Would you like to inspect the original subtitles? These are the user uploaded subtitles that are being translated: Porter�s Business Strategies in Japan Richard S. Allen, Ph.D.* UC Foundation Associate Professor of Management The University of Tennessee at Chattanooga College of Business Administration Dept. 6156; 615 McCallie Avenue Chattanooga, TN 37403-2598 423-425-5283 423-425-4158 Fax Rich-Allen@utc.edu Marilyn M. Helms, D.B.A., CFPIM, CIRM, CSCP, CQM/OE Sesquicentennial Endowed Chair and Professor of Management Dalton State College Business Administration Division 213 N. College Drive Dalton, GA 30720 706-272-2600 706-272-4525 Fax mhelms@daltonstate.edu Holly Jones, MBA The University of Tennessee at Chattanooga College of Business Administration Dept. 6156; 615 McCallie Avenue Chattanooga, TN 37403-2598 Holly-Jones@utc.edu Margaret B. Takeda, Ph.D. Global Management Consultant and Associate Professor of International Business California State University San Bernardino College of Business and Public Administration San Bernardino, CA 92407 760-834-9175 mtakeda@csusb.edu Charles S. White, Ph.D. Hart Professor of Management The University of Tennessee at Chattanooga College of Business Administration Dept. 6156; 615 McCallie Avenue Chattanooga, TN 37403 423-425-4686 423-425-4158 Fax charlesswhite@hotmail.com * Corresponding Author Structured Abstract Category: Research Paper Purpose of this paper: The Japanese government is promoting a move towards a variety of generic business strategies based on the Porter Prize as a way to regain global competitiveness and end their long economic recession. This article reports on the current state of Japanese business strategies to a practitioner audience based on our previous academic-oriented research. Design/methodology/approach: A survey of 101 Japanese respondents was conducted to determine their relative use of Porter�s generic business strategies. Examples of implementation are presented to illustrate use of the critical strategies. Findings: Japanese are using two of Porter�s generic strategies, namely cost leadership and differentiation and they are using two variations of Porter�s focus strategies. Research limitations/implications: As is typical with all survey research, the convenience sample of organizations used in this survey may not be representative of all Japanese organizations. Practical implications: Managers, consultants and policy makers will gain insights into the impact national policy can have on corporate strategy. This understanding is important when conducting business in a global environment. More specifically, readers will gain a better understanding of how Japanese firms are presently implementing competitive strategies as a result of a Japanese national strategy to promote the use of Porter�s generic strategies. Value of paper: This article is a practitioner-oriented translation of an academic research study. The value of the current article is to share findings with the practitioner community and present examples of strategic implementation to managers, consultants and policy makers in a less technical format than a typical academic journal. Key Words: Japan, Porter, generic strategies, differentiation, cost leadership, and focus Japan has been in economic decline since the late 1980�s. They are experiencing a shrinking economy, failing stocks, rising unemployment, and job cuts. Without reforms, the economy is only predicted to grow at only 0.8% annually from 2006 to 2010 according to country advisors Lorange & Turpin (2004). Legendary business strategy professor and consultant Michael Porter contends Japanese business strategy has been at least partially responsible for the inability of Japan to regain their position of global business dominance experienced in the early 1980�s (Porter & Takeuchi, 1999). Porter contends his generic strategies of cost leadership, differentiation and focus should be used if organizations expect to gain a competitive advantage and ultimately compete in the global economy. Ultimately, Porter believes national policy should facilitate the use of the generic strategies in order to gain and maintain a competitive economic advantage. Accordingly, the Japanese government has instituted the Porter Prize to encourage Japanese businesses to make a transition to the generic strategies espoused by Porter. The authors have recently published research on the actual use of Porter�s competitive business strategies in Japanese organizations in a more technical format in academic journals (Allen, Helms, Takeda & White, 2006 and Allen, Helms, Takeda, White & White, 2007). In this article, the results of these academic studies are discussed, discernable business strategies in Japan are explored and examples from Japanese firms implementing each of the strategies are included. This article will give senior managers, consultants and government policy makers the opportunity to see competitive strategies at work in actual situations and provides information for competing in an increasingly global business environment in the future. The Research Japanese business strategy has traditionally been based on the idea of Total Quality Management (Deming, 1986; Juran, 1988). Total Quality Management (TQM) strives to have continual cost reductions by improving processes and reducing waste. Japan�s post-war recovery and great leap to becoming an economic powerhouse in the last half of the past century was attributed to their use of the TQM strategy to simultaneously reduce costs and increase quality (Ho, 1999). Over nearly the past two decades, a long recession has taken its toll on the Japanese economy. Japanese managers have lost faith in a system that once brought them so much success and they have begun to search for ways to bring about corporate change and an economic up-turn. In a controversial article, Porter and Takeuchi (1999) presented an argument that the economic recession in Japan is due in large part to the lack of discernable business strategies being practiced by Japanese firms. In an effort to become more globally competitive, the Japanese Ministry of Economic Trade and Industry (METI) established the �Porter Prize.