CHAPTER TWENTY-FOUR
The New Japanese Business Strategies
QUIETLY AND WITH a minimum of discussion, the leading Japanese companies are moving to new business strategies. They are embracing a radically new—indeed, a heretical—theory: doing blue-collar manufacturing work in Japan is gross misallocation of resources and weakens both the company and the national economy. They are also embracing an equally new—and equally radical—theory: leadership throughout the developed world no longer rests on financial control or on traditional cost advantages. It rests on control of brainpower. These companies are also quickly restructuring their organization on the assumption that the winner in a competitive world economy is going to be the firm that most effectively shortens the product life of its own products—that is, the firm that best organizes the systematic abandonment of its own products. And they are moving away from Deming and Total Quality Management and toward Zero-Defects Management based on drastically different principles and methods.
The Japanese now hold about 30 percent of the American automobile market and expect to increase this share substantially in the next few years. Yet they also expect to stop exporting Japanese-made cars to the American market altogether within the next three to five years; by 1995 or so Japanese marques sold in the U.S. should mostly be manufactured in plants located in North America. Similarly, the Japanese expect to have something like one third of the automobile market of the European Economic Community by the year 2000 (whatever their present promises to the EEC to the contrary), but again without exporting many cars from Japan to Europe. And Japanese multinationals—Toyota, Honda, Sony, Matshushita, Fujitsu, the ceramics leader Kyocera, the Mitsubishi companies, are all pouring staggering amounts of money into manufacturing plants in developing countries, in Tijuana on the U.S.–Mexican border, in all of South America, in Southern Europe, e.g., Spain, Portugal, and Turkey, and in Southeast Asia: Malaysia, Indonesia, Thailand. The standard explanations for moving manufacturing out of Japan are “foreign protectionism” and “Japan’s growing labor shortage.” Both are legitimate. The supply of young people available in Japan for blue-collar manufacturing work will, for instance, shrink by 50 percent in the next ten years—the combined result of the sharp drop in birth rates in the ’70s and of the simultaneous educational upgrading to the point that virtually every Japanese boy now finishes high school and goes to college or into a white-collar job. But both explanations are also smoke screens. The real reason is the growing conviction among Japan’s business leaders (and also among influential bureaucrats) that manufacturing work does not belong in a developed country like Japan and is, indeed, a misallocation of such a country’s most expensive resource. “Before youngsters can go to work on the assembly line,” my Japanese friends say again and again, “a developed country pours $100,000 in school expenses into them, whether they learn anything or not. And then they have to get a middle-class income, lifetime security, a pension, and health care. In Indonesia or in Tijuana they have never been to school and require no capital investment in their education; and they are ‘middle-class’ if we pay them one tenth of what they cost in the U.S. or in Japan. Yet their productivity after two or three years of training is as high in Tijuana or in Bangkok as it is in Nagoya or Detroit. When you figure the enormous social capital invested in them, the return blue-collar workers make to society in developed countries is at most one or two percent; in Latin America or Indonesia it’s twenty times that.” Whenever I then argue that a country is highly vulnerable without a strong manufacturing base, I get the answer: “The supply of young people in the developing world, in South America, in Southern Europe, in Southeast Asia, will be so large in the next thirty years that it’s absurd to worry about the “manufacturing base” the way you in the U.S. do. Indeed, it’s our social responsibility to Japan to make sure that as few as possible of our high-investment and high-cost young people are being misused for low-yield manufacturing work.”
But while manufacturing at home is now increasingly considered in Japan a liability and a drag on the performance of both manufacturing companies and national economy, the new Japanese strategies call for total control of what now matters: brainpower and knowledge. To be competitive the world over, the argument goes, requires leadership in all important knowledge areas: technology, marketing, management, and firm control of what my Japanese friends are beginning to call “brain capital.” “You Americans,” I am told over and over again, “thirty years ago virtually gave away to us your technology and your management know-how to gain through a joint venture access to the Japanese market. We shan’t repeat that mistake.” The Japanese are willing to pay very large sums of money to gain access to knowledge: through a minority participation in a Silicon-Valley computer specialist; through similar investments in U.S. and European pharmaceutical or genetics entrepreneurs; above all through financing research in Western (primarily U.S.) universities. The direct financial return on these investments is usually zero. But what the Japanese are paying for is not dividends but access to the knowledge their partners will produce, and control over it—or at least priority in using it. Increasingly Japanese companies employ foreigners in their international operations, both as professionals and as executives. The large Japanese automobile manufacturers now all have design studios in Southern California, and they have Westerners running their international marketing. But the use they made of the knowledge these foreigners produce—that is, its application to the company’s strategy and decisions—is considered “proprietary”—it is tightly held within the Japanese management team. Whereas in the past some Japanese companies granted licenses of their knowledge to a Western company—e.g., on some Japanese-developed cardiac drugs—they are now revoking them or not renewing them.
