| Japan's Seasonal Factors Seasonal income flow & impact on consumer spending |
| Arbitrage & Consumers Law of "One Price" in consumer product markets |
| Japan Viewed from the Outside "Gai-jin," outsiders, views of Japan uncover new insights |
| Mobile phone usage habits -- Japan, China, U.S. JMR study finds culturally influenced patterns |
| Richard May -- interview on iTV Video clip -- marketing research trends in Japan now |
| Software-as-a-Service SaaS changes how you acquire software |
 Japanese-style management makes a comeback Hisakazu Matsuda |
|
What is behind the consumption recovery? In an earlier article, we investigated the non-income asset of external global factors in an article titled "Cool Japan". Corporate spending is another growth engine. Why are corporations enjoying a profit recovery? We propose a theoretical answer to the problem from the perspective of shifts in corporate strategy. That is, the return of the manufacturing industry, which is the backbone of Japanese industry, to a "new Japanese-style management". Our analysis excludes the financial and construction industries, which have their own unresolved structural issues. |
|
| A Shift to Strategic Management? |
|
| Strategic management attempts to predict the future of an uncertain and changing environment, define new management objectives, and redistribute and concentrate limited management resources to further these goals. A practical example of implementing strategic management is General Electric (GE). The 47-year-old Jeffrey Immelt, chairman and CEO, tells the story of the GE strategy for the 21st century: "Management practices in the future will be totally focused on growth; will be totally focused on how you can grow in a slow-growth world." Now, after setting new growth targets, we put forth four strategies that really enhance the value of GE. And those four strategies are first, to execute on a strong business model; second, to develop core growth initiatives that are really the foundation of management; third, to constantly improve our set of businesses to really make sure that we're in the best industries for the future; and lastly, to develop a great competency as it pertains to people, leadership and core values." (From Fifth Annual Nikkei Forum "Global Management Forum 2003", October 20, 2003, Tokyo, sponsored by Nihon Keizai Shimbun and others). By proposing this roadmap of solid, consistent logic, assuming that the future is uncertain, and meeting challenges by concentrating limited management resources, we can observe that the role of strategic managers is paramount. The investment logic during periods of difficult is consistent. In the United States, there is no longer a shred of dedication to the "manufacturing economy." Like Immelt, in the 1990s, most Japanese corporations measured uncertainty and set new business objectives, but ultimately were unable to show the leadership strategy to achieve these goals. The eminent business strategist and Harvard Business School professor Michael E. Porter described this by saying "Japanese corporations have almost no strategy" (1). Through management under monikers, such as selling good products at a low price, organizing corporate alliances, decentralizing decision-making and management by employees, he panned the acclaimed Japanese management style of the 1980s as "management without strategy." In the 1990s, most companies abandoned Japanese-style management and moved toward strategic management through activities such as concentrating on profitable businesses, relocating factories overseas, abandoning the concept of lifetime employment, implementing pay for performance systems, and prioritizing the shareholder. Were there strategic efforts behind the current earnings recovery? Porter would probably say "no" again. |
|
| Dedication to "Monozukuri" |
|
| The shift to strategic management probably was not tied to the corporate profit recovery. This can be confirmed through JMR's own timeline analysis. If so, what was behind this success? It was most likely the untiring 'dedication to skilled manufacture' unconstrained by investment logic. About 90% of all research and development is performed by manufacturing firms. In the economic recovery, the manufacturing industry is also driving growth in corporate profits and corporate spending. The primary drivers are digital home appliances, automobiles, and exports to China. Profits are recovering and capital investments are growing, especially for corporations such as automotive leader Toyota Motors, and information appliance and flat screen television digital home appliance manufacturers, such as Sharp and Matsushita Electronics Industries. Some 80% of this investment is marked for domestic projects. Behind this recovery is not strategic management, but a shift to "new Japanese-style management." This shift is characterized by a directional shift of management to be "dedicated to skilled manufacture." President Kunio Nakamura of Matsushita says, "Matsushita Electronics has strong manufacturing DNA and we see the manufacture of goods as the best way for us to continue to contribute to society." Toyota's Fujio Cho makes the same point in saying, "Cherishing