� This prize recognizes Japanese companies who achieve and maintain superior profitability in their industry by implementing unique strategies based on innovations in products, processes, and management techniques. METI patterned this new award after the Deming Prize, which helped to spur many Japanese companies to implement TQM in the post World War II recovery era. Japanese policy makers think a significant shift in strategy is necessary for a successful transition from the traditional Japanese system to a more globally competitive system (Miyagawa & Yoshida, 2005). Understanding the degree to which Japanese companies are embracing strategic management �Porter style� is essential to understanding the future of the Japanese economy. Recent research provides interesting insights concerning the impact Japanese national policy is having on the strategies of Japanese organizations. The main goal of our research was to determine the extent to which Japanese companies are making use of Porter�s generic business strategies and then compare the use of the Porter strategies in Japan to the strategies implemented in the United States. A questionnaire was submitted to a sample of more than 300 American and Japanese managers with adequate organizational knowledge to answer basic questions regarding strategic practices used in their organizations. Should the reader wish to see more details regarding the methodology and statistical analyses included in this research they are encouraged to review these academic-oriented articles (Allen et. al.; 2006 & 2007). Table 1 is a summary of the organizations included in the sample. ----- Insert Table 1 ----- The respondents answered questions which focused on their organizations� relative usage of such Porter strategic practices as pursuit of cost reductions, improved customer service, operational efficiency, quality control, personnel supervision, targeting niche markets, and providing specialty products/services. Responses were statistically analyzed using an approach known as factor analysis in order to determine which types of strategies the organizations were practicing. The findings are summarized in Table 2. (Please note that some conceptual overlap between strategies was present because some organizations were using strategic practices that were not purely of a single strategic type. Due to this mixing of strategies the total of all strategies for each nation exceeds 100 percent. ------ Insert Table 2 ------ Our findings indicate while American firms make relatively equal use of each of Porter�s four generic strategies, the Japanese rely heavily on the cost leadership strategy. In fact, the Japanese organizations made only minimal usage of the product differentiation strategy. Two other uniquely Japanese types of strategies emerged from the Japanese data that can best be described as �supply chain management� and �training-oriented.� At first glance, it appears in spite of MITI�s attempts to diversify Japanese strategic management with the Porter Prize, the Japanese remain stuck in what Porter and Takeuchi (1999) contended to be the source of Japan�s economic woes. Japan�s business strategies appear to remain rooted in the TQM-based tactics of the past. The TQM-based themes of cost minimization, supply chain management and training appear to still be very common in Japan. But upon further inspection and reflection on these results, we argue that Japanese strategy may actually be in transition towards Porter�s generic strategies. In the following sections we further discuss these strategies and provide illustrative examples of their use by Japanese organizations. These examples will help practicing managers, consultants and national policy makers more clearly understand the implications of this research for the practice of strategy and national economic policy. Cost Leadership Porter�s generic strategy of cost leadership focuses on gaining competitive advantage by having the lowest costs and cost structure in the industry. To achieve a low-cost advantage, an organization must have a low-cost leadership mindset, low-cost manufacturing with rapid distribution and replenishment, and a workforce committed to the low-cost strategy. The organization must be willing to discontinue any activities in which they do not have a cost advantage and may outsource activities to other organizations having a cost advantage. There are many ways organizations achieve cost leadership including mass production, mass distribution, economies of scale, technology, product design, input cost, capacity utilization of resources, and access to raw materials. Cost