In the past 2 years, American business readers have been deluged with scores of books and articles purporting to unlock the secrets of Japan’s global business success. The “keys” supplied by the authors of these treatises make an imposing bundle: consensus decision making, lifetime employment, “Japan, Inc.,” a “shame” culture, longer planning horizons, kanban production systems, quality circles, Zen Buddhism — you name it. Each of these affords some measure of insight. But until now, none has unlocked the central enigma.
Almost without exception, I find that these business leaders, many of them older and far wiser than I, are keenly interested in what I have to say about business strategy. The reason is quite simple: I happen to be Japanese.
Everyone thinks that Japanese possess some special magic that enables them to run rings around their competitors in world markets. They seem to think that I must possess some measure of that magic. And I might, just possibly, be prepared to whisper the secret formula into their waiting ears.
How do they do it? They may not have a strategic planning staff, but they do have a strategist of great natural talent: usually the founder or CEO. Often — especially in Japan, where there is no business school — these outstanding strategists have had little or no formal business education, at least at the college level. They may never have taken a course or read a book on strategy. But they have an intuitive grasp of the basic elements of strategy. They have an idiosyncratic mode of thinking in which company, customers, and competition merged in a dynamic interaction out of which a comprehensive set of objectives and plans for action eventually crystallizes.
Insight is the key to this process. Because it is creative, partly intuitive, and often disruptive of the status quo, the resulting plans might not even hold water from the analyst’s point of view.
Both in Japan and in the West, this breed of natural or instinctive strategist is dying out or at least being pushed to the sidelines in favor of rational, by-the-numbers strategic and financial planners. Today’s giant institutions, both public and private, are by and large not organized for innovation. Their systems and processes are all oriented toward incremental improvement — doing better what they are doing already.
In all times and places, large institutions develop cultures of their own, and success is often closely tied to the ability to conform. In our day, the culture of most business corporations exalts logic and rationality; hence, it is analysts rather than innovators who tend to get ahead. It is not unreasonable to say that many large US corporations today are run like the Soviet economy. In order to survive, they must plan ahead comprehensively, controlling an array of critical functions in every detail.
Strategists do not reject analysis. Indeed they can hardly do without it. But they use it only to stimulate the creative process, to test the ideas that emerge, to work out their strategic implications, or to ensure successful execution of high potential “wild” ideas that might otherwise never be implemented properly. Great strategies, like great works of art or great scientific discoveries, call for technical mastery in the working out but originate in insights that are beyond the reach of conscious analysis.
What the travel agency was selling, of course, was a package consisting of a number of different elements, including “atmosphere,” integrated into a whole. Customers normally pay their $125 for the package without trying to identify precisely how much they are paying for each element and whether it is all really worth the cost. To do this, one has to probe into what is actually being offered, disentangling the various components of the package and understanding how each element contributes to the whole.
Analysis is the critical starting point of strategic thinking. Faced with problems, trends, events, or situations that appear to constitute a harmonious whole or come packaged as a whole by the common sense of the day, the strategic thinker dissects them into their constituent parts. Then, having discovered the significance of these constituents, he reassembles them in a way calculated to maximize his advantage.
In strategic thinking, one first seeks a clear understanding of the particular character of each element of a situation and then makes the fullest possible use of human brainpower to restructure the elements in the most advantageous way. Phenomena and events in the real world do not always fit a linear model. Hence the most reliable means of dissecting a situation into its constituent parts and reassembling them in the desired pattern is not a step-by-step methodology such as systems analysis. Rather, it is that ultimate nonlinear thinking tool, the human brain. True strategic thinking thus contrasts sharply with the conventional mechanical systems approach based on linear thinking. But it also contrasts with the approach that stakes everything on intuition, reaching conclusions without any real breakdown or analysis.
No matter how difficult or unprecedented the problem, a breakthrough to the best possible solution can come only from a combination of rational analysis, based on the real nature of things, and imaginative reintegration of all the different items into a new pattern, using nonlinear brainpower.
In problem solving, it is vital at the start to formulate the question in a way that will facilitate the discovery of a solution.
The questions are not framed to point toward a solution; rather, they are directed toward finding remedies to symptoms.
It is hard to overstate the importance of formulating the question correctly. People who are trained and motivated to formulate the right questions will not offer vague proposals for “improvements,” as are seen in many suggestion boxes. They will come up with concrete, practical ideas.
When problems are poorly defined or vaguely comprehended, one’s creative mind does not work sharply. The greater one’s tolerance for lukewarm solutions, half measures, and what the British used to call muddling through, the more loosely the issue is likely to be defined. For this reason, isolating the crucial points of the problem — in other words, determining the critical issue — is most important to the discovery of a solution.
