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Tuesday, Jan. 30, 2001

Eminently sensible remediesfor Japan's economic woes


Staff writer
CAN JAPAN COMPETE?, by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara. Cambridge, Mass.: Perseus Publishing, 2000, 208 pp., $27.50 (cloth).

The title has got to go. "Can Japan Compete?" What sort of question is that? Of course Japan can compete. No one disputes that the country has world-beating corporations, great products and has set standards for manufacturing efficiency.

And everyone now knows that those companies are a minority in Japan. At the other extreme, sheltered domestic industries have been laggards, creating a "dual economy," as economist Richard Katz aptly describes it.

These three authors know it too -- even without the prodigious research that provides the foundation of the book. Michael Porter, a Harvard Business School professor, is perhaps the world's leading academic theorist on competition. Hirotaka Takeuchi is professor of corporate strategy at Hitotsubashi University, and Mariko Sakakibara teaches at the UCLA Business School after a stint at the Ministry of International Trade and Industry.

This slim volume condenses eight years of exhaustive research on competition in Japan. It includes much of the statistical analysis; no reader will want for data.

But the conclusions, like the title, will leave most readers asking, "Is that it?" "Japan did not create a superior form of capitalism . . . what actually worked in Japan was the same thing that works in the United States and elsewhere." Despite the continuing economic slump, "Americans will do well not to underestimate Japan . . ."

The authors argue that the proper focus of Japan's record is microeconomics, not macroeconomics. Firm behavior, in particular, corporate strategies, is the key to understanding the Japanese economy and its woes. Or, rather, the lack of strategy.

Japanese firms all do the same thing. "The commitment to competing on total quality and continuous improvement -- doing the same thing as rivals but doing it better -- results in competitive convergence, which means that all competitors in an industry imitate each other in a zero-sum competition that erodes price and destroys profitability."

Compare Japanese profits with those of other countries and the problem is plain. Return on assets in Japan is about half that of U.S. companies -- and this is among the good firms. Even U.S. subsidiaries in Japan are more profitable than homegrown Japanese companies.

While most of us know and buy products from Sony, Toyota, Honda and Panasonic, Japan's share of world exports peaked in 1986 -- before the bubble burst -- and has been shrinking ever since. The size of the problem is striking. "Of the 1,618 international trade industries in which Japan participates, its world export share has declined in 1,250 industries and risen in only 166." Sure, the relocation of plants overseas is part of the explanation, but that is another way of restating the problem: Japan is too inefficient.

The study discounts the government's role in nurturing competitive industry. Some credit is deserved for encouraging a patient supply of capital, a good education system, and lots of engineers, but "policies widely believed to explain Japan's success were far more prevalent in the nation's failures than in its successes." Competition is the crucible of business success and government policy has never been really keen on competition.

There are two ways to prevail in the market: Management either pursues operational effectiveness -- doing the same things as the competition, but doing them better -- or it competes by unique positioning through the use of a distinctive product or service. That's strategy, and that is something that few Japanese companies have done. Rather, they try either to be all things to all people, or they are content to sit back and rest on government-supported haunches.

Take chocolates. The country is swimming in the stuff, but no Japanese manufacturer has really ventured abroad. Instead, they have flooded the domestic market. In 1991, at the peak of the bubble, Morinaga introduced 32 new chocolate items and deleted 42; its entire product line consisted of 89 goodies.

The industry got wise in 1992 and started cutting the number of products on offer. Morinaga trimmed its offerings to 60 brands, after cutting more than 100. In contrast, Mars, a leading foreign maker, has but 40 brands in the 120 countries in which it competes.

Old habits die hard, though. Japanese makers still introduce 100 to 120 items each year. When Mars introduced M&Ms to Japan in 1973, 25 imitations were on the shelves within six months.

What is to be done? Once again, we return to the obvious. Open the economy, inviting more trade and competition; build a world-class university system; modernize the domestic economy and sweep out the dinosaurs; move toward new models of corporate accountability; encourage decentralization and regional specialization; and embrace entrepreneurship and new forms of innovation.

And the title? Blame it on the publisher. This book first appeared in Japanese and that title is just the sort of agonized, breast-beating attention-getter that appeals to this market. Now there's a business that could use some competition.

Brad Glosserman can be contacted at brad@japantimes.co.jp.


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