leaders work to have the lowest product or service unit costs and can withstand competition with their lower cost structure. Japan has utilized the cost leadership strategy extensively. The largest percentage of Japanese companies (41.4%) exhibited use of this strategy. An illustrative example is Taiyo Yakuhin, the leading low-cost manufacturer of generic drugs in Japan. Taiyo maintains cost leadership by implementing several tactics such as employing one-third the number of employees as compared to their nearest competitor and other manufacturers. Taiyo also employs part-time laboratory technicians for R&D. This has been made possible by moving their factory to a more centralized location where they are able to recruit female engineers, who previously were not part of the workforce. Another key to Taiyo�s ability to maintain cost leadership has been their ability to organize a group of more than 200 small to medium sized wholesalers to act as sales agents. The benefit to the wholesalers is �one-stop shopping� at Taiyo because they offer 415 products, the broadest selection in the generic drug industry. In addition, Taiyo agrees to transfer ownership of the products only after they are sold to hospitals. This eliminates the enormous financial carrying costs for these wholesalers. Through these activities, Taiyo has captured greater market share and attained higher levels of sales because the wholesalers are pushing Taiyo�s products more than competitors� products. Taiyo Yakuhin�s sales have doubled in five years because of these strategies. The company�s profit per employee is �20 million and they won the Porter prize in 2005 for exceptional implementation of a Porter strategy (Porter Prize Organizing Committee, 2005). Product Differentiation When using the differentiation strategy, companies focuses their efforts on providing a unique product or service, thus setting their offerings apart from other competitors. This strategy allows organizations to charge a premium price to capture market share. The differentiation strategy is effectively implemented when the business provides unique or superior value to the customer through product quality, features, or after-sale support and service. Firms following a differentiation strategy can charge a higher price for their product based on the product characteristics, the delivery system, the quality of service, or the distribution channels. The quality may be real or perceived and based on fashion, brand name, or image. The differentiation strategy appeal to a sophisticated, knowledgeable consumer interested in a unique quality product or service and does not mind paying a higher price for these non-standardized products. Japan utilizes this strategy much less frequently than other countries. Only 7.6% of the companies surveyed had strategies resembling Porter�s differentiation strategy. Horiba�s Engine Measurement Instruments and Systems division, otherwise known as the Engine Division, is a good example of a Japanese company using the differentiation strategy to gain a competitive advantage. This division provides analyzers and turnkey systems for engine development, emissions certifications, and research and development. Although there are a variety of different products sold in this field, the Engine Division�s primary product is exhaust gas analyzers, which represent 90% of division sales (Porter Prize Organizing Committee, 2005). These analyzers are unique because they comply with clean air regulations and their competitors products do not. Their products are also indispensable to automakers developing fuel-efficient hybrids and diesels. By making these exhaust gas analyzers for the last 40 years, Horiba has become a market leader. They now enjoy an 80% share of the world market for automotive emission analyzers. Because Horiba focuses on the exhaust gas analyzer as opposed to the general environmental analyzer, they are able to market to customers willing to pay a higher price for their unique product. Focus-Low Cost vs. Supply Chain Strategies In a focus strategy, a firm targets a specific, often narrow segment of the market. The firm can choose to concentrate on a select customer group (youths or senior citizens for example), product range (baby or pet care items), segment of a market (professional craft persons versus do-it-yourselfers), geographical areas (East coast versus West coast), or service line (residential or commercial only). For example, many European firms focus solely on the European market. Focus also is based on adopting a narrow competitive scope within an industry that large firms may have overlooked. The focus strategy aims at growing market share through operating in a narrow market or niche segment more effectively than larger competitors. A successful focus strategy depends upon an industry segment large enough to have good growth potential but small enough not to be important to other major competitors. Focusing allows the firm to direct its resources to certain value chain activities to build its advantage. An organization may also choose a combination strategy by mixing one of the generic strategies of low-cost or differentiation with the focus strategy. For example, a firm may choose to have a focus-cost-leadership strategy or a focus-differentiation strategy. While Japan does not currently embrace this version of Porter�s generic strategy, they do have