The best way to come up with an effective competitive move would be to set the most successful competing product beside Product A, dismantle it completely, and meticulously compare the two in every aspect: construction method, number of parts, quality of materials and components, and so forth.
Each type of analysis requires considerable skill and experience and can be undertaken seriously only when there is constant access to accurate market information. Companies that are strong in marketing gather market information at regular intervals so that they can carry out these analyses routinely. Companies that are less marketing-minded and tend to collect information haphazardly are not so fortunate.
He has a more reliable recipe for success: the combination of analytical method and mental elasticity that I call strategic thinking.
In my opinion, these two are complementary. For the strategic mind to work creatively, it needs the stimulus of a good, insightful analysis. In order to conduct a good analysis, it takes a strategic and inquisitive mind to come up with the right questions and phrase them as solution-oriented issues. Analyses done for the sake of vindicating one’s own preconceived notions do not lead to creative solutions. Intuition or gut-feel alone does not ensure secure business plan. It takes a good balance between the two to come up with a successful strategy.
What business strategy is all about — and what distinguishes it from all other kinds of business planning — is, in a word, competitive advantage. Without competitors there would be no need for strategy, for the sole purpose of strategic planning is to enable the company to gain, as efficiently as possible, a sustainable edge over its competitors. Corporate strategy thus implies an attempt to alter a company’s strength relative to that of its competitors in the most efficient way.
I believe, however, that it will make for clearer thinking if we reserve the term “strategy” for actions aimed directly at altering the strength of the enterprise relative to that of its competitors. We must distinguish these actions from actions aimed at achieving operational improvements, such as greater profitability, a more streamlined organization, more efficient management procedures, or improved training.
When one is striving to achieve or maintain a position of relative superiority over a dangerous competitor, the mind functions very differently from the way it does when the object is to make internal improvements with reference to some absolute model. It is the difference between going into battle and going on a diet.
In the real world of business, “perfect” strategies are not called for. What counts is not performance in absolute terms but performance relative to competitors.
The principal concern is to avoid doing the same thing, on the same battleground, as the competition. To opt for a simple price war, for example, in which the competitors can easily follow suit, will not only harm the profitability of the industry as a whole but may very well strangle the strategist’s own company in the bargain.
Having segmented its market and identified each segment’s requirements, this company decided to concentrate on customers in the retailing and construction industries, leaving the more demanding segments (heavy-duty harbor and logging) to its competitors. This enabled it to introduce a lower-priced, value-engineered product line into a clearly defined target market segment.
It should not be surprising to find that companies with a large share of the forklift truck market have all adopted distribution networks designed exclusively for that purpose, whereas companies with distribution networks intended to serve both truck and forklift truck customers have achieved little success.
Results do not automatically come just because one realizes where the KFS lie. The strategist must have the courage to gamble and accept the risks involved. This gamble — the strategic decision — is the narrow gate through which a company must pass if it is to win superiority in the demanding field of competitive business, particularly in head-on competition.
Such is the universal human urge for possession and security that people in an office with a copier almost invariably get in the habit of telling their subordinates to copy this or that document and file it away just in case, even though the possibility of any future need for the document in question may be remote or nonexistent.
But it is precisely by asking questions like these — challenges to the fundamental commonsense premises of business activity — that many outstandingly successful companies have managed to break out of seemingly hopeless competitive stalemates.
The basis of such an approach is always to confront what is taken for granted in an industry or business with the simple question, Why? If, instead of accepting the first answer, one demands the reason for that and persists in asking “Why?” 4 or 5 times in succession, one will certainly get to the guts of the issue, where fundamental bottlenecks and problems lie. All the great inventions of the past had their origin in this kind of inquisitive mind.
To become an effective strategist requires constant practice in strategic thinking. It is a daily discipline, not a resource that can be left dormant in normal times and tapped at will in an emergency.
What alternatives would be open to you if all these constraints were removed? If they are blocked from taking action by such factors as personnel, funds, or corporate image, I ask them to imagine that they have been given a free hand in all these matters and to outline what kind of solution to their current problems they would envision in that case. After a pause, they will say hesitantly, “Well, the most desirable solution would be…” or “Ideally…” Then I know I have set them on the right track.
If the strategic thinker can generate an awareness of what an ideal state of affairs might be, even if it seems unattainable at present, constraints that have loomed as absolute can be seen rather differently — as potentially surmountable obstacles to the attainment of the ideal solution. Strategic thinking can then be concentrated on ways of removing these obstacles.