Every major Japanese industrial group now has its own research institute. Its main function is not technical research but “research into knowledge”—that is, to bring to the group awareness of any important new knowledge: in technology, management and organization, marketing, finance, training, developed anyplace in the world. On my last trip to Japan a few months ago, I spoke at the twentieth anniversary of one of these “think tanks,” the research institute of the Mitsubishi Group. At the lunch after my talk, one of the most respected elders of the Mitsubishi clan leaned over and said to me, “In another twenty years the entire Mitsubishi Group will be organized around this research institute, where we have always been organized around the Mitsubishi Bank or the Mitsubishi Trading Company.”
Everybody now knows that the Japanese can bring out a new product—e.g., a new automobile model—in half the time it takes their American competitors and in one third it takes the Europeans. Everybody also knows that major U.S. companies have been rushing to emulate the Japanese and are reorganizing their research and development work on the Japanese model, that is, along cross-functional lines. But the Japanese are already moving to the next stage. They are reorganizing research and development so that it simultaneously produces three new products with the effort traditionally needed to produce one. They do this by systematically starting out with a deadline for abandoning today’s new product set on the very day on which this product is first sold. “The faster we can abandon today’s new product, the stronger and the more profitable we’ll be” is the new motto.
To most Western businessmen this is madness. They believe that a product becomes more profitable the longer its product life. For then the monies spent on developing it have been written off. But “writing off” to the Japanese is accounting fiction—useful to cut taxes but otherwise sheer self-delusion. Money spent on developing a product or a process is not “investment” to them; it is “sunk cost” (the economist’s term). And they tend to accept what the great Austro-American economist Joseph Schumpeter (1883–1950) preached: there is no “profit” except the short-lived innovator’s profit. As soon as that’s gone—that is, as soon as there is competition in the marketplace for the new product—products don’t earn; they cost. But the fundamental reason why the leading Japanese businesses are now shifting to organized abandonment as their strategy is not economic theory. It is their growing conviction that the only alternative to themselves shortening the life cycle of the product is for a competitor to do so—and then the competitor will not only have the profits but the market as well. “Of course,” my Japanese friends say, “some Western companies, e.g., 3M, have long operated on the policy that seventy percent of their sales five years hence will have to come from products that do not yet exist today. But these companies rely on spontaneous upswelling of entrepreneurship from within. We organize the company—and the key is systematic abandonment.” By deciding in advance that they will abandon a new product within a given period of time, the Japanese force themselves to go to work immediately on replacing it, and to do so on three parallel tracks. One track—the Japanese call it kaizen—is organized work on improvement with specific goals and deadlines—e.g., a 10 percent reduction in cost within 15 months and/or a 10 percent improvement in reliability within the same time, and/or a 15 percent increase in performance characteristics—and enough, in any event, that the improved product is substantially different, is in fact a new product. The second track is “leaping,” that is, developing a new and different product out of the old—the best example is still the earliest one: Sony’s development of the Walkman out of the newly developed portable tape recorder. And, finally, there is genuine innovation. Increasingly the leading Japanese companies organize themselves so that all three tracks are pursued simultaneously and under the direction of the same cross-functional team. The results—at least that’s the idea—is to produce not one but three new and different products to replace each present product and to gain, with the same investment of time and money, an improved product; a “leap”; and a genuine innovation, with one of the three then becoming the new market leader and producing the “innovator’s profit.”
Finally, the leading Japanese companies are moving from Total Quality Management (TQM) to Zero Defects Management. The Deming Prize is still Japan’s ultimate business accolade and Dr. Deming is still a folk hero. But what the leading companies increasingly practice was expressed in a recent statement by one of the top manufacturing people at Toyota. “We can’t use TQM,” he said. “At its very best—and no one has reached that yet—it cuts defects to ten percent. But we turn out four million cars; and a ten-percent defect rate means that 400,000 Toyota buyers get a 100 percent defective car. But Zero Defects Management is now possible and actually not too difficult.” What the Japanese now practice is very much a return to Frederic Taylor’s “scientific management.” Only the operators themselves, rather than the industrial engineer, take the initiative in studying the task, the work, and the tools, and instead of stop watch and photo camera, the operators use computer simulation. What triggered this shift, paradoxically enough, was an American import: the big and highly successful Disneyland that opened outside Tokyo a few years ago. “We all knew that it would take Disney three years to work the bugs out of this huge undertaking,” a leading Japanese industrialist told me; “instead it ran with zero defects the day it opened. Every single operation had been engineered all the way through and simulated on the computer and trained for, and it suddenly dawned on us that we could do this too. You know,” he continued, “the Americans are now all rushing to install TQM; that’ll take ten years before it really works—at least that’s what it took here. This means it will work in America around 1995. By that time we’ll have Zero Defects Management and will again be fifteen years ahead of you.”
These new Japanese strategies may not work. Or they may turn out to work only for the Japanese. But even if they are the wrong responses, they are at least responses to reality: the emergence of the highly competitive and worldwide knowledge economy.
[1991]