a similar strategy which, although based in the past, may actually be viewed as a focus type of strategy. The Japanese are well known for their passion of managing supply chains through critical tactics including long-term supplier relationships, inventory minimization, and providing suppliers with predictable schedules of stable orders and regular demand (Liker & Yu, 2000). High levels of collaboration between firms and suppliers have been created by deliberate policies to create a circle of improvement with mutually beneficial results. For decades, Japanese companies have been focusing on managing their supply chains to increase cash flow and minimize operational costs of manufacturing for themselves and their suppliers. This unique strategy of developed and managed supplier relationships has led to excellence in supply chain management for the Japanese. While the practices associated with this strategy do not fit a traditional Porter generic strategy, one could assert the supply chain strategy is an attempt by the Japanese to move toward an adoption of a focus-low cost strategy as the main objectives of supply chain collaboration are to reduce logistical costs, production and distribution costs, minimize raw materials, and minimize work-in-process and finished goods inventories. In the focused or niche environment, the supply chain strategy can work to lower costs below other competitors through collaborative knowledge sharing, thus creating a market advantage. By focusing on the supply chain many Japanese businesses have become the low cost producers in their markets. Toyota is the best example of a company implementing the supply chain strategy. The �Toyota Way� is a system of continuous improvement shared among both their suppliers and dealers. David Kiley, a Business Week reporter, recalls a time when Toyota was screening a new supplier of pick-up trucks axles. The firm awarded the contract had never been a Toyota supplier before. Even though Toyota awarded the contract to them, there was never a discussion of price. Kiley spoke with Yuki Funo, the chairman and CEO of Toyota Motor Sales USA, asking him if this was the common way Toyota does business. Funo replied, �Toyota�s thinking based on the Toyota Way is teamwork with suppliers. This teamwork is going to be a long-lasting relationship. Price is only one element. Trust is a more important element. The relationship is a sharing concept and should always be win-win� (Kiley, 2007). The �Toyota Way� Funo describes is exactly what the supply chain strategy is all about. Toyota strives to build relationships with suppliers based on trust to facilitate knowledge sharing. Knowledge sharing enables suppliers and assemblers to achieve more cost reduction with less investment in process improvement activities (Berstein & Kok, 2006). The net result is Toyota gains a competitive advantage by focusing on reducing their costs throughout their supply chain. Focus-Differentiation vs. Training Strategies The other combination strategy is a focused-differentiation strategy and the organization has a unique quality product offered to a targeted market segment or niche. Again, we found a true Porter focus-differentiation strategy is not being used the same way in Japan as in the U. S., but there is a similar Japanese strategy that does contain key elements of the focus-differentiation strategy. Japan is well known for intense company-wide training as well as supervision of all employees in a rigid, formal hierarchal structure. The key features of Japanese management are a seniority-based wage scale and promotion ladder, a traditional system of lifetime employment, and a concentration of power in middle management (Ghosn, 2003). Hull, Hage, and Zuumi (1985), in their study of the differences between the U.S. and Japanese approaches to management found Japanese companies invest more in employee training. While not a purely American styled generic strategy, it could be argued the training strategy is indeed a form of Porter�s focus differentiation strategy. The intense training results in either a differentiated customer service and delivery process for service firms or a quality manufacturing process for production firms. In either case � service or manufacturing � the result is a quality differentiated service or product. Quality products and services can command a premium price from customers and are thus perceived as a differentiated product, particularly in narrow market segments. A good example of how this strategy is operating in a Japanese-based firm is with Bears Company. Bears provides a maid service for busy Japanese families (Inada, 2007). To make this company a success, the co- founder, Yuki Takahashi, had to challenge the traditional Japanese way of thinking which rejected hiring others to do housework. In the Japanese mind, maids are only for the rich. Because of the increases of working women, outsourcing housework has become a realistic alternative for some Japanese families. Bears took advantage of this unique opportunity by offering their specialty service to women. Takahashi attributes the company�s present and future success to an extensive four-week training period where all employees are trained in seven areas ranging from housekeeping skills, to knowledge of cleaning agents, to the company philosophy of hospitality. Bears also teaches employees about their corporate mission