your people is a very important unchanging value at Toyota that ensures that our endless challenge toward innovation will continue to produce positive results." Both comments were made in speeches given at the "Global Management Forum 2003." This dedication to skilled manufacturing, or monozukuri as the Japanese call it, and the gathering of human resources in the company is the same as the "human network" mantra of Japanese-style management. When we attempted to define the three characteristics of Japanese-style management: "distributed decision-making," "management by the employees," and "organizing corporate alliances," we found that these elements had changed significantly. If bottom-up and top-down was incorporated into distributed decision-making, top-down took precedence, there was no guarantee of lifetime employment, and business partners were restricted to cut costs. The trademarks of Japanese-style management had all but disappeared. However, the view of companies as not 'things' that can be bought or sold, but as 'the people,' remained. "Relentless innovation, concentrating on skilled manufacture, developing the people" -- can all be thought of as trademarks of new Japanese-style management. The basic difference is commitment to not the 'things,' but the 'people.' Dedication to skilled manufacturing reverses the trend of softening of society, advancement of the information age, and shift from goods-based to service-based economy. This is the logic behind strategic management, greeted by most Japanese people with empathy. In Japanese culture, there is a strong tradition for 'motion' and 'form.' The influence of traditional Japanese culture could be behind the commitment to skilled manufacture. However, this commitment is behind the shift in manufacturing from old Japanese-style management to new Japanese-style management, and the recovery of Japan's manufacturing industry is undisputed. |
|
| Resource Based View Strategy |
|
| According to Porter's view, this new management style is not a strategy -- it is only a continually improving business process. From a rational, logical perspective, new Japanese-style management is a strategy where a company excels in a certain product, service, or innovation, concentrates on human capital, and through the skills and teamwork of its people, builds a superior competitive position that cannot be imitated. This capability cannot be bought or sold; it is nurtured through the people and teamwork. A rival competitor cannot simply carbon copy the people and the teamwork. Simply choosing top-rated players for each position, for instance, cannot form a strong soccer team. Actual ability is determined by how well the players work together as a team. Teamwork is formed by the shared experiences of all players. This logic truly stands in opposition to Porter's view as well as the resource based view (RBV) strategy and the idea of "core competence," as coined by G. Hamel and C.K. Prahalad. It is the basic principle underlying the strategy for a company to determine core product areas where they hold strong advantage, and bolstering management resources that form this advantage to expand competence. First proposed by B. Wernerfelt (2), the idea was studied and developed as an alternative to Porter's competitive strategy in the 1990s. It states that to overcome external competition, companies must focus on internal competitive strength and competitive capabilities. From these different perspectives, one can see a strategy in Japanese-style management that is not-so-obvious from to those taking a Porter competitive strategy view of the world. |
|
| The Losing Pattern of Appliance Makers in the 1990s |
|
| As an actual example, take the digital home appliance market. In the 1990s, Korean companies like Samsung captured market share from Japanese electronics makers for products such as DRAM and mobile phones. The losing pattern was clear. In the volatile semiconductor market, Japanese manufacturers were able to beat American manufacturers in the 1980s because they built end-user products other than computers that used semiconductors. In a market where demand is greatly affected by the silicon cycle, making massive capital investments is highly risky. Japanese manufacturers were able to continue investing to satisfy internal demand win on cost competition. The opposite mechanism was at work in the 1990s. End-user semiconductor products had reached maturity. Unable to develop more end-user products, Japanese DRAM and semiconductor manufacturers were faced with shrinking demand. Through big government deals, Samsung and other Korean manufacturers captured an oligopoly over the domestic market and concentrated on DRAM core markets, making huge investments there. In stark contrast, in an overcrowded market, Japanese became more generalized, spread out their management resources, and resisted centralization. Losing technological advantage, Japanese manufacturers were caught up in global cost competition where competitor's products were cheaper but offered similar quality. Companies rushed to exit the market. In 1999, Elpida Memory Inc. was founded as Japan's only DRAM maker from Hinomaru with a joint investment from NEC and Hitachi. |
