“Choose and Focus” 選択と集中:
The Transformation of Japan’s
Industrial Architecture
Five Surprising Facts
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Ulrike Schaede
Graduate School of International Relations
and Pacific Studies
University of California, San Diego
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RIETI,
RIETI, Tokyo
August 5, 2008
In April 2008, Japan marked 73 months of economic
growth.
In March 2008, Japan’
Japan’s current account balance
surplus increased for the 6th straight year. It reached
its highest level since 1985 (¥
(¥24.6 trillion).
trillion).
For FY 2007, Japanese listed firms posted record
combined pretax profits for the 6th year in a row.
Between January 2003 and 2007, the Nikkei 225
stock market index increased by 100%.
Leaders behind this growth include companies such
as JSR, Nitto Denko, Teijin, Softbank, Astellas.
Astellas.
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Strategic Inflection Point
戦略的な変曲点
The “Smiley” Curve
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Operating
margin
„
Japanese companies cannot
and should not compete
in downstream products.
„
Choose and Focus strategies
have propelled this transition.
Upstream
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Downstream
“A point in time when industry dynamics are altered
so profoundly that there is a fundamental change in
what it takes to win.”
Burgelman/Grove)
win.” (Burgelman/Grove)
An irreversible change in the competitive
environment so that the balance of forces shifts
away from previous ways of doing business to new
ones.
Examples in business history: the arrival of
telephony, mechanical refrigeration (shipping), the
semiconductor, the internet, ….
Retail
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
1
1998-2006: Japan’s
Strategic Inflection Point
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Strategic Inflection Point
1998-2006
Banking crisis
Globalization (“
(“hollowing out”
out”; imports reach
Japanese markets)
Political entrepreneurship (“
(“Leave it to the Market”
Market”)
Social distress (crime, suicides, homelessness)
„
– “Big Bang”
Bang” reforms of 1998; new business model for banks.
– Switch to direct disposals of bad loans (sell off assets).
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In 1998, Japan reached a tipping point.
New Demand for Law
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From “ex ante regulation”
regulation” (Civil LawLaw-type) …
– Judges only “interpret”
interpret” the law.
– Markets don’
don’t have access to lawmaking (to introduce a new
process, lawmakers must write the law first).
– People have limited access to courts, which are slow; i.e. very
little precedent, no developed legal doctrine.
„
…to “postremedy regulation”
regulation” (Common LawLaw-type)
– Everything that is not prohibited is o.k.; problems legislated in
in
the courts.
– Courts make law in reaction to market initiative.
– Access to courts is assured through lower fees, more attorneys,
better court processes, more judges.
⇒ Greater managerial flexibility, but also legal liability
⇒ Supervisory agencies instead of informal regulation
A market for rules and regulations.
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
New laws on bankruptcies, corporate reorganization, stocks,
mergers, acquisitions, hostile takeovers, etc.
– Annual revisions of 商法
– 会社法 2006
Irreversible change in laws, processes of regulation,
and markets 19981998-2006
New strategic context for Japanese firms
New industrial architecture
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
“Sunshine”
Sunshine” rules, 2000
– New accounting rules (consolidated balance sheets)
– New disclosure requirements (e.g., quarterly earnings reports)
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=
Banking Crisis
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New rules on corporate governance: FIEL and JJ-SOX (2007)
– Internal oversight committees: directors are liable
– Financial regulation by product, not by actor
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Stricter prosecution of corporate wrongdoings
Undoing of crosscross-shareholdings, influx of foreign investors
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
What Foreigners “Know” about
Postwar Japanese Business
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Business groups
Main bank system
Internal processes of corporate governance
Subcontracting hierarchies
Lifetime employment
Restricted distribution system and relational
pricing Industrial polic
Difficult entry for (foreign) competitors
The strategic logic underlying these has changed.
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
2
The Challenge is …
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People in the U.S. have not looked at Japan
since the late 1980s/early 1990s.
Business interest has shifted to China.
If you ask: “What do you know about
Japan?”
Japan?”, they repeat “wisdom”
wisdom” of the 20th
century.
Limited awareness of the New Japan.
Strategic Drivers in the
Postwar Period (1950s-1980s)
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Bank strategies
– regulated interest rates → volume
– risk exposure → diversification
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Companies
– Large firms’
firms’ DER: over 600 → stability
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business groups
steady sales revenues to pay interest
Lifetime employment
– Exit difficult → diversification
– Promotion of special talent under seniority pay
High Leverage, High Risk
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Buy insurance through stable owners
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Diversification vs. Unbundling
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–
–
–
– crosscross-shareholdings
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Buy insurance through preferential trades
– intermarket groups
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Buy insurance through a main bank
– access to credit, rescue
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Diversify into many markets
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Reduces risk of corporate failure
Increases profits if “related”
related”
Decreases profits if “unrelated”
unrelated”
Optimal point differs
by company.
„ In Japan, coupled
coupled with sales
priority.