which is to �create a feeling of security that can make a woman relate better to her husband, her children, and the outside world�. By having such an extensive training program, Takahashi is ensuring that her employees provide a quality service for each client that they have. The Bears Company saw sales for the fiscal year 2006, double to �300 million from the previous year. Bears� focus on training has thus resulted in a differentiated service. Conclusion This article represents an attempt to identify current strategies in use in Japanese companies and the degree to which Japanese management is embracing these strategies in light of such developments as the Porter Prize. While Porter says Japanese companies, �have no strategy� and this tradition will be hard to break, the fact such a large-scale effort is underway to ignite Japanese interest in international strategies is an interesting topic. While Japanese companies do have discernable strategies, not all of them fit neatly into Porter�s generic classifications. However, there is sufficient evidence the Japanese are making considerable progress in embracing the strategies that have proven successful to American organizations over the last three decades. Modern Japanese managers are beginning to adopt more typical Porter styles with greater success. Companies such as Taiyo Yakuhin, Horiba, and Bears Company are but a few such examples. But some Japanese companies are embracing traditional strategic methods as evidenced by their low usage of the differentiation and pure focus strategies. This may be because their strategies are more in line with their national culture, which is ingrained in TQM, group decision-making and formalized systems which seem to slow down urgent business decisions (Ishikawa, 1988). However, with incentives such as the Porter Prize, many Japanese firms are beginning to embrace the more �Westernized� way of thought. We must consider the important implications these research findings for Japanese managers. What do they need to do differently? What impact does their lack of adoption of differentiation and generic focus strategies have on their ability to compete globally? They were successful in the 1980�s by differentiating based on quality, but that no longer seems to be the path for success. Considering the trend towards competition from low-labor cost countries like China, who have good quality based on the latest technology (financed by foreign investors), how can a high wage country like Japan compete globally? One of the ways Japan could begin to make greater advances within the global economy is to begin targeting different and selective market segments. Japanese firms could increase their use of differentiation strategies by creating products and services customers of a high-end market segment would be willing to buy. In addition, Japanese organizations could begin to invest more money in new research and development focused on creating new goods and processes, rather than improving existing products and services. What does all of this mean for non-Japanese managers, consultants and policy makers? Based on the examples described here, it is apparently critical to factor in national culture when trying to define an international strategy. Even within the context of her native country, Yuki Takahashi, co-founder of Bears Company had to create a strategy to match the traditional Japanese culture�s view of women�s responsibility in the home. This suggests that some of Porter�s generic strategies might need to be modified to fit a specific culture. The supply-chain and training based strategies are focusing on culturally unique aspects that can indeed provide a competitive advantage through cost savings and differentiation. From a strategic standpoint, modern managers must be aware of the growing competitiveness of Japanese companies. They are trying to move out of an economic downturn, so they are highly motivated and encouraged to try new strategic methods to gain competitive advantages in world markets. Modern managers must begin thinking more globally in terms of competition and they must embrace strategic decision-making to a greater degree than they have before. By having an awareness of successful strategies, both in the United States and abroad, managers should be able to compete more effectively in international markets. If by understanding local economic and cultural driving forces behind a competitor�s strategy, it is possible to anticipate their strategic decisions and reactions. Table 1 U. S. and Japanese Samples Compared U.S. Japan Sample Size 226 respondents 101 respondents Average Number of Employees in Organization 1,467 633 Service Organizations 62% 53% Manufacturing 28% 21% Government/Non-Profit 10% 4% Unionized 17% 56%* *In Japan all employees will belong to an internal �company union,� if one exists Table 2 Frequency of Use of Strategies Strategy United States Japan Cost Leadership 45.4% 41.4% Product Differentiation 39.3% 7.6% Focus-Differentiation 62.3% 0% Focus-Cost 56.6% 0% Supply Chain Management 0% 36.2% Training Oriented 0% 33.8% References Allen, R. S., Helms, M. M., Takeda, M. & White, C. S. (2007). �Porter's generic strategies: an exploratory study of their use in Japan�. Journal of Business Strategies. Spring 24(1): 69-90. Allen, R. S., Helms, M. M., Takeda, M., White, C. 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