It resembles a boat race. No matter how hard each crew member rows, if the coxswain doesn’t choose the right direction, the crew can never hope to win. Conversely, even if the coxswain is a perfect navigator, you cannot win the race unless the rowers strive hard in unison.
When no competition exists, there is no need to strategize; the need is rather to think about how to make operational improvements in the service provided to the customers or recipients.
Obvious differences in age, race, profession, region, family size, and so forth, may be the basis of segmentation, but usually these constitute convenient statistical classes rather than strategic segments. Differences per se are not good enough unless each segment has differentiable objectives that can be reflected in the way the corporation approaches the market.
Very few companies lose market share in head-on competition. In my experience, the majority lose market share because of structural changes, i.e., the faster growth of its weak segment compared with its strong segment.
A company that analyzes customers and competitors but fails to strengthen the functions that are critical for success in the industry is like a staff-dominated military with a weak combat force.
The secret of many Japanese corporations’ success is their skill in sequencing the improvement of functional competence. In the 1950s and early 1960s many of them made heavy investments of both money and talented people in manufacturing engineering. Their production technology, together with the advantage in labor cost they enjoyed at that time, constituted their principal source of strength. Later, they shifted their emphasis to quality control and product design capabilities. Today they are very active in basic research and direct marketing. At each phase they have been able to generate the money to reinvest in improving the next generation of functional strengths.
Most of its competitors are organized around the traditional functions of engineering, manufacturing, and marketing and have gone in heavily for vertical integration, for example, through ownership of dedicated IC production facilities. Casio, in contrast, even today remains basically an engineering, marketing, and assembly company, with every little investment in production facilities and sales channels. Its strength is flexibility. Recognizing its competitors’ inability to introduce new products rapidly, Casio has adopted a strategy of accelerating and shortening product life cycles. No sooner had its 2mm-think, card-size calculator been introduced than Casio started rapidly bringing down the price, thus discouraging its competitors from following with a similar product. Within a few months, Casio introduced another model, which emits musical notes as the numerical keys are touched.
In Casio’s case, the functional strategy is to integrate design and development into marketing so that consumers’ desires are analyzed by those closest to the market and quickly converted into engineering blueprints. Because Casio has this function so well developed, it can afford to make its new products obsolete quickly.
When it runs out of new ideas and its customers get fed up with the accelerated life cycles, Casio will have a major problem, for it has little differentiable expertise in the traditional functions of production, logistics, and sales. The company’s current success, however, may indeed enable it to gradually strengthen these functions sufficiently before the time bomb explodes.
Outside of marketing, shared resources are often observed in R&D, in the form of technical licensing and joint development. Where the key function does not lie in technology, or where technology cannot be monopolized, licensing is usually a more sensible way of lowering development costs. When development costs are exceptional high, transnational R&D efforts may even be undertaken to help a company remain competitive in the worldwide market.
Some time ago, having discovered that its competitors were beginning to concentrate on fewer large-volume components, Moron installed 2 types of managers: (1) a manager charged with keeping watch on specific competitors, and (2) 8 market managers responsible for analyzing trends in given end-use markets, specialized competitors’ moves, and customization needs.
Service in any industry — be it trucks, machinery, or office equipment — is a relatively captive, stable business compared with sales of new equipment.
The value of any system depends on how it is employed, and PPM — which has been much criticized by people who haven’t really used or worked at it — is no exception. If care is taken to understand the reasons for the position of the dot, and if the matrix is used to generate creative ideas on each business, given its situation relative to other businesses in the corporate context, PPM can be very useful.
Convinced that every product line has its natural “product life cycle,” they treated the ratio as a product that had passed its peak and the radio business as a prime candidate for financial “milking” or “harvesting.”
The crucial point, then, is how you define the business and how you treat it. If you really believe in a product’s value and are emotionally committed to it, you will not take an outsider’s view of it, the way a portfolio manager using “objective” indexes might do. A business reflects its manager.
In fact, it is how they do it rather than what industries they are in that distinguishes the best-performing businesses. Even in the fastest-growing industries, such as facsimile, office computers, and fast food, there are many losers.
The gold hunters’ watchword may be “Invest to grow!” But how? Bystanders may urge more selectivity, but where, and to what extent? Answers to these questions can come only from profound understanding of the business. The value of such directional advice really hinges on what use is made of it and by whom.
Indeed, there are ways of making money for a surprisingly long time in a bad industry, so long as a reasonable level of demand remains. Kanzaki Seishi is doing exceptionally well in the deeply troubled Japanese pulp and paper industry by achieving a high-value-added operation through low inventory and transportation costs and through shifting its produc mix toward the high end of the market.