⇒ decline in performance
over time
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⇒ Steady process of conglomeration
Diversification
Bubble period excesses
(exuberant diversification)
performance
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
x
none
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
related
unrelated
diversification
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TSE Shareholder Structure
Trust
Banks
Large Banks
20.9
1986
1988
14.9
1990
15.7
Insurance&
Inv. Banks
8.6
19.0
10.2
17.6
15.6
9.7
17.5
1994
15.4
10.0
16.9
1996
15.1
10.3
15.7
1998
14.8
12.4
11.3
2002
8.7
5.9
5.3
2006 4.7
4.6
2008 4.7
2004
0%
13.6
10%
20%
30%
4.1
20.4
29.5
4.2
20.5
27.2
24.6
26.0
10.9
6.0
20.3
7.7
20.0
10.5
19.5
21.8
50%
13.4
18.3
70%
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Compete through technological leadership
– focused R&D on clearly defined areas of excellence
– new system of innovation
19.7
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Compete through efficiency and “getting things done”
done”
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Compete through lower costs
– new work content, performance pay, a market for talent
19.1
18.1
18.2
90%
Compete through high margins
– no longer an advantage in mass production of standard goods
– no longer “alsoalso-runs”
runs” in many industries
20.5
80%
Compete for investors through higher ROI
– cost of financing determined by credit rating, ROE
– threat of hostile takeovers
18.0
21.8
23.7
26.7
28.0
27.6
60%
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19.0
18.6
21.8
21.9
21.1
20.7
21.3
40%
Individuals
22.3
30.3
29.0
11.6
9.0
8.6
8.4
8.6
8.7
7.0
28.3
15.0
19.9
19.6
18.8
18.4
17.9
17.5
Foreigners
28.8
1992
2000
Corporations
18.8
Strategic Drivers in the
New Japan
– global sourcing
– 空洞化 and weeding out Old Japan suppliers
– no longer insurance through relational pricing
100%
Source: TSE, 平成19年度株式分布状況調査の調査結果について
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Refocusing: From unwieldy
goliaths to nimble competitors
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Japan’s Restructuring Wave:
“Choose and Focus”
Focus” of Nikkei 500 Firms, ‘0000-’06
“Choose and Focus”
選択と集中)
Focus” (選択と集中)
– Exit:
Exit: spinspin-offs, M&As,
M&As, MBOs (focus on core
business)
– Reorganization:
Reorganization: “company system”
system”, holding
company structure (implement new goals through
incentives, promotions, accountability)
– Consolidation:
Consolidation: purchase competitors (choose core
businesses and dominate in those)
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© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Criteria:
1) Exit: sale/liquidation of a business unit
2) Reorganization: holding company, with
SBUs spun off into independent entities
3) Consolidation: acquisition of a company
in the same industry
reorganize
3 actions
5%
more
actions
2%
no action
25%
2 actions
27%
From sales focus to profitability focus
– From “stability”
stability” to “winning”
winning”
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
consolidate
divest
1 action
41%
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Findings:
1) 75% of Japan’s largest firms have
undergone reorganization.
2) 41% (194 firms) have restructured in
more than one way.
3) 25% (177 firms) have done nothing.
* Without financial institutions, n=472
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Was this a sectoral
phenomenon?
Is this a lot or a little?
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Real Estate
Retail
Construction
Glass and Cement
0.0
Electric Appliances
Services
Machinery
Gas, Oil, Mining
General trading
Average
Automotive
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Rubber
Transportation and
Shipping
Food and Drinks
Chemicals
Precision Machinery
Steel
Electric power
Shipbuilding
Pharmaceuticals
Non-Iron Metals
Telecommunications
0.5
Textiles
1.5
1.0
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Japan’s Changing Industrial
Architecture
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Business groups (keiretsu) : Repositioning or Dissolving
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Main bank system : Gone (for large firms)
– Horizontal (inter(inter-market); vertical (subcontractors)
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Internal processes of corporate governance
– Externalized through M&As,
M&As, hostile takeovers, new laws
Lifetime employment:
– Towards performance pay, wage by job category, individual
career paths, labor mobility
– Externalization of labor: 35% nonnon-regular work force
Industrial Policy
– Government reorganization and laws: “Leave it to the Market”
Market”
Difficult entry for (foreign) competitors
– Market opening through price competition.
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Compare to Japan:
– 36% of firms have divested, 75% have
restructured
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A truly remarkable episode in global
business history.
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
Implications for Japan
New Market Dynamics
1.
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– Deregulation; loans no longer cheaper
– Bankruptcy rules vs. informal bailouts
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U.S. refocusing of the 1980s:
– At least 20%, but more likely about 50%
of U.S. Fortune 500 firms restructured in
the 1980s (Markides
(Markides 1995)
2.0
Paper and Pulp
Average # of Reorganization
2.5
New Human Resource Practices
2.
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•
3.
New industrial architecture
New business organization
Labor shortage
New complexity in HR management
New Leadership Style
© Ulrike Schaede, Choose and Focus, Cornell University Press 2008
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