatives.
The first one is the interactive platform, My Kao. We launched this in December 2022 and had a large number of visitors of 10 million in 2023. This is Kao's new digital platform to connect trajectory with consumers. This is a medium to send information, but at the same time, it has two important roles of creating Kao fans and new marketing platform. So here, I'd like to share a video with you.
[Presentation]
There's a video on creating fans. Of course, creating fans for product brand is important, but also we are striving to create fans for Kao. As you saw, extensive categories of Kao are our unique strengths, and we can provide value proposition to match the needs of individual using digital technology. With these, we like to take on challenge of maximizing lifetime value, LTV.
My Kao as a marketing platform. Upper part shows what we have been emphasizing in marketing activities, including collect the voices of consumers and dialogue with consumers. Lower part shows the potential drastically upgraded activities of My Kao through digitalization. In the video presentation, the process of accumulation of data, so-called first-party data, were presented, and that will be our assets. We continue to increase communities. Currently, we have four communities, and it will increase to 15 by the end of the year.
We create communities where various divisions of Kao, not only the business function, will have opportunities to talk with customers directly and learn from them. Previously, test marketing and sales required enormous effort, but it became much easier through My Kao Mall. We continue to improve the quality and the level of marketing by leveraging My Kao.
I have explained the initiative in Japan, but interactive platforms are already available in the U.S. and China, as creating fans and new marketing platform are important. We continue to expand in other countries gradually. Another initiative to improve customer experience value is implementation of precision monitoring technology. Skin and body condition varies one by one. One product may match one person, but may not match the other. Of course, if it fits you'll be an avid fan of the product and repeat customer.
If it doesn't fit you, unfortunately, you will quit using and may dump it. To avoid such cases, like-minded companies gathered to establish RNA Co-creation Consortium with istyle, KOSÉ, MatsukiyoCocokara, Kirin, Perfect, and Healthcare Systems. We are testing through POC, and we'll announce when we find any deliverables. As a first step, we have a case of implementation. We launched est Skin Athlete Gym in April this year.
This is a subscription model of annual fee of JPY 330,000. Through RNA analysis, we provide personalized precision solution for individual customer. Exclusive beauty expert will provide services via online and offline to create beauty. Next year, for a larger scale, we'll implement new business using RNA technology from SOFINA iP and Curél. Finally, future key action for K27. In DX for rapid global expansion, there are two perspectives.
First one is penetration in countries where we currently do business in terms of quality and scale. Another one is acceleration of expansion in newly developing countries. In these two perspectives, we identified five items. Blue one is the action to support local subsidiaries through cross-brand approach. At the bottom, DX talent development makes progress in Japan. We are working with companies outside Japan as well.
Interactive platform on the left is going to be deployed globally, as mentioned. Global S&OP, sales and operating planning, as mentioned, is clearly more advanced in Japan using AI. We consider how it can be deployed globally. Yellow one is the action by brand. Now let me explain the example of Curél. On the left, I'd like you to remind the effect of scrum system, which led the improvement of Kao business. I'd like to enhance the system using the digital technology.
This is a hub where all global employees involved in Curél can get together, including marketing, sales, and researchers. This is a multilingual hub. You can text in your language, and that is properly translated to the language of readers. Any brand guide, data, knowledge of success case, and community information can be shared.
To support the scrum system, we are creating this mechanism first in Curél, and this can be deployed in other brands easily. OMO modularization is shown on the right. This is online merges with offline. In the past, it took enormous effort for a brand to expand into a new country overseas. It was a huge job to negotiate with 200 brick-and-mortar retail stores, and it took a long time. Now using this OMO model, we can make a system to directly connect with consumers via B2C quickly, and we can start small with only one or two flagship stores.
Without negotiation with retailers, we can make flagship store on our own. Once we make this model, overseas expansion will be much faster. This is based on the business model of Molton Brown U.K. team, and their development is very quick. Now we are striving to deploy in Curél and put it into module. You can imagine some Japanese small emerging cosmetics brand, which are quickly expanding. We follow their suit. Outside Japan, we are a small brand.
By deploying this strategy, we'd like to contribute to the speedy business development through DX. This is the final slide. I have explained four major initiatives. Promotion of data-driven management and promotion of operational excellence, there is no end.
We continue to strive, and customer experience and global expansion are related to very important value creation, being a part of numerator of the formula, as explained at the beginning. We would like to support the acceleration leveraging DX. Thank you very much for your attention. This concludes my presentation. Thank you.