When a company takes various strategic steps to acquire a share of a mature product market, it often finds that the required investment far exceeds the gain. Experience has repeatedly shown that such moves as price reductions, advertising, and development of new products undertaken in this situation can almost always put profitability at risk.
When the strategist is looking for solutions in a stalemated market, one method is to challenge the conventional wisdom about product and market head-on. When the market was still growing, these commonsense assumptions or accepted ideas may have reflected the actual conditions for success accurately. Today they may be shackling the company’s strategic potential.
There is no end of the list of commonsense assumptions that the strategist should question. If there is no easy to the question: Why? then that gives him his chance. If even the experts have no satisfactory answer, it may be that common sense is blocking everyone’s thinking.
US semiconductor manufacturers that moved into Southeast Asia in response to the lure of low wage rates have almost all been compelled to withdraw or transfer their operations back home. Companies which stayed and invested at home have survived because the industry itself has become capital-intensive rather than labor-intensive.
Japanese companies that started operating in Spain to take advantage of low labor costs have failed in almost every case.
According to both Keynesian and Marxist economic theory, inflation is an irreversible phenomenon that is almost impossible to moderate by politically acceptable means. Control of inflation may of course become practicable if one is willing to pay the price of high unemployment, but given our current level of technical competence in the political and economic sphere, there is no satisfactory way of solving both problems at once.
Traditional assembly-oriented industries — such as automobiles, appliances, semiconductors, and cameras — 25% or more of whose total cost structures traditionally were made up of labor content, are changing. As a result of advanced production technology, automation, robot machining centers, and numerical controls, their labor content is now declining to something like 5-10%. In other words, the labor-intensive industries of yesterday are becoming capital-intensive.
In 1973, the year before the energy crisis, their labor costs rose by 30% and their cost of materials by more than half. Normally, a manufacturer would hope to pass on cost increases of that magnitude to the customers. The Japanese home appliance companies didn’t do that. Instead, they reduced the number of component items by 40% and began using medium-scale ICs. At the same time, they reduced their power consumption of their products by an average of 44%.
NO one can so successfully overcome such a massive competitive lead of accumulated experience without starting from scratch — a zero base — and designing the plant and product simultaneously.
Not too long ago, most Japanese companies were determined to have what they called international financial management. In the quest for low-cost money, they borrowed in Switzerland, where interest costs were lowest. Today, they are having to repay those loans to the Swiss banks in Japanese yen. In the meantime, however, exchange rates have changed to their disadvantage. Although Swiss interest rates are still low, the currency disparity is making this repayment very expensive for Japanese borrowers.
In these companies, brains and muscles were separated, destroying the entire body’s coordination. On one hand there were the brains; on the other there was the muscle — the people of the enterprise. They were there to make the plan a reality, to carry out the brain’s instructions.
Or putting it differently, there were smart people and dumb people. The smart people were so smart that they had to spell out every detail of the corporation’s strategy for 3-5 years into the future. They planned everything; they knew the job description of every function. Thus the dumb people never got the big picture.
Back in the early 1950s, the company’s 45K employees turned in only a few hundred suggestions annually. Today, Toyota gets 900K proposals — 20 per employee on the average — per year, worth $230M a year in savings.
The US CEOs said their principal concern was government regulation. In contrast, the Japanese participants typically responded, “New products” or “New businesses.”
To come up with new ideas, new businesses, and new product lines, 3 basic techniques are available to the strategist:
- Removing bottlenecks.
- Coming up with new combinations.
- Maximizing strategic degrees of freedom.
To come up with the right “something different” takes objectivity, insight, aggressive questioning — in short, strategic thinking. Theories and concepts are subject to obsolescence; brains and thought processes are not.
Most Japanese watchers in the West regard the nation’s current industrial system — with its characteristic features such as lifetime employment and docile labor unions — as uniquely Japanese. In reality, it was forced by necessity in the turmoil of the post-WW2 days.
But their future looked uncertain until the Korean War, when all at once they were under pressure to produce goods at more than their full capacity. They reaped handsome profits and promptly reinvested them in productive capacity as well as paying wages to the commune residents, who thereafter became monthly salaried workers.
In Japanese eyes a corporation is nothing but an assembly of people, each known as a member of the corporation. The stockholders are a group of wealthy and interested moneylenders. Like the banks, they are simply another source of capital, willing to invest in the collective viability and wisdom of the corporation.