|
| The Winning Pattern of Digital Appliances |
|
First is the success of large-scale new product development. New products with the potential for massive demand were created. In the 1990s, the spread of broadband networks and digital technologies brought predictions that all household appliances would be networked. However, end products were slow to emerge. Jumbo flat screen televisions and DVD recorders were gradually developed to satisfy replacement demand. Manufacturers could see hope in escaping from the pattern of products that revolved around personal computers. There was movement away from "modular industry architecture" and standardization by Microsoft and Intel. Microsoft led the standardization of LCD computer displays and Sharp lost market share to Korea in cost competition, making the market unattractive. However, this shifted manufacturers' attention to big screen LCD televisions. It is clear that the environment was not amicable to Japanese companies, like modular industry being unable to freely innovate on non-computer-centered products. The poster child of modular industry was "Sun Microsystems," which cast off skilled manufacturing entirely (3). Nearly all digital appliance end-user products were new products developed in Japan. This is not competition of similar products. Second is the shift toward vertical competition. Japanese companies are engaging in high value-added vertical competition based on quality. Komatsu is selling well in China's construction boom. The quality is better than American or Korean manufacturers, and even though they cost more, construction workers think Komatsu's machines are worth it because they are more reliable and Komatsu keeps its delivery schedule promises. Some companies are specializing vertically, adding low value-added products for China while at the same time making capital investments to develop and produce high value-added products. Manufacturers everywhere are embracing this kind of vertical specialization within the company, changing to compete vertically from the low-end to the-high end. For instance, some companies have electric rice cooker product lineups with prices ranging from about 10,000 yen to 80,000 yen. Third is the birth of unique technological expertise. For Japanese appliance manufacturers, one of these is their "implementation technologies." This is the technology of integrating many components into a specific form, such as LSI semiconductors. This implementation technology makes possible exceptional designs under the moniker "lighter, thinner, shorter, smaller." One reason mobile phone market share leader Nokia is rapidly losing share in Europe is probably because it was late to adopt the folding (clamshell) design, and users began to perceive the conventional form factor as outdated. This competency is acquired through experiences, which in turn come from collaboration and teamwork. Therefore, it cannot be easily copied. Companies like Toyota and Matsushita Electric gain strength from their technological expertise. It is also one reason behind the increase in domestic capital investment as relocating manufacturing overseas results in a loss of this technical expertise. Fourth are efforts by companies to protect intellectual capital through patents, better factory security, and reducing employee turnover. By "black boxing" core technologies and increasing the lifespan of the technology even just a little bit, companies are working to maintain competitive advantage. Through these four factors, Japanese manufacturers are maintaining their competitive advantage in the digital appliance market. Their strategy is not simply to make similar products but to compete vertically on quality to avoid competing on cost, and rely on core strengths to maintain competitive advantage. DRAM maker Elpida Memory is reported to be investing about 500 billion yen over three years to build the world's largest memory chip factory (from Elpida Memory January 10, 2004 news release). The revival of Japan's semiconductor industry sends shockwaves through Korea's semiconductor makers that risked sparking a price war. Undoubtedly, the market will be one where Japan has manufacturing expertise for core products, such as mobile phone memory or system LSI modules. This symbolizes the restoration of new Japanese-style management after tough lessons learned in the 1990s. The losing pattern of the 1990s has clearly gone away. The new winning pattern is to create new products through relentless innovation, embrace vertical competition, integrate skilled manufacturing, and create differentiating value through growing human capital. This will cause mechanisms to appear which will solidify a company's competitive advantage and reverberate throughout the entire digital appliance industry. |
|
| Source of Dynamic Competitive Advantage |
|