Another striking characteristic of many US corporations is their heavy emphasis on long-range strategic planning. For Japan, which like West Germany has no business school, it is a matter for envy that American managers seem so adept at developing rigorous and objective strategies. A Japanese planner who had just been introduced to the comprehensive computer-assisted strategic planning process of a large US company exclaimed: “My goodness, it looks as complicated as building a chemical plant!” In effect, most large US corporations are run like the Soviet economy. Many are centrally planned for 3-5 years, with their managers’ actions spelled out in impressive detail for both normal and contingency conditions. During the ongoing implementation process, each manager is “monitored” on how accurately he has been adhering to the agreed objectives.
The assumption seems to be prevalent that because some people are more intelligent than others, it is up to the smart people to tell the left gifted — through such devices as planning processes and job descriptions — exactly what to do. The “smart” people, typically coming from law schools or business schools, enter corporate life at a pay level well above the top of the range for many middle managers.
The only solution to this problem, pupils were and still are told, is to import raw materials, add value to them, and export, thus earning the wealth needed to buy food from outside. We must do this or perish.
This cultural upbringing is the mainspring of the “workaholic” nature of the Japanese. People fear not to work, because if they stopped working, the country would cease to function. If they stopped exporting, they would starve.
Because the Japanese education system emphasizes group harmony, it discourages heroes and super performers. No genius is permitted to skip grades or advance faster than the others. Gifted children are taught to use their extra margin of intelligence to smooth out interpersonal relationships and help their slow-moving classmates.
In the early 1950s, MITI encouraged aggressive investment in steelmaking with the slogan “Steel is the nation.” What it did in terms of subsidies was negligibly small, but by openly endorsing a company (Kawasaki) that was committing itself to a rather bold growth strategy, MITI fired up the whole industry to join in a “meeting too” investment game. As a result, Japan as a nation has been able to produce high-quality steel at the lowest cost in the world. This competitive steel has been the underlying force behind Japan’s current position in shipbuilding, automobiles, and many other export-oriented industries, such as home appliances, machine tools, steel structure, and plants.
Today, MITI feels that the days of steel’s dominance are about to end and is looking to very large scale integrated (VLSI) circuits to power the next industrial era. It has begun referring to VLSI as the “rice of industry,” meaning that it feeds into all industries.
With this objective, 5 companies — Hitachi, Fujitsu, Mitsubishi, NEC, and Toshiba — formed an ad hoc cooperative in 1976, which dissolved itself in 1980 after 4 years of joint R&D efforts.
It is therefore not surprising to see some prestigious Japanese companies contracting, as so-called OEMs, to supply components or even whole products to be sold under the trademarks of Western competitors. These companies simply put long-term success ahead of the short-term pride and ego satisfaction of selling under their own brand names.
Many Western companies, especially the automotive giants, made the mistake of taking for granted the superiority of their own resources, especially their technological competence and engineering and marketing know-how. The automakers were exhausting their engineering competence in the effort to develop gas-turbine and solar-battery-driven cars at a time when the far more immediate challenges were to improve the emission efficiency of the traditional internal combustion engine and to reduce exhaust pollutants. Almost overnight, they found themselves forced to contend on a different battleground. By changing the design concept, relatively small, strategy-minded Japanese companies had proved that a clean engine was possible.
It is clear in hindsight that such Japanese companies as Canon, Ricoh, Panasonic, and Pentax all had an ambition to be come world leaders, but each started with a trading-company, dealer, and/or OEM arrangement. Once confident of their product quality and cost-competitiveness, however, they began to address their marketing inefficiencies, gradually bypassing first the trading companies and eventually the distributor and OEM partners.
Choosing the battleground so that they would not have to fight head-on against large Western enterprises has been the key to their success. They have sought out markets, functions, and product ranges where they could initially avoid head-to-head competition.
Once the choice is made, people, technology, and money must be deployed very boldly and aggressively.
The only way to secure the stability of a business over the long term is to define its business domain in terms of the user’s objective function and to segment the market accordingly. In the case of consumer goods businesses, the challenge is to get away from the preconceived notion of consumer needs in redefining the business domain. In the case of industrial goods, the objective function is most likely to relate to user economics: productivity improvements, rationalization, enhanced precision — whatever carries the most weight in the purchasing decision among the customers in question.
Strategy is no more than a plan of action for maximizing one’s strength against the forces at work in the business environment.
Managers who confine themselves to developing plans within a predefined business domain can at best improve product design or reduce costs. This situation, typical of large companies, has been called the big corporation syndrome.
The odds of a win are perceptibly better if, after considering the key factors — the horse’s track history, the competition, track conditions, etc., as well as your own gambling instinct — you pick out just a few key horses. The art is to strike an optimum balance between wasteful dissipation of resources and needly going for broke — a balance that differs in every business situation.
Man should do only what only man can do.