| Japan's recovery has been supported by the shift to new Japanese-style management mainly in manufacturing industries. Growth in capital investment, one of the engines for the recovery, has been supported by this strategic shift. At the same time, a shift in strategic perspective has happened for managers and planning staff. In the 1990s, various corporate strategy schools of thought fought for supremacy. The traditional, academic, Porter School competitive strategy view depicts revolutionary strategy that produces results in a fell swoop, while the new style modular school proposed that new industry architecture should be created and competition done through modules. Gathering the most support in America, the resource based view (RBV) school, popular with economists, says that strength comes from resources inside the company, and to compete, the company's own competencies must be expanded. We evaluated which school's prescription was effective in reviving Japanese manufacturing industries. The prescription from the modular school worsened the symptoms, but the RBV school's diagnosis and treatment was effective for championing traditional Japanese-style management. There were no "beds" at the "hospital" of the Porter school that could accommodate the size of the Japanese people. However, this does not mean that the Porter view of strategy is no longer valid, nor does it mean that the RBV strategy is best. It is a comparison of strategic perspectives that place different emphasis on external conditions or internal resources. This difference is fundamentally rooted into the perspective of the market and companies. At issue is whether Japanese companies can build and sustain competitive advantage for the 21st century through Japanese-style management and emphasis on internal resources. Clearly, the new winning pattern has shown competitive advantage can be maintained for at least 2 or 3 years. A VRIO analysis supports this (4). From this perspective, at least for the manufacturing industry, the increase of capital expenditure forms a solid base for the future. However, will this still be true 10 years from now? Can we really cast off for good the Porter perspective of strategy emphasizing external environment? American companies, like GE or Hewlett Packard (HP) as well as Sony, Nissan and Samsung, are clearly turning to strategic management, while Toyota, Canon, Matsushita Electric, Sharp and NEC are turning to new Japanese-style management. The skilled manufacturing capabilities of companies following strategic management are ill-defined and losing their "cool" factor, showing that the current trend appears to strongly favor the latter of these management styles. This is supported by the consensus of a nation of consumers. However, emphasis on skilled manufacturing has resulted in software and information divisions being sold off in view of those functions as being less critical. Can the needs of users be satisfied and can the company survive through skilled manufacture alone? Apple, for instance, is changing from a PC maker into an AV maker with a music distribution network, with sales of its iPod portable music player exceeding personal computer sales. The micro hard disk inside the iPod mini is reputedly from Hitachi. What is important in building a dynamic competitive advantage that adapts to changes in the marketplace? Does the ultimate source of competitive strength come from inside or outside a company? Porter asserts that a "company's success comes from external, not internal resources." (5) For example, through implementation technology, let's say a company successfully creates a superior product. Creating this competitively strong product is possible by exclusively acquiring limited resources and high-level collaborative competency through teamwork. In this case, competitive strength is seen as originating from two resources in the company, from within. Japanese managers would say that differentiating value comes from the people. However, it is not possible to consider why these two resources are inside the company without also considering specific physical locations, such as factories and research laboratories that make a product, manufacturing alliances, or infrastructure. Without users to say what is and isn't "cool," even if implementation technology makes a lighter, thinner, shorter and smaller product, the design direction cannot be found. Traced back to the ultimate source, competitive strength resides outside of the strategy dependent on historic patterns. Perhaps, actual competitive strength comes from user-centered external market and marketing connected through internal resources and product services. Key to maintaining competitive strength for 10 years or more is how to connect the inside and the outside of the company while compensating for historical and cultural conditions. However, this is left as the topic for a future paper where we carefully consider the future direction of strategy. Footnotes: 1 Porter, M.E.(1996) "What is strategy?", Harvard Business Review. 2 Wernerfelt, B. (1984) "A Resource-based View of the Firm"-- Strategic Management Journal, 5, pp.171-180. 3 Baldwin,C,Y. and Clark, K.B.(2000), "Design Rules - volume 1," MIT. 4 Barney, J.B.(2001) "Gaining and sustaining competitive advantage," Prentice Hall. (Commentary at JMR website, membership service "Analysis Framework Collection") 5 Porter, M.E.(2001) "Regions and the New Economics of Competition," extracts from "Global City-Regions," A.J.Scott (eds). |
